UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2007
|
or
|
o
|
|
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
(State or other jurisdiction
of
incorporation or organization)
|
|
74-1563240
(I.R.S. Employer
Identification No.)
|
P.O. Box 36611
Dallas, Texas
(Address of principal
executive offices)
|
|
75235-1611
(Zip
Code)
|
Registrants telephone number, including area code:
(214) 792-4000
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
Common Stock ($1.00 par value)
|
|
New York Stock Exchange, Inc.
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
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
þ
No
o
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 registrants 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.
þ
Indicate by check mark if the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated
filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer
þ
Accelerated
filer
o
Non-accelerated
filer
o
Indicate by check mark if the registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
The aggregate market value of the common stock held by
non-affiliates of the registrant was approximately
$11,172,660,474, computed by reference to the closing sale price
of the common stock on the New York Stock Exchange on
June 29, 2007, the last trading day of the
registrants most recently completed second fiscal quarter.
Number of shares of common stock outstanding as of the close of
business on January 30, 2008: 735,665,898 shares
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Companys Annual
Meeting of Shareholders to be held May 21, 2008 are
incorporated into Part III of this Annual Report on
Form 10-K.
PART I
Overview
Southwest Airlines Co. is a major passenger airline that
provides scheduled air transportation in the United States.
Based on the most recent data available from the
U.S. Department of Transportation (DOT),
Southwest is the largest air carrier in the United States, as
measured by the number of originating passengers boarded and the
number of scheduled domestic departures. Southwest commenced
Customer Service on June 18, 1971, with three Boeing 737
aircraft serving three Texas cities Dallas, Houston,
and San Antonio. As of December 31, 2007, Southwest
operated 520 Boeing 737 aircraft and provided service to
64 cities in 32 states throughout the United States.
In 2007, Southwest recommenced service to San Francisco
International Airport.
Southwest focuses principally on point-to-point, rather than
hub-and-spoke,
service, providing its markets with frequent, conveniently timed
flights and low fares. As of December 31, 2007, Southwest
served 411 nonstop city pairs. Historically, Southwest has
served predominantly short-haul routes, with high frequencies.
In recent years, Southwest has complemented this service with
more medium to long-haul routes, including transcontinental
service.
Southwest has a low cost structure, enabling it to charge low
fares. Adjusted for stage length, Southwest has lower unit
costs, on average, than most major network carriers.
Southwests low cost advantage is facilitated by reliance
upon a single aircraft type, an operationally efficient route
structure, and highly productive Employees.
Fuel Cost
Impact and Related Growth Plans and Initiatives
Fuel prices can have a significant impact on Southwests
profitability. From October 1, 2007 through
December 31, 2007, the average cost per gallon for jet fuel
was $1.87. Southwests average cost of jet fuel, net of
hedging gains and excluding fuel taxes, over the past five years
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Average Cost
|
|
|
Percent of
|
|
Year
|
|
(Millions)
|
|
|
Per Gallon
|
|
|
Operating Expenses
|
|
|
2003
|
|
$
|
830
|
|
|
$
|
.72
|
|
|
|
14.9
|
%
|
2004
|
|
$
|
1,000
|
|
|
$
|
.83
|
|
|
|
16.3
|
%
|
2005
|
|
$
|
1,341
|
|
|
$
|
1.03
|
|
|
|
19.6
|
%
|
2006
|
|
$
|
2,138
|
|
|
$
|
1.53
|
|
|
|
26.2
|
%
|
2007
|
|
$
|
2,536
|
|
|
$
|
1.70
|
|
|
|
28.0
|
%
|
Fuel costs, coupled with evidence of slowing economic growth and
the impact of labor costs, led to the Companys decision in
2007 to slow capacity growth through a combination of schedule
adjustments and fleet changes. The Company has been working on
optimizing its flight schedule by reducing frequency on less
profitable routes and reallocating capacity to potentially more
rewarding markets. This in turn has allowed the Company to
reduce the number of aircraft it will add to its fleet in 2008.
As discussed further below under Properties, the
Company has also adjusted its aircraft deliveries from Boeing.
In addition to schedule adjustments, the Company has developed
several initiatives designed to enhance Customer Service and to
help offset increasing costs through improving future revenues.
These initiatives include, among others:
|
|
|
|
|
Implementation of a new Customer boarding method for flights;
|
|
|
|
Commencement of a significant gate re-design to enhance the
airport experience for Customers;
|
|
|
|
Introduction of a new fare structure, including a Business
Select product;
|
|
|
|
Introduction of enhancements to the Companys Rapid Rewards
frequent flyer program;
|
|
|
|
Launch of a new advertising campaign;
|
|
|
|
Announcement of an expansion of the Companys GDS (Global
Distribution System) and corporate travel account
efforts; and
|
|
|
|
Exploration of international codeshare alliances.
|
The Companys initiatives are discussed in more detail
below under Operating Strategies and Marketing. Fuel
costs and Southwests fuel hedging activities are discussed
in more detail below under Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Regulation
The airline industry is regulated heavily, especially by the
federal government. Examples of such regulation include:
Economic
and Operational Regulation
|
|
|
|
|
Aviation Taxes.
The statutory authority for
the federal government to collect aviation taxes, which are
used, in part, to finance the nations airport and air
traffic control systems, and the authority of the
|
1
Federal Aviation Administration (FAA) to expend
those funds must be periodically reauthorized by the U.S.
Congress. This authority was scheduled to expire on
September 30, 2007. However, Congress has approved a
temporary extension of this authority through February 29,
2008. Similar temporary extensions or a reauthorization for a
fixed term are expected to occur in 2009. Other proposals being
considered by Congress in connection with the FAA
reauthorization legislation include: (i) the imposition of
new user fees on jet-powered aircraft, (ii) an increase in
the amount of airport passenger facility charges, and
(iii) the adoption of new unfunded mandates on commercial
airlines such as passenger-rights standards and labor protection
provisions, any of which could have an impact on the
Companys operations.
|
|
|
|
|
U.S. Department of Transportation.
The
DOT has significant regulatory jurisdiction over passenger
airlines. To provide passenger transportation in the United
States, a domestic airline is required to hold a Certificate of
Public Convenience and Necessity issued by the DOT. A
certificate is unlimited in duration and generally permits the
Company to operate among any points within the United States and
its territories and possessions. The DOT may revoke a
certificate, in whole or in part, for intentional failure to
comply with federal aviation statutes, regulations, orders, or
the terms of the certificate itself. The DOT also has
jurisdiction over certain economic and consumer protection
matters such as advertising, denied boarding compensation,
baggage liability, and access for persons with disabilities. The
DOT may impose civil penalties on air carriers for violations of
its regulations in these areas.
|
|
|
|
Wright Amendment.
The International Air
Transportation Competition Act of 1979, as amended (the
Act), imposed restrictions on the provision of air
transportation to and from Dallas Love Field. The applicable
portion of the Act, commonly known as the Wright
Amendment, impacted Southwests scheduled service by
prohibiting the carrying of nonstop and through passengers on
commercial flights between Dallas Love Field and all states
outside of Texas, with the exception of the following states
(the Wright Amendment States): Alabama, Arkansas,
Kansas, Louisiana, Mississippi, Missouri, New Mexico, and
Oklahoma. In addition, the Wright Amendment only permitted an
airline to offer flights between Dallas Love Field and the
Wright Amendment States to the extent the airline did not offer
or provide any through service or ticketing with another air
carrier at Dallas Love Field and did not market service to or
from Dallas Love Field and any point outside of a Wright
Amendment State. In other words, a Customer could not purchase a
single ticket between Dallas Love Field and any destination
other than a Wright Amendment State. The Wright Amendment did
not restrict flights operated with aircraft having 56 or fewer
passenger seats, nor did it restrict Southwests intrastate
Texas flights or its air service to or from points other than
Dallas Love Field.
|
In 2006, Southwest entered into an agreement with the City of
Dallas, the City of Fort Worth, American Airlines, Inc.,
and the DFW International Airport Board. Pursuant to this
agreement, the five parties sought enactment of legislation to
amend the Act. Congress responded by passing the Wright
Amendment Reform Act of 2006 (the Reform Act). The
Reform Act immediately repealed through service and ticketing
restrictions, thereby allowing the purchase of a single ticket
between Dallas Love Field and any U.S. destination (while
still requiring the Customer to make a stop in a Wright
Amendment State), and reduced the maximum number of gates
available for commercial air service at Dallas Love Field from
32 to 20. Southwest currently uses 15 gates at Dallas Love
Field. Pursuant to the Reform Act and local agreements with the
City of Dallas with respect to gates, Southwest can expand
scheduled service from Dallas Love Field and intends to do so.
The Reform Act also provides for substantial repeal of the
remainder of the Wright Amendment in 2014.
|
|
|
Safety
and Health Regulation
|
The Company and its third-party maintenance providers are
subject to the jurisdiction of the FAA with respect to the
Companys 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, and Southwest has obtained, operating,
airworthiness, and other certificates. These certificates are
subject to suspension or revocation for cause. In addition,
pursuant to FAA regulations, the Company has established, and
the FAA has approved, the Companys operations
specifications and a maintenance program for the Companys
2
aircraft, ranging from frequent routine inspections to major
overhauls. 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 Aviation 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
and Food and Drug Administration regulations.
Following the terrorist attacks on September 11, 2001,
Congress enacted the Aviation and Transportation Security Act
(the Aviation Security Act). The Aviation Security
Act established the Transportation Security Administration (the
TSA), a division of the U.S. Department of
Homeland Security that is responsible for certain civil aviation
security matters. The Aviation Security Act also mandated, among
other things, improved flight deck security, deployment of
federal air marshals onboard flights, improved airport perimeter
access security, airline crew security training, enhanced
security screening of passengers, baggage, cargo, mail,
employees, and vendors, enhanced training and qualifications of
security screening personnel, additional provision of passenger
data to U.S. Customs and Border Protection, and enhanced
background checks. Under the Aviation Security Act,
substantially all security screeners at airports are federal
employees, and significant other elements of airline and airport
security are overseen and performed by federal employees,
including federal security managers, federal law enforcement
officers, and federal air marshals.
Enhanced security measures have impacted the Companys
business. In particular, they have had a significant impact on
the airport experience for passengers. For example, in the third
quarter of 2006, the TSA mandated new security measures in
response to a terrorist plot uncovered by authorities in London.
These rules, which primarily regulate the types of liquid items
that can be carried onboard aircraft, have had a negative impact
on air travel, especially on shorthaul routes and with business
travelers. Although the TSA has relaxed some of its
requirements, the Company is not able to predict the ongoing
impact, if any, that these security changes will have on
passenger revenues, both in the shortterm and the longterm. The
Company has made significant investments to address the impact
of these types of regulations, including investments in
facilities, equipment, and technology to process Customers
efficiently and restore the airport experience. The
Companys Automated Boarding Passes and self service kiosks
have reduced the number of lines in which a Customer must wait.
In addition, the Companys gate readers at all of its
airports have improved the boarding reconciliation process. The
Company also offers baggage checkin through self service kiosks
at certain airport locations, as well as Internet checkin and
transfer boarding passes at the time of checkin.
Enhanced security measures have also impacted the Companys
business through the imposition of security fees on the
Companys Customers and on the Company. Under the Aviation
Security Act, funding for passenger security is provided in part
by a $2.50 per enplanement security fee, subject to a maximum of
$5.00 per one-way trip. The Aviation Security Act also allows
the TSA to assess an Aviation Security Infrastructure Fee
(ASIF) on each airline. Southwests ASIF
liability was originally set at $24 million per year. Effective
in 2005, the TSA unilaterally increased the amount to $50
million. Southwest and 22 other airlines are joined in
litigation presently pending in the U.S. Court of Appeals
against the TSA to challenge that increase.
The Airport Noise and Capacity Act of 1990 gives airport
operators the right, under certain circumstances, to implement
local noise abatement programs, so long as they do not
unreasonably interfere with interstate or foreign commerce or
the national air transportation system. Some airports 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 operations.
These types of restrictions can cause curtailments in service or
increases in operating costs and could limit the ability of
Southwest to expand its operations at the affected airports.
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.
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 presently pending
environmental regulatory developments will have a material
impact on the Companys capital expenditures or otherwise
adversely affect its operations, operating costs,
3
or competitive position. However, legislation has been
introduced in the U.S. Congress to regulate so-called
green house gas emissions. The legislation could
impose unknown costs or restrictions on all
transportation-related activities, the impact of which is
presently unpredictable. 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. The Company does not
believe that any environmental liability associated with such
sites will have a material adverse effect on the Companys
operations, costs, or profitability.
The Company has appointed a Green Team to target
areas of environmental improvement in all aspects of the
Companys business, while at the same time remaining true
to the Companys low cost philosophy. As part of this
initiative, during 2008, the Company will be publishing an
Environmental Report describing the Companys strategies to
reduce greenhouse gas emissions and addressing other
environmental matters such as waste management and recycling.
|
|
|
Regulation
of Customer Service Practices
|
From time to time, the airline industry has been faced with
possible legislation dealing with certain Customer Service
practices. As a compromise with Congress, the industry, working
with the Air Transport Association, has responded by adopting
and filing with the DOT written plans disclosing commitments to
improve performance. Southwest Airlines Customer Service
Commitment is a comprehensive plan that 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
Southwest at
www.southwest.com
. The DOT and
Congress monitor the industrys plans, and there can be no
assurance that legislation or regulations will not be proposed
in the future to regulate airline Customer Service practices.
|
|
|
Operating
Strategies and Marketing
|
|
|
|
General
Operating Strategies
|
Southwest focuses principally on point-to-point service, rather
than the
hub-and-spoke
service provided by most major U.S. airlines. The
hub-and-spoke
system concentrates most of an airlines operations at a
limited number of hub cities and serves most other destinations
in the system by providing one-stop or connecting service
through the hub. Point-to-point service allows for more direct
nonstop routing than the hub and spoke system, minimizing
connections, delays, and total trip time. As a result,
approximately 78 percent of Southwests Customers fly
nonstop. Southwests average aircraft trip stage length in
2007 was 629 miles with an average duration of
approximately 1.8 hours, as compared to an average aircraft
trip stage length of 622 miles and an average duration of
approximately 1.7 hours in 2006. Point-to-point service
also enables Southwest to provide its markets with frequent,
conveniently timed flights and low fares. Examples of markets
offering frequent daily flights are: Dallas Love Field to
Houston Hobby, 30 weekday roundtrips; Phoenix to Las Vegas,
18 weekday roundtrips; and Los Angeles International to
Oakland, 20 weekday roundtrips. Southwest complements these
high-frequency shorthaul routes with longhaul nonstop service
between markets such as Phoenix and Tampa Bay, Las Vegas and
Orlando, and Nashville and Oakland.
Southwest serves many conveniently located secondary 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 Islip airports,
which are typically less congested than other airlines hub
airports. This operating strategy enables the Company to achieve
high asset utilization because aircraft can be scheduled to
minimize the amount of time they are on the ground. This in turn
reduces the number of aircraft and gate facilities that would
otherwise be required. The Company is also able to simplify
scheduling, maintenance, flight operations, and training
activities by operating only one aircraft type, the Boeing 737.
All of these strategies enhance the Companys ability to
sustain high Employee productivity and reliable ontime
performance.
|
|
|
Simplified
Fare Structure
|
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. As of
November 1, 2007, Southwests highest non-codeshare,
oneway unrestricted walkup fare offered was $399 for its longest
flights. Substantially lower walkup fares are generally
available on Southwests short and medium haul flights.
In November 2007, Southwest announced enhancements to its fare
structure and unveiled a new fare display on its web site,
www.southwest.com
. Instead of a large display with
numerous fare categories, Southwest has streamlined the process
by bundling fares into three
4
major fare columns: Business Select,
Business, and Wanna Get Away, with the
goal of making it easier for Customers to choose the fare they
want. The new Business Select fare is part of the
Companys initiative to increase offerings and improve
productivity for the business traveler. Customers who purchase
the Business Select fare are allowed to be among the first
Customers to board the aircraft. They also receive extra Rapid
Rewards credit for the flight and a free drink.
|
|
|
Enhanced
Boarding Method and Updated Gate Design
|
During fourth quarter 2007, the Company introduced an enhanced
boarding method, which is designed to significantly reduce the
time a Customer spends standing in line at the gate. The
enhanced boarding process automatically reserves a place for a
Customer in the Customers boarding group at the time of
check-in by assigning a specific position number within the A,
B, or C boarding group. Customers then board the aircraft in
that numerical order. The new boarding method also allows for
future enhancements, such as product customization and
additional incentives for business and leisure travelers.
The Company has also commenced modification of its gate areas
with columns and signage that facilitate the new boarding
process. The extreme gate makeover is also designed
to improve the airport experience for all of the Companys
Customers by including (i) a business focused area with
padded seats, tables with power outlets, power stations with
stools, and a flat screen television for news programming; and
(ii) a family area with smaller tables and chairs,
kid friendly programming on a flat screen
television, and power stations for charging electrical devices.
The updated gate design is scheduled to be completed during 2008
at virtually all airports served by the Company.
|
|
|
Rapid
Rewards Frequent Flyer Program
|
Southwests frequent flyer program, Rapid Rewards, is based
on trips flown rather than mileage. Rapid Rewards Customers earn
a credit for each one-way trip flown or two credits for each
roundtrip flown. Rapid Rewards Customers can also earn credits
by using the services of non-airline partners, which include car
rental agencies, hotels, and credit card partners, including the
Southwest Airlines
Chase
®
Visa card. Rapid Rewards offers two types of travel awards. The
Rapid Rewards Award Ticket (Award Ticket) offers one
free roundtrip award, valid to any destination available on
Southwest, after the accumulation of 16 credits within
24 months. The Rapid Rewards Companion Pass
(Companion Pass) is granted for accumulating
100 credits within a consecutive twelve-month period. The
Companion Pass offers unlimited free roundtrip travel, to any
destination available on Southwest, for a designated companion
of the qualifying Rapid Rewards Member. For the designated
companion to use this pass, the Rapid Rewards Member must
purchase a ticket or use an Award Ticket. Additionally, the
Rapid Rewards Member and designated companion must travel
together on the same flight.
Award Tickets and Companion Passes are automatically generated
when earned by the Customer rather than allowing the Customer to
bank credits indefinitely. Award Tickets are valid for
12 months after issuance and are subject to seat
restrictions. Companion Passes have no seat restrictions or
Black out dates.
The Company also sells credits to business partners, including
credit card companies, hotels, and car rental agencies. These
credits may be redeemed for Award Tickets having the same
program characteristics as those earned by flying.
During 2007, the Company enhanced its Rapid Rewards program and
rolled out a new business traveler focused marketing campaign.
Rapid Rewards Members who fly 32 or more qualifying one-way
flights within a
12-month
period receive priority boarding privileges for an entire year.
In addition, if travel is purchased at least 36 hours prior
to flight time, these passengers also receive the best boarding
pass number available (generally, an A boarding
pass). Customers on this A-List are also
automatically checked in for their flight in advance of
departure. During 2007, Southwest also introduced a new Freedom
Award, which allows Rapid Rewards Members the opportunity to
exchange two standard Award Tickets for one Freedom Award. The
Freedom Award is free of seat restrictions, except for a limited
number of blackout dates around major holidays.
Customers redeemed approximately 2.8 million,
2.7 million, and 2.6 million Award Tickets and flights
on Companion Passes during 2007, 2006, and 2005, respectively.
The amount of free travel award usage as a percentage of total
Southwest revenue passengers carried was 6.2 percent in
2007, 6.4 percent in 2006, and 6.6 percent in 2005.
The number of fully earned Award Tickets and partially earned
awards outstanding at December 31, 2007 was approximately
11.6 million, of which approximately 81 percent were
partially earned awards. The number of fully earned Award
Tickets and partially earned awards outstanding at
December 31, 2006 was approximately 10.1 million, of
which
5
approximately 81 percent were partially earned awards.
However, due to the expected expiration of a portion of credits
making up partial awards, not all of them will eventually turn
into useable Award Tickets. In addition, not all Award Tickets
will be redeemed for future travel. Since the inception of Rapid
Rewards in 1987, approximately 15 percent of all fully
earned Award Tickets have expired without being used. The number
of Companion Passes outstanding at December 31, 2007 and
2006 was approximately 65,000 and 58,000, respectively. The
Company currently estimates that an average of three to four
trips will be redeemed per outstanding Companion Pass.
The Company accounts for its Rapid Rewards program obligations
by recording, at the time an award is earned, a liability for
the estimated incremental cost of the use of flight awards the
Company expects to be redeemed. 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. Revenue from the sale of credits to business
partners and associated with future travel is deferred and
recognized when the ultimate free travel award is flown or the
credits expire unused. The liability for free travel awards
earned but not used at December 31, 2007 and 2006 was not
material to the Companys business.
|
|
|
Southwest.com;
Expansion of GDS Participation and Corporate Travel Account
Efforts
|
Southwest was the first major airline to introduce a Ticketless
travel option, eliminating the need to print and then process a
paper ticket altogether, and the first to offer Ticketless
travel through the Companys web site at
www.southwest.com
. For the year ended December 31,
2007, more than 95 percent of Southwests Customers
chose the Ticketless travel option, and nearly 74 percent
of Southwests passenger revenues came through its web site
(including SWABiz revenues), which has become a vital part of
the Companys distribution strategy.
In 2007, in order to better attract business travelers,
Southwest began exploring selling tickets through channels in
addition to its own reservation system, web site, and the Sabre
System. Southwest is continuing its efforts to provide travel
agent and professional travel manager partners with increased
and cost effective access to its fares and inventory. In
particular, during 2007, Southwest announced an expansion of its
GDS (Global Distribution System) and corporate travel account
efforts through a ten-year content distribution agreement with
Travelports Galileo, a leading provider of global
distribution services. The agreement has recently been expanded
to include Worldspan, another of Travelports global
distribution systems. Through the agreement, Southwest intends
that all of its published fares and inventory, with the
exception of Southwests exclusive web fares, will
eventually be available to Galileo-connected travel agencies in
North America.
During 2007, Southwest announced an agreement with Naverus, an
aviation consulting firm in Seattle, Washington, to partner on
development of a Required Naviation Performance
(RNP) program. RNP combines GPS (Global Positioning
System), the capabilities of advanced aircraft avionics, and new
flight procedures for the purpose of achieving safer, more
efficient, and environmentally friendly flight operations. RNP
procedures are designed to reduce fuel consumption, improve
safety, and minimize emissions and noise, while simultaneously
taking advantage of the high-performance characteristics that
exist in an airlines fleet.
Southwest implemented codesharing in 2005 with ATA Airlines.
Under its codeshare arrangement with ATA, Southwest may market
and sell tickets for certain flights on ATA that are identified
by Southwests designator code (for example, WN
Flight 123). Conversely, ATA may market and sell tickets
under its code designator (TZ) for certain flights on Southwest.
Any flight bearing a Southwest code designator that is operated
by ATA is disclosed in Southwests reservations systems and
on the Customers flight itinerary, boarding pass, and
ticket, if a paper ticket is issued. As a result of the ATA
codeshare arrangement, Southwests Customers are able to
purchase single ticket service on Southwest connecting to
ATAs service to Hawaii and Dallas Fort Worth
International Airport. Also, members of Southwests and
ATAs respective frequent flier programs are able to earn
and redeem awards in the other carriers program. Finally,
beginning in 2006, Southwest began selling ATA-only service at
www.southwest.com
. Other than the ATA arrangement,
Southwest does not interline or offer joint fares with other
airlines, nor does Southwest have any marketing or commuter
feeder relationships with other carriers; however Southwest is
currently exploring international codeshare opportunities.
|
|
|
Management
Information Systems
|
Southwest is continuing to invest in technology to support the
initiatives discussed above as well as Southwests ongoing
operations. Southwest is currently
6
developing a system to replace its current point of sale
application in the stations and its refunds system in the back
office. Additionally, Southwest has purchased technology that
will replace its existing Ticketless system and revenue
accounting system. The new systems are designed to, among other
things, enhance data flow and thereby increase Southwests
operational efficiencies and Customer Service capabilities.
Southwest is also working to replace its back office accounting
systems, payroll system, and human resource information system,
with a goal of completion sometime during 2009.
Competition
The airline industry is highly competitive. The Company believes
the principal competitive factors in the industry are:
|
|
|
|
|
Fares;
|
|
|
|
Customer Service;
|
|
|
|
Costs;
|
|
|
|
Frequency and convenience of scheduling;
|
|
|
|
Frequent flyer benefits; and
|
|
|
|
Efficiency and productivity, including effective selection and
use of aircraft.
|
Southwest currently competes with other airlines on all of its
routes. Some of these airlines have larger fleets than Southwest
and some may have wider name recognition in certain markets. In
addition, some major U.S. airlines have established
extensive marketing or codesharing alliances, including
Northwest Airlines/Continental Airlines/Delta Air Lines;
American Airlines/Alaska Airlines; and United Airlines/US
Airways. These alliances are more extensive than
Southwests arrangement with ATA Airlines and enable these
carriers to expand their destinations and marketing
opportunities. In addition, some airlines are able to offset
less profitable domestic fares with more profitable
international fares. As discussed above, the Company is
evaluating international code sharing opportunities.
The Company is also subject to varying degrees of competition
from surface transportation in its shorthaul markets. This
competition can be more significant during economic downturns.
Although price is a competitive factor in these instances, the
Company believes frequency and convenience of scheduling,
facilities, transportation safety and security procedures, and
Customer Service are also of great importance to many passengers.
The competitive landscape for airlines has changed significantly
over the last few years. Following the terrorist attacks on
September 11, 2001, the airline industry, as a whole,
incurred substantial losses through 2005. The war in Iraq and
significant increases in the cost of fuel have exacerbated
industry challenges. As a result, a number of carriers have
sought relief from financial obligations in bankruptcy,
including UAL Corporation, the parent of United Airlines; ATA
Airlines; US Airways; Northwest Airlines Corporation, the parent
of Northwest Airlines; and Delta Air Lines. UAL Corporation and
ATA Airlines emerged from bankruptcy in 2006, and Northwest
Airlines Corporation and Delta Air Lines emerged from bankruptcy
in 2007. US Airways emergence from bankruptcy in 2005
culminated in its merger with America West Airlines in September
of that year. Other, smaller carriers have ceased operations
entirely. In addition, post-9/11, many carriers shrank capacity,
grounded their most inefficient aircraft, cut back on
unprofitable service, and furloughed employees. Reorganization
in bankruptcy, and even the threat of bankruptcy, has allowed
carriers to decrease operating costs through renegotiated labor,
supply, and financing contracts. As a result, differentials in
cost structures between traditional
hub-and-spoke
carriers and low cost carriers have significantly diminished.
Nevertheless, throughout this entire time period, Southwest has
continued to maintain its cost advantage, improve Employee
productivity, pursue steady, controlled growth, and provide
outstanding Service to its Customers. The factors discussed
above have, however, led to more intense competition in the
airline industry, generally. In 2006, some carriers began
reporting profitable results for the first time since 9/11.
The re-emerging competitiveness of some of the larger carriers,
such as United, US Airways, and American, has put pressure on
smaller carriers such as AirTran Airways, JetBlue, and Frontier.
Like Southwest, several other carriers, large and small, have
announced scaled back growth plans, and some carriers have
expressed interest in industry consolidation. The Company cannot
predict the timing or extent of any such consolidation or its
impact (either positive or negative) on the Companys
operations or results of operations.
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 Companys credit and lease agreements. The
policies principally provide coverage for public and passenger
liability, property damage, cargo and baggage liability, loss or
damage
7
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. Through the
2003 Emergency Wartime Supplemental Appropriations Act, the
federal government has continued to provide supplemental,
first-party, war-risk insurance coverage to commercial carriers
for renewable
60-day
periods, at substantially lower premiums than prevailing
commercial rates and for levels of coverage not available in the
commercial market. The government-provided supplemental coverage
from the Wartime Act is currently set to expire on
March 30, 2008. Although another extension beyond this date
is expected, if such coverage is not extended by the government,
the Company could incur substantially higher insurance costs or
unavailability of adequate coverage in future periods.
Seasonality
The business of the Company is somewhat seasonal. Quarterly
operating income and, to a lesser extent, revenues have
historically tended to be lower in the first quarter (January 1
- March 31) and fourth quarter (October 1 - December 31).
Employees
At December 31, 2007, Southwest had 34,378 active full-time
equivalent Employees, consisting of 13,885 flight, 2,079
maintenance, 13,921 ground, Customer, and fleet service, and
4,493 management, accounting, marketing, and clerical personnel.
Southwest has ten collective bargaining agreements, which
covered approximately 82 percent of Southwests
Employees as of December 31, 2007. Southwests
relations with labor unions are governed by the Railway Labor
Act (the RLA), which establishes the right of
airline employees to organize and bargain collectively. Under
the RLA, a collective bargaining agreement between an airline
and a labor union generally does not expire, but instead becomes
amendable as of a stated date. If either party wants to modify
the terms of the agreement, it must notify the other party in
the manner required by the RLA
and/or
described in the agreement. After receipt of such notice, the
parties must meet for direct negotiations, and, if no agreement
is reached, either party may request the National Mediation
Board (the NMB) to appoint a federal mediator. If no
agreement is reached in mediation, the NMB may determine that an
impasse exists and offer binding arbitration to the parties. If
either party rejects binding arbitration, a
30-day
cooling off period begins. At the end of this
30-day
period, the parties may engage in self-help, unless
a Presidential Emergency Board is established to investigate and
report on the dispute. The appointment of a Presidential
Emergency Board maintains the status quo for an
additional 60 days. If the parties do not reach agreement
during this period, the parties may then engage in
self-help. Self-help includes, among
other things, a strike by the union or the airlines
imposition of any or all of its proposed amendments and the
hiring of new employees to replace any striking workers. The
following table sets forth the Companys Employee groups
and collective bargaining status:
|
|
|
|
|
Employee Group
|
|
Represented by
|
|
Agreement Amendable in
|
|
Pilots
|
|
Southwest Airlines Pilots Association
|
|
Currently in negotiation
|
Flight Attendants
|
|
Transportation Workers of America, AFL-CIO (TWU)
|
|
June 2008
|
Ramp, Operations, Provisioning, and Freight Agents
|
|
TWU
|
|
Currently in negotiation
|
Stock Clerks
|
|
International Brotherhood of Teamsters (Teamsters)
|
|
August 2008
|
Mechanics
|
|
Aircraft Mechanics Fraternal Association (AMFA)
|
|
August 2008
|
Customer Service and Reservations Agents
|
|
International Association of Machinists and Aerospace Workers,
AFL-CIO
|
|
November 2008
|
Aircraft Appearance Technicians
|
|
AMFA
|
|
February 2009
|
Flight Dispatchers
|
|
Southwest Airlines Employee Association
|
|
December 2009
|
Flight Simulator Technicians
|
|
Teamsters
|
|
November 2011
|
Flight/Ground School Instructors and Flight Crew Training
Instructors
|
|
Southwest Airlines Professional Instructors Association
|
|
January 2013
|
8
During 2007, as part of its efforts to improve future
profitability, the Company offered an early retirement program
to certain of its Employees. A total of 608 of approximately
8,500 eligible Employees elected to participate in the program.
Additional
Information About Southwest
Southwest was incorporated in Texas in 1967. The following
documents are available free of charge through the
Companys website,
www.southwest.com:
Southwests annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports that are filed with or
furnished to the SEC pursuant to Sections 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended. These materials
are made available through Southwests website as soon as
reasonably practicable after they are electronically filed with,
or furnished to, the SEC.
The certifications of the Companys Chief Executive Officer
and Chief Financial Officer required under Section 302 of
the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and
31.2 to this report. Additionally, in 2007 the Companys
Chief Executive Officer certified to the New York Stock Exchange
(NYSE) that he was not aware of any violation by the
Company of the NYSEs corporate governance listing
standards.
DISCLOSURE
REGARDING FORWARD-LOOKING INFORMATION
Some statements in this
Form 10-K
(or otherwise made by the Company or on the Companys
behalf from time to time in other reports, filings with the SEC,
news releases, conferences, Internet postings, or otherwise)
that are not historical facts may be forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are based on, and include statements about,
Southwests estimates, expectations, beliefs, intentions,
or strategies for the future, and the assumptions underlying
these forward-looking statements. Specific forward-looking
statements can be identified by the fact that they do not relate
strictly to historical or current facts and include, without
limitation, words such as anticipates,
believes, estimates,
expects, intends, forecasts,
may, will, should, and
similar expressions. While management believes that these
forward-looking statements are reasonable as and when made,
forward-looking statements are not guarantees of future
performance and involve risks and uncertainties that are
difficult to predict. Therefore, actual results may differ
materially from what is expressed in or indicated by
Southwests forward-looking statements or from historical
experience or the Companys present expectations. Factors
that could cause these differences include, but are not limited
to, those set forth below under Risk Factors.
Caution should be taken not to place undue reliance on the
Companys forward-looking statements, which represent the
Companys 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.
Southwests
business is dependent on the price and availability of aircraft
fuel. Continued periods of high fuel costs and/or significant
disruptions in the supply of fuel could adversely affect the
Companys results of operations.
Airlines are inherently dependent upon energy to operate and,
therefore, are impacted by changes in the prices of jet fuel.
The cost of fuel, which has been at historically high levels
over the last three years, is largely unpredictable and has a
significant impact on the Companys results of operations.
Jet fuel and oil consumed for fiscal 2007 and 2006 represented
approximately 28 percent and 26 percent of
Southwests operating expenses, respectively. In both
years, jet fuel costs were the second largest expense incurred
by the Company, following only salaries, wages, and benefits.
These costs contributed to the Companys decision during
2007 to slow growth and could continue to impact growth
decisions.
Fuel availability, as well as pricing, is also impacted by
political and economic factors. The Company does not currently
anticipate a significant reduction in fuel availability;
however, it is difficult to predict the future availability of
jet fuel due to the following, among other, factors: dependency
on foreign imports of crude oil and the potential for
hostilities or other conflicts in oil producing areas; limited
refining capacity; and the possibility of changes in
governmental policies on jet fuel production, transportation,
and marketing. Significant disruptions in the supply of aircraft
fuel could adversely affect the Companys business,
financial condition, and results of operations.
9
The Companys profitability is impacted in part by its
ability to pass fuel cost increases through to the consumer in
the form of fare increases. Due to the competitive nature of the
airline industry, the Companys ability to increase fares
is limited, and it is not certain that future fuel cost
increases can be covered by increasing fares. Fare increases are
even more difficult to achieve in uncertain economic
environments, as low fares are often used to stimulate demand.
From time to time the Company enters into fuel derivative
contracts to protect against rising fuel costs. Changes in the
Companys overall fuel hedging strategy, the ability of the
commodities used in fuel hedging (principally crude oil, heating
oil, and unleaded gasoline) to qualify for special hedge
accounting, and the effectiveness of the Companys fuel
hedges pursuant to highly complex accounting rules, are all
significant factors impacting the Companys results of
operations. For more information on Southwests fuel
hedging arrangements, see Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Note 10 to the Consolidated Financial Statements.
Southwests
business is labor-intensive; Southwest could be adversely
affected if it were unable to maintain satisfactory relations
with any unionized or other Employee work group.
The airline business is labor intensive, and the Companys
results are subject to variations in labor-related job actions.
Salaries, wages, and benefits represented 35.4 percent of
the Companys operating expenses for the year ended
December 31, 2007. In addition, as of December 31,
2007, approximately 82 percent of the Companys
Employees were represented for collective bargaining purposes by
labor unions. The Companys Ramp, Operations, Provisioning,
and Freight Agents are subject to an agreement with the
Transport Workers Union of America, AFL-CIO (TWU),
which becomes amendable on June 30, 2008. The Company and
TWU are in discussions on a new agreement. The Companys
Pilots are subject to an agreement with the Southwest Airlines
Pilots Association (SWAPA), which became
amendable during September 2006. The Company and SWAPA are in
discussions on a new agreement. Although, historically, the
Companys relationships with its Employees have been good,
the following items could have a significant impact on the
Companys results of operations: results of labor contract
negotiations, employee hiring and retention rates, pay rates,
outsourcing costs, the impact of work rules, and costs for
health care.
Southwests
business is affected by many changing economic conditions and
other conditions beyond its control.
The Companys business, and the airline industry in
general, is particularly impacted by changes in economic
conditions. Unfavorable general economic conditions, such as
higher unemployment rates, higher interest rates,
housing-related pressures (such as recent issues in the subprime
mortgage market), and increased operating costs can reduce
consumer spending or cause shifts in spending. A general
reduction or shift in discretionary spending can result in
decreased demand for leisure and business travel and can also
impact the Companys ability to raise fares to counteract
increased fuel and labor costs.
The Companys business, and the airline industry in
general, is also impacted by other conditions that are largely
outside of the Companys control, including, among others:
|
|
|
|
|
Actual or threatened war, terrorist attacks, and political
instability;
|
|
|
|
Changes in consumer preferences, perceptions, spending patterns,
or demographic trends;
|
|
|
|
Actual or potential disruptions in the air traffic control
system;
|
|
|
|
Increases in costs of safety, security, and environmental
measures; and
|
|
|
|
Weather and natural disasters.
|
Because expenses of a flight do not vary significantly with the
number of passengers carried, a relatively small change in the
number of passengers can have a disproportionate effect on an
airlines operating and financial results. Therefore, any
general reduction in airline passenger traffic as a result of
any of these factors could adversely affect the Companys
business, financial condition, and results of operations.
The
Company relies on technology to operate its business and
continues to implement substantial changes to its information
systems; any failure or disruption in the Companys systems
could adversely impact the Companys
operations.
The Company has historically been dependent on automated systems
and technology to operate its business, enhance Customer Service
and back office support systems, and increase Employee
productivity, including the Companys computerized airline
reservation system, flight operations systems, telecommunication
systems, website at
www.southwest.com
, Automated Boarding
10
Passes system, and its self service kiosks. The Company has
become increasingly dependent on its systems and technology to
maintain and support the growth of its business. Therefore, the
Companys ability to expand and update its information
technology infrastructure in response to its growth and changing
needs is increasingly important to the operation of its business
generally and the implementation of its new initiatives. Any
issues with transitioning to upgraded or replacement systems, or
any material failure, inadequacy, interruption, or security
failure of these systems, could harm the Companys ability
to effectively operate its business. In addition, the
Companys growth strategies are dependent on its ability to
effectively implement technology advancements.
The
Companys inability to successfully implement its revenue
initiatives could adversely affect its results of
operations.
As discussed above, the Company has implemented and intends to
continue to implement revenue initiatives that are designed to
help offset increasing costs. The implementation of the
Companys initiatives has and will involve significant
investments by the Company of time and money and could be
impacted by (i) the Companys ability to timely
implement and maintain the necessary information technology
systems and infrastructure (as discussed above), and
(ii) the extent and timing of the Companys investment
of incremental operating expenses and capital expenditures to
develop and implement its initiatives and the Companys
corresponding ability to effectively control operating expenses.
Because the Company has limited experience with some of its
strategic initiatives, it cannot ensure that they will be
successful or profitable either over the short or long term. The
Companys ability to effectively and timely prioritize and
implement its initiatives will also affect when and if they will
have a positive impact on the Companys profitability.
The
travel industry continues to face on-going security concerns and
cost burdens; further threatened or actual terrorist attacks, or
other hostilities, could significantly harm the Companys
industry and its business.
The attacks of September 11, 2001, materially impacted, and
continue to impact, air travel and the results of operations for
Southwest and the airline industry generally. The Department of
Homeland Security and the TSA have implemented numerous security
measures that affect airline operations and costs. Substantially
all security screeners at airports are now federal employees,
and significant other elements of airline and airport security
are now overseen and performed by federal employees, including
federal security managers, federal law enforcement officers, and
federal air marshals. Enhanced security procedures, including
enhanced security screening of passengers, baggage, cargo, mail,
employees, and vendors, introduced at airports since the
terrorist attacks of September 11 have increased costs to
airlines and have from time to time impacted demand for air
travel.
Additional terrorist attacks, even if not made directly on the
airline industry, or the fear of such attacks or other
hostilities (including elevated national threat warnings or
selective cancellation or redirection of flights due to terror
threats) could have a further significant negative impact on
Southwest and the airline industry. Additional international
hostilities could potentially have a material adverse impact on
the Companys results of operations.
Airport
capacity constraints and air traffic control inefficiencies
could limit the Companys growth; changes in or additional
governmental regulation could increase the Companys
operating costs or otherwise limit the Companys ability to
conduct business.
Almost all commercial service airports are owned
and/or
operated by units of local or state government. Airlines are
largely dependent on these governmental entities to provide
adequate airport facilities and capacity at an affordable cost.
Similarly, the federal government singularly controls all
U.S. airspace, and airlines are completely dependent on the
FAA to operate that airspace in a safe, efficient, and
affordable manner. As discussed above under
Business Regulation, airlines are also
subject to other extensive regulatory requirements. These
requirements often impose substantial costs on airlines. The
Companys results of operations may be affected by changes
in law and future actions taken by governmental agencies having
jurisdiction over its operations, including, but not limited to:
|
|
|
|
|
Increases in airport rates and charges;
|
|
|
|
Limitations on airport gate capacity or other use of airport
facilities;
|
|
|
|
Increases in taxes;
|
|
|
|
Changes in the law that affect the services that can be offered
by airlines in particular markets and at particular airports;
|
|
|
|
Restrictions on competitive practices;
|
11
|
|
|
|
|
The adoption of regulations that impact customer service
standards, such as security standards; and
|
|
|
|
The adoption of more restrictive locally-imposed noise
regulations.
|
The
airline industry is intensely competitive.
As discussed in more detail above under
Business Competition, the airline
industry is extremely competitive. Southwests competitors
include other major domestic airlines, as well as regional and
new entrant airlines, and other forms of transportation,
including rail and private automobiles. Southwests
revenues are sensitive to the actions of other carriers in the
areas of capacity, pricing, scheduling, codesharing, and
promotions.
Southwests
low cost structure is one of its primary competitive advantages,
and many factors could affect the Companys ability to
control its costs.
Factors affecting the Companys ability to control its
costs include the price and availability of fuel, results of
Employee labor contract negotiations, Employee hiring and
retention rates, costs for health care, capacity decisions by
the Company and its competitors, unscheduled required aircraft
airframe or engine repairs, regulatory requirements, ability to
access capital or financing at competitive rates in financial
markets, and future financing decisions made by the Company. In
addition, a key contributor to the Companys low cost
structure is its use of a single aircraft type, the Boeing 737.
Although the Company is able to purchase some of these aircraft
from parties other than Boeing, most of its purchases are direct
from Boeing. Therefore, if the Company were unable to acquire
additional aircraft from Boeing, or Boeing were unable or
unwilling to provide adequate support for its products, the
Companys operations could be adversely impacted. In
addition, the Companys dependence on a single aircraft
type could result in downtime for part or all of the
Companys fleet if mechanical or regulatory issues relating
to the Boeing 737 aircraft type arise. However, given the
Companys years of experience with the Boeing 737 aircraft
type and its longterm relationship with Boeing, the Company
believes the advantages of operating a single fleet type
outweigh the risks of its single aircraft strategy.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Aircraft
Southwest operated a total of 520 Boeing 737 aircraft as of
December 31, 2007, of which 86 and 9 were under operating
and capital leases, respectively. The remaining 425 aircraft
were owned.
The following table details information on the 520 aircraft in
the Companys fleet as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Age
|
|
|
Number of
|
|
|
Number
|
|
|
Number
|
|
737 Type
|
|
Seats
|
|
|
(Yrs)
|
|
|
Aircraft
|
|
|
Owned
|
|
|
Leased
|
|
|
-300
|
|
|
137
|
|
|
|
16.7
|
|
|
|
194
|
|
|
|
112
|
|
|
|
82
|
|
-500
|
|
|
122
|
|
|
|
16.7
|
|
|
|
25
|
|
|
|
16
|
|
|
|
9
|
|
-700
|
|
|
137
|
|
|
|
4.2
|
|
|
|
301
|
|
|
|
297
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
|
9.4
|
|
|
|
520
|
|
|
|
425
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
In 2007, the Company announced a reduction in its planned growth
rate for fourth quarter 2007 and for full year 2008. A portion
of this growth slowdown will be achieved through changes in the
Companys aircraft deliveries from Boeing. In 2008, the
Company also plans to return from lease or sell a total of 22
aircraft. In total, at December 31, 2007, the Company had
firm orders, options and purchase rights for the purchase of
Boeing 737 aircraft as follows:
Firm
Orders, Options and Purchase Rights for Boeing
737-700
Aircraft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Boeing Company
|
|
|
|
|
Delivery Year
|
|
Firm Orders
|
|
|
Options
|
|
|
Purchase Rights
|
|
|
Total
|
|
|
2008
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
2009
|
|
|
20
|
|
|
|
8
|
|
|
|
|
|
|
|
28
|
*
|
2010
|
|
|
10
|
|
|
|
24
|
|
|
|
|
|
|
|
34
|
|
2011
|
|
|
10
|
|
|
|
22
|
|
|
|
|
|
|
|
32
|
|
2012
|
|
|
10
|
|
|
|
30
|
|
|
|
|
|
|
|
40
|
|
2013
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
2014
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
2008-2014
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108
|
|
|
|
84
|
|
|
|
54
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The Company exercised one option in January 2008, bring 2009
firm orders and options to 21 and 7, respectively.
|
Ground
Facilities and Services
Southwest leases terminal passenger service facilities at each
of the airports it serves, to which it has made various
leasehold improvements. The Company leases the land and
structures on a long-term basis for its maintenance centers
(located at Dallas Love Field, Houston Hobby, Phoenix Sky
Harbor, and Chicago Midway), its flight training center at
Dallas Love Field (which houses seven 737 simulators), and its
corporate headquarters, also located at Dallas Love Field. As of
December 31, 2007, the Company operated six reservation
centers. The reservation centers located in Chicago,
Albuquerque, and Oklahoma City occupy leased space. The Company
owns its Houston, Phoenix, and San Antonio reservation
centers.
The Company performs substantially all line maintenance on its
aircraft and provides ground support services at most of the
airports it serves. However, the Company has arrangements with
certain aircraft maintenance firms for major component
inspections and repairs for its airframes and engines, which
comprise the majority of the Companys annual aircraft
maintenance costs.
|
|
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 Companys federal income tax
returns and, in the course of those examinations, proposes
adjustments to the Companys federal income tax liability
reported on such returns. It is the Companys practice to
vigorously contest those proposed adjustments that it deems
lacking merit. The Companys management does not expect 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 Companys financial condition, results of
operations, or cash flows.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None to be reported.
13
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following information regarding the Companys executive
officers is as of January 1, 2008.
|
|
|
|
|
|
|
Name
|
|
Position
|
|
Age
|
|
Herbert D. Kelleher
|
|
Executive Chairman of the Board
|
|
|
76
|
|
Gary C. Kelly
|
|
Vice Chairman of the Board and Chief Executive Officer
|
|
|
52
|
|
Colleen C. Barrett
|
|
President and Secretary
|
|
|
63
|
|
Robert E. Jordan
|
|
Executive Vice President Strategy and Technology
|
|
|
47
|
|
Ron Ricks
|
|
Executive Vice President Law, Airports, and Public
Affairs
|
|
|
58
|
|
Michael G. Van de Ven
|
|
Executive Vice President Chief of Operations
|
|
|
46
|
|
Davis S. Ridley
|
|
Senior Vice President Marketing
|
|
|
54
|
|
Laura H. Wright
|
|
Senior Vice President Finance and Chief Financial
Officer
|
|
|
47
|
|
Set forth below is a description of the background of each of
the Companys executive officers.
Herbert D. Kelleher
has been Executive Chairman of the
Board of the Company since March 1978. Mr. Kelleher became
interim President and Chief Executive Officer of the Company in
September 1981, and assumed those offices on a permanent basis
in February 1982, relinquishing those titles in June 2001.
Mr. Kelleher serves on the Board of the Federal Reserve
Bank of Dallas.
Gary C. Kelly
has been Vice Chairman of the Board and
Chief Executive Officer of the Company since July 2004. Prior to
that time, Mr. Kelly was Executive Vice
President Chief Financial Officer from
June 2001 to July 2004, and Vice President
Finance and Chief Financial Officer from 1989 to 2001.
Mr. Kelly joined the Company in 1986 as its Controller.
Colleen C. Barrett
has been President of the Company
since June 2001, at which time she was also named to the Board
of Directors. Prior to that time, Ms. Barrett was Executive
Vice President Customers from 1990 to 2001 and Vice
President Administration from 1986 to 1990.
Ms. Barrett has been Secretary of the Company since March
1978. Ms. Barrett is a Director of J.C. Penney Company, Inc.
Robert E. Jordan
has been Executive Vice
President Strategy and Technology since September
2006. Prior to that time, Mr. Jordan served as Senior Vice
President Enterprise Spend Management from August
2004 to September 2006 and as Vice President
Technology from October 2002 to August 2004.
Ron Ricks
has been Executive Vice President
Law, Airports, and Public Affairs for the Company since
September 2006. Prior to that time, Mr. Ricks was Senior
Vice President Law, Airports, and Public Affairs
from August 2004 until September 2006. Prior to 2004,
Mr. Ricks served as Vice President Governmental
Affairs of the Company.
Michael G. Van de Ven
has been Executive Vice
President Chief of Operations of the Company since
September 2006. Prior to that time, Mr. Van de Ven served
as Executive Vice President Aircraft Operations from
November 2005 through August 2006, as Senior Vice
President Planning from August 2004 to
November 2005, and as Vice President Financial
Planning & Analysis from June 2001 to
August 2004.
Davis S. Ridley
has been Senior Vice
President Marketing since November 2007. Prior to
such time, Mr. Ridley served as Senior Vice
President People & Leadership Development
from August 2004 to January 2006, and as Vice
President Ground Operations from May 1998 to August
2004. Mr. Ridley served as a consultant for the Company
from January 2006 to November 2007.
Laura H. Wright
has been Senior Vice
President Finance and Chief Financial Officer of the
Company since July 2004. Prior to such time, Ms. Wright
served as Vice President Finance and Treasurer
beginning June 2001.
14
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
|
Southwests common stock is listed on the New York Stock
Exchange and is traded under the symbol LUV. The
following table shows, for the periods indicated, the high and
low sales prices per share of the Companys common stock,
as reported on the NYSE Composite Tape, and the cash dividends
per share paid on the Companys common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Dividend
|
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
0.00450
|
|
|
$
|
16.58
|
|
|
$
|
14.50
|
|
2nd Quarter
|
|
|
0.00450
|
|
|
|
15.90
|
|
|
|
14.03
|
|
3rd Quarter
|
|
|
0.00450
|
|
|
|
16.96
|
|
|
|
14.21
|
|
4th Quarter
|
|
|
0.00450
|
|
|
|
15.06
|
|
|
|
12.12
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
0.00450
|
|
|
$
|
18.10
|
|
|
$
|
15.51
|
|
2nd Quarter
|
|
|
0.00450
|
|
|
|
18.20
|
|
|
|
15.10
|
|
3rd Quarter
|
|
|
0.00450
|
|
|
|
18.20
|
|
|
|
15.66
|
|
4th Quarter
|
|
|
0.00450
|
|
|
|
17.03
|
|
|
|
14.61
|
|
As of January 30, 2008, there were 10,708 holders of record
of the Companys common stock.
15
Stock
Performance Graph
The following Performance Graph and related information shall
not be deemed soliciting material or
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
the Company specifically incorporates it by reference into such
filing.
The following graph compares the cumulative total Shareholder
return on the Companys common stock over the five-year
period ended December 31, 2007, with the cumulative total
return during such period of the Standard and Poors 500
Stock Index and the AMEX Airline Index. The comparison assumes
$100 was invested on December 31, 2002, in the
Companys common stock and in each of the foregoing indices
and assumes reinvestment of dividends. The stock performance
shown on the graph below represents historical stock performance
and is not necessarily indicative of future stock price
performance.
COMPARISION
OF FIVE YEAR CUMULATIVE TOATL RETURN
AMONG SOUTHWEST AIRLINES CO., S&P 500 INDEX,
AND AMEX AIRLINE INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/02
|
|
|
|
12/31/03
|
|
|
|
12/31/04
|
|
|
|
12/31/05
|
|
|
|
12/31/06
|
|
|
|
12/31/07
|
|
Southwest Airlines Co.
|
|
|
$
|
100
|
|
|
|
$
|
116
|
|
|
|
$
|
117
|
|
|
|
$
|
119
|
|
|
|
$
|
111
|
|
|
|
$
|
88
|
|
S&P 500
|
|
|
$
|
100
|
|
|
|
$
|
128
|
|
|
|
$
|
142
|
|
|
|
$
|
149
|
|
|
|
$
|
172
|
|
|
|
$
|
182
|
|
AMEX Airline
|
|
|
$
|
100
|
|
|
|
$
|
158
|
|
|
|
$
|
155
|
|
|
|
$
|
141
|
|
|
|
$
|
151
|
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Item 6.
|
Selected
Financial Data
|
The following financial information for the five years ended
December 31, 2007, has been derived from the Companys
Consolidated Financial Statements. This information should be
read in conjunction with the Consolidated Financial Statements
and related notes thereto included elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in millions, except per share amounts)
|
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
9,861
|
|
|
$
|
9,086
|
|
|
$
|
7,584
|
|
|
$
|
6,530
|
|
|
$
|
5,937
|
|
Operating expenses
|
|
|
9,070
|
|
|
|
8,152
|
|
|
|
6,859
|
|
|
|
6,126
|
|
|
|
5,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
791
|
|
|
|
934
|
|
|
|
725
|
|
|
|
404
|
|
|
|
379
|
|
Other expenses (income) net
|
|
|
(267
|
)
|
|
|
144
|
|
|
|
(54
|
)
|
|
|
65
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
1,058
|
|
|
|
790
|
|
|
|
779
|
|
|
|
339
|
|
|
|
604
|
|
Provision for income taxes
|
|
|
413
|
|
|
|
291
|
|
|
|
295
|
|
|
|
124
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
645
|
|
|
$
|
499
|
|
|
$
|
484
|
|
|
$
|
215
|
|
|
$
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic
|
|
$
|
.85
|
|
|
$
|
.63
|
|
|
$
|
.61
|
|
|
$
|
.27
|
|
|
$
|
.48
|
|
Net income per share, diluted
|
|
$
|
.84
|
|
|
$
|
.61
|
|
|
$
|
.60
|
|
|
$
|
.27
|
|
|
$
|
.46
|
|
Cash dividends per common share
|
|
$
|
.0180
|
|
|
$
|
.0180
|
|
|
$
|
.0180
|
|
|
$
|
.0180
|
|
|
$
|
.0180
|
|
Total assets at period-end
|
|
$
|
16,772
|
|
|
$
|
13,460
|
|
|
$
|
14,003
|
|
|
$
|
11,137
|
|
|
$
|
9,693
|
|
Long-term obligations at period-end
|
|
$
|
2,050
|
|
|
$
|
1,567
|
|
|
$
|
1,394
|
|
|
$
|
1,700
|
|
|
$
|
1,332
|
|
Stockholders equity at period-end
|
|
$
|
6,941
|
|
|
$
|
6,449
|
|
|
$
|
6,675
|
|
|
$
|
5,527
|
|
|
$
|
5,029
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers carried
|
|
|
88,713,472
|
|
|
|
83,814,823
|
|
|
|
77,693,875
|
|
|
|
70,902,773
|
|
|
|
65,673,945
|
|
Enplaned passengers
|
|
|
101,910,809
|
|
|
|
96,276,907
|
|
|
|
88,379,900
|
|
|
|
81,066,038
|
|
|
|
74,719,340
|
|
Revenue passenger miles (RPMs) (000s)
|
|
|
72,318,812
|
|
|
|
67,691,289
|
|
|
|
60,223,100
|
|
|
|
53,418,353
|
|
|
|
47,943,066
|
|
Available seat miles (ASMs) (000s)
|
|
|
99,635,967
|
|
|
|
92,663,023
|
|
|
|
85,172,795
|
|
|
|
76,861,296
|
|
|
|
71,790,425
|
|
Load factor(1)
|
|
|
72.6
|
%
|
|
|
73.1
|
%
|
|
|
70.7
|
%
|
|
|
69.5
|
%
|
|
|
66.8
|
%
|
Average length of passenger haul (miles)
|
|
|
815
|
|
|
|
808
|
|
|
|
775
|
|
|
|
753
|
|
|
|
730
|
|
Average aircraft stage length (miles)
|
|
|
629
|
|
|
|
622
|
|
|
|
607
|
|
|
|
576
|
|
|
|
558
|
|
Trips flown
|
|
|
1,160,699
|
|
|
|
1,092,331
|
|
|
|
1,028,639
|
|
|
|
981,591
|
|
|
|
949,882
|
|
Average passenger fare
|
|
$
|
106.60
|
|
|
$
|
104.40
|
|
|
$
|
93.68
|
|
|
$
|
88.57
|
|
|
$
|
87.42
|
|
Passenger revenue yield per RPM
|
|
|
13.08
|
¢
|
|
|
12.93
|
¢
|
|
|
12.09
|
¢
|
|
|
11.76
|
¢
|
|
|
11.97
|
¢
|
Operating revenue yield per ASM
|
|
|
9.90
|
¢
|
|
|
9.81
|
¢
|
|
|
8.90
|
¢
|
|
|
8.50
|
¢
|
|
|
8.27
|
¢
|
Operating expenses per ASM
|
|
|
9.10
|
¢
|
|
|
8.80
|
¢
|
|
|
8.05
|
¢
|
|
|
7.97
|
¢
|
|
|
7.74
|
¢
|
Fuel costs per gallon (average)
|
|
$
|
1.70
|
|
|
$
|
1.53
|
|
|
$
|
1.03
|
|
|
$
|
0.83
|
|
|
$
|
0.72
|
|
Fuel consumed, in gallons (millions)
|
|
|
1,489
|
|
|
|
1,389
|
|
|
|
1,287
|
|
|
|
1,201
|
|
|
|
1,143
|
|
Fulltime equivalent Employees at period-end
|
|
|
34,378
|
|
|
|
32,664
|
|
|
|
31,729
|
|
|
|
31,011
|
|
|
|
32,847
|
|
Size of fleet at period-end(2)
|
|
|
520
|
|
|
|
481
|
|
|
|
445
|
|
|
|
417
|
|
|
|
388
|
|
|
|
|
(1)
|
|
Revenue passenger miles divided by available seat miles.
|
|
(2)
|
|
Includes leased aircraft.
|
17
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Year in
Review
Several events were significant for Southwest during 2007. For
example, Southwest:
* Extended its string of consecutive profitable years to 35 and
consecutive profitable quarters to 67. Both of these marks are
unmatched in the modern era of aviation results.
* Implemented a new Customer boarding method for flights to
significantly reduce the average time a Customer spends waiting
in line at the gate, while retaining the Companys famous
open seating policy once aboard the aircraft.
* Introduced a new fare structure including a Business
Select product, which enables Customers to be among the
first to board the aircraft. We also unveiled enhancements to
our Rapid Rewards program.
* Began a significant gate re-design to enhance the airport
experience for Customers, to be installed at virtually all
airports served by the Company.
* Grew the Companys fleet by 39 Boeing
737-700
aircraft to a total of 520 737s as of December 31, 2007.
* Earned $727 million (on a cash basis, before
profitsharing and income taxes) from the expiration/settlement
of fuel derivative instruments the Company had previously
entered into to protect against jet fuel price increases.
* Incurred a one-time $25 million charge (before
profitsharing and income taxes) related to an early retirement
program that was offered by the Company and accepted by more
than 600 Employees during third quarter 2007, as one of many
efforts underway to improve the Companys future
profitability.
* Announced an expansion of our GDS (Global Distribution System)
and corporate travel account efforts through an agreement with
Travelports Galileo and Worldspan.
* Recommenced service to San Francisco International
Airport, with the highest initial concentration of flights of
any new city in the Companys history.
* Repurchased 66 million shares of Company common stock
totaling $1.0 billion through programs authorized by the
Companys Board of Directors.
Although the Companys 2007 net income of
$645 million ($.84 per share, diluted) exceeded its
2006 net income of $499 million ($.61 per share,
diluted), the increase was entirely driven by certain gains and
losses, recorded in accordance with Statement of Financial
Accounting Standards No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, as amended
(SFAS 133), that relate to fuel derivatives expiring in
future periods. In fact, the Companys operating income,
which excludes these items, actually declined 15.3 percent
from 2006 to 2007, primarily due to the significant increase in
fuel costs, which the Company was not able to recover through
increased revenues. The airline revenue environment was more
difficult than the Company envisioned coming into 2007. This was
due to a slowing economy as well as continued competitive
pressures from both new airlines as well as those that have
significantly reduced their cost structures through the
bankruptcy process or the threat of bankruptcy. The Company did
raise fares several times during 2007 in an attempt to offset
fuel cost pressures; however, these increases did not keep up
with the rapidly increasing fuel prices.
Looking ahead to 2008, the Company believes it has retained, and
in some cases strengthened, its low-cost competitive advantages
as demonstrated by its protective fuel hedging position,
excellent Employees, and strong balance sheet. These enable
Southwest to respond quickly to potential industry consolidation
and to favorable market opportunities in the face of an
uncertain economy and record energy prices. Based on current and
projected energy prices for 2008 and expected growth plans, the
Company believes net cash expenditures for jet fuel, which
exclude certain FAS 133 gains and losses, could increase
more than $500 million compared to 2007, even including the
effects of fuel derivative contracts the Company has in place as
of January 2008. The Companys fuel derivative contracts in
place for 2008 provide protection for over 70 percent of
the Companys expected jet fuel consumption at an average
price of approximately $51 per barrel of crude oil. The Company
is also currently expecting a significant increase in its
aircraft engine maintenance activity in 2008. The Company will
attempt to overcome the impact of higher anticipated 2008 fuel
prices and other cost pressures through improved revenues and
continued focus on non-fuel costs. Based on this current
outlook, Southwest has reduced its previously planned growth
rate for 2008. The Company currently plans to grow its fleet by
a net seven aircraft. The Company will add 29 new
737-700
aircraft from Boeing, but plans to return from lease or sell a
total of 22 aircraft, resulting in a net available seat mile
(ASM) capacity
18
increase of four to five percent. For first quarter 2008, the
Companys year-over-year capacity increase is expected to
slightly exceed six percent. Based on current plans, the
Companys fleet is scheduled to total 527 737s by the end
of 2008.
Results
of Operations
Southwests profit of $645 million ($.84 per share,
diluted) in 2007 was an increase of $146 million, or
29.3 percent, compared to the Companys 2006 net
income of $499 million ($.61 per share, diluted). However,
the Companys net profit results in both 2007 and 2006
include certain gains and losses, recorded in accordance with
SFAS 133, that relate to fuel derivatives expiring in
future periods. These adjustments, which are related to the
ineffectiveness of hedges and the loss of hedge accounting for
certain fuel derivatives, are included in Other (gains)
losses, which is below the operating income line, in both
periods. In 2007, these adjustments totaled net gains of
$360 million. For 2006, these adjustments totaled net
losses of $101 million. Therefore, Southwest believes
operating income provides a better indication of the
Companys financial performance for both 2007 and 2006 than
does net income. Southwests 2007 operating income was
$791 million, a decrease of $143 million, or
15.3 percent, compared to 2006. The decrease in operating
income was driven primarily by a substantial increase in fuel
expense, despite the fact that the Company once again benefited
tremendously from its fuel hedging program. The Company had
instruments in place to protect against over 90 percent of
its fuel consumption needs at an average crude oil equivalent
price of $50 per barrel. This resulted in a $686 million
reduction to Fuel and oil expense during 2007, although, even
with this protection, the Companys average jet fuel cost
per gallon increased from $1.53 in 2006 to $1.70 in 2007.
Although fuel prices began 2007 at moderately high levels, they
quickly increased and stayed at record levels throughout most of
the second half of the year. Market crude oil prices flirted
with $100 per barrel several times during 2007 and market
(unhedged) jet fuel prices reached as high as $2.87 per gallon
during the second half of the year.
Consolidated operating revenues increased $775 million, or
8.5 percent, primarily due to a $707 million, or
8.1 percent, increase in passenger revenues. The increase
in passenger revenues was primarily due to an increase in
capacity, as the Company added aircraft and flights, resulting
in a 7.5 percent increase in available seat miles compared
to 2006. The Company purchased a total of 37 new Boeing
737-700
aircraft during 2007, and added another two leased
737-700s
from a previous owner, resulting in the addition of 39 aircraft
for the year. The Company attempted to combat high fuel prices
through modest fare increases. However, general economic
conditions as well as significant low-fare competition made it
difficult to raise fares as much as the Company had done in
2006. The Companys passenger revenue yield per RPM
(passenger revenues divided by revenue passenger miles)
increased 1.2 percent compared to 2006. Unit revenue (total
revenue divided by available seat miles) also increased
0.9 percent compared to 2006 levels, as a result of the
higher RPM yield. The Company has been encouraged by more recent
year-over-year unit revenue trends, which improved each month
during fourth quarter 2007. The improved trends have continued
thus far in first quarter 2008. Because of the uncertainty
surrounding our nations overall economy, however, it is
difficult for the Company to precisely predict first quarter
2008 revenues.
Consolidated freight revenues decreased $4 million, or
3.0 percent, versus 2006. A $10 million, or
8.5 percent, increase in freight revenues, resulting
primarily from higher rates, was more than offset by a
$14 million decline in mail revenues. The lower mail
revenues were due to the Companys decision to discontinue
carrying mail for the U.S. Postal Service effective as of
the end of second quarter 2006. The Company expects an increase
in consolidated freight revenues during first quarter 2008,
primarily due to an increase in capacity and higher rates
charged. Other revenues increased $72 million,
or 35.6 percent, compared to 2006, primarily from higher
commissions earned from programs the Company sponsors with
certain business partners, such as the Company sponsored
Chase
®
Visa card. The Company currently expects another increase in
first quarter 2008, also due to higher commissions earned, and
at a somewhat comparable rate to the 2007 increase.
19
Operating
Expenses
Consolidated operating expenses for 2007 increased
$918 million, or 11.3 percent, compared to a
7.5 percent increase in capacity. Historically, changes in
operating expenses for airlines are typically driven by changes
in capacity, or ASMs. The following presents Southwests
operating expenses per ASM for 2007 and 2006 followed by
explanations of these changes on a per-ASM basis
and/or
on a
dollar basis (in cents, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Salaries, wages, and benefits
|
|
|
3.22
|
¢
|
|
|
3.29
|
¢
|
|
|
(.07
|
)¢
|
|
|
(2.1
|
)%
|
Fuel and oil
|
|
|
2.55
|
|
|
|
2.31
|
|
|
|
.24
|
|
|
|
10.4
|
|
Maintenance materials and repairs
|
|
|
.62
|
|
|
|
.51
|
|
|
|
.11
|
|
|
|
21.6
|
|
Aircraft rentals
|
|
|
.16
|
|
|
|
.17
|
|
|
|
(.01
|
)
|
|
|
(5.9
|
)
|
Landing fees and other rentals
|
|
|
.56
|
|
|
|
.53
|
|
|
|
.03
|
|
|
|
5.7
|
|
Depreciation and amortization
|
|
|
.56
|
|
|
|
.56
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1.43
|
|
|
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9.10
|
¢
|
|
|
8.80
|
¢
|
|
|
.30
|
¢
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys 2007 CASM (cost per available seat mile)
increased 3.4 percent compared to 2006. Approximately
80 percent of this increase was solely due to the increase
in fuel expense, net of gains from the Companys fuel
hedging program. The remainder of the increase was due to higher
maintenance expense. All other operating expense categories
combined to be approximately flat compared to 2006. Due to
higher fuel prices, the Company has intensified its focus on
controlling non-fuel costs and continues to mitigate wage rate
and benefit cost pressures through productivity and efficiency
improvements. The Companys headcount per aircraft at
December 31, 2007, was 66, versus a year-ago level of 68.
From the end of 2003 to the end of 2007, Southwests
headcount per aircraft decreased 22 percent, as the Company
implemented various technology improvements, which improved
efficiency and enabled the Company to grow capacity without a
commensurate increase in headcount. Based on current cost
trends, the Company expects first quarter 2008 unit costs
to increase from first quarter 2007s 8.93 cents, due
primarily to a significant increase in fuel costs and the
continuation of higher maintenance costs. The higher expected
fuel costs are due to the fact that the Companys
protective position as to fuel derivative instruments is not as
favorable as first quarter 2007, and current physical (unhedged)
jet fuel prices are significantly higher than the prior year.
On an absolute dollar basis, Salaries, wages, and benefits
increased $161 million, primarily from a $204 million
increase in salaries and wages, partially offset by a
$43 million decrease in benefits. The dollar increase in
salaries and wages was due primarily to a 5.2 percent
headcount increase, and the dollar decrease in benefits was due
primarily to a $33 million decrease in profitsharing,
attributable to lower income available for profitsharing, and a
$43 million decrease in share-based compensation, due to
fewer Employee stock options becoming vested during 2007 versus
2006. These benefits decreases were partially offset by higher
healthcare costs. Although the Companys net income was
higher than 2006, income available for profitsharing was lower,
since the Companys profitsharing plan does not consider
the unrealized gains
and/or
losses the Company records in its fuel hedging program as a
result of SFAS 133. Salaries, wages, and benefits expense
per ASM decreased 2.1 percent compared to 2006, primarily
due to lower profitsharing expense and lower share-based
compensation expense, despite the increase in ASMs. See
Note 10 to the Consolidated Financial Statements for
further information on SFAS 133 and fuel hedging, and
Note 13 for further information on share-based
compensation. Based on current trends, the Company expects
salaries, wages, and benefits per ASM in first quarter 2008 to
be in line with first quarter 2007s unit cost.
The Companys Pilots are subject to an agreement with the
Southwest Airlines Pilots Association (SWAPA),
which became amendable during September 2006. The Company and
SWAPA are currently in discussions on a new agreement.
The Companys Flight Attendants are subject to an agreement
with the Transport Workers Union of America, AFL-CIO
(TWU), which becomes amendable in June 2008.
The Companys Ramp, Operations, Provisioning, and Freight
Agents are subject to an agreement with the TWU, which becomes
amendable in July 2008. However,
20
the Company and TWU began negotiations on a new agreement in
January 2008.
The Companys Stock Clerks are subject to an agreement with
the International Brotherhood of Teamsters, and the
Companys Mechanics are subject to an agreement with the
Aircraft Mechanics Fraternal Association. Both of these
agreements become amendable in August 2008.
The Companys Customer Service and Reservations Agents are
subject to an agreement with the International Association of
Machinists and Aerospace Workers, AFL-CIO, which becomes
amendable in November 2008.
Fuel and oil expense increased $398 million, and on a
per-ASM basis increased 10.4 percent versus 2006.
Approximately 60 percent of the dollar increase was due to
an increase in fuel prices, and the remainder was from an
increase in gallons consumed to support the 7.5 percent
capacity increase versus 2006. On a per-ASM basis, nearly the
entire increase was due to higher fuel prices. The fuel
derivative instruments the Company held for 2007 were not as
favorable as those held in the prior year, as they were at
higher average crude-oil equivalent prices than the instruments
that settled/expired in 2006. Despite this, the Companys
hedging program resulted in the realization of $727 million
in cash settlements during 2007. These settlements generated a
2007 reduction to Fuel and oil expense of $686 million,
compared to the prior year when the Companys fuel
derivative instruments resulted in a $634 million reduction
to Fuel and oil expense. Even with these significant hedge
positions in both years, the Companys jet fuel cost per
gallon increased 11.1 percent versus 2006. The average cost
per gallon of jet fuel in 2007 was $1.70 compared to $1.53 in
2006, excluding fuel-related taxes and net of hedging gains. See
Note 10 to the Consolidated Financial Statements. The 2007
increase in fuel prices was partially offset by steps the
Company has taken to improve the fuel efficiency of its
aircraft, including the addition of blended winglets to all of
the Companys
737-700
aircraft. The Company is also in the process of installing
blended winglets on a significant number of its
737-300
aircraft.
The Company holds a significant fuel hedge position for 2008,
although for a lower percentage of forecasted consumption than
in 2007. As of mid-January 2008, the Company is nearly
75 percent protected with fuel derivative instruments for
its first quarter 2008 jet fuel requirements, at an average
crude oil equivalent price of $51 per barrel, and the majority
of these positions effectively perform like option
contracts allowing the Company to benefit in most
cases from energy price decreases. During first quarter 2007,
market prices (unhedged) for jet fuel averaged $1.81 per gallon,
and the Company had fuel derivatives in place to protect against
nearly 100 percent of its fuel usage at a crude oil
equivalent price of $50 per barrel. January 2008 average market
prices (unhedged) for jet fuel have been in the $2.60 to $2.65
range. Based on this difference in protection and current market
conditions, the Company expects its first quarter 2008 jet fuel
cost per gallon to be approximately $2.00 per gallon, excluding
the impact of any hedge ineffectiveness and derivatives that do
not qualify for hedge accounting as defined in SFAS 133. In
addition, the Company had fuel derivative contracts in place for
over 70 percent of its expected fuel consumption for the
remainder of 2008 at approximately $51 per barrel; over
55 percent in 2009 at approximately $51 per barrel; nearly
30 percent in 2010 at approximately $63 per barrel; over
15 percent in 2011 at $64 per barrel; and over
15 percent in 2012 at $63 per barrel.
Maintenance materials and repairs per ASM increased
21.6 percent compared to 2006, while increasing
$148 million on a dollar basis. On a dollar basis, engine
expense accounted for over 45 percent of the increase and
airframe expense accounted for over 43 percent of the
increase. With respect to airframe expense, the Company
completed significantly more planned airframe inspection and
repair events than in the prior year. These events, which are
required based on the number of flight hours each individual
aircraft has flown, were higher in number as well as cost per
event, and were also due to the ongoing transition to a new
airframe maintenance program for
737-300
and
737-500
aircraft which began in 2006. In engine expense, there was a
significant increase in repairs for the Companys
737-700
aircraft engines primarily due to the maturation of this fleet,
which was introduced in 1997, and more repair events than
expected. On a per-ASM basis, approximately 48 percent of
the increase in maintenance materials and repairs was a result
of the higher airframe expense, and approximately
43 percent of the increase was due to the higher engine
expense. In first quarter 2008, the Company expects an increase
in maintenance materials and repairs per ASM compared to first
quarter 2007 and fourth quarter 2007, due to higher engine
expense for
737-700
aircraft as well as continued higher airframe expense from the
transition of aircraft to the Companys new airframe
maintenance program for
737-300
and
737-500
aircraft.
Aircraft rentals expense per ASM decreased 5.9 percent and,
on a dollar basis, decreased slightly. The decrease per ASM was
due primarily to the fact that the Company increased overall
ASMs by 7.5 percent, but the number of aircraft on
operating lease increased by only two from 2006 to 2007. The
Company added 37
21
purchased aircraft to its fleet during 2007, and leased two
additional
737-700
aircraft. The Company currently expects similar year-over-year
rental expense comparisons for first quarter 2008.
Landing fees and other rentals increased $65 million on a
dollar basis and 5.7 percent on a per-ASM basis, compared
to 2006. The dollar increase was due primarily to an increase in
airport gate space to support the increase in capacity and trips
flown versus 2006. On a per-ASM basis, the increase was due
primarily to higher rates paid for airport space. The Company
currently expects a year-over-year increase in landing fees and
other rentals per ASM for first quarter 2008, primarily due to
higher rates paid for airport space.
Depreciation and amortization expense increased $40 million
on a dollar basis compared to 2006, but was flat on a per-ASM
basis. The dollar increase was due primarily to 37 new
737-700
aircraft purchased during 2007. Based on current fleet and
growth plans, the Company expects a similar year-over-year
comparison for first quarter 2008 on a per-ASM basis. See
Note 4 to the Consolidated Financial Statements for further
information on the Companys future aircraft deliveries.
Other operating expenses increased $108 million but were
flat on a per-ASM basis, compared to 2006. On a dollar basis,
approximately 20 percent of the increase was due to an
increase in revenue-related costs associated with the
8.1 percent increase in passenger revenues (such as credit
card processing fees) and approximately 20 percent was due
to higher personnel expenses (which includes items associated
with flight crew travel, such as hotel and per diem costs)
caused by the increase in capacity and trips flown. Excluding
anticipated gains from the sale of aircraft, the Company
currently expects an increase in other operating expenses on a
per-ASM basis for first quarter 2008 compared to first quarter
2007, assuming increased revenues.
Other expenses (income) included interest expense,
capitalized interest, interest income, and other gains and
losses. Interest expense decreased by $9 million, or
7.0 percent, primarily due to the Companys repayment
of $729 million in debt during 2006 and 2007. This was
partially offset by the issuance of $800 million in new
debt instruments in 2006 and 2007; however, the timing of the
new debt issued compared to the debt repaid resulted in lower
expense for 2007. The Company currently expects an increase in
interest expense compared to 2007, primarily due to a higher
average debt balance associated with recent borrowings in late
2006 and in 2007. See Note 7 to the Consolidated Financial
Statements for more information on long-term debt transactions.
Capitalized interest declined slightly compared to 2006 due to a
reduction in progress payment balances for scheduled future
aircraft deliveries. Interest income decreased $40 million,
or 47.6 percent, primarily due to a decrease in average
cash and short-term investment balances on which the Company
earns interest. See Note 1 to the Consolidated Financial
Statements for more information.
Other (gains) losses, net, primarily includes amounts recorded
in accordance with the Companys hedging activities and
SFAS 133. During 2007, the Company recorded significant
gains related to the ineffectiveness of its hedges as well as to
the increase in market value of fuel derivative contracts that
were marked to market because they didnt qualify for
SFAS 133 hedge accounting. The gains resulted from the
dramatic increase in the fair value of the Companys
portfolio of fuel derivative instruments as commodity prices
reached record levels. During 2006, the Company recorded losses
related to the ineffectiveness of its hedges, as well as the
increase in market value of fuel derivative contracts that were
marked to market because they didnt qualify for
SFAS 133 hedge accounting, as commodity prices declined
during that year. The following table displays the components of
Other (gains) losses, net, for the years ended December 31,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Mark-to-market impact from fuel contracts settling in future
periods included in Other (gains) losses, net
|
|
$
|
(219
|
)
|
|
$
|
42
|
|
Ineffectiveness from fuel hedges settling in future
periods included in Other (gains) losses, net
|
|
|
(51
|
)
|
|
|
39
|
|
Realized ineffectiveness and mark-to-market (gains) or
losses included in Other (gains) losses, net
|
|
|
(90
|
)
|
|
|
20
|
|
Premium cost of fuel contracts included in Other (gains) losses,
net
|
|
|
58
|
|
|
|
52
|
|
Other
|
|
|
10
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(292
|
)
|
|
$
|
151
|
|
22
See Note 10 to the Consolidated Financial Statements for
further information on the Companys hedging activities.
The provision for income taxes, as a percentage of income before
taxes, increased to 39.0 percent in 2007 from
36.8 percent in 2006. The higher 2007 rate included an
$11 million ($.01 per share, diluted) net addition related
to a revision in Illinois income tax laws enacted in 2007. The
2006 rate included a $9 million net reduction related to a
revision in the State of Texas franchise tax law enacted during
2006. The Company currently expects its 2008 effective tax rate
to be between 36 and 37 percent. The lower expected 2008
rate is primarily due to the January 2008 reversal of the 2007
Illinois tax law change, that resulted in the $11 million
tax increase. The Company currently expects to reverse the
$11 million net charge during first quarter 2008.
The Companys consolidated net income for 2006 was
$499 million ($.61 per share, diluted), as compared to
2005 net income of $484 million ($.60 per share,
diluted), an increase of $15 million, or 3.1 percent.
Operating income for 2006 was $934 million, an increase of
$209 million, or 28.8 percent, compared to 2005. The
2006 increase in operating income was due primarily to higher
revenues from the Companys fleet growth, improved load
factors, and higher fares, which more than offset a significant
increase in the cost of jet fuel. In both 2006 and 2005, the
Company recognized adjustments related to the ineffectiveness of
hedges and the loss of hedge accounting for certain fuel
derivatives, which are included in Other (gains)
losses. For 2006, these adjustments totaled net losses of
$101 million. For 2005, these adjustments totaled net gains
of $110 million.
Consolidated operating revenues increased $1.5 billion, or
19.8 percent, almost entirely due to a $1.5 billion,
or 20.2 percent, increase in passenger revenues. The
increase in passenger revenues was due primarily to an increase
in capacity, an increase in RPM yield, and an increase in load
factor. Approximately 45 percent of the increase in
passenger revenue was due to the Companys 8.8 percent
increase in available seat miles compared to 2005. The Company
increased available seat miles as a result of the addition of 36
737-700
aircraft. Approximately 35 percent of the increase in
passenger revenue was due to a 6.9 percent increase in
passenger yields. Average passenger fares increased
11.4 percent compared to 2005, primarily due to less fare
discounting because of strong demand for air travel coupled with
the availability of fewer seats as a result of industrywide
domestic capacity reductions. The remainder of the passenger
revenue increase was due primarily to the 2.4 point increase in
the Companys load factor compared to 2005.
The airline revenue environment changed significantly from the
first half of 2006 to the second half of the year. The Company
believes this was due to both reduced demand related to domestic
economic factors, as well as the effects of the increased
carryon baggage restrictions put in place following the
terrorist plot uncovered by London authorities in August 2006.
The airline revenue environment regained some momentum during
late fourth quarter 2006, and, despite growing capacity
10 percent during the quarter, the Company achieved a
record load factor of 70.2 percent at healthy yields, which
resulted in a unit revenue growth rate of 4.2 percent.
Consolidated freight revenues increased slightly versus 2005. An
$18 million, or 17.1 percent, increase in freight and
cargo revenues, primarily as a result of higher rates charged,
was almost entirely offset by lower mail revenues. The lower
mail revenues were due to the Companys decision to
discontinue carrying mail for the U.S. Postal Service
effective as of the end of second quarter 2006. Other
revenues increased $30 million, or 17.4 percent,
compared to 2005, primarily from higher commissions earned from
programs the Company sponsors with certain business partners,
such as the Company sponsored
Chase
®
Visa card.
Consolidated operating expenses for 2006 increased
$1.3 billion, or 18.9 percent, compared to the
8.8 percent increase in capacity. Historically, changes in
operating expenses for airlines are typically driven by changes
in capacity, or
23
ASMs. The following presents Southwests operating expenses
per ASM for 2006 and 2005 followed by explanations of these
changes on a per-ASM
and/or
an
absolute dollar basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Change
|
|
|
Salaries, wages, and benefits
|
|
|
3.29
|
¢
|
|
|
3.27
|
¢
|
|
|
.02
|
¢
|
|
|
.6
|
%
|
Fuel and oil
|
|
|
2.31
|
|
|
|
1.58
|
|
|
|
.73
|
|
|
|
46.2
|
|
Maintenance materials and repairs
|
|
|
.51
|
|
|
|
.52
|
|
|
|
(.01
|
)
|
|
|
(1.9
|
)
|
Aircraft rentals
|
|
|
.17
|
|
|
|
.19
|
|
|
|
(.02
|
)
|
|
|
(10.5
|
)
|
Landing fees and other rentals
|
|
|
.53
|
|
|
|
.53
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
.56
|
|
|
|
.55
|
|
|
|
.01
|
|
|
|
1.8
|
|
Other
|
|
|
1.43
|
|
|
|
1.41
|
|
|
|
.02
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8.80
|
¢
|
|
|
8.05
|
¢
|
|
|
.75
|
¢
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses per ASM increased 9.3 percent to 8.80
cents, primarily due to an increase in jet fuel prices, net of
gains from the Companys fuel hedging program. The
Companys average cost per gallon of fuel increased
48.5 percent versus the prior year.
Salaries, wages, and benefits expense per ASM increased
.6 percent compared to 2005, primarily due to an increase
in average wage rates, largely offset by productivity efforts
that enabled the Company to grow overall headcount at a rate
less than the growth in ASMs. The Companys headcount at
December 31, 2006, was 2.9 percent higher than at
December 31, 2005, despite the 8.8 percent growth in
available seat miles. On a dollar basis, Salaries, wages and
benefits increased $270 million, of which $197 million
was solely wages. The $197 million increase in wages
represented a 10.1 percent increase compared to 2005, on an
8.8 percent increase in ASMs. Of the $197 million
increase in wages, the majority was related to the increase in
average wage rates.
Fuel and oil expense increased $797 million, and on a
per-ASM basis increased 46.2 percent, net of hedging gains,
primarily due to a significant increase in the average cost per
gallon of jet fuel. Although the Companys fuel hedge
position was not as strong as the position the Company held in
2005, the Companys hedging program still resulted in the
realization of $675 million in cash settlements during
2006. These settlements resulted in a 2006 reduction to Fuel and
oil expense of $634 million. However, even with this hedge
position, the Companys jet fuel cost per gallon increased
48.5 percent versus 2005. The average cost per gallon of
jet fuel in 2006 was $1.53 compared to $1.03 in 2005, excluding
fuel-related taxes and net of hedging gains. See Note 10 to
the Consolidated Financial Statements. The increase in fuel
prices was partially offset by steps the Company has taken to
improve the fuel efficiency of its aircraft, including the
addition of blended winglets to all of the Companys
737-700
aircraft.
On an absolute dollar basis, maintenance materials and repairs
expense increased $22 million, primarily due to an increase
in the number of aircraft engine repairs. However, on a per-ASM
basis, maintenance materials and repairs decreased
1.9 percent compared to 2005, as the dollar increase was
only 4.9 percent versus the capacity (ASM) increase of
8.8 percent.
Aircraft rentals per ASM decreased 10.5 percent. The
Companys 8.8 percent increase in ASMs was generated
by the 36 aircraft the Company acquired during 2006, all of
which were purchased. The number of aircraft on operating lease
remained the same, thereby reducing the percentage of these
aircraft in the total fleet. On an absolute dollar basis,
expense decreased $5 million due to the renegotiation of
some aircraft leases at lower rates.
Landing fees and other rentals per ASM was flat compared to
2005. On a dollar basis, expense increased $41 million,
primarily due to the Companys increase in airport space to
support additional flight activity.
Depreciation and amortization expense per ASM increased
1.8 percent, and on a dollar basis increased
$46 million. These increases were primarily due to an
increase in depreciation expense per ASM from 36 new
737-700
aircraft purchased during 2006 and the resulting higher
percentage of owned aircraft.
In absolute dollars, Other operating expenses increased
$122 million, of which $39 million related to credit
card processing fees. The $39 million increase in credit
card processing fees represented a 22.2 percent increase
from 2005 compared to the Companys 20.2 percent
increase in Passenger revenues. In excess of 97 percent of
Passenger revenues are booked via customer credit cards,
resulting in a close correlation between these two measures. The
second
24
and third largest increases in Other operating expenses on an
absolute dollar basis were in Fuel taxes ($18 million, or
14.0 percent, primarily due to a 15.0 percent increase
in the unhedged cost of jet fuel per gallon and a
7.9 percent increase in gallons consumed), and Personnel
expenses ($16 million, or 11.9 percent, primarily
representing hotel and per diem costs for Pilots and Flight
Attendants, primarily due to a 6.2 percent increase in
trips flown). Other operating expenses per ASM increased
1.4 percent compared to 2005, primarily due to the increase
in revenue-related costs, such as credit card processing fees,
related to the Companys 20.2 percent increase in
Passenger revenues.
Other expenses (income) included interest expense,
capitalized interest, interest income, and other gains and
losses. Interest expense increased by $6 million, or
4.9 percent, primarily due to an increase in floating
interest rates. This was partially offset by the Companys
repayment during 2006 of $607 million in debt. The majority
of the Companys long-term debt is at floating rates. In
addition, the Company issued $300 million in senior
unsecured notes during December 2006. See Note 7 to the
Consolidated Financial Statements for more information.
Capitalized interest increased $12 million, or
30.8 percent, compared to 2005, due to higher 2006 progress
payment balances for scheduled future aircraft deliveries as
well as higher interest rates. Interest income increased
$37 million, or 78.7 percent, primarily due to an
increase in rates earned on cash and investments.
Other (gains) losses, net, primarily includes amounts recorded
in accordance with the Companys hedging activities and
SFAS 133. During 2006, the Company recorded losses related
to the ineffectiveness of its hedges as well as the decrease in
market value of fuel derivative contracts that were marked to
market because they didnt qualify for SFAS 133 hedge
accounting. The losses resulted from the decrease in the fair
value of the Companys portfolio of fuel derivative
instruments as commodity prices declined during the year. During
2005, the Company recorded significant gains related to the
ineffectiveness of its hedges as well as the increase in market
value of fuel derivative contracts that were marked to market
because they didnt qualify for SFAS 133 hedge
accounting, as commodity prices increased during that year. The
following table displays the components of Other (gains) losses,
net, for the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2006
|
|
|
2005
|
|
|
Mark-to-market impact from fuel contracts settling in future
periods included in Other (gains) losses, net
|
|
$
|
42
|
|
|
$
|
(77
|
)
|
Ineffectiveness from fuel hedges settling in future
periods included in Other (gains) losses, net
|
|
|
39
|
|
|
|
(9
|
)
|
Realized ineffectiveness and mark-to-market (gains) or
losses included in Other (gains) losses, net
|
|
|
20
|
|
|
|
(24
|
)
|
Premium cost of fuel contracts included in Other (gains) losses,
net
|
|
|
52
|
|
|
|
35
|
|
Other
|
|
|
(2
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
151
|
|
|
$
|
(90
|
)
|
See Note 10 to the Consolidated Financial Statements for
further information on the Companys hedging activities.
The provision for income taxes, as a percentage of income before
taxes, decreased to 36.8 percent in 2006 from
37.9 percent in 2005. The decrease in the 2006 rate was due
primarily to a $9 million net reduction related to a
revision in the State of Texas franchise tax law enacted during
2006.
Liquidity
and Capital Resources
Net cash provided by operating activities was $2.8 billion
in 2007 compared to $1.4 billion in 2006. For the Company,
operating cash inflows primarily are derived from providing air
transportation for Customers. The vast majority of tickets are
purchased prior to the day on which travel is provided and, in
some cases, several months before the anticipated travel date.
Operating cash outflows primarily are related to the recurring
expenses of operating the airline. The operating cash flows in
both 2007 and 2006 were also significantly impacted by
fluctuations in counterparty deposits associated with the
Companys fuel hedging program (counterparty deposits are
reflected as an increase to Cash and a corresponding increase to
Accrued liabilities). There was an increase in counterparty
deposits of $1.5 billion for 2007, versus a decrease of
$410 million during 2006. The increase in these deposits
during 2007 was due to the significant increase in fair value of
the Companys fuel derivative portfolio from
December 31, 2006, to December 31, 2007. The decrease
during 2006 was due primarily to a decrease in the fair value of
the Companys fuel derivative instruments, as a result of a
decline in energy commodity
25
prices during 2006. Cash flows associated with purchasing
and/or
selling derivatives are also classified as operating cash flows,
although these amounts were not material for 2007 or 2006. Cash
flows from operating activities for 2007 were also driven by the
$645 million in net income, plus noncash depreciation and
amortization expense of $555 million. For further
information on the Companys hedging program and
counterparty deposits, see Note 10 to the Consolidated
Financial Statements, and Item 7A. Qualitative and
Quantitative Disclosures about Market Risk, respectively. Cash
generated in 2007 and in 2006 was used primarily to finance
aircraft-related capital expenditures and to provide working
capital.
Net cash flows used in investing activities in 2007 totaled
$1.5 billion, approximately the same as in 2006. Investing
activities in both years primarily consisted of payments for new
737-700
aircraft delivered to the Company and progress payments for
future aircraft deliveries. The Company purchased 37 new
737-700
aircraft in 2007 (the remaining two
737-700s
added to the fleet during 2007 were leased) versus the purchase
of 36
737-700s
in
2006. See Note 4 to the Consolidated Financial Statements.
Investing activities for 2007 were also reduced by
$198 million related to a change in the balance of the
Companys short-term investments, namely auction rate
securities.
Net cash used in financing activities was $493 million in
2007, primarily from the repurchase of $1.0 billion of
common stock. The Company repurchased a total of 66 million
shares of outstanding common stock during 2007 as a result of
buyback programs authorized by the Companys Board of
Directors. These uses were partially offset by the October 2007
issuance of $500 million Pass Through Certificates
consisting of $412 million 6.15% Series A certificates
and $88 million 6.65% Series B certificates. Net cash
used in financing activities was $801 million in 2006,
primarily from the repurchase of $800 million of common
stock and the repayment of $607 million in debt. The
Company repurchased a total of 49 million shares of
outstanding common stock during 2006 as a result of three
buyback programs authorized by the Companys Board of
Directors. These uses were partially offset by the issuance of
$300 million senior unsecured 5.75% notes in December
2006 and $260 million in proceeds from exercises of
Employee stock options. See Note 7 to the Consolidated
Financial Statements for more information on the issuance and
redemption of long-term debt.
The Company has various options available to meet its 2008
capital and operating commitments, including cash on hand and
short-term investments at December 31, 2007, totaling
$2.8 billion, internally generated funds, and a
$600 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 currently has outstanding shelf
registrations for the issuance of up to $540 million in
public debt securities and pass through certificates, which it
may utilize for aircraft financings or other purposes in the
future.
Off-Balance
Sheet Arrangements, Contractual Obligations, and Contingent
Liabilities and Commitments
Southwest has contractual obligations and commitments primarily
with regard to future purchases of aircraft, payment of debt,
and lease arrangements. The Company received 39 Boeing
737-700
aircraft in 2007 37 of which were new aircraft from
Boeing, and two of which were pre-owned and leased from a third
party. As of December 31, 2007, the Company had exercised
all remaining options for aircraft to be delivered in 2008, and
had firm orders for 29
737-700
aircraft in 2008, 20 in 2009, 10 each in
2010-2012,
and 29 thereafter. The Company also had options for 8
737-700
aircraft in 2009, 24 in 2010, 22 in 2011 and 30 in 2012.
Southwest also has an additional 54 purchase rights for
737-700
aircraft for the years 2008 through 2014. The Company has the
option to substitute
737-600s
or
-800s for the -700s. This option is applicable to aircraft
ordered from Boeing and must be exercised 18 months prior
to the contractual delivery date.
The leasing of aircraft effectively provides flexibility to the
Company as a source of financing. Although the Company is
responsible for all maintenance, insurance, and expense
associated with operating the aircraft, and retains the risk of
loss for leased aircraft, it has not made any guarantees to the
lessors regarding the residual value (or market value) of the
aircraft at the end of the lease terms. The Company operates 95
leased aircraft, of which 86 are operating leases. As prescribed
by GAAP, assets and obligations under operating leases are not
included in the Companys Consolidated Balance Sheet.
Disclosure of the contractual obligations associated with the
Companys leased aircraft is included below as well as in
Note 8 to the Consolidated Financial Statements.
The Company is required to provide standby letters of credit to
support certain obligations that arise in the ordinary course of
business. Although the letters of credit
26
are an off-balance sheet item, the majority of obligations to
which they relate are reflected as liabilities in the
Consolidated Balance Sheet. Outstanding letters of credit
totaled $211 million at December 31, 2007.
The following table aggregates the Companys material
expected contractual obligations and commitments as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations by Period
|
|
|
|
|
|
|
2009
|
|
|
2011
|
|
|
Beyond
|
|
|
|
|
Contractual Obligations
|
|
2008
|
|
|
- 2010
|
|
|
- 2012
|
|
|
2012
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Long-term debt(1)
|
|
$
|
27
|
|
|
$
|
65
|
|
|
$
|
451
|
|
|
$
|
1,499
|
|
|
$
|
2,042
|
|
Interest commitments(2)
|
|
|
115
|
|
|
|
229
|
|
|
|
208
|
|
|
|
556
|
|
|
|
1,108
|
|
Capital lease commitments(3)
|
|
|
16
|
|
|
|
32
|
|
|
|
12
|
|
|
|
|
|
|
|
60
|
|
Operating lease commitments
|
|
|
400
|
|
|
|
633
|
|
|
|
430
|
|
|
|
876
|
|
|
|
2,339
|
|
Aircraft purchase commitments(4)
|
|
|
747
|
|
|
|
839
|
|
|
|
902
|
|
|
|
684
|
|
|
|
3,172
|
|
Other purchase commitments
|
|
|
60
|
|
|
|
64
|
|
|
|
14
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
1,365
|
|
|
$
|
1,862
|
|
|
$
|
2,017
|
|
|
$
|
3,615
|
|
|
$
|
8,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes current maturities, but excludes amounts associated
with interest rate swap agreements
|
|
(2)
|
|
Related to fixed-rate debt
|
|
(3)
|
|
Includes amounts classified as interest
|
|
(4)
|
|
Firm orders from Boeing
|
There were no outstanding borrowings under the revolving credit
facility at December 31, 2007. See Note 6 to the
Consolidated Financial Statements for more information on the
Companys revolving credit facility.
In January 2004, the Companys Board of Directors
authorized the repurchase of up to $300 million of the
Companys common stock, utilizing present and anticipated
proceeds from the exercise of Employee stock options.
Repurchases were made in accordance with applicable securities
laws in the open market or in private transactions from time to
time, depending on market conditions. This program was completed
during first quarter 2005, resulting in the total repurchase of
approximately 21 million of the Companys common
shares.
In 2006 and 2007, the Companys Board of Directors
authorized five separate programs for the repurchase of up to a
total of $1.8 billion of the Companys Common
Stock $300 million authorized in January 2006,
$300 million authorized in May 2006, $400 million
authorized in November 2006, $300 million authorized in
March 2007, and $500 million authorized in May 2007.
Repurchases were made in accordance with applicable securities
laws in the open market or in private transactions from time to
time, depending on market conditions. These programs, the last
of which was completed during third quarter 2007, resulted in
the repurchase of a total of approximately 116 million
shares.
During January 2008, the Companys Board of Directors
authorized an additional program for the repurchase of up to
$500 million of the Companys Common Stock.
Repurchases will be made in accordance with applicable
securities laws in the open market or in private transactions
from time to time, depending on market conditions.
Critical
Accounting Policies and Estimates
The Companys Consolidated Financial Statements have been
prepared in accordance with U.S. Generally Accepted
Accounting Principles (GAAP). The Companys significant
accounting policies are described in Note 1 to the
Consolidated Financial Statements. The preparation of financial
statements in accordance with GAAP requires the Companys
management to make estimates and assumptions that affect the
amounts reported in the Consolidated Financial Statements and
accompanying footnotes. The Companys estimates and
assumptions are based on historical experience and changes in
the business environment. However, actual results may differ
from 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
Companys financial condition and results and require
managements most subjective judgments. The Companys
most critical accounting policies and estimates are described
below.
27
As described in Note 1 to the Consolidated Financial
Statements, tickets sold for passenger air travel 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 represents tickets sold for
future travel dates and estimated future refunds and exchanges
of tickets sold for past travel dates. The balance in Air
traffic liability fluctuates throughout the year based on
seasonal travel patterns and fare sale activity. The
Companys Air traffic liability balance at
December 31, 2007 was $931 million, compared to
$799 million as of December 31, 2006.
Estimating the amount of tickets that will be refunded,
exchanged, or forfeited involves some level of subjectivity and
judgment. The majority of the Companys tickets sold are
nonrefundable, which is the primary source of forfeited tickets.
According to the Companys Contract of
Carriage, tickets (whether refundable or nonrefundable)
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 and
exchanges, net of 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 of
travel. 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 Companys estimates with respect to forfeited
tickets. Holding other factors constant, a ten-percent change in
the Companys estimate of the amount of refunded,
exchanged, or forfeited tickets for 2007 would have resulted in
a $20 million, or .2%, change in Passenger revenues
recognized for that period.
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. The Company evaluates its
estimates within a narrow range of acceptable amounts. If actual
refunds, exchanges, or forfeiture experience results in an
amount outside of this range, estimates and assumptions are
reviewed and adjustments to Air traffic liability
and to Passenger revenue are recorded, as necessary.
Additional factors that may affect estimated refunds and
exchanges include, but may not be limited to, the Companys
refund and exchange policy, the mix of refundable and
nonrefundable fares, and promotional fare activity. The
Companys estimation techniques have been consistently
applied from year to year; however, as with any estimates,
actual refund, exchange, and forfeiture activity may vary from
estimated amounts. No material adjustments were recorded for
years 2005, 2006, or 2007.
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.
|
|
|
Accounting
for Long-Lived Assets
|
As of December 31, 2007, the Company had approximately
$15.2 billion (at cost) of long-lived assets, including
$13.0 billion (at cost) in flight equipment and related
assets. Flight equipment primarily relates to the 434 Boeing 737
aircraft in the Companys fleet at December 31, 2007,
which are either owned or on capital lease. The remaining 86
Boeing 737 aircraft in the Companys fleet at
December 31, 2007, are on operating lease. 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.
The following table shows a breakdown of the Companys
long-lived asset groups along with information about estimated
useful lives and residual values of these groups:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Residual
|
|
|
Estimated Useful Life
|
|
value
|
Aircraft and engines
|
|
23 to 25 years
|
|
15%
|
Aircraft parts
|
|
Fleet life
|
|
4%
|
Ground property and equipment
|
|
5 to 30 years
|
|
0%-10%
|
Leasehold improvements
|
|
5 years or lease term
|
|
0%
|
In estimating the lives and expected residual values of its
aircraft, the Company primarily has relied upon actual
experience with the same or similar aircraft types and
recommendations from Boeing. Aircraft estimated useful lives are
based on the number of cycles flown (one take-off
and landing). The Company has made a conversion of cycles into
years based on both its historical and anticipated future
utilization of the aircraft.
28
Subsequent revisions to these estimates, which can be
significant, could be caused by changes to the Companys
maintenance program, changes in utilization of the aircraft
(actual cycles 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 and amortization expense, as required
by GAAP.
When appropriate, the Company evaluates its long-lived assets
for impairment. Factors that would indicate potential impairment
may 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 assets 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, generate positive cash flow, and
produce profits. 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.
The Company believes it unlikely that materially different
estimates for expected lives, expected residual values, and
impairment evaluations would be made or reported based on other
reasonable assumptions or conditions suggested by actual
historical experience and other data available at the time
estimates were made.
|
|
|
Financial
Derivative Instruments
|
The Company utilizes financial derivative instruments primarily
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, as amended
(SFAS 133). See Quantitative and Qualitative
Disclosures about Market Risk for more information on
these risk management activities and see Note 10 to the
Consolidated Financial Statements for more information on
SFAS 133, the Companys fuel hedging program, and
financial derivative instruments.
SFAS 133 requires that all derivatives be reflected at
market (fair value) and recorded on the Consolidated Balance
Sheet. At December 31, 2007, the Company was a party to
over 346 financial derivative instruments, related to its fuel
hedging program, for year 2008 and beyond. The fair value of the
Companys fuel hedging financial derivative instruments
recorded on the Companys Consolidated Balance Sheet as of
December 31, 2007, was $2.4 billion, compared to
$999 million at December 31, 2006. The large increase
in fair value was due primarily to the significant increase in
energy prices in the second half of 2007, net of the expiration
(i.e., settlement) of approximately $727 million in fuel
derivative instruments that related to 2007 and net of new
derivative instruments the Company added for future years. Of
the remaining $2.4 billion in fair value of fuel hedging
financial derivative instruments at December 31, 2007,
approximately $1.1 billion is expected to settle, or expire
during 2008. Changes in the fair values of these instruments can
vary dramatically, as was evident during recent years, based on
changes in the underlying commodity prices. Market price changes
can be driven by factors such as supply and demand, inventory
levels, weather events, refinery capacity, political agendas,
and general economic conditions, among other items. The
financial derivative instruments utilized by the Company
primarily are a combination of collars, purchased call options,
and fixed price swap agreements. The Company does not purchase
or hold any derivative instruments for trading purposes.
The Company enters into financial derivative instruments with
third party institutions in over-the-counter
markets. Since the majority of the Companys 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, heating oil, and unleaded gasoline) and adjusted
based on variations of those like commodities to the
Companys ultimate expected price to be paid for jet fuel
at the specific locations in which the Company hedges.
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 occurs and
the hedged jet fuel is purchased and consumed, all values and
prices are known and are recognized in the financial statements.
In recent years,
29
because of increased volatility in energy markets, the
Companys estimates of the presumed effectiveness of its
hedges made at the time the hedges were initially designated
have materially differed from actual results, resulting in
increased volatility in the Companys periodic financial
results. For example, historical data had been utilized in
qualifying unleaded gasoline for SFAS 133 hedge accounting
under the presumption that derivatives of such commodity would
result in effective hedges, as defined. This historical data is
updated every quarterly reporting period to ascertain whether
SFAS 133 hedge accounting is allowed for every commodity
the Company uses in its hedging program. During 2006, based on
these updates, the Company in fact lost SFAS 133 hedge
accounting for all unleaded gasoline derivative instruments, and
thus has marked all such derivatives to market value in each
subsequent quarterly period since that time, with all changes in
value reflected as a component of Other gains/losses in the
Consolidated Statement of Income. Although commodities such as
crude oil and heating oil have continued to qualify for hedge
accounting in most cases, there have been instances in which the
Company has also lost hedge accounting in specific geographic
locations for these commodities. In these instances, the Company
has also marked such derivatives to market value with changes
reflected in the income statement each reporting period.
Although the Companys prospective assessment has been
utilized to ensure that crude oil and heating oil in most cases
still qualify for SFAS 133 hedge accounting in specific
locations where the Company hedges, there are no assurances that
these commodities will continue to qualify in the future. This
is due to the fact that future price changes in these refined
products may not be consistent with historical price changes. If
recent volatility in these commodity markets continues for an
extended period of time or worsens in the near future, the
Company could lose hedge accounting altogether for all crude oil
and heating oil derivatives, which would create further
volatility in the Companys financial results.
Estimating the fair value of these fuel derivative instruments
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
change in the estimated fair value of a fuel derivative
instrument differs from the change in the estimated price of the
associated jet fuel to be purchased, both on a cumulative and a
period-to-period basis, ineffectiveness of the fuel hedge can
result, as defined by SFAS 133. This could result in the
immediate recording of noncash charges or income, representing
the change in the fair value of the derivative, even though the
derivative instrument may not expire/settle until a future
period. Likewise, if a derivative contract ceases to qualify for
hedge accounting, the changes in the fair value of the
derivative instrument is recorded every period to Other
gains and losses in the income statement in the period of
the change.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in other crude oil related commodities,
especially given the magnitude of the current fair market value
of the Companys fuel derivatives and the recent volatility
in the prices of refined products. Due to the volatility in
markets for crude oil and related products, the Company is
unable to predict the amount of ineffectiveness each period,
including the loss of hedge accounting, which could be
determined on a derivative by derivative basis or in the
aggregate for a specific commodity. This may result, and has
resulted, in increased volatility in the Companys
financial statements. The significant increase in the amount of
hedge ineffectiveness and unrealized gains and losses on the
change in value of derivative contracts settling in future
periods recorded during recent periods has been due to a number
of factors. These factors include: the significant fluctuation
in energy prices, the number of derivative positions the Company
holds, significant weather events that have affected refinery
capacity and the production of refined products, and the
volatility of the different types of products the Company uses
for protection. The number of instances in which the Company has
discontinued hedge accounting for specific hedges and for
specific refined products, such as unleaded gasoline, has
increased recently, primarily due to these reasons. In these
cases, the Company has determined the hedges will not regain
effectiveness in the time period remaining until settlement and
therefore must discontinue special hedge accounting, as defined
by SFAS 133. When this happens, any changes in fair value
of the derivative instruments are marked to market through
earnings in the period of change. As the fair value of the
Companys hedge positions can fluctuate significantly in
amount from period to period, it is probable there will be
continued variability recorded in the income statement and that
the amount of hedge ineffectiveness and unrealized gains or
losses recorded in future periods will be material. This is
primarily because small differences in the correlation of crude
oil related products are leveraged over large dollar volumes.
SFAS 133 is a complex accounting standard with stringent
requirements, including the documentation of a Company hedging
strategy, statistical analysis to qualify a commodity for hedge
accounting both on a historical and a prospective basis, and
strict contemporaneous
30
documentation that is required at the time each hedge is
designated by the Company. 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.
The Company continually looks for better and more accurate
methodologies in forecasting future cash flows relating to its
jet fuel hedging program. These estimates are an important
component used in the measurement of effectiveness for the
Companys fuel hedges, as required by SFAS 133. During
first quarter 2006, the Company did revise its method for
forecasting these future cash flows. Prior to 2006, the Company
had estimated future cash flows using actual market forward
prices of a single like commodity and adjusting for historical
differences from the Companys actual jet fuel purchase
prices. The Company implemented an improved model for
forecasting forward jet fuel prices during 2006, due to the fact
that different types of commodities are statistically better
predictors of forward jet fuel prices, depending on specific
geographic locations in which the Company hedges. In accordance
with SFAS 133, the Company then adjusts for certain items,
such as transportation costs, that are stated in fuel purchasing
contracts with its vendors, in order to estimate the actual
price paid for jet fuel associated with each hedge. This
improved methodology for estimating future cash flows (i.e., jet
fuel prices) was applied prospectively, in accordance with the
Companys interpretation of SFAS 133. The Company did
not, however, change its method for either assessing or
measuring hedge ineffectiveness. As a result of this new method
for forecasting future jet fuel prices, the Company believes its
hedges are more likely to be effective over the long-term.
The Company also utilizes financial derivative instruments in
the form of interest rate swap agreements. The primary objective
for the Companys use of interest rate hedges is to reduce
the volatility of net interest income by better matching the
repricing of its assets and liabilities. The Company currently
holds interest rate swap agreements related to its
$385 million 6.5% senior unsecured notes due 2012, its
$350 million 5.25% senior unsecured notes due 2014,
its $300 million 5.125% senior unsecured notes due
2017, and its $100 million 7.375% senior unsecured
debentures due 2027. The interest rate swaps associated with the
$300 million 5.125% notes and $100 million
7.375% debentures were entered into during 2007.
The floating rate paid under the swap associated with the
$385 million 6.5% senior unsecured notes due 2012 is
set in arrears. The Company pays the London InterBank Offered
Rate (LIBOR) plus a margin every six months and receives
6.5 percent every six months on a notional amount of
$385 million until 2012. The average floating rate paid
under this agreement during 2007 is estimated to be
7.31 percent based on actual and forward rates at
December 31, 2007. The floating rate for the swap agreement
relating to its $350 million 5.25% senior unsecured
notes due 2014 is set at the beginning of each six month period.
Under this agreement, the Company pays LIBOR plus a margin every
six months and receives 5.25 percent every six months on a
notional amount of $350 million until 2014. The average
floating rate paid under this agreement during 2007 was
6.02 percent. For both the swap agreements associated with
the $300 million 5.125% notes and $100 million
7.375% debentures, the Company pays the LIBOR plus a margin
every six months on the notional amount of the debt, and
receives the fixed stated rate of the notes or debentures every
six months until the date the notes or debentures become due.
The average floating rate paid during 2007 under the agreement
associated with the $300 million 5.125% notes due 2016
was 4.64 percent. The average floating rate paid during
2007 under the agreement associated with the $100 million
7.375% debentures due 2027 was 6.73 percent.
The Companys interest rate swap agreements qualify as fair
value hedges, as defined by SFAS 133. In addition, these
interest rate swap agreements qualify for the
shortcut method of accounting for hedges, as defined
by SFAS 133. Under the shortcut method, the
hedges are assumed to be perfectly effective, and, thus, there
is no ineffectiveness to be recorded in earnings. The fair
values of the interest rate swap agreements, which are adjusted
regularly, is recorded in the Consolidated Balance Sheet, as
necessary, with a corresponding adjustment to the carrying value
of the long-term debt. The total fair value of the interest rate
swap agreements, excluding accrued interest, at
December 31, 2007, was an asset of approximately
$16 million. The total fair value of the swap agreements
held at December 31, 2006, was a liability of
$30 million. The long-term portion of these amounts is
recorded in Other deferred liabilities in the
Consolidated Balance Sheet for each respective year. In
accordance with fair value hedging, the offsetting entry is an
adjustment to decrease the carrying value of long-term debt. See
Note 10 to the Consolidated Financial Statements.
31
The Company believes it is unlikely that materially different
estimates for the fair value of financial derivative
instruments, and forward jet fuel prices, would be made or
reported based on other reasonable assumptions or conditions
suggested by actual historical experience and other data
available at the time estimates were made.
The Company has share-based compensation plans covering the
majority of its Employee groups, including plans adopted via
collective bargaining, a plan covering the Companys Board
of Directors, and plans related to employment contracts with the
Executive Chairman of the Company. Prior to January 1,
2006, the Company accounted 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 was recognized for fixed option plans because the
exercise prices of Employee stock options equaled or exceeded
the market prices of the underlying stock on the dates of grant.
However, prior to adoption of SFAS 123R, share-based
compensation had been included in pro forma disclosures in the
financial statement footnotes for periods prior to 2006.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS No. 123R,
Share-Based Payment using the modified retrospective
transition method. Among other items, SFAS 123R eliminates
the use of APB 25 and the intrinsic value method of accounting,
and requires companies to recognize the cost of Employee
services received in exchange for awards of equity instruments,
based on the grant date fair value of those awards, in the
financial statements.
Under the modified retrospective method, compensation cost is
recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and based on
the requirements of SFAS 123 for all unvested awards
granted prior to the effective date of SFAS 123R. In
addition, results for prior periods were retroactively adjusted
utilizing the pro forma disclosures in those prior financial
statements. As part of this revision, the Company recorded
cumulative share-based compensation expense of $409 million
for the period
1995-2005,
resulting in a reduction to Retained earnings in the
Consolidated Balance Sheet as of December 31, 2005. This
adjustment, along with the creation of a net Deferred
income tax asset in the amount of $130 million, resulted in
an offsetting increase to Capital in excess of par value in the
amount of $539 million in the Consolidated Balance Sheet as
of December 31, 2005. The Deferred tax asset represents the
portion of the cumulative expense related to stock options that
will result in a future tax deduction.
The Company estimates the fair value of stock option awards on
the date of grant utilizing a modified Black-Scholes option
pricing model. 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. However, certain assumptions used in the
Black-Scholes model, such as expected term, can be adjusted to
incorporate the unique characteristics of the Companys
stock option awards. Option valuation models require the input
of somewhat subjective assumptions including expected stock
price volatility and expected term. For 2006 and 2007, the
Company has relied on observations of historical volatility
trends, implied future volatility observations as determined by
independent third parties, and implied volatility from traded
options on the Companys stock. For both 2007 and 2006
stock option grants, the Company utilized expected volatility
based on the expected life of the option, but within a range of
24 percent to 27 percent. Prior to 2005, the Company
relied exclusively on historical volatility as an input for
determining the estimated fair value of stock options. In
determining the expected term of the option grants, the Company
has observed the actual terms of prior grants with similar
characteristics, the actual vesting schedule of the grant, and
assessed the expected risk tolerance of different optionee
groups.
Other assumptions required for estimating fair value with the
Black-Scholes model are the expected risk-free interest rate and
expected dividend yield of the Companys stock. The
risk-free interest rates used were actual U.S. Treasury
zero-coupon rates for bonds matching the expected term of the
option on the date of grant. The expected dividend yield of the
Companys common stock over the expected term of the option
on the date of grant was estimated based on the Companys
current dividend yield, and adjusted for anticipated future
changes.
Vesting terms for the Companys stock option plans differ
based on the type of grant made and the group to which the
options are granted. For grants made to Employees under
collective bargaining plans, vesting has ranged in length from
immediate vesting to vesting periods in accordance with the
period covered by the respective collective bargaining
agreement. For Other Employee Plans, options
generally vest and become fully exercisable over three, five, or
ten years of continued
32
employment, depending upon the grant type. For grants in any of
the Companys plans that are subject to graded vesting over
a service period, the Company recognizes expense on a
straight-line basis over the requisite service period for the
entire award. None of the Companys grants include
performance-based or market-based vesting conditions, as defined.
As of December 31, 2007, the Company had $37 million
in remaining unrecognized compensation cost related to past
grants of stock options, which is expected to be recognized over
a weighted-average period of 2.25 years. The total
recognition period for the remaining unrecognized compensation
cost was approximately eight years; however, the majority of
this cost will be recognized over the next two years, in
accordance with vesting provisions. The majority of the $37
million in share-based compensation expense reflected in the
Consolidated Statement of Income for the year ended
December 31, 2007, was related to options granted prior to
the adoption of SFAS 123R. Based on Employee stock options
expected to vest during 2008, and the Companys expectation
of future grants, the Company expects the expense related to
share-based compensation to once again decrease during 2008
compared to 2007 expense.
The Company believes it is unlikely that materially different
estimates for the assumptions used in estimating the fair value
of stock options granted would be made based on the conditions
suggested by actual historical experience and other data
available at the time estimates were made.
|
|
|
Recent
Accounting Developments
|
In September 2006, the FASB issued statement No. 157,
Fair Value Measurements
,
(SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with accounting principles
generally accepted in the United States, and expands disclosures
about fair value measurements. The Company is subject to the
provisions of SFAS 157 beginning January 1, 2008. The
Company has not yet determined whether SFAS 157 will have a
material impact on its financial condition, results of
operations, or cash flow. However, the Company believes it will
likely be required to provide additional disclosures as part of
future financial statements, beginning with first quarter 2008.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (Statement 159). Statement 159 allows entities
the option to measure eligible financial instruments at fair
value as of specified dates. Such election, which may be applied
on an instrument by instrument basis, is typically irrevocable
once elected. Statement 159 is effective for fiscal years
beginning after November 15, 2007. The Company does not
believe Statement 159 will result in a material adverse effect
on its financial condition, results of operations, or cash flow.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Southwest has interest rate risk in its floating rate debt
obligations and interest rate swaps, and has commodity price
risk in jet fuel required to operate its aircraft fleet. The
Company purchases jet fuel at prevailing market prices, but
seeks to manage market risk through execution of a documented
hedging strategy. Southwest has market sensitive instruments in
the form of fixed rate debt instruments and financial derivative
instruments used to hedge its exposure to jet fuel price
increases. The Company also operates 95 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 10 to the Consolidated Financial
Statements for information on the Companys accounting for
its hedging program and for further details on the
Companys financial derivative instruments.
The Company utilizes financial derivative instruments, on both a
short-term and a long-term basis, as a form of insurance against
significant increases in fuel prices. The Company believes there
is significant risk in not hedging against the possibility of
such fuel price increases. The Company expects to consume
approximately 1.5 billion gallons of jet fuel in 2008.
Based on this usage, a change in jet fuel prices of just one
cent per gallon would impact the Companys Fuel and
oil expense by approximately $15 million per year,
excluding any impact of the Companys derivative
instruments.
The fair values of outstanding financial derivative instruments
related to the Companys jet fuel market price risk at
December 31, 2007, were net assets of $2.4 billion.
The current portion of these financial derivative instruments,
or $1.1 billion, is classified as Fuel derivative
contracts in the Consolidated Balance Sheet. The long-term
portion of these financial derivative instruments, or
$1.3 billion, is included in Other assets.
33
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, 2007,
prices would correspondingly change the fair value of the
commodity derivative instruments in place by up to
$658 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, 2007, levels, except underlying futures
prices.
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 its
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 will periodically review
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, 2007, the Company had agreements with nine
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. At December 31,
2007, the Company held $2.0 billion in cash collateral
deposits under these bilateral collateral provisions. These
collateral deposits serve to decrease, but not totally
eliminate, the credit risk associated with the Companys
hedging program. The deposits are included in Accrued
liabilities on the Consolidated Balance Sheet. See also
Note 10 to the Consolidated Financial Statements.
The vast majority of the Companys assets are aircraft,
which are long-lived. The Companys strategy is to maintain
a conservative balance sheet 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 & Poors and Fitch ratings agencies, and
a Baa1 credit rating with Moodys rating agency
as of December 31, 2007. In January 2008, Fitch announced a
cut in the Companys senior unsecured debt rating to
A−. The Companys 1999 and 2004 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. In addition, as disclosed in
Note 10 to the Consolidated Financial Statements, the
Company has converted certain of its long-term debt to floating
rate debt by entering into interest rate swap agreements. This
includes the Companys $385 million 6.5% senior
unsecured notes due 2012, the $350 million
5.25% senior unsecured notes due 2014, the
$300 million 5.125% senior unsecured notes due 2017,
and the $100 million 7.375% senior unsecured
debentures due 2027. Although there is interest rate risk
associated with these floating rate borrowings, the risk for the
1999 and 2004 French Credit Agreements is somewhat mitigated by
the fact that the Company may prepay this debt under certain
conditions. See Notes 6 and 7 to the Consolidated Financial
Statements for more information on the material terms of the
Companys short-term and long-term debt.
Excluding the notes or debentures that were converted to a
floating rate as previously noted, the Companys only
fixed-rate senior unsecured notes at December 31, 2007 were
its $300 million notes due 2016. These senior unsecured
notes have a fixed-rate of 5.75 percent, which is
comparable to average rates prevailing for similar debt
instruments over the last ten years. The Companys
outstanding $500 million EETCs, which are secured by 16
Boeing
737-700
aircraft, had an effective fixed-rate of 6.24 percent. The
carrying value of the Companys floating rate debt totaled
$1.3 billion, and this debt had a weighted-average maturity
of 6.1 years at floating rates averaging 5.68 percent
for the twelve months ended December 31, 2007. In total,
the Companys fixed rate debt and floating rate debt
represented 6.5 percent and 10.3 percent,
respectively, of total noncurrent assets at December 31,
2007.
The Company also has some risk associated with changing interest
rates due to the short-term nature of its invested cash, which
totaled $2.2 billion, and short-term investments, which
totaled $566 million, at December 31, 2007. However,
the Company generally does not retain the interest earnings on
the $2.0 billion in cash collateral deposits from
counterparties associated with the Companys fuel
derivative instruments. See Notes 1 and 10 to the
Consolidated Financial Statements for further information. The
Company invests available cash in certificates of deposit,
highly rated money market instruments, investment grade
commercial paper, auction rate securities, and other highly
rated financial instruments. Because of the short-term nature of
these investments, the returns earned parallel closely with
short-term floating interest
34
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, 2007, would not have a material affect on the
fair value of the Companys fixed rate debt instruments.
See Note 10 to the Consolidated Financial Statements for
further information on the fair value of the Companys
financial instruments. A change in market interest rates could,
however, have a corresponding effect on the Companys
earnings and cash flows associated with its floating rate debt,
invested cash (excluding cash collateral deposits), and
short-term investments because of the floating-rate nature of
these items. Assuming floating market rates in effect as of
December 31, 2007, were held constant throughout a
12-month
period, a hypothetical ten percent change in those rates would
correspondingly change the Companys net earnings and cash
flows associated with these items by less than $3 million.
Utilizing these assumptions and considering the Companys
cash balance (excluding cash collateral deposits), short-term
investments, and floating-rate debt outstanding at
December 31, 2007, an increase in rates would have a net
positive effect on the Companys earnings and cash flows,
while a decrease in rates would have a net negative effect on
the Companys earnings and cash flows. However, a ten
percent change in market rates would not impact the
Companys earnings or cash flow associated with the
Companys publicly traded fixed-rate debt.
The Company is also subject to various financial covenants
included in its credit card transaction processing agreement,
the revolving credit facility, and outstanding debt agreements.
Covenants include the maintenance of minimum credit ratings. For
the revolving credit facility, the Company must also maintain,
at all times, a Coverage Ratio, as defined in the agreement, of
not less than 1.00 to 1.25. The Company met or exceeded the
minimum standards set forth in these agreements as of
December 31, 2007. However, if conditions change and the
Company fails 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 these agreements intact
as written.
35
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
SOUTHWEST
AIRLINES CO.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,213
|
|
|
$
|
1,390
|
|
Short-term investments
|
|
|
566
|
|
|
|
369
|
|
Accounts and other receivables
|
|
|
279
|
|
|
|
241
|
|
Inventories of parts and supplies, at cost
|
|
|
259
|
|
|
|
181
|
|
Fuel derivative contracts
|
|
|
1,069
|
|
|
|
369
|
|
Prepaid expenses and other current assets
|
|
|
57
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,443
|
|
|
|
2,601
|
|
Property and equipment, at cost:
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
13,019
|
|
|
|
11,769
|
|
Ground property and equipment
|
|
|
1,515
|
|
|
|
1,356
|
|
Deposits on flight equipment purchase contracts
|
|
|
626
|
|
|
|
734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,160
|
|
|
|
13,859
|
|
Less allowance for depreciation and amortization
|
|
|
4,286
|
|
|
|
3,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,874
|
|
|
|
10,094
|
|
Other assets
|
|
|
1,455
|
|
|
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,772
|
|
|
$
|
13,460
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
759
|
|
|
$
|
643
|
|
Accrued liabilities
|
|
|
3,107
|
|
|
|
1,323
|
|
Air traffic liability
|
|
|
931
|
|
|
|
799
|
|
Current maturities of long-term debt
|
|
|
41
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,838
|
|
|
|
2,887
|
|
Long-term debt less current maturities
|
|
|
2,050
|
|
|
|
1,567
|
|
Deferred income taxes
|
|
|
2,535
|
|
|
|
2,104
|
|
Deferred gains from sale and leaseback of aircraft
|
|
|
106
|
|
|
|
120
|
|
Other deferred liabilities
|
|
|
302
|
|
|
|
333
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $1.00 par value: 2,000,000,000 shares
authorized; 807,611,634 shares issued in 2007 and 2006
|
|
|
808
|
|
|
|
808
|
|
Capital in excess of par value
|
|
|
1,207
|
|
|
|
1,142
|
|
Retained earnings
|
|
|
4,788
|
|
|
|
4,307
|
|
Accumulated other comprehensive income
|
|
|
1,241
|
|
|
|
582
|
|
Treasury stock, at cost: 72,814,104 and 24,302,215 shares in
2007 and 2006, respectively
|
|
|
(1,103
|
)
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,941
|
|
|
|
6,449
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,772
|
|
|
$
|
13,460
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
36
SOUTHWEST
AIRLINES CO.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except
|
|
|
|
per share amounts)
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$
|
9,457
|
|
|
$
|
8,750
|
|
|
$
|
7,279
|
|
Freight
|
|
|
130
|
|
|
|
134
|
|
|
|
133
|
|
Other
|
|
|
274
|
|
|
|
202
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
9,861
|
|
|
|
9,086
|
|
|
|
7,584
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
3,213
|
|
|
|
3,052
|
|
|
|
2,782
|
|
Fuel and oil
|
|
|
2,536
|
|
|
|
2,138
|
|
|
|
1,341
|
|
Maintenance materials and repairs
|
|
|
616
|
|
|
|
468
|
|
|
|
446
|
|
Aircraft rentals
|
|
|
156
|
|
|
|
158
|
|
|
|
163
|
|
Landing fees and other rentals
|
|
|
560
|
|
|
|
495
|
|
|
|
454
|
|
Depreciation and amortization
|
|
|
555
|
|
|
|
515
|
|
|
|
469
|
|
Other operating expenses
|
|
|
1,434
|
|
|
|
1,326
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,070
|
|
|
|
8,152
|
|
|
|
6,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
791
|
|
|
|
934
|
|
|
|
725
|
|
OTHER EXPENSES (INCOME):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
119
|
|
|
|
128
|
|
|
|
122
|
|
Capitalized interest
|
|
|
(50
|
)
|
|
|
(51
|
)
|
|
|
(39
|
)
|
Interest income
|
|
|
(44
|
)
|
|
|
(84
|
)
|
|
|
(47
|
)
|
Other (gains) losses, net
|
|
|
(292
|
)
|
|
|
151
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses (income)
|
|
|
(267
|
)
|
|
|
144
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
1,058
|
|
|
|
790
|
|
|
|
779
|
|
PROVISION FOR INCOME TAXES
|
|
|
413
|
|
|
|
291
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
645
|
|
|
$
|
499
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER SHARE, BASIC
|
|
$
|
.85
|
|
|
$
|
.63
|
|
|
$
|
.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER SHARE, DILUTED
|
|
$
|
.84
|
|
|
$
|
.61
|
|
|
$
|
.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
37
SOUTHWEST
AIRLINES CO.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2007, 2006, and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Excess of
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Par Value
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In millions, except per share amounts)
|
|
|
Balance at December 31, 2004
|
|
$
|
790
|
|
|
$
|
777
|
|
|
$
|
3,614
|
|
|
$
|
417
|
|
|
$
|
(71
|
)
|
|
$
|
5,527
|
|
Purchase of shares of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
(55
|
)
|
Issuance of common and treasury stock pursuant to Employee stock
plans
|
|
|
12
|
|
|
|
59
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
126
|
|
|
|
131
|
|
Tax benefit of options exercised
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Share-based compensation
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Cash dividends, $.018 per share
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
|
484
|
|
Unrealized gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
474
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
802
|
|
|
$
|
963
|
|
|
$
|
4,018
|
|
|
$
|
892
|
|
|
$
|
|
|
|
$
|
6,675
|
|
Purchase of shares of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(800
|
)
|
|
|
(800
|
)
|
Issuance of common and treasury stock pursuant to Employee stock
plans
|
|
|
6
|
|
|
|
39
|
|
|
|
(196
|
)
|
|
|
|
|
|
|
410
|
|
|
|
259
|
|
Tax benefit of options exercised
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
Share-based compensation
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Cash dividends, $.018 per share
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
Unrealized loss on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(306
|
)
|
|
|
|
|
|
|
(306
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
808
|
|
|
$
|
1,142
|
|
|
$
|
4,307
|
|
|
$
|
582
|
|
|
$
|
(390
|
)
|
|
$
|
6,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of shares of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,001
|
)
|
|
|
(1,001
|
)
|
Issuance of common and treasury stock pursuant to Employee
stock plans
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
288
|
|
|
|
138
|
|
Tax benefit of options exercised
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Share-based compensation
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
Cash dividends, $.018 per share
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
|
|
|
|
|
|
|
|
645
|
|
Unrealized gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
636
|
|
|
|
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
23
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
808
|
|
|
$
|
1,207
|
|
|
$
|
4,788
|
|
|
$
|
1,241
|
|
|
$
|
(1,103
|
)
|
|
$
|
6,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
38
SOUTHWEST
AIRLINES CO.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
645
|
|
|
$
|
499
|
|
|
$
|
484
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
555
|
|
|
|
515
|
|
|
|
469
|
|
Deferred income taxes
|
|
|
328
|
|
|
|
277
|
|
|
|
291
|
|
Amortization of deferred gains on sale and leaseback of aircraft
|
|
|
(14
|
)
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Share-based compensation expense
|
|
|
37
|
|
|
|
80
|
|
|
|
80
|
|
Excess tax benefits from share-based compensation arrangements
|
|
|
(28
|
)
|
|
|
(60
|
)
|
|
|
(47
|
)
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables
|
|
|
(38
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
Other current assets
|
|
|
(229
|
)
|
|
|
87
|
|
|
|
(59
|
)
|
Accounts payable and accrued liabilities
|
|
|
1,609
|
|
|
|
(223
|
)
|
|
|
855
|
|
Air traffic liability
|
|
|
131
|
|
|
|
150
|
|
|
|
120
|
|
Other, net
|
|
|
(151
|
)
|
|
|
102
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,845
|
|
|
|
1,406
|
|
|
|
2,118
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(1,331
|
)
|
|
|
(1,399
|
)
|
|
|
(1,146
|
)
|
Purchases of short-term investments
|
|
|
(5,086
|
)
|
|
|
(4,509
|
)
|
|
|
(1,804
|
)
|
Proceeds from sales of short-term investments
|
|
|
4,888
|
|
|
|
4,392
|
|
|
|
1,810
|
|
Payment for assets of ATA Airlines, Inc.
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Debtor in possession loan to ATA Airlines, Inc.
|
|
|
|
|
|
|
20
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,529
|
)
|
|
|
(1,495
|
)
|
|
|
(1,146
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
500
|
|
|
|
300
|
|
|
|
300
|
|
Proceeds from Employee stock plans
|
|
|
139
|
|
|
|
260
|
|
|
|
132
|
|
Payments of long-term debt and capital lease obligations
|
|
|
(122
|
)
|
|
|
(607
|
)
|
|
|
(149
|
)
|
Payments of cash dividends
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Repurchase of common stock
|
|
|
(1,001
|
)
|
|
|
(800
|
)
|
|
|
(55
|
)
|
Excess tax benefits from share-based compensation arrangements
|
|
|
28
|
|
|
|
60
|
|
|
|
47
|
|
Other, net
|
|
|
(23
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(493
|
)
|
|
|
(801
|
)
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
AND CASH EQUIVALENTS
|
|
|
823
|
|
|
|
(890
|
)
|
|
|
1,232
|
|
CASH AND CASH EQUIVALENTS AT
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
1,390
|
|
|
|
2,280
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
2,213
|
|
|
$
|
1,390
|
|
|
$
|
2,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of amount capitalized
|
|
$
|
63
|
|
|
$
|
78
|
|
|
$
|
71
|
|
Income taxes
|
|
$
|
94
|
|
|
$
|
15
|
|
|
$
|
8
|
|
Noncash rights to airport gates acquired through reduction in
debtor in possession loan to ATA Airlines, Inc.
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20
|
|
See accompanying notes.
39
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
|
|
1.
|
Summary
of Significant Accounting Policies
|
Southwest Airlines Co. (the Company or Southwest) is a major
domestic airline that provides point-to-point, low-fare service.
The Consolidated Financial Statements include the accounts of
Southwest and its wholly owned subsidiaries. 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 in excess of that necessary for operating requirements is
invested in short-term, highly liquid, income-producing
investments. Investments with maturities of three months or less
are classified as cash and cash equivalents, which primarily
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 stated
at cost, which approximates market value.
Short-Term
Investments
Short-term investments consist of auction rate securities with
auction reset periods of less than 12 months. These
investments are classified as available-for-sale securities and
are stated at fair value. At each reset period, the Company
accounts for the transaction as Proceeds from sales of
short-term investments for the security relinquished, and
a Purchase of short-investments for the security
purchased, in the accompanying Consolidated Statement of Cash
Flows. Unrealized gains and losses, net of tax, are recognized
in Accumulated other comprehensive income (loss) in
the accompanying Consolidated Balance Sheet. Realized gains and
losses on specific investments, which totaled $17 million
in 2007, $17 million in 2006, and $4 million in 2005,
are reflected in Interest income in the accompanying
Consolidated Income Statement.
The Companys cash and cash equivalents and short-term
investments as of December 31, 2006 and 2007, included
$540 million and $2.0 billion, respectively, in
collateral deposits received from the counterparties of the
Companys fuel derivative instruments. Although these
amounts are not restricted in any way, the Company generally
must remit the investment earnings from these amounts back to
the counterparties. Depending on the fair value of the
Companys fuel derivative instruments, the amounts of
collateral deposits held at any point in time can fluctuate
significantly. Therefore, the Company generally excludes the
cash collateral deposits in its decisions related to long-term
cash planning and forecasting. See Note 10 for further
information on these collateral deposits and fuel derivative
instruments.
Accounts
and Other Receivables
Accounts and other receivables are carried at cost. They
primarily consist of amounts due from credit card companies
associated with sales of tickets for future travel and amounts
due from counterparties associated with fuel derivative
instruments that have settled. The amount of allowance for
doubtful accounts as of December 31, 2005, 2006 and 2007
was immaterial. In addition, the provision for doubtful accounts
and write-offs for 2005, 2006, and 2007 were immaterial.
Inventories
Inventories primarily consist of flight equipment expendable
parts, materials, aircraft fuel, and supplies. All of these
items are carried at average cost, less an allowance for
obsolescence. These items are generally charged to expense when
issued for use. The reserve for obsolescence was immaterial at
December 31, 2005, 2006 and 2007. In addition, the
Companys provision for obsolescence and write-offs for
2005, 2006, and 2007 were immaterial.
Property
and Equipment
Property and equipment is stated at cost. Depreciation is
provided by the straight-line method to estimated residual
values over periods generally ranging from 23 to 25 years
for flight equipment and 5 to 30 years for ground property
and equipment once the asset is placed in service. Residual
values estimated for aircraft are generally 15 percent and
for ground property and equipment range from zero to
10 percent. Property under capital leases and related
obligations is recorded at an amount equal to the present value
of future minimum lease payments computed on the basis of the
Companys incremental borrowing rate or, when known, the
interest rate implicit in
40
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 primarily has relied upon actual
experience with the same or similar aircraft types,
recommendations from Boeing, the manufacturer of the
Companys aircraft, and current fair values in markets for
similar used aircraft. Subsequent revisions to these estimates,
which can be significant, could be caused by changes to the
Companys maintenance program, modifications or
improvements to the aircraft, 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 and
amortization expense, as required by GAAP.
When appropriate, the Company 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 assets physical condition, operating or
cash flow losses associated with the use of the long-lived
asset, etc. The Company continues to experience positive cash
flow and operate all of its aircraft, and there have been no
significant impairments of long-lived assets recorded during
2005, 2006, or 2007.
Aircraft
and Engine Maintenance
The cost of scheduled inspections and repairs and routine
maintenance costs for all aircraft and engines are charged to
maintenance expense as incurred. 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.
Intangible
Assets
Intangible assets primarily consist of leasehold rights to
airport owned gates. These assets are amortized on a
straight-line basis over the expected useful life of the lease,
approximately 20 years. The accumulated amortization
related to the Companys intangible assets at
December 31, 2007, and 2006, was $9 million and
$5 million, respectively. The Company periodically assesses
its intangible assets for impairment in accordance with
SFAS 142,
Goodwill and Other Intangible Assets
;
however, no impairments have been noted.
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 Companys tickets sold are
nonrefundable. Tickets that are sold but not flown on the travel
date (whether refundable or nonrefundable) 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 and exchanges, net of forfeitures, for all
unused tickets once the flight date has passed. These estimates
are based on historical experience over many years. The Company
and many 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
Companys 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, exchanges, and forfeitures include,
but may not be limited to, the Companys refund and
exchange policy, the mix of refundable and nonrefundable fares,
and fare sale activity. The Companys 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.
The Company is also required to collect certain taxes and fees
from Customers on behalf of government agencies and remit these
back to the applicable
41
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
governmental entity on a periodic basis. These taxes and fees
include U.S. federal transportation taxes, federal security
charges, and airport passenger facility charges. These items are
collected from Customers at the time they purchase their
tickets, but are not included in Passenger revenue. The Company
records a liability upon collection from the Customer and
relieves the liability when payments are remitted to the
applicable governmental agency.
Frequent
Flyer Program
The Company records a liability for the estimated incremental
cost of providing free travel under its Rapid Rewards frequent
flyer program at the time an award is earned. 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 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 are accounted for under the residual value
method. Under this method, the Company has determined the
portion of funds received for sale of flight segment credits
that relate to free travel, currently estimated at
75 percent of the amount received per flight segment credit
sold. These amounts are deferred and recognized as
Passenger revenue when the ultimate free travel
awards are flown or the credits expire unused. The remaining 25
percent of the amount received per flight segment credit sold,
which is assumed not to be associated with future travel,
includes items such as access to the Companys frequent
flyer program population for marketing/solicitation purposes,
use of the Companys logo on co-branded credit cards, and
other trademarks, designs, images, etc. of Southwest for use in
marketing materials. This remaining portion is recognized in
Other revenue in the period earned.
Advertising
The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 2007,
2006, and 2005 was $191 million, $182 million, and
$173 million, respectively.
Share-Based
Employee Compensation
The Company has stock-based compensation plans covering the
majority of its Employee groups, including a plan covering the
Companys Board of Directors and plans related to
employment contracts with the Executive Chairman of the Company.
The Company accounts for stock-based compensation utilizing the
fair value recognition provisions of SFAS No. 123R,
Share-Based Payment. See Note 13.
Financial
Derivative Instruments
The Company accounts for financial derivative instruments
utilizing Statement of Financial Accounting Standards
No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities, as amended. The
Company utilizes various derivative instruments, including crude
oil, unleaded gasoline, and heating oil-based derivatives, to
attempt to reduce the risk of its exposure to jet fuel price
increases. These instruments primarily consist of purchased call
options, collar structures, and fixed-price swap agreements, and
upon proper qualification are accounted for as cash-flow hedges,
as defined by SFAS 133. The Company has also entered into
interest rate swap agreements to convert a portion of its
fixed-rate debt to floating rates. These interest rate hedges
are accounted for as fair value hedges, as defined by
SFAS 133.
Since the majority of the Companys 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
utilization of a statistical-based regression equation with data
from market forward prices of like commodities. This equation is
then adjusted for certain items, such as transportation costs,
that are stated in the Companys fuel purchasing contracts
with its vendors.
For the effective portion of settled hedges, as defined in
SFAS 133, the Company records the associated gains or
losses as a component of Fuel and oil expense in the
Consolidated Statement of Income. For amounts representing
ineffectiveness, as defined, or changes in fair value of
derivative instruments for which hedge accounting is not
applied, the Company records any gains or losses as a component
of Other (gains) losses, net, in the Consolidated Statement of
Income. Amounts that are paid or
42
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
received associated with the purchase or sale of financial
derivative instruments (i.e., premium costs of option contracts)
are classified as a component of Other (gains) losses, net, in
the Consolidated Statement of Income in the period in which the
instrument settles or expires. All cash flows associated with
purchasing and selling derivatives are classified as operating
cash flows in the Consolidated Statement of Cash Flows, either
as a component of changes in Other current assets or Other, net,
depending on whether the derivative will settle within twelve
months or beyond twelve months, respectively. See Note 10
for further information on SFAS 133 and financial
derivative instruments.
Income
Taxes
The Company accounts for deferred income taxes utilizing
Statement of Financial Accounting Standards No. 109
(SFAS 109), Accounting for Income Taxes, as
amended. SFAS 109 requires an asset and liability method,
whereby deferred tax assets and liabilities are recognized based
on the tax effects of temporary differences between the
financial statements and the tax bases of assets and
liabilities, as measured by current enacted tax rates. When
appropriate, in accordance with SFAS 109, the Company
evaluates the need for a valuation allowance to reduce deferred
tax assets.
Concentration
Risk
A significant number of the Companys Employees are
unionized and are covered by collective bargaining agreements.
The following Employee groups are under agreements that are
currently amendable or will become amendable during 2008: the
Companys Pilots (became amendable in 2006, and currently
in discussions on a new agreement); the Companys Flight
Attendants (becomes amendable in June 2008); the Companys
Ramp, Operations, Provisioning, and Freight Agents (becomes
amendable in July 2008, and began negotiations in January 2008);
the Companys Stock Clerks and Mechanics (both become
amendable in August 2008); and the Companys Customer
Service and Reservations Agents (becomes amendable in November
2008.)
The Company attempts to minimize its concentration risk with
regards to its cash, cash equivalents, and its investment
portfolio. This is accomplished by diversifying and limiting
amounts among different counterparties, the type of investment,
and the amount invested in any individual security or money
market fund.
To manage risk associated with financial derivative instruments
held, the Company selects and will periodically review
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, 2007, the Company had agreements with nine
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. At December 31,
2007, the Company held $2.0 billion in cash collateral
deposits under these bilateral collateral provisions. These
collateral deposits serve to decrease, but not totally
eliminate, the credit risk associated with the Companys
hedging program.
The Company operates an all-Boeing 737 fleet of aircraft. If the
Company was unable to acquire additional aircraft from Boeing,
or Boeing was unable or unwilling to provide adequate support
for its products, the Companys operations could be
adversely impacted. However, the Company considers its
relationship with Boeing to be good and believes the advantages
of operating a single fleet type outweigh the risks of such a
strategy.
|
|
2.
|
Recent
Accounting Developments
|
In September 2006, the FASB issued statement No. 157,
Fair Value Measurements
,
(SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with accounting principles
generally accepted in the United States, and expands disclosures
about fair value measurements. The Company is subject to the
provisions of SFAS 157 beginning January 1, 2008. The
Company has not yet determined whether SFAS 157 will have a
material impact on its financial condition, results of
operations, or cash flow. However, the Company believes it will
likely be required to provide additional disclosures as part of
future financial statements, beginning with first quarter 2008.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (Statement 159). Statement 159 allows entities
the option to measure eligible financial instruments at fair
value as of specified dates. Such election, which may be applied
on an instrument by instrument basis, is typically irrevocable
once elected. Statement 159 is effective for fiscal years
beginning after November 15, 2007. The Company does not
believe Statement 159 will result in a material adverse effect
43
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
on its financial condition, results of operations, or cash flow.
|
|
3.
|
Acquisition
of Certain Assets
|
In fourth quarter 2004, Southwest was selected as the winning
bidder at a bankruptcy-court approved auction for certain ATA
Airlines, Inc. (ATA) assets. As part of the transaction, which
was approved in December 2004, Southwest agreed to pay
$40 million for certain ATA assets, consisting of the
leasehold rights to six of ATAs leased Chicago Midway
Airport gates and the rights to a leased aircraft maintenance
hangar at Chicago Midway Airport. In addition, Southwest
provided ATA with $40 million in
debtor-in-possession
financing while ATA remained in bankruptcy, and also guaranteed
the repayment of an ATA construction loan to the City of Chicago
for $7 million. As part of this original transaction,
Southwest committed, upon ATAs emergence from bankruptcy,
to convert the
debtor-in-possession
financing to a term loan, payable over five years, and to invest
$30 million cash in ATA convertible preferred stock.
During fourth quarter 2005, ATA Airlines, Inc. (ATA) entered
into an agreement in which an investor, MatlinPatterson Global
Opportunities Partners II, would provide financing to enable ATA
to emerge from bankruptcy. As part of this transaction,
Southwest entered into an agreement with ATA to acquire the
leasehold rights to four additional leased gates at Chicago
Midway Airport in exchange for a $20 million reduction in
the Companys
debtor-in-possession
loan. Upon ATAs emergence from bankruptcy, which took
place on February 28, 2006, ATA repaid the remaining
$20 million balance of the
debtor-in-possession
financing to the Company, and provided a letter of credit to
support Southwests obligation under the construction loan
to the City of Chicago. In addition, Southwest was relieved of
its commitment to purchase ATA convertible preferred stock.
Southwest and ATA also agreed on a code share arrangement, under
which each carrier can exchange passengers on certain designated
flights. This agreement was approved and implemented during
first quarter 2005, although it has since been enhanced and
adjusted.
The Companys contractual purchase commitments primarily
consist of scheduled aircraft acquisitions from Boeing. As of
December 31, 2007, the Company had contractual purchase
commitments with Boeing for 29
737-700
aircraft deliveries in 2008, 20 scheduled for delivery in 2009,
10 each in 2010 thru 2012, and 29 thereafter. In addition, the
Company has options and purchase rights for an additional 138
737-700s
that it may acquire during
2009-2014.
The Company has the option, which must be exercised
18 months prior to the contractual delivery date, to
substitute
737-600s
or
737-800s
for
the
737-700s.
As
of December 31, 2007, aggregate funding needed for firm
commitments is approximately $3.2 billion, subject to
adjustments for inflation, due as follows: $747 million in
2008, $498 million in 2009, $341 million in 2010,
$444 million in 2011, $458 million in 2012, and
$684 million thereafter.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Retirement plans (Note 14)
|
|
$
|
132
|
|
|
$
|
165
|
|
Aircraft rentals
|
|
|
125
|
|
|
|
128
|
|
Vacation pay
|
|
|
164
|
|
|
|
151
|
|
Advances and deposits (Note 10)
|
|
|
2,020
|
|
|
|
546
|
|
Deferred income taxes
|
|
|
370
|
|
|
|
78
|
|
Other
|
|
|
296
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
3,107
|
|
|
$
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Revolving
Credit Facility
|
The Company has a revolving credit facility under which it can
borrow up to $600 million from a group of banks. The
facility expires in August 2010 and is unsecured. At the
Companys option, interest on the facility can be
calculated on one of several different bases. For most
borrowings, Southwest would anticipate choosing a
44
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
floating rate based upon LIBOR. If the facility had been fully
drawn at December 31, 2007, the spread over LIBOR would
have been 62.5 basis points given Southwests credit
rating at that date. The facility also contains a financial
covenant requiring a minimum coverage ratio of adjusted pre-tax
income to fixed obligations, as defined. As of December 31,
2007, the Company was in compliance with this covenant, and
there were no outstanding amounts borrowed under this facility.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
7
7
/
8
% Notes
due 2007
|
|
$
|
|
|
|
$
|
100
|
|
French Credit Agreements due 2012
|
|
|
32
|
|
|
|
37
|
|
6
1
/
2
% Notes
due 2012
|
|
|
386
|
|
|
|
369
|
|
5
1
/
4
% Notes
due 2014
|
|
|
352
|
|
|
|
336
|
|
5
3
/
4
% Notes
due 2016
|
|
|
300
|
|
|
|
300
|
|
5
1
/
8
% Notes
due 2017
|
|
|
311
|
|
|
|
300
|
|
French Credit Agreements due 2017
|
|
|
94
|
|
|
|
100
|
|
Pass Through Certificates
|
|
|
480
|
|
|
|
|
|
7
3
/
8
% Debentures
due 2027
|
|
|
103
|
|
|
|
100
|
|
Capital leases (Note 8)
|
|
|
52
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,110
|
|
|
|
1,705
|
|
Less current maturities
|
|
|
41
|
|
|
|
122
|
|
Less debt discount and issuance costs
|
|
|
19
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,050
|
|
|
$
|
1,567
|
|
|
|
|
|
|
|
|
|
|
On September 1, 2007, the Company redeemed its
$100 million senior unsecured
7
7
/
8
% notes
on their scheduled maturity date.
On October 3, 2007, grantor trusts established by the
Company issued $500 million Pass Through Certificates
consisting of $412 million 6.15% Series A certificates
and $88 million 6.65% Series 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 in the same amounts, 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 16 Boeing
737-700
aircraft owned by Southwest and are secured by a mortgage on
each aircraft. Interest on the equipment notes held for the
certificates is payable semi-annually, beginning
February 1, 2008. Also beginning February 1, 2008,
principal payments on the equipment notes held for both series
of certificates are due semi-annually until the balance of the
certificates mature on August 1, 2022. The Company utilized
the proceeds from the issuance of the Pass Through Certificates
for general corporate purposes. Prior to their issuance, the
Company also entered into swap agreements to hedge the
variability in interest rates on the Pass Through Certificates.
The swap agreements were accounted for as cash flow hedges, and
resulted in a payment by the Company of $20 million upon
issuance of the Pass Through Certificates. The effective portion
of the hedge is being amortized to interest expense concurrent
with the amortization of the debt and is reflected in the above
table as a reduction in the debt balance. The ineffectiveness of
the hedge transaction was immaterial.
During December 2006, the Company issued $300 million
senior unsecured Notes due 2016. The notes bear interest at
5.75 percent, payable semi-annually in arrears, with the
first payment made on June 15, 2007. Southwest used the net
proceeds from the issuance of the notes for general corporate
purposes.
During February 2005, the Company issued $300 million
senior unsecured Notes due 2017. The notes bear interest at
5.125 percent, payable semi-annually in arrears, with the
first payment made on September 1, 2005. Southwest used the
net proceeds from the issuance of the notes for general
corporate purposes. In January 2007, the Company entered into an
interest-rate swap
45
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreement to convert this fixed-rate debt to a floating rate.
See Note 10 for more information on the interest-rate swap
agreement.
In fourth quarter 2004, the Company entered into four identical
13-year
floating-rate financing arrangements, whereby it borrowed a
total of $112 million from French banking partnerships.
Although the interest rates on the borrowings float, the Company
estimates that, considering the full effect of the net
present value benefits included in the transactions, the
effective economic yield over the
13-year
term
of the loans will be approximately LIBOR minus 45 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,
under certain conditions. The Company pledged four aircraft as
collateral for the transactions.
In September 2004, the Company issued $350 million senior
unsecured Notes due 2014. The notes bear interest at
5.25 percent, payable semi-annually in arrears, on April 1
and October 1. Concurrently, the Company entered into an
interest-rate swap agreement to convert this fixed-rate debt to
a floating rate. See Note 10 for more information on the
interest-rate swap agreement. Southwest used the net proceeds
from the issuance of the notes for general corporate purposes.
On March 1, 2002, the Company issued $385 million
senior unsecured Notes due March 1, 2012. The notes bear
interest at 6.5 percent, payable semi-annually on March 1
and September 1. Southwest used the net proceeds from the
issuance of the notes for general corporate purposes. During
2003, the Company entered into an interest rate swap agreement
relating to these notes. See Note 10 for further
information.
In fourth quarter 1999, the Company entered into two identical
13-year
floating rate financing arrangements, whereby it borrowed a
total of $56 million from French banking partnerships.
Although the interest rates on the borrowings float, the Company
estimates that, considering the full effect of the net
present value benefits included in the transactions, the
effective economic yield over the
13-year
term
of the loans will be approximately LIBOR minus 67 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 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. In January 2007, the Company entered into an
interest-rate swap agreement to convert this fixed-rate debt to
a floating rate. See Note 10 for more information on the
interest-rate swap agreement.
The Company is required to provide standby letters of credit to
support certain obligations that arise in the ordinary course of
business. Although the letters of credit are an off-balance
sheet item, the majority of obligations to which they relate are
reflected as liabilities in the Consolidated Balance Sheet.
Outstanding letters of credit totaled $211 million at
December 31, 2007.
The net book value of the assets pledged as collateral for the
Companys secured borrowings, primarily aircraft and
engines, was $660 million at December 31, 2007.
As of December 31, 2007, aggregate annual principal
maturities of debt and capital leases (not including amounts
associated with interest rate swap agreements and interest on
capital leases) for the five-year period ending
December 31, 2012, were $40 million in 2008,
$42 million in 2009, $50 million in 2010,
$44 million in 2011, $418 million in 2012, and
$1.5 billion thereafter.
46
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company had nine aircraft classified as capital leases at
December 31, 2007. The amounts applicable to these aircraft
included in property and equipment were:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Flight equipment
|
|
$
|
168
|
|
|
$
|
168
|
|
Less accumulated depreciation
|
|
|
133
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
Total rental expense for operating leases, both aircraft and
other, charged to operations in 2007, 2006, and 2005 was
$469 million, $433 million, and $409 million,
respectively. The majority of the Companys terminal
operations space, as well as 86 aircraft, were under operating
leases at December 31, 2007. Future minimum lease payments
under capital leases and noncancelable operating leases with
initial or remaining terms in excess of one year at
December 31, 2007, were:
|
|
|
|
|
|
|
|
|
|
|
Capital Leases
|
|
|
Operating Leases
|
|
|
|
(In millions)
|
|
|
2008
|
|
$
|
16
|
|
|
$
|
400
|
|
2009
|
|
|
17
|
|
|
|
335
|
|
2010
|
|
|
15
|
|
|
|
298
|
|
2011
|
|
|
12
|
|
|
|
235
|
|
2012
|
|
|
|
|
|
|
195
|
|
After 2012
|
|
|
|
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
60
|
|
|
$
|
2,339
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
52
|
|
|
|
|
|
Less current portion
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 lessors defined cost of the
aircraft.
|
|
9.
|
Project
Early Departure
|
Project Early Departure was a voluntary early retirement program
offered in July 2007 to eligible Employees, in which the Company
offered a cash bonus of $25,000 plus medical/dental continuation
coverage and travel privileges based on eligibility.
A total of 608 out of approximately 8,500 eligible Employees
elected to participate in the program. The number of Employees
from each group that accepted the package is as follows: 395
from Reservations, 165 from Ground Operations, 41 from Inflight
and seven from Provisioning. The participants last day of
work falls between September 30, 2007 and April 30,
2008, based on the operational needs of particular work
locations and departments. The Company did not have a target or
expectation for the number of Employees expected to accept the
package.
Project Early Departure resulted in a pre-tax,
pre-profitsharing, one-time charge of approximately
$25 million during third quarter 2007, all of which is
reflected in Salaries, wages and benefits in the
accompanying Consolidated Statement of Income. Approximately
$14 million remained to be paid and is recorded as an
accrued liability in the accompanying Consolidated Balance Sheet
as of December 31, 2007. The Company will continue to
address future staffing needs, but currently anticipates that
the majority of the positions will be filled with
entry-level Employees at lower wage rates to meet
operational demands. The purpose of this voluntary initiative
and
47
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
other initiatives is to help the Company reduce future operating
costs.
|
|
10.
|
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 during 2007, 2006, and 2005
represented approximately 28.0 percent, 26.2 percent,
and 19.6 percent of Southwests operating expenses,
respectively. The primary reason that fuel and oil has become an
increasingly large portion of the Companys operating
expenses has been due to the dramatic increase in all energy
prices over this period. The Company endeavors to acquire jet
fuel at the lowest possible cost. Because jet fuel is not traded
on an organized futures exchange, there are limited
opportunities to hedge directly in jet fuel. However, the
Company has found that financial derivative instruments in other
commodities, such as crude oil, and refined products such as
heating oil and unleaded gasoline, can be useful in decreasing
its exposure to jet fuel price increases. The Company does not
purchase or hold any derivative financial instruments for
trading purposes.
The Company has utilized financial derivative instruments for
both short-term and long-term time frames. In addition to the
significant protective fuel derivative positions the Company had
in place during 2007, the Company also has significant future
positions. The Company currently has a mixture of purchased call
options, collar structures, and fixed price swap agreements in
place to protect against over 70 percent of its 2008 total
anticipated jet fuel requirements at average crude oil
equivalent prices of approximately $51 per barrel, and has also
added refinery margins on most of those positions. Based on
current growth plans, the Company also has fuel derivative
contracts in place for over 55 percent of its expected fuel
consumption for 2009 at approximately $51 per barrel, nearly
30 percent for 2010 at approximately $63 per barrel, over
15 percent for 2011 at $64 per barrel, and over
15 percent in 2012 at $63 per barrel.
Upon proper qualification, the Company endeavors to account for
its fuel derivative instruments as cash flow hedges, as defined
in Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities
, as amended (SFAS 133). Under SFAS 133,
all derivatives designated as hedges that meet certain
requirements are granted special hedge accounting treatment.
Generally, utilizing the special hedge accounting, all periodic
changes in fair value of the derivatives designated as hedges
that are considered to be effective, as defined, are recorded in
Accumulated other comprehensive income until the
underlying jet fuel is consumed. See Note 11 for further
information on Accumulated other comprehensive income. The
Company is exposed to the risk that periodic changes will not be
effective, as defined, or that the derivatives will no longer
qualify for special hedge accounting. Ineffectiveness, as
defined, results when the change in the fair value of the
derivative instrument exceeds the change in the value of the
Companys expected future cash outlay to purchase and
consume jet fuel. To the extent that the periodic changes in the
fair value of the derivatives are not effective, that
ineffectiveness is recorded to Other gains and losses in the
income statement. Likewise, if a hedge ceases to qualify for
hedge accounting, any change in the fair value of derivative
instruments since the last period is recorded to Other gains and
losses in the income statement in the period of the change;
however, in accordance with SFAS 133, any amounts
previously recorded to Accumulated other comprehensive income
would remain there until such time as the original forecasted
transaction occurs, then would be reclassified to Fuel and oil
expense. In a situation where it becomes probable that a hedged
forecasted transaction will not occur, any gains
and/or
losses that have been recorded to Accumulated other
comprehensive income would be required to be immediately
reclassified into earnings. The Company did not have any such
situations occur in 2005, 2006, or 2007.
Ineffectiveness is inherent in hedging jet fuel with derivative
positions based in other crude oil related commodities,
especially given the magnitude of the current fair market value
of the Companys fuel derivatives and the recent volatility
in the prices of refined products. Due to the volatility in
markets for crude oil and related products, the Company is
unable to predict the amount of ineffectiveness each period,
including the loss of hedge accounting, which could be
determined on a derivative by derivative basis or in the
aggregate for a specific commodity. This may result, and has
resulted, in increased volatility in the Companys results.
The significant increase in the amount of hedge ineffectiveness
and unrealized gains and losses on derivative contracts settling
in future periods recorded during the past few years has been
due to a number of factors. These factors included: the
significant fluctuation in energy prices, the number of
derivative positions the Company holds, significant weather
events that have affected refinery capacity and
48
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the production of refined products, and the volatility of the
different types of products the Company uses for protection. The
number of instances in which the Company has discontinued hedge
accounting for specific hedges and for specific refined
products, such as unleaded gasoline, has increased recently,
primarily due to these reasons. In these cases, the Company has
determined that the hedges will not regain effectiveness in the
time period remaining until settlement and therefore must
discontinue special hedge accounting, as defined by
SFAS 133. When this happens, any changes in fair value of
the derivative instruments are marked to market through earnings
in the period of change. However, even though these derivatives
may not qualify for SFAS 133 special hedge accounting, the
Company continues to hold the instruments as it believes they
continue to represent good economic hedges in its
goal to minimize jet fuel costs. As the fair value of the
Companys hedge positions can fluctuate significantly in
amount from period to period, it is more probable that there
will be continued variability recorded in the income statement
and that the amount of hedge ineffectiveness and unrealized
gains or losses for changes in value of the derivatives recorded
in future periods will be material. This is primarily due to the
fact that small differences in the correlation of crude oil
related products are leveraged over large dollar volumes.
All cash flows associated with purchasing and selling
derivatives are classified as operating cash flows in the
Consolidated Statement of Cash Flows, either as a component of
changes in Other current assets or Other, net, depending on
whether the derivative will settle within twelve months or
beyond twelve months, respectively. The following table presents
the location of pre-tax gains
and/or
losses on derivative instruments within the Consolidated
Statement of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Fuel hedge (gains) included in Fuel and oil expense
|
|
$
|
(686
|
)
|
|
$
|
(634
|
)
|
|
$
|
(892
|
)
|
Mark-to-market impact from fuel contracts settling in future
periods included in Other (gains) losses, net
|
|
|
(219
|
)
|
|
|
42
|
|
|
|
(77
|
)
|
Ineffectiveness from fuel hedges settling in future
periods included in Other (gains) losses, net
|
|
|
(51
|
)
|
|
|
39
|
|
|
|
(9
|
)
|
Realized ineffectiveness and mark-to-market (gains) or
losses included in Other (gains) losses, net
|
|
|
(90
|
)
|
|
|
20
|
|
|
|
(24
|
)
|
Premium cost of fuel contracts included in Other (gains) losses,
net
|
|
|
58
|
|
|
|
52
|
|
|
|
35
|
|
Also, the following table presents the fair values of the
Companys remaining derivative instruments, receivable
amounts from settled/expired derivative contracts, and the
amounts of unrealized gains, net of tax, in Accumulated other
comprehensive income related to fuel hedges within the
Consolidated Balance Sheet.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Fair value of current fuel contracts (Fuel derivative contracts)
|
|
$
|
1,069
|
|
|
$
|
369
|
|
Fair value of noncurrent fuel contracts (Other assets)
|
|
|
1,318
|
|
|
|
630
|
|
Due from third parties for settled fuel contracts (Accounts and
other receivables)
|
|
|
109
|
|
|
|
42
|
|
Net unrealized gains from fuel hedges, net of tax (Accumulated
other comprehensive income)
|
|
|
1,221
|
|
|
|
584
|
|
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.
Included in the above total net unrealized gains from fuel
hedges as of December 31, 2007, are approximately
$556 million in net unrealized gains that are expected to
be realized in earnings during 2008. In addition, as of
December 31, 2007, the Company had already recognized gains
due to ineffectiveness and derivatives that do not qualify for
hedge accounting totaling $180 million, net of taxes. These
gains were recognized in 2007 and prior periods, and are
reflected in Retained earnings as of December 31, 2007, but
the underlying derivative instruments will not expire/settle
until 2008 or future periods.
During first quarter 2007, the Company executed interest rate
swap agreements relating to its $300 million
49
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
5.125% senior unsecured notes due 2017 and its
$100 million 7.375% senior unsecured debentures due
2027. Under the agreement related to its $300 million
5.125% senior unsecured notes due 2017, the average
floating rate paid during 2007 was 4.64 percent. Under the
agreement related to its $100 million 7.375% senior
unsecured debentures due 2027, the average floating rate paid
during 2007 was 6.73 percent.
Prior to 2007, the Company had entered into interest rate swap
agreements relating to its $385 million 6.5% senior
unsecured notes due 2012 and its $350 million
5.25% senior unsecured notes due 2014. Under each of these
interest rate swap agreements, the Company pays the London
InterBank Offered Rate (LIBOR) plus a margin every six months on
the notional amount of the debt, and receives payments based on
the fixed stated rate of the notes every six months until the
date the notes become due. Under the agreement related to its
$385 million 6.5% senior unsecured notes due 2012, the
average floating rate paid during 2007 is estimated to be
7.31 percent based on actual and forward rates at
December 31, 2007. Under the agreement related to its
$350 million 5.25% senior unsecured notes due 2014,
the average floating rate paid during 2007 was 6.02 percent.
The primary objective for the Companys use of interest
rate hedges is to reduce the volatility of net interest income
by better matching the repricing of its assets and liabilities.
The Companys interest rate swap agreements qualify as fair
value hedges, as defined by SFAS 133. The fair values of
the interest rate swap agreements, which are adjusted regularly,
are recorded in the Consolidated Balance Sheet, as necessary,
with a corresponding adjustment to the carrying value of the
long-term debt. The fair value of the interest rate swap
agreements, excluding accrued interest, at December 31,
2007, was an asset of approximately $16 million and is
recorded in Other deferred liabilities in the
Consolidated Balance Sheet. In accordance with fair value
hedging, the offsetting entry is an adjustment to increase the
carrying value of long-term debt. See Note 7.
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 its
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, 2007, the Company had agreements with nine
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. At December 31,
2007, the Company held $2.0 billion in fuel hedge related
cash collateral deposits under these bilateral collateral
provisions. These collateral deposits serve to decrease, but not
totally eliminate, the credit risk associated with the
Companys hedging program. The cash deposits, which can
have a significant impact on the Companys cash balance and
cash flows as of and for a particular operating period, are
included in Accrued liabilities on the Consolidated
Balance Sheet and are included as Operating cash
flows in the Consolidated Statement of Cash Flows.
The carrying amounts and estimated fair values of the
Companys long-term debt and fuel contracts at
December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Estimated Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
|
(In millions)
|
|
|
French Credit Agreements due 2012
|
|
$
|
32
|
|
|
$
|
32
|
|
6
1
/
2
% Notes
due 2012
|
|
|
386
|
|
|
|
402
|
|
5
1
/
4
% Notes
due 2014
|
|
|
352
|
|
|
|
342
|
|
5
3
/
4
% Notes
due 2016
|
|
|
300
|
|
|
|
295
|
|
5
1
/
8
% Notes
due 2017
|
|
|
311
|
|
|
|
291
|
|
French Credit Agreements due 2017
|
|
|
94
|
|
|
|
94
|
|
Pass Through Certificates
|
|
|
480
|
|
|
|
487
|
|
7
3
/
8
% Debentures
due 2027
|
|
|
103
|
|
|
|
105
|
|
Fuel contracts
|
|
|
2,387
|
|
|
|
2,387
|
|
The estimated fair values of the Companys publicly held
long-term debt were based on quoted market prices. The carrying
values of all other financial instruments approximate their fair
value.
50
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive income includes changes in the fair value of
certain financial derivative instruments, which qualify for
hedge accounting, unrealized gains and losses on certain
investments, and adjustments to recognize the funded status of
the Companys postretirement obligations. See Note 14
for further information on Employee retirement plans.
Comprehensive income totaled $1,304 million,
$189 million, and $959 million for 2007, 2006, and
2005, respectively. The differences between Net
income and Comprehensive income for these
years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Net income
|
|
$
|
645
|
|
|
$
|
499
|
|
|
$
|
484
|
|
Unrealized gain (loss) on derivative instruments, net of
deferred taxes of $408, ($201) and $300
|
|
|
636
|
|
|
|
(306
|
)
|
|
|
474
|
|
Other, net of deferred taxes of $14, ($2) and $1
|
|
|
23
|
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
659
|
|
|
|
(310
|
)
|
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,304
|
|
|
$
|
189
|
|
|
$
|
959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A rollforward of the amounts included in Accumulated other
comprehensive income (loss), net of taxes for 2007, 2006,
and 2005, is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
|
|
|
|
Accumulated Other
|
|
|
|
Hedge
|
|
|
|
|
|
Comprehensive
|
|
|
|
Derivatives
|
|
|
Other
|
|
|
Income (Loss)
|
|
|
|
(In millions)
|
|
|
Balance at December 31, 2005
|
|
$
|
890
|
|
|
$
|
2
|
|
|
$
|
892
|
|
2006 changes in fair value
|
|
|
52
|
|
|
|
(4
|
)
|
|
|
48
|
|
Reclassification to earnings
|
|
|
(358
|
)
|
|
|
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
584
|
|
|
|
(2
|
)
|
|
|
582
|
|
2007 changes in fair value
|
|
|
1,039
|
|
|
|
23
|
|
|
|
1,062
|
|
Reclassification to earnings
|
|
|
(403
|
)
|
|
|
|
|
|
|
(403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,220
|
|
|
$
|
21
|
|
|
$
|
1,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has one class of capital stock, its 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, 2007, the Company
had 82 million shares of common stock reserved for issuance
pursuant to Employee stock benefit plans (of which
32 million shares had not been granted.)
In January 2004, the Companys Board of Directors
authorized the repurchase of up to $300 million of the
Companys common stock, utilizing proceeds from the
exercise of Employee stock options. Repurchases were made in
accordance with applicable securities laws in the open market or
in private transactions from time to time, depending on market
conditions. During first quarter 2005, the Company completed
this program. In total, the Company repurchased approximately
21 million of its common shares during the course of the
program.
In 2006, the Companys Board of Directors authorized three
separate programs for the repurchase of up to a total of
$1.0 billion of the Companys common stock
$300 million authorized in January 2006, $300 million
authorized in May 2006, and $400 million authorized in
November 2006. Repurchases were made in accordance with
applicable securities laws in the open market or in private
transactions from time to time, depending on market conditions.
These programs, which were completed during first quarter 2007,
resulted in the repurchase of a total of approximately
63 million shares.
In 2007, the Companys Board of Directors authorized two
separate programs for the repurchase of up to a total of
$800 million of the Companys common stock
$300 million authorized in March 2007, and
$500 million authorized in May 2007. Repurchases were made
in
51
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accordance with applicable securities laws in the open market or
in private transactions from time to time, depending on market
conditions. These programs, which were completed during third
quarter 2007, resulted in the repurchase of a total of
approximately 53 million shares.
During January 2008, the Companys Board of Directors
authorized an additional program for the repurchase of up to
$500 million of the Companys Common Stock.
Repurchases will be made in accordance with applicable
securities laws in the open market or in private transactions
from time to time, depending on market conditions.
The Company has share-based compensation plans covering the
majority of its Employee groups, including plans adopted via
collective bargaining, a plan covering the Companys Board
of Directors, and plans related to employment contracts with the
Executive Chairman of the Company. Effective January 1,
2006, the Company adopted the fair value recognition provisions
of SFAS No. 123R, Share-Based Payment
using the modified retrospective transition method. Among other
items, SFAS 123R eliminated the use of APB 25 and the
intrinsic value method of accounting, and requires recognition
of the cost of Employee services received in exchange for awards
of equity instruments, based on the grant date fair value of
those awards, in the financial statements.
Under the modified retrospective method, compensation cost is
recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and based on
the requirements of SFAS 123 for all unvested awards
granted prior to the effective date of SFAS 123R. In
addition, results for prior periods were retrospectively
adjusted in first quarter 2006 utilizing the pro forma
disclosures in those prior financial statements, except as
noted. The Consolidated Statement of Income for the years ended
December 31, 2007, 2006, and 2005 reflects share-based
compensation cost of $37 million, $80 million, and
$80 million, respectively. The total tax benefit recognized
from share-based compensation arrangements for the years ended
December 31, 2007, 2006, and 2005, was $11 million,
$27 million, and $25 million, respectively. As a
result of the SFAS 123R retroactive application, for the
year ended December 31, 2005, net income was reduced by
$55 million, net income per share, basic was reduced by
$.08, and net income per share, diluted was reduced by $.06.
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 non-qualified, granted at or above the fair
market value of the Companys Common Stock on the date of
grant, and generally have terms ranging from six to twelve
years. Neither Executive Officers nor members of the
Companys Board of Directors are eligible to participate in
any of these collective bargaining plans. Options granted to
Employees through other Employee plans are both qualified as
incentive stock options under the Internal Revenue Code of 1986
and non-qualified stock options, granted at no less than the
fair market value of the Companys Common Stock on the date
of grant, and have ten-year terms. All of the options included
under the heading of Other Employee Plans have been
approved by shareholders, except the plan covering
non-management, non-contract Employees, which had options
outstanding to purchase 5 million shares of the
Companys Common Stock as of December 31, 2007. The
Company also has plans related to past employment agreements
with its current Executive Chairman. As of December 31,
2007, there were 556,000 options outstanding under these plans,
all of which were fully vested. Although the Company does not
have a formal policy, upon option exercise, the Company will
typically issue treasury stock, to the extent such shares are
available.
Vesting terms for the collective bargaining plans differ based
on the grant made, and have ranged in length from immediate
vesting to vesting periods in accordance with the period covered
by the respective collective bargaining agreement. For
Other Employee Plans, options vest and generally
become fully exercisable over three, five, or ten years of
continued employment, depending upon the grant type. For grants
in any of the Companys plans that are subject to graded
vesting over a service period, Southwest recognizes expense on a
straight-line basis over the requisite service period for the
entire award. None of the Companys grants include
performance-based or market-based vesting conditions, as defined.
52
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each option grant is estimated on the date of
grant using a modified Black-Scholes option pricing model. The
following weighted-average assumptions were used for grants made
under the fixed option plans for the current and prior years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average risk-free interest rate
|
|
|
3.7
|
%
|
|
|
4.6
|
%
|
|
|
4.1
|
%
|
Expected life of option (years)
|
|
|
4.9
|
|
|
|
5.0
|
|
|
|
4.7
|
|
Expected stock volatility
|
|
|
25.7
|
%
|
|
|
26.0
|
%
|
|
|
26.2
|
%
|
Expected dividend yield
|
|
|
0.09
|
%
|
|
|
0.07
|
%
|
|
|
0.09
|
%
|
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 somewhat
subjective assumptions including expected stock price
volatility. For 2007 and 2006, the Company has relied on
observations of both historical volatility trends as well as
implied future volatility observations as determined by
independent third parties. For both 2007 and 2006 stock option
grants, the Company utilized expected volatility based on the
expected life of the option, but within a range of
24 percent to 27 percent. Prior to 2006, the Company
relied exclusively on historical volatility as an input for
determining the estimated fair value of stock options. In
determining the expected life of the option grants, the Company
has observed the actual terms of prior grants with similar
characteristics, the actual vesting schedule of the grant, and
assessed the expected risk tolerance of different optionee
groups. The risk-free interest rates used, which were actual
U.S. Treasury zero-coupon rates for bonds matching the
expected term of the option as of the option grant date, ranged
from .50 percent to 5.37 percent for the year ended
December 31, 2007, from 4.26 percent to
5.24 percent for 2006, and from 3.37 percent to
4.47 percent for 2005.
The fair value of options granted under the fixed option plans
during the year ended December 31, 2007, ranged from $0.67
to $6.33, with a weighted-average fair value of $4.28. The fair
value of options granted under the fixed option plans during
2006 ranged from $2.48 to $6.99, with a weighted-average fair
value of $5.47. The fair value of options granted under the
fixed option plans during 2005 ranged from $2.90 to $6.79, with
a weighted-average fair value of $4.49.
Aggregated information regarding the Companys fixed stock
option plans is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collective Bargaining Plans
|
|
|
|
|
|
|
|
|
|
Wtd. Average
|
|
|
|
|
|
|
|
|
|
Wtd. Average
|
|
|
Remaining
|
|
|
Aggregate Intrinsic
|
|
|
|
Options (000)
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value (Millions)
|
|
|
Outstanding December 31, 2004
|
|
|
120,703
|
|
|
$
|
10.98
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,697
|
|
|
|
14.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(14,739
|
)
|
|
|
6.13
|
|
|
|
|
|
|
|
|
|
Surrendered
|
|
|
(2,417
|
)
|
|
|
13.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2005
|
|
|
105,244
|
|
|
$
|
11.65
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,025
|
|
|
|
16.64
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(24,632
|
)
|
|
|
7.91
|
|
|
|
|
|
|
|
|
|
Surrendered
|
|
|
(1,427
|
)
|
|
|
14.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2006
|
|
|
80,210
|
|
|
$
|
12.83
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
751
|
|
|
|
14.89
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(14,145
|
)
|
|
|
7.17
|
|
|
|
|
|
|
|
|
|
Surrendered
|
|
|
(3,440
|
)
|
|
|
16.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
|
63,376
|
|
|
$
|
13.93
|
|
|
|
3.8
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2007
|
|
|
63,254
|
|
|
$
|
13.93
|
|
|
|
3.8
|
|
|
$
|
2
|
|
Exercisable at December 31, 2007
|
|
|
62,442
|
|
|
$
|
13.92
|
|
|
|
3.8
|
|
|
$
|
2
|
|
53
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Employee Plans
|
|
|
|
|
|
|
|
|
|
Wtd. Average
|
|
|
|
|
|
|
|
|
|
Wtd. Average
|
|
|
Remaining
|
|
|
Aggregate Intrinsic
|
|
|
|
Options (000)
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value (Millions)
|
|
|
Outstanding December 31, 2004
|
|
|
34,221
|
|
|
$
|
12.94
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,662
|
|
|
|
15.60
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,800
|
)
|
|
|
7.09
|
|
|
|
|
|
|
|
|
|
Surrendered
|
|
|
(1,263
|
)
|
|
|
15.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2005
|
|
|
35,820
|
|
|
$
|
13.96
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,831
|
|
|
|
17.52
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,015
|
)
|
|
|
9.57
|
|
|
|
|
|
|
|
|
|
Surrendered
|
|
|
(1,442
|
)
|
|
|
15.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2006
|
|
|
32,194
|
|
|
$
|
14.87
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
293
|
|
|
|
16.35
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,506
|
)
|
|
|
8.45
|
|
|
|
|
|
|
|
|
|
Surrendered
|
|
|
(1,454
|
)
|
|
|
16.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
|
28,527
|
|
|
$
|
15.37
|
|
|
|
4.9
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2007
|
|
|
28,407
|
|
|
$
|
15.36
|
|
|
|
4.9
|
|
|
$
|
7
|
|
Exercisable at December 31, 2007
|
|
|
20,777
|
|
|
$
|
15.29
|
|
|
|
4.6
|
|
|
$
|
6
|
|
The total aggregate intrinsic value of options exercised during
the years ended December 31, 2007, 2006, and 2005, was
$137 million, $262 million, and $179 million,
respectively. The total fair value of shares vesting during the
years ended December 31, 2007, 2006, and 2005, was
$64 million, $112 million, and $96 million,
respectively. As of December 31, 2007, there was
$37 million of total unrecognized compensation cost related
to share-based compensation arrangements, which is expected to
be recognized over a weighted-average period of 2.25 years.
The total recognition period for the remaining unrecognized
compensation cost is approximately eight years; however, the
majority of this cost will be recognized over the next two
years, in accordance with vesting provisions.
|
|
|
Employee
Stock Purchase Plan
|
Under the amended 1991 Employee Stock Purchase Plan (ESPP),
which has been approved by shareholders, 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 monthly
purchase period. Common Stock purchases are paid for through
periodic payroll deductions. For the years ended
December 31, 2007, 2006, and 2005, participants under the
plan purchased 1.3 million shares, 1.2 million shares,
and 1.5 million shares at average prices of $13.30, $14.86,
and $13.19, respectively. The weighted-average fair value of
each purchase right under the ESPP granted for the years ended
December 31, 2007, 2006, and 2005, which is equal to the
ten percent discount from the market value of the Common Stock
at the end of each monthly purchase period, was $1.48, $1.65,
and $1.47, respectively.
|
|
|
Non-Employee
Director Grants and Incentive Plan
|
Upon initial election to the Board, non-Employee Directors
receive a one-time option grant to purchase 10,000 shares
of Southwest Common Stock at the fair market value of such stock
on the date of the grant. These grants are made out of one of
the Companys plans covering Employees not subject to
collective bargaining agreements (other Employee plans). Stock
option grants to the Board become exercisable over a period of
three years from the grant date and have a term of 10 years.
In 2001, the Board adopted the Southwest
Airlines Co. Outside Director Incentive Plan. The
purpose of the plan is to align more closely the interests of
the non-Employee Directors with those of the Companys
Shareholders and to provide the non-Employee Directors with
retirement income. To accomplish this purpose, the plan
compensates each non-Employee Director based on the
54
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
performance of the Companys Common Stock and defers the
receipt of such compensation until after the non-Employee
Director ceases to be a Director of the Company. Pursuant to the
plan, on the date of the 2002 Annual Meeting of Shareholders,
the Company granted 750 non-transferable Performance Shares to
each non-Employee Director who had served as a Director since at
least May 2001. Thereafter, on the date of each Annual Meeting
of Shareholders, the Company granted 750 Performance Shares to
each non-Employee Director who has served since the previous
Annual Meeting. Effective beginning with the 2007 Annual
Meeting, the plan was amended to increase the annual number of
Performance Shares to be granted to 1,000. A Performance Share
is a unit of value equal to the Fair Market Value of a share of
Southwest Common Stock, based on the average closing sale price
of the Common Stock as reported on the New York Stock Exchange
during a specified period. On the
30
th
calendar
day following the date a non-Employee Director ceases to serve
as a Director of the Company for any reason, Southwest will pay
to such former non-Employee Director an amount equal to the Fair
Market Value of the Common Stock during the 30 days
preceding such last date of service multiplied by the number of
Performance Shares then held by such Director. The plan contains
provisions contemplating adjustments on changes in
capitalization of the Company. The Company accounts for grants
made under this plan as liability awards, as defined, and since
the awards are not stock options, they are not reflected in the
above tables. The fair value of the awards as of
December 31, 2007, which is not material to the Company, is
included in Accrued liabilities in the accompanying Consolidated
Balance Sheet.
A portion of the Companys granted options qualify as
incentive stock options (ISO) for income tax purposes. As such,
a tax benefit is not recorded at the time the compensation cost
related to the options is recorded for book purposes due to the
fact that an ISO does not ordinarily result in a tax benefit
unless there is a disqualifying disposition. Stock option grants
of non-qualified options result in the creation of a deferred
tax asset, which is a temporary difference, until the time that
the option is exercised. Due to the treatment of incentive stock
options for tax purposes, the Companys effective tax rate
from year to year is subject to variability.
|
|
14.
|
Employee
Retirement Plans
|
|
|
|
Defined
Contribution Plans
|
The Company has defined contribution plans covering
substantially all Southwest Employees. The Southwest Airlines
Co. Profit Sharing Plan (Profit Sharing Plan) is a money
purchase defined contribution plan and Employee stock purchase
plan. However, the Profit Sharing Plan was amended as of
January 1, 2008, and is now characterized as simply a
Profit Sharing Plan. The Company contributes 15 percent of
its eligible pre-tax profits, as defined, to the Profit Sharing
Plan on an annual basis. No Employee contributions to the Profit
Sharing Plan are allowed.
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 primarily based on Employee compensation
and performance of the Company.
Company contributions to all retirement plans expensed in 2007,
2006, and 2005 were $279 million, $301 million, and
$264 million, respectively.
|
|
|
Postretirement
Benefit Plans
|
The Company provides postretirement benefits to qualified
retirees in the form of medical and dental coverage. Employees
must meet minimum levels of service and age requirements as set
forth by the Company, or as specified in collective bargaining
agreements with specific workgroups. Employees meeting these
requirements, as defined, may use accrued unused sick time to
pay for medical and dental premiums from the age of retirement
until age 65.
The following table shows the change in the Companys
accumulated postretirement benefit obligation (APBO) for the
years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
APBO at beginning of period
|
|
$
|
111
|
|
|
$
|
94
|
|
Service cost
|
|
|
16
|
|
|
|
15
|
|
Interest cost
|
|
|
6
|
|
|
|
5
|
|
Benefits paid
|
|
|
(6
|
)
|
|
|
(5
|
)
|
Actuarial (gain) loss
|
|
|
(39
|
)
|
|
|
2
|
|
Plan amendments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APBO at end of period
|
|
$
|
88
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
55
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The assumed healthcare cost trend rates have a significant
effect on the amounts reported for the Companys plan. A
one-percent change in all healthcare cost trend rates used in
measuring the APBO at December 31, 2007, would have the
following effects:
|
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
1% Decrease
|
|
|
(In millions)
|
|
Increase (decrease) in total service and interest costs
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
Increase (decrease) in the APBO
|
|
$
|
7
|
|
|
$
|
(6
|
)
|
The Companys plans are unfunded, and benefits are paid as
they become due. For 2007, both benefits paid and Company
contributions to the plans were each $6 million. For 2006,
both benefits paid and Company contributions to the plans were
each $5 million. Estimated future benefit payments expected
to be paid for each of the next five years are $6 million
in 2008, $7 million in 2009, $8 million in 2010,
$9 million in 2011, $10 million in 2012, and
$80 million for the next five years thereafter.
On December 31, 2006, the Company adopted the recognition
and disclosure provisions of SFAS 158. SFAS 158
requires the Company to recognize the funded status (i.e., the
difference between the fair value of plan assets and the
projected benefit obligations) of its benefit plans in the
Consolidated Balance Sheet, with a corresponding adjustment to
accumulated other comprehensive income, net of tax. The
following table reconciles the funded status of the plan to the
Companys accrued postretirement benefit cost recognized in
Other deferred liabilities on the Companys
Consolidated Balance Sheet at December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Funded status
|
|
$
|
(88
|
)
|
|
$
|
(111
|
)
|
Unrecognized net actuarial (gain) loss
|
|
|
(31
|
)
|
|
|
7
|
|
Unrecognized prior service cost
|
|
|
3
|
|
|
|
4
|
|
Accumulated other comprehensive income (loss)
|
|
|
28
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Cost recognized on Consolidated Balance Sheet
|
|
$
|
(88
|
)
|
|
$
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
During 2007, the Company recorded a $31 million actuarial
gain as a decrease to the recognized obligation with the offset
to accumulated other comprehensive income. This actuarial gain
is included above and resulted from Congress passage of a
law to increase the mandatory retirement age for
U.S. commercial airline pilots from 60 to 65, effective
immediately. Therefore, since the Company projects that some of
its Pilots will now work past age 60, this assumption
resulted in a decrease to the Companys projected future
postretirement obligation.
The Companys periodic postretirement benefit cost for the
years ended December 31, 2007, 2006, and 2005, included the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Service cost
|
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
12
|
|
Interest cost
|
|
|
6
|
|
|
|
5
|
|
|
|
4
|
|
Amortization of prior service cost
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Recognized actuarial loss
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit cost
|
|
$
|
24
|
|
|
$
|
21
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost is expensed using a
straight-line amortization of the cost over the average future
service of Employees expected to receive benefits under the
plan. The Company used the following actuarial assumptions to
account for its postretirement benefit plans at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Wtd-average discount rate
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
|
|
5.25
|
%
|
Assumed healthcare cost trend rate(1)
|
|
|
8.00
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
(1)
|
|
The assumed healthcare cost trend rate is assumed to decline to
7.50% for 2008, then decline gradually to 5% by 2014 and remain
level thereafter.
|
The selection of a discount rate is made annually and is
selected by the Company based upon comparison of the expected
cash flows associated with the Companys future payments
under its postretirement obligations to a hypothetical bond
portfolio created using high quality bonds that closely match
those expected cash flows. The assumed healthcare trend rate is
also reviewed at least annually and is determined based upon
both historical experience with the Companys healthcare
benefits paid and expectations of how those trends may or may
not change in future years.
56
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2007 and 2006, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
DEFERRED TAX LIABILITIES:
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
$
|
2,612
|
|
|
$
|
2,405
|
|
Fuel hedges
|
|
|
884
|
|
|
|
363
|
|
Other
|
|
|
19
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
3,515
|
|
|
|
2,769
|
|
DEFERRED TAX ASSETS:
|
|
|
|
|
|
|
|
|
Deferred gains from sale and leaseback of aircraft
|
|
|
65
|
|
|
|
70
|
|
Capital and operating leases
|
|
|
58
|
|
|
|
65
|
|
Accrued employee benefits
|
|
|
187
|
|
|
|
160
|
|
Stock-based compensation
|
|
|
110
|
|
|
|
122
|
|
State taxes
|
|
|
75
|
|
|
|
55
|
|
Business partner income
|
|
|
78
|
|
|
|
37
|
|
Net operating loss carry forward
|
|
|
|
|
|
|
22
|
|
Other
|
|
|
37
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
610
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
2,905
|
|
|
$
|
2,182
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes is composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
CURRENT:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
108
|
|
|
$
|
64
|
|
|
$
|
43
|
|
State
|
|
|
9
|
|
|
|
15
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
117
|
|
|
|
79
|
|
|
|
50
|
|
DEFERRED:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
246
|
|
|
|
220
|
|
|
|
231
|
|
State
|
|
|
50
|
|
|
|
(8
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
296
|
|
|
|
212
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
413
|
|
|
$
|
291
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year 2004, Southwest had a tax net operating loss of
$616 million for federal income tax purposes. The Company
carried a portion of this net operating loss back to prior
periods, resulting in a $35 million refund of federal taxes
previously paid. This refund was received during 2005. The
Company applied a portion of this 2004 net operating loss
to the 2005 and 2006 tax years, resulting in the payment of no
regular federal income taxes for these years. The remaining
portion of the Companys federal net operating loss was
utilized during 2007.
57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effective tax rate on income before income taxes differed
from the federal income tax statutory rate for the following
reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Tax at statutory U.S. tax rates
|
|
$
|
370
|
|
|
$
|
276
|
|
|
$
|
274
|
|
Nondeductible items
|
|
|
6
|
|
|
|
10
|
|
|
|
8
|
|
State income taxes, net of federal benefit
|
|
|
38
|
|
|
|
4
|
|
|
|
14
|
|
Other, net
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
413
|
|
|
$
|
291
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In July 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN 48), which clarifies
the accounting and disclosure for uncertainty in tax positions,
as defined. FIN 48 seeks to reduce the diversity in
practice associated with certain aspects of the recognition and
measurement related to accounting for income taxes. The Company
is subject to the provisions of FIN 48 as of
January 1, 2007, and has analyzed filing positions in all
of the federal and state jurisdictions where it is required to
file income tax returns, as well as all open tax years in these
jurisdictions. The Company has identified its federal tax return
and its state tax returns in California and Texas as
major tax jurisdictions, as defined. The only
periods subject to examination for the Companys federal
tax returns are the 2005 and 2006 tax years. The periods subject
to examination for the Companys state tax returns in
California and Texas are years 2002 through 2006. The Company
believes that its income tax filing positions and deductions
will be sustained on audit and does not anticipate any
adjustments that will result in a material adverse effect on the
Companys financial condition, results of operations, or
cash flow. Therefore, no reserves for uncertain income tax
positions have been recorded pursuant to FIN 48. In
addition, the Company did not record a cumulative effect
adjustment related to the adoption of FIN 48.
The Companys policy for recording interest and penalties
associated with audits is to record such items as a component of
income before taxes. Penalties are recorded in Other
(gains) losses, net, and interest paid or received is
recorded in interest expense or interest income, respectively,
in the statement of income. For the year ended December 31,
2007, the Company recorded approximately $1 million in
interest income related to the settlement of audits for certain
prior periods.
The following table sets forth the computation of net income per
share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except per share amounts)
|
|
|
Net income
|
|
$
|
645
|
|
|
$
|
499
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic
|
|
|
757
|
|
|
|
795
|
|
|
|
789
|
|
Dilutive effect of Employee stock options
|
|
|
11
|
|
|
|
29
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding, diluted
|
|
|
768
|
|
|
|
824
|
|
|
|
806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic
|
|
$
|
.85
|
|
|
$
|
.63
|
|
|
$
|
.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted
|
|
$
|
.84
|
|
|
$
|
.61
|
|
|
$
|
.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has excluded 49 million, 20 million, and
12 million shares from its calculations of net income per
share, diluted, in 2007, 2006, and 2005, respectively, as they
represent antidilutive stock options for the respective periods
presented.
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 IRS. The IRS regularly examines
the Companys federal
58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income tax returns and, in the course thereof, proposes
adjustments to the Companys federal income tax liability
reported on such returns. It is the Companys practice to
vigorously contest those proposed adjustments it deems lacking
of merit.
The Companys 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 Companys financial condition, results of
operations or cash flow.
59
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2007 and 2006,
and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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, 2007 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Southwest Airlines Co.s internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated January 31, 2008 expressed
an unqualified opinion thereon.
Dallas, Texas
January 31, 2008
60
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
SOUTHWEST AIRLINES CO.
We have audited Southwest Airlines Co.s internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Southwest Airlines
Co.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an
opinion on the companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Southwest Airlines Co. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Southwest Airlines Co. as of
December 31, 2007 and 2006, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the three years in the period ended
December 31, 2007 of Southwest Airlines Co. and our report
dated January 31, 2008 expressed an unqualified opinion
thereon.
Dallas, Texas
January 31, 2008
61
QUARTERLY
FINANCIAL DATA
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
|
(In millions except per share amounts)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
2,198
|
|
|
$
|
2,583
|
|
|
$
|
2,588
|
|
|
$
|
2,492
|
|
Operating income
|
|
|
84
|
|
|
|
328
|
|
|
|
251
|
|
|
|
126
|
|
Income before income taxes
|
|
|
149
|
|
|
|
447
|
|
|
|
277
|
|
|
|
183
|
|
Net income
|
|
|
93
|
|
|
|
278
|
|
|
|
162
|
|
|
|
111
|
|
Net income per share, basic
|
|
|
.12
|
|
|
|
.36
|
|
|
|
.22
|
|
|
|
.15
|
|
Net income per share, diluted
|
|
|
.12
|
|
|
|
.36
|
|
|
|
.22
|
|
|
|
.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
2,019
|
|
|
$
|
2,449
|
|
|
$
|
2,342
|
|
|
$
|
2,276
|
|
Operating income
|
|
|
98
|
|
|
|
402
|
|
|
|
261
|
|
|
|
174
|
|
Income before income taxes
|
|
|
96
|
|
|
|
515
|
|
|
|
78
|
|
|
|
101
|
|
Net income
|
|
|
61
|
|
|
|
333
|
|
|
|
48
|
|
|
|
57
|
|
Net income per share, basic
|
|
|
.08
|
|
|
|
.42
|
|
|
|
.06
|
|
|
|
.07
|
|
Net income per share, diluted
|
|
|
.07
|
|
|
|
.40
|
|
|
|
.06
|
|
|
|
.07
|
|
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation of Disclosure Controls and
Procedures.
The Company maintains disclosure
controls and procedures (as defined in
Rule 13a-15(e)
of the Securities Exchange Act) designed to provide reasonable
assurance that the information required to be disclosed by the
Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the SECs rules and
forms. These include controls and procedures designed to ensure
that this information is accumulated and communicated to the
Companys management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Management, with the
participation of the Chief Executive and Chief Financial
Officers, evaluated the effectiveness of the Companys
disclosure controls and procedures as of December 31, 2007.
Based on this evaluation, the Companys Chief Executive
Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures were effective
as of December 31, 2007 at the reasonable assurance level.
Managements Annual Report on Internal Control over
Financial Reporting.
Management of the Company is
responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act). The Companys internal control
over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes of accounting principles generally accepted in
the United States.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance of achieving their control
objectives.
Management, with the participation of the Chief Executive and
Chief Financial Officers, evaluated the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2007. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on this
evaluation, management, with the participation of the Chief
Executive and Chief Financial Officers, concluded that, as of
December 31, 2007, the Companys internal control over
financial reporting was effective.
62
Ernst & Young, LLP, the independent registered public
accounting firm who audited the Companys consolidated
financial statements included in this
Form 10-K,
has issued a report on the Companys internal control over
financial reporting, which is included herein.
Changes in Internal Control over Financial
Reporting.
There were no changes in the
Companys internal control over financial reporting (as
defined in
Rule 13a-15(f)
under the Exchange Act) during the quarter ended
December 31, 2007, that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers, and Corporate Governance
|
Directors
and Executive Officers
The information required by this Item 10 regarding the
Companys directors will be set forth under the heading
Election of Directors in the Proxy Statement for the
Companys 2008 Annual Meeting of Shareholders and is
incorporated herein by reference. The information required by
this Item 10 regarding the Companys executive
officers is set forth under the heading Executive Officers
of the Registrant in Part I of this
Form 10-K
and is incorporated herein by reference.
Section 16(a)
Compliance
The information required by this Item 10 regarding
compliance with Section 16(a) of the Exchange Act will be
set forth under the heading Section 16(a) Beneficial
Ownership Reporting Compliance in the Proxy Statement for
the Companys 2008 Annual Meeting of Shareholders and is
incorporated herein by reference.
Corporate
Governance
Except as set forth in the following paragraph, the remaining
information required by this Item 10 will be set forth
under the heading Corporate Governance in the Proxy
Statement for the Companys 2008 Annual Meeting of
Shareholders and is incorporated herein by reference.
The Company has adopted a Code of Ethics that applies to the
Companys principal executive officer, principal financial
officer, and principal accounting officer or controller. The
Companys Code of Ethics, as well as its Corporate
Governance Guidelines and the charters of its Audit,
Compensation, and Nominating and Corporate Governance
Committees, are available on the Companys website,
www.southwest.com.
Copies of these documents are also
available upon request to Investor Relations, Southwest Airlines
Co., P.O. Box 36611, Dallas, TX 75235. The Company
intends to disclose any amendments to or waivers of its Code of
Ethics on behalf of the Companys Chief Executive Officer,
Chief Financial Officer, Controller, and persons performing
similar functions on the Companys website, at
www.southwest.com
, under
the About Southwest caption, promptly
following the date of any such amendment or waiver.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item 11 will be set forth
under the heading Compensation of Executive Officers
in the Proxy Statement for the Companys 2008 Annual
Meeting of Shareholders and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Except as set forth below regarding securities authorized for
issuance under equity compensation plans, the information
required by this Item 12 will be set forth under the
heading Voting Securities and Principal Shareholders
in the Proxy Statement for the Companys 2008 Annual
Meeting of Shareholders and is incorporated herein by reference.
63
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table provides information as of December 31,
2007, regarding compensation plans (including individual
compensation arrangements) under which equity securities of
Southwest are authorized for issuance.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities Remaining
|
|
|
|
Number of Securities to be
|
|
|
Weighted-Average
|
|
|
Available for Future Issuance Under
|
|
|
|
Issued Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants, and Rights
|
|
|
Warrants, and Rights*
|
|
|
Reflected in Column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
Equity Compensation Plans Approved by Security Holders
|
|
|
23,941
|
|
|
$
|
12.76
|
|
|
|
5,707
|
|
Equity Compensation Plans not Approved by Security Holders
|
|
|
68,517
|
|
|
$
|
15.16
|
|
|
|
20,011
|
|
Total
|
|
|
92,459
|
|
|
$
|
14.54
|
|
|
|
25,718
|
|
|
|
|
*
|
|
As adjusted for stock splits.
|
See Note 13 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.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this Item 13 will be set forth
under the heading Certain Relationships and Related
Transactions, and Director Independence in the Proxy
Statement for the Companys 2008 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item 14 will be set forth
under the heading Relationship with Independent
Auditors in the Proxy Statement for the Companys
2008 Annual Meeting of Shareholders and is incorporated herein
by reference.
64
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) 1.
Financial Statements:
The financial statements included in Item 8. Financial
Statements and Supplementary Data above are filed as part of
this annual report.
2.
Financial Statement Schedules:
There are no financial statement schedules filed as part of this
annual report, since the required information is included in the
consolidated financial statements, including the notes thereto,
or the circumstances requiring inclusion of such schedules are
not present.
3.
Exhibits:
|
|
|
|
|
|
3
|
.1
|
|
Restated Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 4.1 to Southwests 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
Southwests 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
Southwests 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
Southwests 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
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2001 (File
No. 1-7259));
Articles of Amendment to Articles of Incorporation of Southwest
(incorporated by reference to Exhibit 3.1 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007 (File
No. 1-7279)).
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Southwest, effective
September 20, 2007 (incorporated by reference to
Exhibit 3.1 to Southwests Current Report on
Form 8-K
dated September 20, 2007).
|
|
4
|
.1
|
|
$600,000,000 Competitive Advance and Revolving Credit Facility
Agreement dated as of April 20, 2004 (incorporated by
reference to Exhibit 10.1 to Southwests Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2004 (File
No. 1-7259));
First Amendment, dated as of August 9, 2005, to Competitive
Advance Revolving Credit Agreement (incorporated by reference to
Exhibit 10.1 to Southwests Current Report on
Form 8-K
dated August 12, 2005 (File
No. 1-7259)).
|
|
4
|
.2
|
|
Specimen certificate representing common stock of Southwest
(incorporated by reference to Exhibit 4.2 to
Southwests Annual Report on
Form 10-K
for the year ended December 31, 1994 (File
No. 1-7259)).
|
|
4
|
.3
|
|
Indenture dated as of February 14, 2005, between Southwest
Airlines Co. and The Bank of New York Trust Company, N.A.,
Trustee (incorporated by reference to Exhibit 4.2 to
Southwests Current Report on
Form 8-K
dated February 14, 2005 (File
No. 1-7259)).
|
|
4
|
.4
|
|
Indenture dated as of September 17, 2004 between Southwest
Airlines Co. and Wells Fargo Bank, N.A., Trustee (incorporated
by reference to Exhibit 4.1 to Southwests
Registration Statement on
Form S-3
dated October 30, 2002 (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 Southwests 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 percent
of its total consolidated assets. Copies of such instruments
will be furnished to the Securities and Exchange Commission upon
request.
|
65
|
|
|
|
|
|
10
|
.1
|
|
Purchase Agreement No. 1810, dated January 19, 1994,
between The Boeing Company and Southwest (incorporated by
reference to Exhibit 10.4 to Southwests 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 Southwests 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 Southwests 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 Southwests 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 Southwests 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 Southwests 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 Southwests 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 Southwests Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2002 (File
No. 1-7259));
Supplemental Agreements Nos. 25, 26, 27, 28 and 29 to Purchase
Agreement No. 1810, dated January 19, 1994, between
The Boeing Company and Southwest (incorporated by reference to
Exhibit 10.8 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259));
Supplemental Agreements Nos. 30, 31, 32, and 33 to Purchase
Agreement No. 1810, dated January 19, 1993 between The
Boeing Company and Southwest; (incorporated by reference to
Exhibit 10.1 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2003 (File
No. 1-7259));
Supplemental Agreements Nos. 34, 35, 36, 37, and 38
(incorporated by reference to Exhibit 10.3 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004 (File
No. 1-7259));
Supplemental Agreements Nos. 39 and 40 (incorporated by
reference to Exhibit 10.6 to Southwests Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2004 (File
No. 1-7259));
Supplemental Agreement No. 41; Supplemental Agreement Nos.
42, 43 and 44 (incorporated by reference to Exhibit 10.1 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005 (File
No. 1-7259));
Supplemental Agreement No. 45 (incorporated by reference to
Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005 (File
No. 1-7259));
Supplemental Agreement Nos. 46 and 47 (incorporated by reference
to Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005 (File
No. 1-7259));
Supplemental Agreement No. 48 (incorporated by reference to
Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 (File
No. 1-7259));
Supplemental Agreements No. 49 and 50 (incorporated by
reference to Exhibit 10.1 to Southwests Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2006 (File
No. 1-7259));
Supplemental Agreement No. 51 (incorporated by reference to
Exhibit 10.1 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2006 (File
No. 1-7259));
Supplemental Agreement No. 52 (incorporated by reference to
Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007 (File
No. 1-7259));
Supplemental Agreement No. 53 (incorporated by reference to
Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007 (File
No. 1-7259));
Supplemental Agreement Nos. 54 and 55 (incorporated by reference
to Exhibits 10.1 and 10.2, respectively, to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 (File
No. 1-7259));
Supplemental Agreement No. 56.
|
|
|
|
|
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 Companys 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
|
|
2001 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2001 (File
No. 1-7259)).
|
|
10
|
.4
|
|
1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.6 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.5
|
|
1991 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.7 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
66
|
|
|
|
|
|
10
|
.6
|
|
1991 Employee Stock Purchase Plan as amended March 16, 2006
(incorporated by reference to Exhibit 99.1 to Registration
Statement on
Form S-8
(File
No. 333-139362)).
|
|
10
|
.7
|
|
Southwest Airlines Co. Profit Sharing Plan.
|
|
10
|
.8
|
|
Southwest Airlines Co. 401(k) Plan.
|
|
10
|
.9
|
|
Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwests Annual Report on
Form 10-K
for the year ended December 31, 1994 (File
No. 1-7259)).
|
|
10
|
.10
|
|
1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.12 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.11
|
|
1996 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.13 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.12
|
|
Employment Contract dated as of July 15, 2007, between
Southwest and Herbert D. Kelleher (incorporated by reference to
Exhibit 10.3 to Southwests Quarterly Report on
Form 10-Q
the quarter ended September 30, 2007 (File
No. 1-7259)).
|
|
10
|
.13
|
|
Employment Contract dated as of July 15, 2007, between
Southwest and Gary C. Kelly (incorporated by reference to
Exhibit 10.4 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 (File
No. 1-7259)).
|
|
10
|
.14
|
|
Employment Contract dated as of July 15, 2007, between
Southwest and Colleen C. Barrett (incorporated by reference to
Exhibit 10.5 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 (File
No. 1-7259)).
|
|
10
|
.15
|
|
Southwest Airlines Co. Severance Plan for Directors.
|
|
10
|
.16
|
|
Southwest Airlines Co. Outside Director Incentive Plan
(incorporated by reference to Exhibit 10.2 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007 (as amended and
restated effective May 16, 2007) (File
No. 1-7259)).
|
|
10
|
.17
|
|
1998 SAEA Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.17 to Southwests Annual
Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.18
|
|
1999 SWAPIA Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.18 to Southwests Annual
Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
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));
Amendment No. 1 to 2000 Aircraft Appearance Technicians
Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.4 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259)).
|
|
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));
Amendment No. 1 to 2000 Stock Clerks Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 10.5 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259)).
|
|
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));
Amendment No. 1 to 2000 Flight Simulator Technicians
Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.6 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259)).
|
|
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)).
|
67
|
|
|
|
|
|
10
|
.27
|
|
2002 Ramp, Operations, Provisioning and Freight Non-Qualified
Stock Option Plan (incorporated by reference to
Exhibit 10.27 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.28
|
|
2002 Customer Service/Reservations Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.28 to
Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259));
Amendment No. 1 to 2002 Customer Service/Reservations
Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.3 to Registration Statement on
Form S-8
(File
No. 333-104245)).
|
|
10
|
.29
|
|
2003 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.3 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259)).
|
|
10
|
.30
|
|
Southwest Airlines Co. 2007 Equity Incentive Plan (incorporated
by reference to Exhibit 99.1 to Southwests Current
Report on
Form 8-K
dated May 16, 2007 (File
No. 1-7259)).
|
|
10
|
.31
|
|
2007 Equity Incentive Plan Form of Notice of Grant and Terms and
Conditions for Stock Option Grants.
|
|
10
|
.32
|
|
Southwest Airlines Co. 2005 Excess Benefit Plan (incorporated by
reference to Exhibit 99.1 to Southwests Current
Report on
Form 8-K
dated November 15, 2007 (File
No. 1-7259)).
|
|
14
|
|
|
Code of Ethics (incorporated by reference to Exhibit 14.1
to Southwests Current Report on
Form 8-K
dated November 16, 2006 (File
No. 1-7259)).
|
|
21
|
|
|
Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 1997 (File
No. 1-7259)).
|
|
23
|
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm.
|
|
31
|
.1
|
|
Rule 13a-14(a)
Certification of Chief Executive Officer.
|
|
31
|
.2
|
|
Rule 13a-14(a)
Certification of Chief Financial Officer.
|
|
32
|
|
|
Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer.
|
A copy of each exhibit may be obtained at a price of 15 cents
per page, $10.00 minimum order, by writing to: Investor
Relations, Southwest Airlines Co., P.O. Box 36611,
Dallas, Texas
75235-1611.
68
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.
February 1, 2008
Laura Wright
Senior Vice President Finance,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on February 1, 2008 on behalf of the registrant and in the
capacities indicated.
|
|
|
|
|
Signature
|
|
Capacity
|
|
|
|
|
/s/
Herbert
D. Kelleher
Herbert
D. Kelleher
|
|
Executive Chairman of the Board of Directors
|
|
|
|
/s/
Gary
C. Kelly
Gary
C. Kelly
|
|
Chief Executive Officer and Director
|
|
|
|
/s/
Colleen
C. Barrett
Colleen
C. Barrett
|
|
President and Director
|
|
|
|
/s/
Laura
Wright
Laura
Wright
|
|
Sr. Vice President Finance and Chief Financial
Officer
(Chief Financial and Accounting Officer)
|
|
|
|
/s/
David
W. Biegler
David
W. Biegler
|
|
Director
|
|
|
|
/s/
Louis
Caldera
Louis
Caldera
|
|
Director
|
|
|
|
/s/
C.
Webb Crockett
C.
Webb Crockett
|
|
Director
|
|
|
|
/s/
William
H. Cunningham
William
H. Cunningham
|
|
Director
|
|
|
|
/s/
Travis
C. Johnson
Travis
C. Johnson
|
|
Director
|
|
|
|
/s/
Nancy
Loeffler
Nancy
Loeffler
|
|
Director
|
|
|
|
/s/
John
T. Montford
John
T. Montford
|
|
Director
|
69
INDEX TO
THE EXHIBITS
|
|
|
|
|
|
3
|
.1
|
|
Restated Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 4.1 to Southwests 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
Southwests 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
Southwests 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
Southwests 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
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2001 (File
No. 1-7259));
Articles of Amendment to Articles of Incorporation of Southwest
(incorporated by reference to Exhibit 3.1 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007 (File
No. 1-7279)).
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Southwest, effective
September 20, 2007 (incorporated by reference to
Exhibit 3.1 to Southwests Current Report on
Form 8-K
dated September 20, 2007).
|
|
4
|
.1
|
|
$600,000,000 Competitive Advance and Revolving Credit Facility
Agreement dated as of April 20, 2004 (incorporated by
reference to Exhibit 10.1 to Southwests Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2004 (File
No. 1-7259));
First Amendment, dated as of August 9, 2005, to Competitive
Advance Revolving Credit Agreement (incorporated by reference to
Exhibit 10.1 to Southwests Current Report on
Form 8-K
dated August 12, 2005 (File
No. 1-7259)).
|
|
4
|
.2
|
|
Specimen certificate representing common stock of Southwest
(incorporated by reference to Exhibit 4.2 to
Southwests Annual Report on
Form 10-K
for the year ended December 31, 1994 (File
No. 1-7259)).
|
|
4
|
.3
|
|
Indenture dated as of February 14, 2005, between Southwest
Airlines Co. and The Bank of New York Trust Company, N.A.,
Trustee (incorporated by reference to Exhibit 4.2 to
Southwests Current Report on
Form 8-K
dated February 14, 2005 (File
No. 1-7259)).
|
|
4
|
.4
|
|
Indenture dated as of September 17, 2004 between Southwest
Airlines Co. and Wells Fargo Bank, N.A., Trustee (incorporated
by reference to Exhibit 4.1 to Southwests
Registration Statement on
Form S-3
dated October 30, 2002 (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 Southwests 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 percent
of its total consolidated assets. Copies of such instruments
will be furnished to the Securities and Exchange Commission upon
request.
|
70
|
|
|
|
|
|
10
|
.1
|
|
Purchase Agreement No. 1810, dated January 19, 1994,
between The Boeing Company and Southwest (incorporated by
reference to Exhibit 10.4 to Southwests 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 Southwests 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 Southwests 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 Southwests 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 Southwests 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 Southwests 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 Southwests 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 Southwests Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2002 (File
No. 1-7259));
Supplemental Agreements Nos. 25, 26, 27, 28 and 29 to Purchase
Agreement No. 1810, dated January 19, 1994, between
The Boeing Company and Southwest (incorporated by reference to
Exhibit 10.8 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259));
Supplemental Agreements Nos. 30, 31, 32, and 33 to Purchase
Agreement No. 1810, dated January 19, 1993 between The
Boeing Company and Southwest; (incorporated by reference to
Exhibit 10.1 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2003 (File
No. 1-7259));
Supplemental Agreements Nos. 34, 35, 36, 37, and 38
(incorporated by reference to Exhibit 10.3 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004 (File
No. 1-7259));
Supplemental Agreements Nos. 39 and 40 (incorporated by
reference to Exhibit 10.6 to Southwests Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2004 (File
No. 1-7259));
Supplemental Agreement No. 41; Supplemental Agreement Nos.
42, 43 and 44 (incorporated by reference to Exhibit 10.1 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005 (File
No. 1-7259));
Supplemental Agreement No. 45 (incorporated by reference to
Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005 (File
No. 1-7259));
Supplemental Agreement Nos. 46 and 47 (incorporated by reference
to Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005 (File
No. 1-7259));
Supplemental Agreement No. 48 (incorporated by reference to
Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 (File
No. 1-7259));
Supplemental Agreements No. 49 and 50 (incorporated by
reference to Exhibit 10.1 to Southwests Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2006 (File
No. 1-7259));
Supplemental Agreement No. 51 (incorporated by reference to
Exhibit 10.1 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2006 (File
No. 1-7259));
Supplemental Agreement No. 52 (incorporated by reference to
Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007 (File
No. 1-7259));
Supplemental Agreement No. 53 (incorporated by reference to
Exhibit 10.1 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007 (File
No. 1-7259));
Supplemental Agreement Nos. 54 and 55 (incorporated by reference
to Exhibits 10.1 and 10.2, respectively, to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 (File
No. 1-7259));
Supplemental Agreement No. 56.
|
|
|
|
|
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 Companys 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
|
|
2001 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2001 (File
No. 1-7259)).
|
|
10
|
.4
|
|
1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.6 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.5
|
|
1991 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.7 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
71
|
|
|
|
|
|
10
|
.6
|
|
1991 Employee Stock Purchase Plan as amended March 16, 2006
(incorporated by reference to Exhibit 99.1 to Registration
Statement on
Form S-8
(File
No. 333-139362)).
|
|
10
|
.7
|
|
Southwest Airlines Co. Profit Sharing Plan.
|
|
10
|
.8
|
|
Southwest Airlines Co. 401(k) Plan.
|
|
10
|
.9
|
|
Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwests Annual Report on
Form 10-K
for the year ended December 31, 1994 (File
No. 1-7259)).
|
|
10
|
.10
|
|
1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.12 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.11
|
|
1996 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.13 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.12
|
|
Employment Contract dated as of July 15, 2007, between
Southwest and Herbert D. Kelleher (incorporated by reference to
Exhibit 10.3 to Southwests Quarterly Report on
Form 10-Q
the quarter ended September 30, 2007 (File
No. 1-7259)).
|
|
10
|
.13
|
|
Employment Contract dated as of July 15, 2007, between
Southwest and Gary C. Kelly (incorporated by reference to
Exhibit 10.4 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 (File
No. 1-7259)).
|
|
10
|
.14
|
|
Employment Contract dated as of July 15, 2007, between
Southwest and Colleen C. Barrett (incorporated by reference to
Exhibit 10.5 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 (File
No. 1-7259)).
|
|
10
|
.15
|
|
Southwest Airlines Co. Severance Plan for Directors.
|
|
10
|
.16
|
|
Southwest Airlines Co. Outside Director Incentive Plan
(incorporated by reference to Exhibit 10.2 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007 (as amended and
restated effective May 16, 2007) (File
No. 1-7259)).
|
|
10
|
.17
|
|
1998 SAEA Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.17 to Southwests Annual
Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.18
|
|
1999 SWAPIA Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.18 to Southwests Annual
Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
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));
Amendment No. 1 to 2000 Aircraft Appearance Technicians
Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.4 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259)).
|
|
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));
Amendment No. 1 to 2000 Stock Clerks Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 10.5 to
Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259)).
|
|
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));
Amendment No. 1 to 2000 Flight Simulator Technicians
Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.6 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259)).
|
|
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)).
|
72
|
|
|
|
|
|
10
|
.27
|
|
2002 Ramp, Operations, Provisioning and Freight Non-Qualified
Stock Option Plan (incorporated by reference to
Exhibit 10.27 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259)).
|
|
10
|
.28
|
|
2002 Customer Service/Reservations Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.28 to
Southwests Annual Report on
Form 10-K
for the year ended December 31, 2002 (File
No. 1-7259));
Amendment No. 1 to 2002 Customer Service/Reservations
Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.3 to Registration Statement on
Form S-8
(File
No. 333-104245)).
|
|
10
|
.29
|
|
2003 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.3 to Southwests Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (File
No. 1-7259)).
|
|
10
|
.30
|
|
Southwest Airlines Co. 2007 Equity Incentive Plan (incorporated
by reference to Exhibit 99.1 to Southwests Current
Report on
Form 8-K
dated May 16, 2007 (File
No. 1-7259)).
|
|
10
|
.31
|
|
2007 Equity Incentive Plan Form of Notice of Grant and Terms and
Conditions for Stock Option Grants.
|
|
10
|
.32
|
|
Southwest Airlines Co. 2005 Excess Benefit Plan (incorporated by
reference to Exhibit 99.1 to Southwests Current
Report on
Form 8-K
dated November 15, 2007 (File
No. 1-7259)).
|
|
14
|
|
|
Code of Ethics (incorporated by reference to Exhibit 14.1
to Southwests Current Report on
Form 8-K
dated November 16, 2006 (File
No. 1-7259)).
|
|
21
|
|
|
Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwests Annual Report on
Form 10-K
for the year ended December 31, 1997 (File
No. 1-7259)).
|
|
23
|
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm.
|
|
31
|
.1
|
|
Rule 13a-14(a)
Certification of Chief Executive Officer.
|
|
31
|
.2
|
|
Rule 13a-14(a)
Certification of Chief Financial Officer.
|
|
32
|
|
|
Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer.
|
A copy of each exhibit may be obtained at a price of 15 cents
per page, $10.00 minimum order, by writing to: Investor
Relations, Southwest Airlines Co., P.O. Box 36611,
Dallas, Texas
75235-1611.
73
EXHIBIT
10.7
SOUTHWEST AIRLINES CO.
PROFITSHARING PLAN
SOUTHWEST AIRLINES CO.
PROFITSHARING PLAN
Table of Contents
|
|
|
|
|
|
|
Page
|
|
ARTICLE I PURPOSE
|
|
|
1
|
|
|
|
|
|
|
ARTICLE II DEFINITIONS AND CONSTRUCTION
|
|
|
2
|
|
|
|
|
|
|
2.1
Definitions
|
|
|
2
|
|
2.2
Construction
|
|
|
8
|
|
|
|
|
|
|
ARTICLE III ELIGIBILITY AND PARTICIPATION
|
|
|
8
|
|
|
|
|
|
|
3.1
Eligibility Requirements
|
|
|
8
|
|
3.2
Notification of Eligibility
|
|
|
8
|
|
3.3
Reentry of Prior Members
|
|
|
8
|
|
|
|
|
|
|
ARTICLE IV CONTRIBUTIONS
|
|
|
9
|
|
|
|
|
|
|
4.1
Company Contributions
|
|
|
9
|
|
|
|
|
|
|
ARTICLE V ADJUSTMENT OF INDIVIDUAL ACCOUNTS
|
|
|
10
|
|
|
|
|
|
|
5.1
Individual Accounts
|
|
|
10
|
|
5.2
Method of Adjustment
|
|
|
10
|
|
|
|
|
|
|
ARTICLE VI ALLOCATIONS
|
|
|
10
|
|
|
|
|
|
|
6.1
Company Contribution
|
|
|
10
|
|
6.2
Allocation of Forfeitures
|
|
|
11
|
|
6.3
Notification to Members
|
|
|
11
|
|
6.4
Maximum Annual Addition to Account or Benefit
|
|
|
11
|
|
|
|
|
|
|
ARTICLE VII RETIREMENT
|
|
|
13
|
|
|
|
|
|
|
7.1
Normal or Late Retirement
|
|
|
13
|
|
7.2
Benefit
|
|
|
14
|
|
|
|
|
|
|
ARTICLE VIII DEATH
|
|
|
14
|
|
|
|
|
|
|
8.1
Death of Member
|
|
|
14
|
|
8.2
Designation of Beneficiary
|
|
|
14
|
|
8.3
Benefit
|
|
|
14
|
|
8.4
No Beneficiary
|
|
|
14
|
|
|
|
|
|
|
ARTICLE IX DISABILITY
|
|
|
15
|
|
|
|
|
|
|
9.1
Disability
|
|
|
15
|
|
9.2
Benefit
|
|
|
15
|
|
|
|
|
|
|
ARTICLE X TERMINATION OF EMPLOYMENT AND FORFEITURES
|
|
|
15
|
|
|
|
|
|
|
10.1
Eligibility and Benefits
|
|
|
15
|
|
10.2
Time of Payment
|
|
|
16
|
|
10.3
Forfeitures
|
|
|
16
|
|
10.4
Forfeiture for Cause
|
|
|
16
|
|
|
|
|
|
|
ARTICLE XI WITHDRAWALS
|
|
|
16
|
|
|
|
|
|
|
11.1
Withdrawals
|
|
|
16
|
|
i
|
|
|
|
|
|
|
|
Page
|
|
ARTICLE
XII INVESTMENT OF THE TRUST FUND
|
|
|
17
|
|
|
|
|
|
|
12.1
Member Direction of Investment
|
|
|
17
|
|
12.2
Conversion of Investments
|
|
|
19
|
|
|
|
|
|
|
ARTICLE XIII ADMINISTRATION
|
|
|
20
|
|
|
|
|
|
|
13.1
Appointment of Committee
|
|
|
20
|
|
13.2
Committee Powers and Duties
|
|
|
20
|
|
13.3
Duties and Powers of the Plan Administrator
|
|
|
21
|
|
13.4
Rules and Decisions
|
|
|
22
|
|
13.5
Committee Procedures
|
|
|
22
|
|
13.6
Authorization of Benefit Payments
|
|
|
22
|
|
13.7
Payment of Expenses
|
|
|
22
|
|
13.8
Indemnification of Members of the Committee
|
|
|
22
|
|
|
|
|
|
|
ARTICLE XIV NOTICES
|
|
|
22
|
|
|
|
|
|
|
14.1
Notice to Trustee
|
|
|
22
|
|
14.2
Subsequent Notices
|
|
|
23
|
|
14.3
Reliance upon Notice
|
|
|
23
|
|
|
|
|
|
|
ARTICLE XV BENEFIT PAYMENTS
|
|
|
23
|
|
|
|
|
|
|
15.1
Method of Payment
|
|
|
23
|
|
15.2
Time of Payment
|
|
|
23
|
|
15.3
Cash Out Distribution
|
|
|
25
|
|
15.4
Minority or Disability Payments
|
|
|
26
|
|
15.5
Distributions Under Domestic Relations Orders
|
|
|
26
|
|
15.6
Direct Rollover of Eligible Rollover Distributions
|
|
|
27
|
|
|
|
|
|
|
ARTICLE XVI TRUSTEE
|
|
|
28
|
|
|
|
|
|
|
16.1
Appointment of Trustee
|
|
|
28
|
|
16.2
Appointment of Investment Manager
|
|
|
29
|
|
16.3
Responsibility of Trustee and Investment Manager
|
|
|
29
|
|
16.4
Bonding of Trustee and Investment Manager
|
|
|
29
|
|
|
|
|
|
|
ARTICLE XVII AMENDMENT AND TERMINATION OF PLAN
|
|
|
29
|
|
|
|
|
|
|
17.1
Amendment of Plan
|
|
|
29
|
|
17.2
Termination of Plan
|
|
|
30
|
|
17.3
Complete Discontinuance of Contributions
|
|
|
30
|
|
17.4
Liquidation of Trust Fund
|
|
|
30
|
|
17.5
Consolidation or Merger
|
|
|
30
|
|
|
|
|
|
|
ARTICLE XVIII GENERAL PROVISIONS
|
|
|
31
|
|
|
|
|
|
|
18.1
No Employment Contract
|
|
|
31
|
|
18.2
Manner of Payment
|
|
|
31
|
|
18.3
Nonalienation of Benefits
|
|
|
31
|
|
18.4
Titles for Convenience Only
|
|
|
31
|
|
18.5
Validity of Plan
|
|
|
31
|
|
18.6
Plan Binding
|
|
|
32
|
|
18.7
Return of Contributions
|
|
|
32
|
|
18.8
Missing Members or Beneficiaries
|
|
|
32
|
|
18.9
Voting Rights
|
|
|
32
|
|
18.10
Preretirement Diversification Rights
|
|
|
34
|
|
18.11
Qualified Military Service
|
|
|
36
|
|
|
|
|
|
|
ARTICLE XIX TOP-HEAVY RULES
|
|
|
37
|
|
|
|
|
|
|
19.1
Definitions
|
|
|
37
|
|
19.2
Determination of Top-Heavy Status
|
|
|
38
|
|
ii
|
|
|
|
|
|
|
Page
|
|
19.3
Minimum Company Contribution
|
|
|
38
|
|
|
|
|
|
|
ARTICLE XX FIDUCIARY PROVISIONS
|
|
|
39
|
|
|
|
|
|
|
20.1
General Allocation of Duties
|
|
|
39
|
|
20.2
Fiduciary Duty
|
|
|
40
|
|
20.3
Fiduciary Liability
|
|
|
40
|
|
20.4
Co-Fiduciary Liability
|
|
|
40
|
|
20.5
Delegation and Allocation
|
|
|
41
|
|
iii
SOUTHWEST AIRLINES CO.
PROFITSHARING PLAN
PREAMBLE
WHEREAS, SOUTHWEST AIRLINES CO., a corporation formed under the laws of the State of Texas
(the Company) has previously adopted a plan and trust designated as the Southwest Airlines Co.
ProfitSharing Plan (the Prior Plan), effective January 1, 1973, which was subsequently amended
and restated in its entirety, effective January 1, 1986, again amended and restated in its
entirety, effective January 1, 1991, and again amended and restated in its entirety, effective
January 1, 1996, as amended from time to time thereafter;
WHEREAS, the Company now desires to continue the plan by again amending and restating the
Prior Plan to implement certain provisions of, and for compliance with, the Pension Protection Act
of 2006, to incorporate amendments that have previously been made to the plan, to change the
designation of the plan from an employee stock ownership plan and a money purchase defined
contribution plan to a profit sharing plan, and to reflect certain other operational and
administrative practices;
NOW, THEREFORE, in consideration of the premises and to carry out the purposes and intent as
set forth above, the Prior Plan is hereby restated and amended in its entirety, superseded and
replaced by this plan (hereinafter referred to as the Plan), effective January 1, 2008, except as
otherwise specifically provided herein. There will be no gap or lapse in time or effect between
such plans, and the existence of a qualified plan and trust shall be continuous and uninterrupted.
The terms and conditions of this restated Plan are as follows:
ARTICLE I
PURPOSE
The purpose of this Plan is to reward Employees of the Company for their loyal and faithful
service, to provide the Employees with a retirement benefit, and to provide funds for their
beneficiaries in the event of death or disability. The benefits provided by this Plan will be paid
from a Trust Fund established by the Company and will be in addition to the benefits Employees are
entitled to receive under any other programs of the Company and under the Social Security Act.
This Plan and the separate related Trust forming a part hereof are established and shall be
maintained for the exclusive benefit of the Members hereunder and their Beneficiaries. No part of
the Trust Fund can ever revert to the Company, except as hereinafter provided, or be used for or
diverted to purposes other than the exclusive benefit of the Members of this Plan and their
Beneficiaries.
1
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1
Definitions
. Where the following words and phrases appear in this Plan, they
shall have the respective meanings set forth below, unless their context clearly indicates to the
contrary:
(a)
Affiliate
. A member of a controlled group of corporations (as defined in
Section 414(b) of the Code), a group of trades or businesses (whether or not incorporated)
which are under common control (as defined in Section 414(c) of the Code), or an affiliated
service group (as defined in Section 414(m) of the Code) of which the Company is a member,
or any entity otherwise required to be aggregated with the Company pursuant to Section
414(o) of the Code and the regulations issued thereunder.
(b)
Allocation Date
. The date on which Company Contributions and forfeitures
are to be allocated, such date to be the last day of each Plan Year.
(c)
Annual Compensation
. The total amounts paid by the Company or any Eligible
Affiliate to an Employee as remuneration for personal services rendered during each Plan
Year, including expense allowances (to the extent includible in the gross income of the
Employee) and any amounts not includible in the gross income of the Employee pursuant to
Sections 402(e)(3), 125(a), or 132(f)(4) of the Code, but excluding (1) directors fees;
(2) expense reimbursements and nontaxable expense allowances; (3) prizes and awards; (4)
expatriate bonuses; (5) items of imputed income; (6) contributions made by the Company under
this Plan or any other employee benefit plan or program it maintains, such as group
insurance, hospitalization or like benefits; (7) amounts realized or recognized from
qualified or nonqualified stock options or when restricted stock or property held by the
Employee either becomes freely transferable or is no longer subject to a substantial risk of
forfeiture; (8) Company contributions to a plan of deferred compensation that are not
included in the Employees gross income for the taxable year in which contributed, or any
distributions from a deferred compensation plan; (9) amounts, if any, paid to an Employee in
lieu of a Company Contribution to this Plan in the event that such Company Contribution
would constitute an annual addition, as defined in Section 415(c)(2) of the Code, in excess
of the limitations under Section 415(c) of the Code; and (10) severance payments. For
purposes of this Section 2.1(c), severance payments include severance pay, unfunded
nonqualified deferred compensation benefits and parachute payments made after an Employees
severance from employment, but shall not include amounts attributable to payments made
within 2
1
/
2
months following severance from employment that, absent a severance from
employment, would have been paid to the Employee for services rendered prior to the
severance from employment and for accrued bona fide sick, vacation, or other leave (to the
extent the Employee would have been able to use the leave if employment had continued).
Annual Compensation shall include amounts otherwise includible, as provided above, which are
paid by the Company or an Eligible Affiliate to the Employee through another person,
pursuant to the common paymaster provisions of Section 3121(s) and 3306(p) of the Code.
2
The Annual Compensation of each Member or former Member taken into account under the
Plan for any Plan Year shall not exceed $230,000, as adjusted by the Secretary of the
Treasury for increases in the cost of living at the time and in the manner set forth in
Section 401(a)(17)(B) of the Code. If a Plan Year consists of fewer than twelve (12)
months, then the dollar limitation in the preceding sentence will be multiplied by a
fraction, the numerator of which is the number of months in the Plan Year, and the
denominator of which is twelve (12). Furthermore, for purposes of an allocation under the
Plan based on Annual Compensation, Annual Compensation shall only include amounts
attributable to the period an Employee is a Member of the Plan.
(d)
Beneficiary
. A person designated by a Member or former Member to receive
benefits hereunder upon the death of such Member or former Member.
(e)
Break in Service
. An Employee shall have a Break in Service for each Plan
Year in which he completes less than 501 Hours of Service with the Company or an Eligible
Affiliate unless he is on a leave of absence authorized by the Company or an Eligible
Affiliate in accordance with its leave policy.
(f)
Code
. The Internal Revenue Code of 1986, as amended.
(g)
Committee
. The persons who may be appointed to administer the Plan in
accordance with Article XIII.
(h)
Common Stock
. The common stock of the Company.
(i)
Company
. Southwest Airlines Co., or its successor or successors.
(j)
Company Contributions
. Contributions that are made by the Company for each
Plan Year pursuant to the provisions of Section 4.1 hereof.
(k)
Deductible Contributions
. A Members voluntary contributions, if any, to
the Plan, made prior to January 1, 1987 and deductible by such Member for federal income tax
purposes in accordance with Section 219 of the Internal Revenue Code, as then in effect.
(l)
Deductible Contribution Account
. A separate subaccount to which is
credited a Members Deductible Contributions, if any, and any earnings attributable thereto,
adjusted to reflect any withdrawals, distributions or investment losses attributable
thereto.
(m)
Disability
. A physical or mental condition that, in the judgment of the
Committee, totally and presumably permanently prevents the Employee from engaging in any
substantial gainful employment with the Company or an Eligible Affiliate. A determination
of Disability shall be based upon competent medical evidence satisfactory to the Committee.
The Committee shall apply the rules with respect to Disability uniformly and consistently to
all Employees in similar circumstances.
3
(n)
Effective Date
. January 1, 2008, except as otherwise specifically provided
herein.
(o)
Employee
. Any person who is receiving remuneration for personal services
rendered to the Company or any Eligible Affiliate, or who would be receiving such
remuneration except for an authorized leave of absence; provided, however, that any
individual whose conditions of employment are governed by a collective bargaining agreement
between the Company and a labor union shall not be considered an Employee unless the
collective bargaining agreement provides for coverage of such individual under the Plan. In
no event shall any individual employed by any Affiliate or subsidiary of the Company be
considered an Employee unless such Affiliate or subsidiary has specifically been designated
by the Company as an Eligible Affiliate. Notwithstanding the foregoing, individuals whose
conditions of employment are governed by a collective bargaining agreement that does not
provide for coverage of such individual under the Plan shall nonetheless be deemed to be an
Employee for purposes of crediting service pursuant to the provisions of subsections 2.1(t),
(gg) and (kk) hereunder.
The term Employee shall also include any leased employee, as such term is defined
below, deemed to be an employee of an Employer or any Affiliate as provided in Sections
414(n) or (o) of the Code. The term leased employee means any person (other than an
employee of the recipient) who, pursuant to an agreement between the recipient and any other
person (leasing organization), has performed services for the recipient (or for the
recipient and related persons determined in accordance with Section 414(n)(6) of the Code)
on a substantially full-time basis for a period of at least one year, and such services are
performed under primary direction or control by the recipient. Contributions or benefits
provided by the leasing organization that are attributable to services performed for the
recipient shall be treated as provided by the recipient. Notwithstanding the foregoing, a
leased employee shall not be considered an employee of the recipient if: (i) such employee
is covered by a money purchase pension plan that provides: (1) a nonintegrated employer
contribution rate of at least ten percent (10%) of compensation, as defined in Section
415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction
agreement that are excludable from the employees gross income under Section 125, Section
402(e)(3), Section 402(h)(1)(B), or Section 403(b) of the Code, immediate vesting; and (ii)
leased employees do not constitute more than twenty percent (20%) of the recipients
nonhighly compensated work force.
(p)
Employer Savings Account
. A separate subaccount to which is credited a
Members Company Contributions and forfeitures, if any, and any earnings attributable
thereto, adjusted to reflect any withdrawals, distributions or investment losses
attributable thereto.
(q)
Entry Date
. January 1st of each year.
(r)
ERISA
. The Employee Retirement Income Security Act of 1974, as amended.
4
(s)
Fund or Trust Fund
. All assets of whatsoever kind or nature held from time
to time by the Trustee in the Trust forming a part of this Plan, without distinction as to
income and principal and without regard to source, e.g., allocations, Company contributions,
earnings, forfeitures or gifts.
(t)
Hour of Service
. An Hour of Service shall include all hours for which pay
is received or for which an Employee is entitled to payment, whether worked or not, plus
service credit on the basis of the number of his regularly scheduled working hours for any
other period of absence for which the Employee is paid or entitled to payment and that is
authorized by the Company in accordance with its uniform leave policy for vacation, holiday,
sick leave, illness, Disability, layoff, military service or civic duty. In no event shall
credit for the number of Hours of Service attributable to a single continuous period for
which no duties are performed exceed 501. Service credit shall also be given for each other
leave of absence authorized by the Company for which the Employee is paid or entitled to
payment.
Hours of Service shall be computed on an equivalency basis, whereby for each month
during which an Employee would be credited with at least one Hour of Service (or, in the
case of flight attendants or pilots, one trip), such Employee shall be credited with one
hundred ninety (190) Hours of Service.
These hours must be credited to Employees in the computation period during which the
duties were performed, or, if no duties were performed, during which the applicable period
of absence occurred, and not when paid, if different. Credit must also be given, without
duplicating any hours described above, for each hour for which back pay, irrespective of
mitigation of damages, has been awarded or agreed to by the Company or any Eligible
Affiliate. These hours must be credited in the computation period or periods to which the
award or agreement pertains rather than that in which the payment, award or agreement was
made.
In determining the number of Hours of Service to be credited to an Employee in the case
of a payment which is made or due to an Employee under the provisions of the paragraphs
above, the Committee shall apply the rules set forth in Department of Labor Regulations
2530.200b-2(b) and (c), which rules are incorporated into and made a part of this Plan by
reference.
For purposes of determining whether an Employee has incurred a Break in Service as
defined in Section 2.1(e), the Committee shall credit an Employee with Hours of Service
during absence from work for maternity or paternity reasons which would otherwise have been
credited to such Employee but for such absence. For purposes of this Plan, an Employee
shall be deemed to be on maternity or paternity leave if the Employees absence from work is
(1) by reason of the pregnancy of the Employee, (2) by reason of the birth of a child of the
Employee, (3) by reason of the placement of a child with the Employee in connection with the
adoption of such child by the Employee, or (4) for purposes of caring for such child for a
period beginning immediately following such birth or placement. The Hours of Service
credited under this paragraph shall be limited to the lesser of (1) the number necessary to
prevent the Employee from incurring a Break
5
in Service or (2) 501 Hours of Service. Hours of Service credited under this paragraph
shall be credited in the Plan Year in which the absence begins, but if the Employee does not
need those Hours of Service to prevent a Break in Service in the Plan Year in which the
absence began, then they shall be credited in the immediately following Plan Year.
(u)
Individual Account
. The account or record maintained by the Committee
showing the monetary value of the individual interest in the Trust Fund of each Member,
former Member and Beneficiary.
(v)
Investment Managers
. The qualified and acting Investment Managers, as
defined in ERISA, who under this Plan may be appointed by the Company to invest and manage
Plan assets as fiduciaries.
(w)
Member
. An Employee who has met the eligibility requirements for
participation in this Plan, as set forth in Article III hereof.
(x)
Named Fiduciary
. The Committee shall be the Named Fiduciary designated to
manage the operation and administration of the Plan.
(y)
Nondeductible Contributions
. A Members voluntary contributions, if any,
to the Plan, made prior to January 1, 1987, which are not deductible by such Member for
federal income tax purposes.
(z)
Nondeductible Contribution Account
. A separate subaccount to which is
credited a Members Nondeductible Contributions, if any, and any earnings attributable
thereto, adjusted to reflect any withdrawals, distributions or investment losses
attributable thereto.
(aa)
Normal Retirement Date
. The date on which a Member attains the age of
fifty-nine and one-half (59
1
/
2
) years.
(bb)
Plan
. Southwest Airlines Co. ProfitSharing Plan, as amended from time to
time.
(cc)
Plan Administrator
. Such person or persons as designated by the
Committee, which shall be the Committee unless and until it designates such other person or
persons.
(dd)
Plan Year
. The annual period beginning January 1st and ending December
31st, both dates inclusive of each year.
(ee)
Prior Plan
. The Southwest Airlines Co. ProfitSharing Plan, effective
January 1, 1973, as heretofore amended and restated from time to time.
(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 Members last day of service.
6
(gg)
Service
. A period or periods of employment by an Employee used in
determining eligibility for Plan participation or in determining the amount of benefits. If
the Company is a member of a controlled group of corporations (as defined in Section 414(b)
of the Code), is one of a group of trades or businesses (whether or not incorporated) which
are under common control (as defined in Section 414(c) of the Code), is a member of an
affiliated service group (as defined in Section 414(m) of the Code) or is otherwise required
to be aggregated with any entity pursuant to Section 414(o) of the Code and the regulations
issued thereunder, then Service shall include any employment with any such Affiliate from
and after the date such entity becomes an Affiliate, including Service prior to the
Effective Date.
(hh)
Trust
. Southwest Airlines Co. ProfitSharing Trust, as amended from time
to time, the Trust established to hold and invest contributions made under the Plan and
Prior Plan for the exclusive benefit of the Members included in the Plan from which the
benefits will be distributed.
(ii)
Trustee
. The qualified and acting Trustee under the Trust, who shall be
the fiduciary designated to invest and manage the Plan assets, other than those which may be
managed exclusively by an Investment Manager, and to operate and administer the Trust Fund.
(jj)
Valuation Date
. Each business day on which the financial markets are
open for trading activity.
(kk)
Vesting Service
. Vesting Service is the period of employment used in
determining eligibility for benefits. A year of Vesting Service shall be granted for each
Plan Year in which an Employee has completed 1,000 or more Hours of Service with the Company
or an Affiliate, subject to the following exceptions:
(i) Vesting Service prior to January 1, 1973 shall be excluded.
(ii) Vesting Service completed after December 31, 1972 and prior to January 1,
1976 shall be excluded if such service would have been disregarded under the break
in service rules of the Prior Plan, as then in effect. For this purpose, break in
service rules are those rules which result in the loss of prior vesting because of
service termination or failure to complete a required period of service within a
specified time.
(iii) In the case of an Employee who has a Break in Service, his years of
Vesting Service before such Break in Service shall not be taken into account until
he has completed a year of Vesting Service following his reemployment. Prior to
January 1, 1985, in the case of an Employee who has any Break in Service, all years
of Vesting Service incurred after such Break shall be disregarded for purposes of
measuring years of Vesting Service before such Break. However, effective January 1,
1985, and thereafter, in the case of an Employee who has five (5) or more
consecutive Breaks in Service, all years of
7
Vesting Service incurred after such Breaks in Service will be disregarded for
purposes of measuring years of Vesting Service before such Breaks in Service.
(ll)
Eligible Affiliate
. An Affiliate, the employees of which the Company has
specifically designated as being eligible to participate in the Plan.
2.2
Construction
. The masculine gender, where appearing in the Plan, shall be deemed
to include the feminine gender, unless the context clearly indicates to the contrary. The words
hereof, herein, hereunder, and other similar compounds of the word here shall mean and
refer to the entire Plan, not to any particular provision or section. The Plan and Trust shall
each form a part of the other by reference and terms shall be used therein interchangeably.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1
Eligibility Requirements
. Every Employee who was a Member in the Prior Plan on
the day before the Effective Date shall continue to be a Member in the Plan. Except as otherwise
provided herein, every other Employee shall become a Member in the Plan as of the first Entry Date
concurrent with or next following his employment commencement date or the date on which his
employer became an Eligible Affiliate, whichever is later. The employment commencement date is the
first day for which an Employee is entitled to be credited hereunder with an Hour of Service.
Notwithstanding the foregoing, non-resident aliens who receive no earned income from the Company
that constitutes income from sources within the United States shall not be eligible to participate
in the Plan. Furthermore, leased employees (as such term is defined in Section 2.1(o) hereof)
and Employees classified by the Company as interns shall not be eligible to participate in the
Plan. A person who is not treated as an Employee on the Companys books and records (such as a
person who as a matter of practice is treated by the Company as an independent contractor, but who
is later determined to be an Employee as a matter of fact) shall not be an eligible Employee during
any part of a Plan Year in which such person was not treated as an Employee, despite any
retroactive recharacterization.
3.2
Notification of Eligibility
. The Committee shall notify in writing each Employee
of the qualifications for eligibility and shall furnish each Employee a copy of such explanation of
the Plan as the Committee shall provide for that purpose.
3.3
Reentry of Prior Members
. An Employee who terminates employment after becoming a
Member hereunder shall be eligible to participate immediately upon his completion of one Hour of
Service following his reemployment by the Company or an Eligible Affiliate. An Employee who
terminates employment after satisfying the requirements of Section 3.1 hereof, but prior to the
first Entry Date following the satisfaction of such requirements, shall be eligible to participate
immediately upon his completion of one Hour of Service following his reemployment by the Company or
an Eligible Affiliate, or, if later, the first Entry Date following the satisfaction of such
requirements.
8
ARTICLE IV
CONTRIBUTIONS
4.1
Company Contributions
. The Company may, for each of its taxable years, contribute
to the Trust Fund such profit sharing contribution, if any, as the Company shall determine by
resolution of its board of directors. The amount of the profit sharing contribution, if any, shall
be determined in the sole and absolute discretion of the board of directors of the Company;
provided, however, that in the absence of any action of the board of directors to the contrary, the
amount of the profit sharing contribution shall be an amount equal to 15% of ANP, reduced by the
contribution made to the Southwest Airlines Co. 2005 Deferred Compensation Plan for Pilots for such
Plan Year pursuant to section 3.2 of such plan.
For purposes of the foregoing, ANP is the operating profit of the Company for such Plan
Year. As used herein, the term operating profit of the Company for any Plan Year shall mean its
income for such Plan Year before income taxes, derived in accordance with generally accepted
accounting principles, and as set forth in the Companys audited statement of income included in
the annual report to shareholders, before provision for any contribution to this Plan, excluding
(1) nonoperating or non-recurring gains or losses not arising from the Companys usual business
operations, including those gains or losses recognized under Statement of Financial Accounting
Standards No. 133 that are factored into the Companys presentation of economic results and gains
or losses from the sale or exchange of capital assets, as set forth in the Companys audited
statement of income or disclosed in the notes thereto, and (2) profits or losses incurred by
TranStar or any separately definable division of the Company; provided, however, that
notwithstanding the foregoing, profits and losses incurred by Morris Air Corporation shall be taken
into account for Plan Years beginning after December 31, 1993.
The contribution shall be made either (1) in cash, (2) in Common Stock having a fair market
value equal to the amount of the contribution, or (3) in cash and Common Stock having an aggregate
fair market value equal to the amount of the contribution. The fair market value of any Common
Stock contributed shall be based on the mean of the reported high and low sales prices of Common
Stock on the New York Stock Exchange-Composite Tape on the day of the contribution to the Plan;
except however, if the Company acquires Common Stock on the open market and contributes it to the
Plan immediately following the settlement date, then the fair market value of the contribution
shall be equal to the cost paid by the Company for the Common Stock, including commissions and
other expenses which the Trustee would incur in the acquisition of Common Stock if the Trustee
acquired the Common Stock directly. Any portion of the contribution made in Common Stock may be
made in the form of authorized but unissued shares or shares previously issued and reacquired by
the Company.
Company Contributions shall be added to and become a part of the Trust Fund, and, as of each
Allocation Date, shall be credited to the Individual Accounts of the Members, as provided in
Section 6.1 hereof.
9
ARTICLE V
ADJUSTMENT OF INDIVIDUAL ACCOUNTS
5.1
Individual Accounts
. The Committee shall establish an Individual Account for each
Member showing the monetary value of the individual interest in the Trust Fund of each Employee,
former Employee and Beneficiary. The Individual Account of each Member shall be composed of an
Employer Savings Account, to which Company Contributions and forfeitures, if any, shall be
credited. In addition, if a Member was at any time prior to the Effective Date a member of the
Prior Plan who, prior to January 1, 1987, made voluntary Deductible Contributions or Nondeductible
Contributions, his Individual Account shall include a Deductible Contribution Account and/or
Nondeductible Contribution Account, as applicable. Such accounts are primarily for accounting
purposes and do not require a segregation of the Trust Fund, except as otherwise provided herein.
5.2
Method of Adjustment
. As of each Valuation Date, before any restoration of
accounts as required pursuant to Section 15.3 hereof and before taking into account the
contributions of the Company and forfeitures for the period since the last preceding Valuation
Date, the Committee or the Trustee, as directed by the Committee, shall value the assets of each
investment fund and adjust the Individual Accounts of all Members who have elected to participate
in such investment fund as follows.
(a) The Committee shall determine the market value of the investment fund, including
the effect of expenses of administration and other charges against such investment fund
since the last Valuation Date.
(b) The Committee shall determine the total aggregate value of all Individual Accounts
participating in the investment fund as shown in its records as of the prior Valuation Date.
The Individual Account balances of Employees, former Employees and Beneficiaries shall be
reduced by any amounts paid to them from the investment fund since the last Valuation Date.
(c) The Committee shall then adjust the value of each Individual Account participating
in the investment fund by crediting each Individual Account with its proportion of the
difference between (a) and (b) if (a) is the larger or charging it with its proportion of
the difference between (a) and (b) if (b) is larger; the proportion to be so credited or
charged to each Individual Account shall be calculated by multiplying the difference between
(a) and (b) by a fraction, the numerator of which is the then value of said Individual
Account and the denominator of which is the then aggregate value of all Individual Accounts
participating in such investment fund.
ARTICLE VI
ALLOCATIONS
6.1
Company Contribution
. As of each Allocation Date, but after any adjustment of
Individual Accounts, as provided in Section 5.2, and other applicable provisions herein, the
Committee shall credit the Company Contribution, as described in Section 4.1 hereof, for the Plan
Year ending with said Allocation Date to the Individual Accounts of all Members and
10
former Members, except those Members and former Members who failed to complete at least 1,000
Hours of Service during such Plan Year. The amount of the annual Company Contribution allocated to
the Individual Account of each eligible Member or former Member shall be in the proportion that his
Annual Compensation during the applicable Plan Year bears to the total Annual Compensation of all
eligible Members and former Members during the applicable Plan Year.
6.2
Allocation of Forfeitures
. If a Member or former Member forfeits a portion of his
Individual Account as provided in Section 10.3 hereof, then said forfeited amount shall be used
first to restore the Individual Accounts of rehired Members, as required under Section 15.3 hereof,
and next to reduce Company Contributions made in accordance with Section 18.11 hereof for Plan
Years prior to the Plan Year in which a Member returns from qualified military service, as well as
any such Company Contributions outstanding as of the effective date hereof. Any remaining
forfeitures shall be allocated as soon as practicable following the Plan Year in which said
forfeiture occurs among the Individual Accounts of the Members and former Members who are eligible
to have a Company contribution credited on their behalf for such Plan Year, as set forth in Section
6.1 hereof. The amount of the forfeiture allocated under this Section 6.2 to the Individual
Account of such Member or former Member shall be in the proportion that his Annual Compensation for
such Plan Year bears to the total Annual Compensation for such Plan Year of all such Members and
former Members.
If a Member or former Member who does not have any nonforfeitable right to his Individual
Account terminates his employment and thereby forfeits his Individual Account, then in the event
such Member or former Member is reemployed before he has incurred five (5) or more consecutive
Breaks in Service, his Individual Account that was forfeited shall be restored by the Company at
the time of his reemployment.
6.3
Notification to Members
. At least annually, the Committee shall advise each
Member, former Member and Beneficiary for whom an Individual Account is held hereunder of the then
balance in such account.
6.4
Maximum Annual Addition to Account or Benefit
.
(a)
Limitations
. If the Employer maintains this Plan and one or more other
qualified defined contribution plans, the Annual Additions (as defined in subsection (b)
below) allocated under this Plan to any Members Individual Account shall be limited in
accordance with the allocation provisions of this subsection 6.4(a).
The amount of the Annual Additions that may be allocated under this Plan to the
Individual Account of any Member as of any Allocation Date, together with Annual Additions
allocated on behalf of any such Member under any other defined contribution plan of the
Employer for the Limitation Year (as defined in subsection (b) below) in which such
Allocation Date occurs, shall not exceed the Maximum Permissible DC Amount (as defined in
subsection (b) below), based upon Annual Compensation up to such Allocation Date for such
Limitation Year.
11
If the Annual Additions allocated on behalf of a Member or former Member under this
Plan and any other defined contribution plan of the Employer are to be reduced as of any
Allocation Date as a result of exceeding the limitations described in the next preceding two
paragraphs, such reduction shall be, to the extent required, effected by first reducing the
Annual Additions to be allocated on behalf of such Member or former Member under this Plan
as of such Allocation Date.
If as a result of the first three paragraphs of this subsection 6.4(a) the allocation
of Annual Additions under this Plan is to be reduced, such reduction shall be allocated to a
suspense account as of such Allocation Date and held therein until the next succeeding
Allocation Date on which Company Contributions and forfeitures could be allocated under the
provisions of the Plan, at which time such reduction shall be allocated and reallocated to
the Individual Accounts of Members hereunder (in accordance with the provisions of Section
6.1 hereof and subject to the limitations of this Section 6.4) before any Company
Contributions may be made to the Plan for the limitation year ending on such Allocation
Date. In the event of termination of the Plan, the suspense account shall revert to the
Company to the extent it may not be allocated to any Individual Account. If a suspense
account is in existence at any time during a Limitation Year pursuant to this Section, it
will not participate in the allocation of the Trust Funds investment gains and losses.
(b)
Definitions Applicable to Section 6.4
. For purposes of Section 6.4, the
following definitions shall apply:
(i)
Annual Additions
. Annual Additions are the sum of the following
amounts allocated on behalf of a Member or former Member for a Limitation Year:
(1) all Employer contributions;
(2) forfeitures, if any;
(3) all Employee contributions; and
(4) amounts allocated after March 31, 1984, to an individual medical
benefit account, as defined in Code Section 415(1)(2) that is part of a
pension or annuity plan maintained by the Employer, and amounts derived from
contributions paid or accrued after December 31, 1985, in taxable years
ending after such date, that are attributable to post-retirement medical
benefits allocated to the separate account of a key employee (as defined in
Code Section 419(d)(3)) under a welfare benefit plan (as defined in Code
Section 419(e) maintained by the Employer.
The Annual Additions for any Limitation Year beginning before January 1, 1987,
shall not be recomputed to treat all Employee Contributions as Annual Additions.
12
(ii)
Employer
. Employer shall mean, in addition to the Company (as
defined in Section 2.1(i) hereof, all members of a controlled group of corporations
(as defined in Section 414(b) of the Code as modified by Section 415(h)), all
commonly controlled trades or businesses (as defined in Section 414(c) as modified
by Section 415(h)) or affiliated service groups (as defined in Section 414(m)) of
which the Company is a part, and any other entity required to be aggregated with the
Company pursuant to regulations under Section 414(o) of the Code.
(iii)
Limitation Year
. The Limitation Year shall be the twelve (12)
consecutive month period ending on the last day of December or any other twelve (12)
consecutive month period for all qualified plans of the Company pursuant to a
written resolution the Company adopts.
(iv)
Maximum Permissible DC Amount
. The Maximum Permissible DC Amount
for a given Limitation Year is equal to the lesser of (i) 100% of compensation or
(ii) $46,000, as adjusted for increases in the cost-of-living under Section 415(d)
of the Code. For purposes of this subparagraph (iv), 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 Companys 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 dollar limitation 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. The compensation limit referred to in this
subparagraph (iv) 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 hereunder.
ARTICLE VII
RETIREMENT
7.1
Normal or Late Retirement
. A Member, upon reaching his Normal Retirement Date for
the purposes of this Plan, shall be one hundred percent (100%) vested in his Individual Account,
and such amount contained therein shall be nonforfeitable. If a Member continues in the service of
the Company beyond his Normal Retirement Date, he shall continue to participate in the Plan.
13
7.2
Benefit
. Upon Retirement (whether normal or late Retirement in accordance with
Section 7.1), a Member shall be entitled to the entire amount to the credit of his Individual
Account as of the Valuation Date concurrent with or next following his date of Retirement,
including his portion, if any, of Company Contributions and forfeitures allocated after his date of
Retirement, adjusted for earnings and losses, if any, that accrue to the Valuation Date immediately
preceding the date of distribution, if later. Upon his Retirement under this Article VII, a Member
shall receive the benefits to which he is entitled at the time and in the manner provided in
Article XV hereof.
ARTICLE VIII
DEATH
8.1
Death of Member
. Upon the death of a Member while employed by the Company, such
Members Individual Account shall thereupon become one hundred percent (100%) vested, and the
amount contained therein shall be nonforfeitable.
8.2
Designation of Beneficiary
. Each Member and former Member may, from time to time,
designate one or more Beneficiaries and alternate Beneficiaries to receive benefits pursuant to
this Article in the event of the death of such Member or former Member. Such designation shall be
made in writing upon a form provided by the Committee and shall only be effective when filed with
the Committee. The last such designation filed with the Committee shall control.
If a Member is married, his spouse shall automatically be designated his Beneficiary;
provided, however, a Beneficiary other than his spouse may be designated if (1) his spouse consents
in writing to such designation, the consent acknowledges the effect of such designation and the
designation is witnessed by a member of the Committee or a notary public, or (2) it is established
to the satisfaction of the Committee that there is sufficient reason why the consent may not be
obtained. Notwithstanding the foregoing, divorce after the filing of a designation or designations
that name the spouse as beneficiary shall be deemed to revoke such designation or designations if
written notice of such divorce is received by the Committee before payment has been made in
accordance with the existing designation or designations on file with the Committee.
8.3
Benefit
. Subject to the requirements of Section 18.10 hereof, upon the death of a
Member or former Member, his designated Beneficiary shall be entitled to the entire amount to the
credit of his Individual Account as of the Valuation Date concurrent with or next following his
date of death, including his portion, if any, of Company Contributions and forfeitures allocated
after the date of his death, adjusted for earnings and losses, if any, that accrue to the Valuation
Date immediately preceding the date of distribution, if later. Payment shall be made at the time
and in the manner provided in Article XV hereof.
8.4
No Beneficiary
. If a Member or former Member dies without a designated Beneficiary
surviving him, or if all his Beneficiaries die before receiving the payment to which they are
entitled, then any amounts to which such Member, former Member or Beneficiary is entitled hereunder
shall be paid to his estate.
14
For the purpose of this Plan, the production of a certified copy of the death certificate of
any Employee or other person shall be sufficient evidence of death, and the Committee shall be
fully protected in relying thereon. In the absence of such proof, the Committee may rely upon such
other evidence of death as it deems necessary or advisable.
ARTICLE IX
DISABILITY
9.1
Disability
. If a Members employment with the Company terminates as a result of
his Disability, such Participants Individual Account shall thereupon become one hundred percent
(100%) vested, and the amount contained therein shall be nonforfeitable.
9.2
Benefit
. In the event of the Disability of a Member or former Member, he shall be
entitled to the entire amount to the credit of his Individual Account as of the Valuation Date
concurrent with or next following the date on which his termination of employment occurs as a
result of his Disability, including his portion, if any, of Company Contributions and forfeitures
allocated after the date of his termination of employment, adjusted for earnings and losses, if
any, that accrue to the Valuation Date immediately preceding the date of distribution, if later.
Payments shall be made at the time and in the manner provided in Article XV hereof.
ARTICLE X
TERMINATION OF EMPLOYMENT AND FORFEITURES
10.1
Eligibility and Benefits
. If a Members employment with the Company and all
Eligible Affiliates shall terminate for any reason other than his Retirement Under Article VII,
death under Article VIII, or Disability under Article IX, such Member shall be entitled to all of
his Nondeductible Contribution Account and Deductible Contribution Account and to a percentage of
the amount in his Employer Savings Account as of the Valuation Date concurrent with or next
following the date on which his termination of employment occurs, including his portion, if any, of
Company Contributions and forfeitures allocated after the date of his termination of employment,
adjusted for earnings and losses, if any, that accrue to the Valuation Date immediately preceding
the date of distribution, if later. The percentage of a Members Employer Savings Account to which
he is entitled shall be determined in accordance with the following schedule:
|
|
|
|
|
|
|
Percentage
|
Completed Years of Vesting Service
|
|
Payable
|
Less than 5 years
|
|
|
0
|
%
|
5 years or more
|
|
|
100
|
%
|
15
Notwithstanding the foregoing, effective with respect to contributions allocated for Plan
Years beginning on and after January 1, 2007, the percentage of a Members Employer Savings Account
to which he is entitled shall be determined in accordance with the following schedule:
|
|
|
|
|
|
|
Percentage
|
Completed Years of Vesting Service
|
|
Payable
|
Less than 1 year
|
|
|
0
|
%
|
1 year but less than 2 years
|
|
|
20
|
%
|
2 years but less than 3 years
|
|
|
40
|
%
|
3 years but less than 4 years
|
|
|
60
|
%
|
4 years but less than 5 years
|
|
|
80
|
%
|
5 years or more
|
|
|
100
|
%
|
The provisions of this Section shall be subject to the provisions of Section 17.3 hereof,
which shall be given full effect.
10.2
Time of Payment
. The amount to which a Member shall be entitled under Section
10.1 shall be paid to him at the time and in the manner provided in Article XV hereof.
10.3
Forfeitures
. A Member to whom Section 10.1 is applicable shall forfeit that
portion of the amount in his Individual Account to which he is not entitled under Section 10.1 and
the amount thus forfeited shall 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 termination
of employment occurs.
10.4
Forfeiture for Cause
. In the event a Member who has not completed at least three
(3) years of Vesting Service is discharged due to his dishonest or criminal act (proven by
conclusive evidence to the unanimous satisfaction of the Committee) or due to embezzlement, fraud,
or dishonesty against and damaging to the Company whereby the reasons for such discharge are
confirmed by resolution of the board of directors or other governing authority of the Company, the
entire amount credited to the benefit of such Member in his Employer Savings Account shall be
forfeited and neither he nor his Beneficiary shall be entitled to any benefit hereunder with
respect to such amounts. Likewise, any amounts credited to, but not distributed from, the Employer
Savings Account of a former Member who has not completed at least three (3) years of Vesting
Service shall be forfeited upon the discovery of any embezzlement, fraud or dishonesty of such
former Member against and damaging to the Company. Notwithstanding the foregoing, in the event the
Plan is top heavy for any Plan Year pursuant to Section 19.2 hereof, the provisions of Section 10.1
shall supersede this Section 10.4 and shall be controlling for all purposes hereunder.
ARTICLE XI
WITHDRAWALS
11.1
Withdrawals
.
16
(a)
Nondeductible and Deductible Contribution Accounts
. Effective as of any
Valuation Date, a Member may, upon prior written notice to the Committee within the time
period established by the Committee for such elections, elect to withdraw from his
Nondeductible and Deductible Contribution Accounts any or all of the balance thereof, as of
such Valuation Date. If a Member timely elects such a withdrawal, distribution shall be
made as soon as practicable following such Valuation Date.
(b)
Employer Savings Account
. Subject to the requirements of Section 18.10
hereof, a Member who has reached his Normal Retirement Date may elect in writing, within the
time period established by the Committee for such elections, to withdraw all or any portion
of his vested interest in his Employer Savings Account. No more than one such withdrawal
may be made by the Member during any Plan Year. The amount available for withdrawal shall
be determined as of the Valuation Date next following the date on which the Committee
receives the Members withdrawal election, and the withdrawal amount shall be distributed to
the Member as soon as practicable thereafter.
ARTICLE XII
INVESTMENT OF THE TRUST FUND
12.1
Member Direction of Investment
.
(a)
Investment of Contributions
. Each Member shall have the right, within the
guidelines established by the Committee, to direct the Committee to instruct the Trustee to
invest any whole percentage, up to one hundred percent (100%), of such Members current
Company Contributions and forfeitures in one or more of such investment media as the
Committee may designate from time to time. The Committee shall direct the Trustee or, if
applicable, an Investment Manager as to the investments in which Members may invest. The
Committee may determine to offer as investment media any investment fund, program or other
vehicle that is suitable as a proper and permissible investment of contributions made to a
retirement plan qualified pursuant to Section 401(a) of the Code. The investment directions
of the Members shall be implemented by the Trustee or, if applicable, an Investment Manager
provided, however, that the Trustee or, if applicable, an Investment Manager shall not be
obligated to follow the investment direction of a Member if such direction would result in a
prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code, would
generate income that would be taxable to the Plan, or:
(i) would not be in accordance with the documents and instruments governing the
Plan insofar as such documents and instruments are consistent with the provisions of
Title I of ERISA;
(ii) would cause a fiduciary to maintain the indicia of ownership of any assets
of the Plan outside the jurisdiction of the district courts of the United States
other than as permitted by Section 404(b) of ERISA and Department of Labor
Regulations §2550.404b-1;
(iii) would jeopardize the Plans tax qualified status under the Code;
17
(iv) could result in a loss in excess of a Members or Beneficiarys account
balance; or
(v) would result in a direct or indirect:
(1) sale, exchange, or lease of property between the Company (or any
affiliate of the Company) and the Plan except for the acquisition or
disposition of any interest in a fund, subfund or portfolio managed by the
Company (or an affiliate of the Company), or the purchase or sale of any
qualifying employer security (as defined in Section 407(d)(5) of ERISA) which
meets the conditions of Section 408(e) of ERISA and subparagraph (4) below;
(2) loan to the Company or any affiliate of the Company;
(3) acquisition or sale of any employer real property (as defined in
Section 407(d)(2) of ERISA); or
(4) acquisition or sale of any employer security except to the extent
that any such employer security and any such acquisition or sale complies
with the requirements of Department of Labor Regulations
§2550.404c-1(d)(2)(4).
(b)
Modification of Investment Media
. The Committee shall be authorized at any
time and from time to time to modify, alter, delete or add to the funds available for
investment at the direction of a Member. In the event a modification occurs, the Committee
shall notify those Members whom the Committee, in its sole and absolute discretion,
determines are affected by the change, and shall give such persons such additional time as
is determined by the Committee to designate the manner and percentage in which amounts
invested in those funds thereby affected shall be invested.
The Committee shall not be obligated to substitute funds of similar investment criteria
for existing funds, nor shall it be obligated to continue the types of investments presently
available to the Members. Nothing contained herein shall constitute any action by the
Committee as a direction of investment of the assets or an attempt to control such
direction.
(c)
Investment Direction
. Any Member, on or before his entry into the Plan,
within the time period established by the Committee, may designate the manner and the
percentage in which the Member desires the Trustee or, if applicable, an Investment Manager
to invest his current Company Contributions and forfeitures, pursuant to the provisions set
forth above, which designation shall continue in effect until revoked or modified by the
Member. If a Member fails to designate the investment of his current Company Contributions
and forfeitures on or before his entry into the Plan, or if a Member wishes to change such
designation, the Member may make such designation or change, within the time period
established by the Committee, to become effective for all such future contributions and
forfeitures as soon as practicable following the date of
18
receipt by the Committee of such designation or change, and such designation or change
shall continue in effect until revoked by the Member in accordance with this Plan.
Any amounts with respect to which the Trustee or, if applicable, an Investment Manager
fails to receive a proper investment direction from any Member shall be invested, as
directed by the Committee, in a qualified default investment alternative, as defined in
Department of Labor Regulations §2550.404c-5 and such other subsequent guidance as may be
promulgated by the Department of Labor, and with respect to which the other conditions set
forth in Department of Labor Regulations §2550.404c-5 are met, including, but not limited
to, the delivery to the Member of any material provided to the Plan that relates to the
Members investment therein. All investment designations shall be made in the manner
prescribed by the Committee.
The Committee shall maintain separate subaccounts in the name of each Member within his
Individual Account to reflect such Members accrued benefit attributable to his directed
investment in the above investment media.
12.2
Conversion of Investments
.
(a)
Members Individual Account
. Effective as of any Valuation Date, within
the time period prior thereto established by the Committee, and subject to any restrictions
on transfer imposed under particular investment funds, a Member may, pursuant to guidelines
established by the Committee, direct the Committee to instruct the Trustee to convert any
whole percentage, up to one hundred percent (100%), of the amount in such Members
Individual Account that is invested in any of the investment media offered for investment
under the Plan into one or more other of such investment media. Such direction shall be
effective as soon as practicable following the date of receipt by the Committee of such
direction to convert. Notwithstanding any provision herein to the contrary, applicable fund
redemption and short-term trading fees may be imposed upon the Members Individual Account
in connection with any direction by such Member to convert investments hereunder.
(b)
Conversion Directions
. A direction to convert by any eligible Member shall
be irrevocable and shall be made in the manner prescribed by the Committee within the time
period established by the Committee. Any conversion of investments pursuant to this Section
12.2 shall not affect a Members direction of investments with respect to his future
contributions and forfeitures pursuant to Section 12.1.
(c)
Direction of Spouse
. If a Members spouse who is not a Member in this Plan
acquires an interest in a Members Individual Account pursuant to a qualified domestic
relations order, then the Members spouse may direct the Committee to convert the investment
of the interest to which such spouse is thus entitled in the same manner and at the same
time as the Member may direct a conversion of investments, as provided above. If such
spouse becomes a Member of the Plan, the spouse shall be entitled to convert such
investments in accordance with the rights of Members in the Plan.
19
(d)
Miscellaneous
. The Committee is authorized to establish such other rules
and regulations, including adding additional times to convert investments, as it determines
are necessary to carry out the provisions of Section 12.1 and this Section 12.2, the
specific dates of conversion to be determined by the Committee, and all earnings on the
Members investments after such dates shall be allocated in accordance with the Members
Employer Savings Account, as adjusted on such dates. The Committee shall be authorized to
modify the allocations of earnings, provided such change is made on a reasonable and
nondiscriminatory basis.
ARTICLE XIII
ADMINISTRATION
13.1
Appointment of Committee
. The Plan shall be administered by a Committee
consisting of at least three or more persons who shall be appointed by and serve at the pleasure of
the board of directors of the Company. All usual and reasonable expenses of the Committee shall
be paid by the Trustee out of the principal or income of the Trust and, to the extent not so paid,
shall be paid by the Company. The members of the Committee shall not receive compensation with
respect to their services for the Committee. The members of the Committee may serve without bond
or security for the performance of their duties hereunder unless applicable law makes the
furnishing of such bond or security mandatory or unless required by the Company. Any member of the
Committee may resign by delivering his written resignation to the Company and to the other members
of the Committee.
13.2
Committee Powers and Duties
. The Committee shall have such powers as may be
necessary to discharge its duties hereunder, including, but not by way of limitation, the following
powers and duties:
(a) to construe and interpret the Plan, decide all questions of eligibility and
determine the amount, manner and time of payment of any benefits hereunder;
(b) to prescribe procedures to be followed by distributees in obtaining benefits;
(c) to make a determination as to the right of any person to a benefit and to afford
any person dissatisfied with such determination the right to a hearing thereon;
(d) to receive from the Company, Eligible Affiliates, and from Members such information
as shall be necessary for the proper administration of the Plan;
(e) to delegate to one or more of the members of the Committee the right to act in its
behalf in all matters connected with the administration of the Plan and Trust;
(f) to receive and review reports of the financial condition and of the receipts and
disbursements of the Trust Fund from the Trustee;
(g) to appoint or employ for the Plan any agents it deems advisable, including, but not
limited to, legal counsel; and
20
(h) to take any and all further actions from time to time as the Committee, in its sole
and absolute discretion, shall deem necessary for the proper administration of the Plan.
The Committee shall have no power to add to, subtract from or modify any of the terms of the
Plan, nor to change or add to any benefits provided by the Plan, nor to waive or fail to apply any
requirements of eligibility for benefits under the Plan. The Committee shall have full and
absolute discretion in the exercise of each and every aspect of its authority under this Plan,
including without limitation, all of the rights, powers and authorities specified in this Section
13.2 and, if applicable, in Section 13.3 hereof.
A majority of the members of the Committee shall constitute a quorum for the transaction of
business. No action of the Committee shall be taken except upon a majority vote of the Committee
members, other than as described in subparagraph (e) above. An individual shall not vote or decide
upon any matter relating solely to himself or vote in any case in which his individual right or
claim to any benefit under the Plan is particularly involved. If, in any case in which a Committee
member is so disqualified to act, and the remaining members cannot agree, the board of directors of
the Company will appoint a temporary substitute member to exercise all the powers of the
disqualified member concerning the matter in which he is disqualified.
13.3
Duties and Powers of the Plan Administrator
. The Plan Administrator shall have
such powers as may be necessary to discharge its duties hereunder, including, but not by way of
limitation, the following powers and duties:
(a) to file with the Secretary of Labor the annual report and other pertinent documents
that may be requested by the Secretary;
(b) to file with the Secretary of Labor such terminal and supplementary reports as may
be necessary in the event of the termination of the Plan;
(c) to furnish each Member, former Member and each Beneficiary receiving benefits
hereunder a summary plan description explaining the Plan;
(d) to furnish any Member, former Member or Beneficiary, who requests in writing,
statements indicating such Members, former Members or Beneficiarys total accrued benefits
and nonforfeitable benefits, if any;
(e) to furnish to a Member a statement containing information contained in a
registration statement required by Section 6057(a)(2) of the Code;
(f) to maintain all records necessary for verification of information required to be
filed with the Secretary of Labor;
(g) to allocate the assets of the Plan available to provide benefits to Members in the
event the Plan should terminate; and
(h) to report to the Trustee all available information regarding the amount of benefits
payable to each Member, the computations with respect to the allocation of
21
assets, and any other information that the Trustee may require in order to terminate
the Plan.
13.4
Rules and Decisions
. The Committee may adopt such rules as it deems necessary or
desirable. All rules and decisions of the Committee shall be uniformly and consistently applied to
all Employees in similar circumstances. The Committee is required to provide a notice in writing
to any person whose claim for benefits under the Plan has been denied, setting forth the specific
reasons for such denial. The Committee shall adopt rules or procedures to carry out the intent of
this Section and to provide a basis for a full and fair review by the Committee of the decision
denying the claim and provide such person with an opportunity to supply any evidence he has to
sustain the claim.
13.5
Committee Procedures
. The Committee may adopt such bylaws as it deems desirable.
The Committee shall elect one of its members as chairman. The Committee shall advise the Trustee
of such election in writing. The Committee shall keep a record of all meetings and forward all
necessary communications to the Trustee.
13.6
Authorization of Benefit Payments
. The Committee shall issue directions to the
Trustee concerning all benefits that are to be paid from the Trust Fund pursuant to the provisions
of the Plan. The Committee shall keep on file, in such manner as it may deem convenient or proper,
all reports from the Trustee.
13.7
Payment of Expenses
. All expenses incident to the administration of the Plan and
Trust, including but not limited to, actuarial, legal, accounting, investment advisory, investment
education, recordkeeping, Trustees fees, and any other plan administrative expenses, shall be paid
by the Trustee from the Trust Fund and, until paid, shall constitute a first and prior claim and
lien against the Trust Fund. To the extent such expenses are not paid by the Trustee from the
Trust Fund, they shall be paid by the Company.
13.8
Indemnification of Members of the Committee
. The Company shall, to the maximum
extent permitted under the Companys bylaws, indemnify the members of the Committee against
liability or loss sustained by them by an act or failure to act in their capacity as members of the
Committee.
ARTICLE XIV
NOTICES
14.1
Notice to Trustee
. As soon as practicable after a Member ceases to be in the
employ of the Company for any of the reasons set forth in Articles VII through X, inclusive, the
Committee shall give notice to the Trustee, which notice shall include such of the following
information and directions as are necessary or advisable under the circumstances:
(a) name and address of the Member;
(b) name and address of the Beneficiary or Beneficiaries in case of a Members death;
22
(c) amount to which the Member is entitled in case of termination of employment
pursuant to Article X; and
(d) manner and amount of payments to be made pursuant to Article XV.
If a former Member dies, the Committee shall give a like notice to the Trustee, but only if
the Committee learns of his death.
14.2
Subsequent Notices
. At any time and from time to time after giving the notice as
provided for in Section 14.1, the Committee may modify such original notice or any subsequent
notice by means of a further notice or notices to the Trustee; but, any action theretofore taken or
payments theretofore made by the Trustee pursuant to a prior notice shall not be affected by a
subsequent notice.
14.3
Reliance upon Notice
. Upon receipt of any notice as provided in this Article,
the Trustee shall promptly take whatever action and make whatever payments are called for therein,
it being intended that the Trustee may rely upon the information and directions in such notice
absolutely and without question. However, the Trustee may call to the attention of the Committee
any error or oversight that the Trustee believes to exist in any notice.
ARTICLE XV
BENEFIT PAYMENTS
15.1
Method of Payment
. As soon as practicable after a Member, former Member, or
Beneficiary becomes 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 Members, former Members or Beneficiarys
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.
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 Members or former Members Individual Account exceeds One Thousand and No/100 Dollars
($1,000.00), 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 one hundred eighty (180) 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
23
(30) days and no more than one hundred eighty (180) 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
Members or former Members 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 18.10 hereof, distribution of the entire Individual Account of a Member shall
be made in a single lump sum on or before such Members required beginning date; provided, however,
that 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, only the minimum distribution required for the calendar year
immediately preceding the Members required beginning date must be made on or before his required
beginning date. Furthermore, a minimum distribution for other calendar years, including the
minimum distribution for the calendar year in which such Members 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 Members date of death. During such Members
lifetime, the minimum amount that will be distributed for each distribution calendar year is the
lesser of:
(a) the quotient obtained by dividing the Members 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 Members age as of the Members birthday in the distribution
calendar year; or
(b) if the Members sole designated beneficiary for the distribution calendar year is
the Members spouse, the quotient obtained by dividing the Members 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 Members and spouses attained ages as
of the Members and spouses 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
24
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 Members 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 Members 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 Members designated Beneficiary is his 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.
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 or
an Eligible Affiliate 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 or an
25
Eligible Affiliate 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 Members or former Members 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 or an Eligible Affiliate prior to incurring five (5) consecutive Breaks in Service, then
upon such reemployment, the rehired Members or former Members Individual Account shall be
credited with the exact amount that was nonvested at the time of termination.
15.4
Minority or Disability Payments
. During the minority or Disability of any person
entitled to receive benefits hereunder, the Committee may direct the Trustee to make payments due
such person directly to him or to his spouse or a relative or to any individual or institution
having custody of such person. Neither the Committee nor the Trustee shall be required to see to
the application of payments so made, and the receipt of the payee (including the endorsement of a
check or checks) shall be conclusive as to all interested parties.
15.5
Distributions Under Domestic Relations Orders
. Nothing contained in this Plan
shall prevent the Trustee, in accordance with the direction of the Committee, from complying with
the provisions of a qualified domestic relations order (as defined in Section 414(p) of the Code).
The Plan specifically permits distribution to an alternate payee under a qualified domestic
relations order at any time, irrespective of whether the Member or former Member has attained his
earliest retirement age under the Plan, as defined in Section 414(p) of the Code; provided,
however, that a distribution to an alternate payee prior to the Member or former Members
attainment of earliest retirement age is available only if: (1) the order specifies distribution
at that time or permits an agreement between the Plan and the alternate payee to authorize an
earlier distribution; (2) the order specifies that such distribution will be in the form of a
single, lump-sum payment; and (3) if the amount to which the alternate payee is entitled under the
Plan exceeds $1,000, and the order so requires, the alternate payee consents to any distribution
occurring prior to the alternate payees attainment of age sixty-two (62). If an alternate payee
has not previously received a distribution of the entire interest to which such alternate payee is
entitled hereunder, distribution shall be made to such alternate payee as soon as practicable
following the alternate payees attainment of age sixty-two (62). Nothing in this Section 15.5
gives a Member or former Member a right to receive distribution at a time otherwise not permitted
under the Plan nor does it permit the alternate payee to receive a form of payment not otherwise
permitted under the Plan.
The Plan Administrator shall establish reasonable procedures to determine the qualified status
of a domestic relations order. Upon receiving a domestic relations order, the Plan Administrator
shall promptly notify the Member or former Member and any alternate payee named in the order, in
writing, of the receipt of the order and the Plans procedures for
26
determining the qualified status of the order. Within a reasonable period of time after
receiving the domestic relations order, the Plan Administrator shall determine the qualified status
of the order and shall notify the Member or former Member and each alternate payee, in writing, of
its determination. The Plan Administrator shall provide notice under this paragraph by mailing to
the individuals address specified in the domestic relations order, or in a manner consistent with
Department of Labor regulations. The Plan Administrator may treat as qualified any domestic
relations order entered prior to January 1, 1985, irrespective of whether it satisfies all the
requirements described in Section 414(p) of the Code.
If any portion of an Individual Account is payable during the period the Plan Administrator is
making its determination of the qualified status of the domestic relations order, the Committee
shall direct the Trustee to segregate the amounts that are payable into a separate account and to
invest the segregated account solely in fixed income investments. If the Plan Administrator
determines the order is a qualified domestic relations order within eighteen (18) months of
receiving the order, the Committee shall direct the Trustee to distribute the segregated account in
accordance with the order. If the Plan Administrator does not make its determination of the
qualified status of the order within eighteen (18) months after receiving the order, the Committee
shall direct the Trustee to distribute the segregated account in the manner in which the Plan would
otherwise distribute if the order did not exist and shall apply the order prospectively if the Plan
Administrator later determines the order is a qualified domestic relations order.
To the extent it is not inconsistent with the provisions of the qualified domestic relations
order, the Committee may direct the Trustee to invest any amount that is subject to being paid to
an alternate payee pursuant to said order into a segregated subaccount or separate account and to
invest the account in federally insured, interest-bearing savings account(s) or time deposit(s) (or
a combination of both), or in other fixed income investments. A segregated subaccount shall remain
a part of the Trust, but it alone shall share in any income it earns, and it alone shall bear any
expense or loss it incurs.
The Trustee shall make any payments or distributions required under this Section 15.5 by
separate benefit checks or other separate distribution to the alternate payee(s).
15.6
Direct Rollover of Eligible Rollover Distributions
. An individual who is
entitled to a benefit hereunder (including a Participants surviving spouse, a Participants spouse
or former spouse who is the alternate payee under a qualified domestic relation order, as defined
in Section 414(p) of the Code, and a non-spouse Beneficiary designated in accordance with Section
8.2 hereof), the distribution of which would qualify as an eligible rollover distribution, as
such term is hereinafter defined, may, in lieu of receiving any payment or payments from the Plan,
direct the Trustee to transfer all or any portion of such payment or payments directly to the
trustee of one or more eligible retirement plans, as such term is hereinafter defined. For
purposes of this Section 15.6, the term eligible rollover distribution is defined as any
distribution of all or any portion of the balance to the credit of the distributee, including any
portion of such balance that consists of amounts that are not includible in gross income, except
that an eligible rollover distribution does not include: any distribution that is one of a series
of substantially equal periodic payments (not less frequently than annually) made for the life (or
life expectancy) of the distributee or the joint lives (or joint life expectancies) of the
distributee and
27
the distributees designated beneficiary, or for a specified period of ten years or more and
any distribution to the extent such distribution is required under Code Section 401(a)(9). For
purposes of this Section 15.6, 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. Notwithstanding the
foregoing, in the case of a non-spouse Beneficiary, the term eligible retirement plan shall refer
only to a plan described in clauses (i) and (ii) above that is established on behalf of the
designated Beneficiary and that is required to be treated as an inherited IRA pursuant to the
provisions of Section 402(c)(11) of the Code. Also, in this case, the determination of any
required minimum distribution under Section 401(a)(9) of the Code that is ineligible for rollover
shall be made in accordance with IRS Notice 2007-7, Q&A 17 and 18, 2007-5 I.R.B. 395.
A portion of a distribution that consists of after-tax employee contributions 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 or defined benefit plan described in Section
401(a) or an annuity contract described in Section 403(b) 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 (as defined in Section 401(a)(31)(D) of the Code).
Any such election of a direct rollover must be made on a form provided by the Committee for
that purpose and received by the Committee no later than the date established by the Committee
preceding the date on which the distribution is to occur. Any election made pursuant to this
Section 15.6 may be revoked at any time prior to the date established by the Committee preceding
the date on which the distribution is to occur. If an individual who is so entitled has not
elected a direct rollover within the time and in the manner set forth above, such distributee shall
be deemed to have affirmatively waived a direct rollover. A distributee who wishes to elect a
direct rollover shall provide to the Committee, within the time and in the manner prescribed by the
Committee, such information as the Committee shall reasonably request regarding the eligible
retirement plan or plans to which the payment or payments are to be transferred. The Committee
shall be entitled to rely on the information so provided, and shall not be required to
independently verify such information. The Committee shall be entitled to delay the transfer of
any payment or payments pursuant to this Section 15.6 until it has received all of the information
which it has requested in accordance with this Section 15.6.
ARTICLE XVI
TRUSTEE
16.1
Appointment of Trustee
. A Trustee (or Trustees) shall be appointed by the
Committee to administer the Trust Fund. The Trustee shall serve at the pleasure of the Committee
and shall have such rights, powers and duties as are provided to a Trustee under ERISA for the
investment of assets and for the administration of the Trust Fund.
28
16.2
Appointment of Investment Manager
. An Investment Manager (or Investment
Managers) may be appointed by the Committee to manage (including the power to acquire and dispose
of) any part or all of the assets of the Trust Fund. The Investment Manager shall serve at the
pleasure of the Committee, and shall have the rights, powers and duties provided to a named
fiduciary under ERISA for the investment of the assets assigned to it. (The Investment Manager may
be referred to from time to time hereafter as he, they, or it, or may be referred to in the
singular or plural, but all such references shall be to the then acting Investment Manager or
Investment Managers serving hereunder.)
16.3
Responsibility of Trustee and Investment Manager
. All contributions under this
Plan shall be paid to and held by the Trustee. The Trustee shall have responsibility for the
investment and reinvestment of the Trust Fund except with respect to the management of those assets
specifically delegated to the Investment Manager and those funds invested pursuant to the
provisions of Section 15.5. The Investment Manager shall have exclusive management and control of
the investment and/or reinvestment of the assets of the Trust Fund assigned to it in writing by the
Trustee. All property and funds of the Trust Fund, including income from investments and from all
other sources, shall be retained for the exclusive benefit of Members or former Members, as
provided herein, and shall be used to pay benefits to Members or former Members or their
Beneficiaries, or to pay expenses of administration of the Plan and Trust Fund.
This Plan and the related Trust are intended to allocate to each fiduciary the individual
responsibilities of the prudent execution of the functions assigned to each. None of the allocated
responsibilities or any other responsibility shall be shared by the fiduciaries or the Trustee
unless such sharing shall be provided for by a specific provision in this Plan or related Trust.
16.4
Bonding of Trustee and Investment Manager
. Neither the Trustee nor the
Investment Manager shall be required to furnish any bond or security for the performance of their
powers and duties hereunder unless the applicable law makes the furnishing of such bond or security
mandatory.
ARTICLE XVII
AMENDMENT AND TERMINATION OF PLAN
17.1
Amendment of Plan
. The Company may, without the assent of any other party, make
from time to time any amendment or amendments to this Plan which do not cause any part of the Trust
Fund to be used for, or diverted to, any purpose other than the exclusive benefit of Members or
former Members of the Plan. Any such amendment shall be by a written instrument executed by the
Company, and shall become effective as of the date specified in such instrument. Notwithstanding
the foregoing, no amendment to the Plan shall be effective to the extent that it has the effect of
decreasing a Members or former Members accrued benefit, except as provided in Section 412(c)(8)
of the Code. For purposes of the preceding sentence, an amendment which has the effect of
decreasing a Members or former Members Individual Account or eliminating an optional form of
benefit, with respect to benefits attributable to service prior to such amendment shall be treated
as reducing an accrued benefit. If any amendment changes the vesting schedule set forth in Section
10.1, then a Members or former Members nonforfeitable percentage in his Individual Account
because of a change to the vesting schedule shall not be less than his nonforfeitable percentage
computed under the vesting schedule in effect prior to the
29
amendment. Furthermore, if any amendment changes the vesting schedule set forth in Section
10.1, then each Member or former Member having at least three (3) Years of Vesting Service may
elect to be governed under the vesting schedule set forth in the Plan without regard to the
amendment. The Member or former Member must file his written election with the Committee within
sixty (60) days after receipt of a copy of the amendment. The Committee shall furnish the Member
or former Member with a copy of the amendment and with notice of the time within which his election
must be returned to the Committee.
17.2
Termination of Plan
. The Company may at any time, effective as specified,
terminate the Plan by resolution of its board of directors. A certified copy of such resolution
shall be delivered to the Trustee.
17.3
Complete Discontinuance of Contributions
. In the event the Company decides it is
impossible or inadvisable for it to continue to make its contributions as provided in Article IV,
it shall have the power by appropriate resolution to either:
(a) discontinue its contributions to the Plan; or
(b) terminate the Plan.
A complete discontinuance of contributions by the Company shall not constitute a formal
termination of the Plan and shall not preclude later contributions, but all Individual Accounts of
Members or former Members not theretofore fully vested shall be and become 100% vested and
nonforfeitable in the respective Members or former Members, irrespective of the provisions of
Section 10.1. In such event, Employees who become eligible to enter the Plan subsequent to the
discontinuance shall receive no benefit, and no additional benefits shall accrue to any of such
Employees unless such contributions are resumed. After the date of a complete discontinuance of
contributions, the Trust shall remain in existence as provided in this Section 17.3, and the
provisions of the Plan and Trust shall remain in force as may be necessary in the sole and absolute
discretion of the Committee.
17.4
Liquidation of Trust Fund
. Upon termination or partial termination of the Plan,
the Individual Accounts of all Members, former Members and Beneficiaries shall thereupon be and
become fully vested and nonforfeitable. Thereupon, the Trustee shall convert the Trust Fund to cash
after deducting all charges and expenses. The Committee shall then adjust the balances of all
Individual Accounts, as provided in Section 5.2. Thereafter, the Trustee shall distribute the
amount to the credit of each affected Member, former Member and Beneficiary, in accordance with the
provisions of Article XV hereof.
17.5
Consolidation or Merger
. This Plan shall not be merged or consolidated with, nor
shall any assets or liabilities be transferred to, any other plan, unless the benefits payable on
behalf of each Member or former Member if the Plan were terminated immediately after such action
would be equal to or greater than the benefits to which such Member or former Member would have
been entitled if this Plan had been terminated immediately before such action. The Trustee shall
not accept a direct transfer of assets from a plan subject to the requirements of Section 417 of
the Code.
30
ARTICLE XVIII
GENERAL PROVISIONS
18.1
No Employment Contract
. Nothing contained in this Plan shall be construed as
giving any person whomsoever any legal or equitable right against the Committee, the Company, its
stockholders, officers or directors or against the Trustee, except as the same shall be
specifically provided for in this Plan. Nor shall anything in this Plan give any Member, former
Member or other Employee the right to be retained in the service of the Company or an Eligible
Affiliate and the employment of all persons by the Company or an Eligible Affiliate shall remain
subject to termination by the Company or such Eligible Affiliate to the same extent as if this Plan
had never been executed.
18.2
Manner of Payment
. Wherever and whenever it is herein provided for payments or
distributions to be made, whether in money or otherwise, said payments or distributions shall be
made directly into the hands of the Member or former Member, his Beneficiary, his administrator,
executor or guardian, or an alternate payee pursuant to Section 15.5 herein, as the case may be. A
deposit to the credit of a person entitled to payment in any bank or trust company selected by such
person shall be deemed payment into his hands, and provided further that in the event any person
otherwise entitled to receive any payment or distribution shall be a minor or an incompetent, such
payment or distribution may be made to his guardian or other person as may be determined by the
Committee.
18.3
Nonalienation of Benefits
. Subject to Code Section 414(p) and Section 15.5
herein relating to qualified domestic relations orders, the interest of any Member, former Member
or Beneficiary hereunder shall not be subject in any manner to any indebtedness, judgment, process,
creditors bills, attachments, garnishment, levy, execution, seizure or receivership, nor shall
such interest be in any manner reduced or affected by any transfer, assignment, conveyance, sale,
encumbrance, act, omission, or mishap, voluntary or incidental, anticipatory or otherwise, of or to
said Member, former Member or Beneficiary, and they and any of them shall have no right or power to
transfer, convey, assign, sell or encumber said benefits and their interest therein, legal or
equitable, during the existence of this Plan. Notwithstanding the foregoing, no provision of this
Plan shall preclude the enforcement of a Federal tax levy made pursuant to Section 6331 of the Code
or collection by the United States on a judgment resulting from an unpaid tax assessment.
18.4
Titles for Convenience Only
. Titles of the Articles and Sections hereof are for
convenience only and shall not be considered in construing this Plan. Also words used in the
singular or the plural may be construed as though in the plural or singular where they would so
apply.
18.5
Validity of Plan
. This Plan and each of its provisions shall be construed and
their validity determined by the laws of the State of Texas, and all provisions hereof shall be
administered in accordance with the laws of said State, provided that in case of conflict, the
provisions of ERISA shall control.
31
18.6
Plan Binding
. This Plan shall be binding upon the successors and assigns of the
Company and the Trustee and upon the heirs and personal representatives of those individuals who
become Members hereunder.
18.7
Return of Contributions
. This Plan and the related Trust are designed to qualify
under Sections 401(a) and 501(a) of the Code. Anything contained herein to the contrary
notwithstanding, if the initial determination letter is issued by the District Director of Internal
Revenue to the effect that this Plan and related Trust hereby created, or as amended prior to the
receipt of such letter, do not meet the requirements of Section 401(a) and 501(a) of the Code, the
Company shall be entitled at its option to withdraw all contributions theretofore made, in which
event the Plan and Trust shall then terminate.
Each contribution to the Plan is specifically conditioned on the deductibility of such
contribution under the Code. The Trustee, upon written request from the Company, shall return to
the Company the amount of the Companys contribution made as a result of a mistake of fact or the
amount of the Companys contribution disallowed as a deduction under Section 404 of the Code. Such
return of contribution must be made within one (1) year after (a) the Company made the contribution
by mistake of fact or (b) the disallowance of the contribution as a deduction. The amount of
contribution subject to being returned hereunder shall not be increased by any earnings
attributable to the contribution, but such amount subject to being returned shall be decreased by
any losses attributable to it.
18.8
Missing Members or Beneficiaries
. Each Member shall file with the Committee from
time to time in writing a mailing address and any change of mailing address for himself and his
designated Beneficiary. Any communication, statement or notice addressed to a Member or
Beneficiary at the last mailing address filed with the Committee, or if no such address is filed
with the Committee, then at his last mailing address as shown on the Companys records, shall be
binding on the Member or his Beneficiary for all purposes of the Plan. The Committee shall not be
required to search for or locate a Member or Beneficiary. If the Committee notifies any Member or
Beneficiary that he is entitled to a distribution and also notifies him of the provisions of this
Section 18.8 (or makes reasonable effort to so notify such Member or Beneficiary by certified
letter, return receipt requested, to the last known address, or such other further diligent effort,
including consultation with the Internal Revenue Service or the Social Security Administration, to
ascertain the whereabouts of such Member or Beneficiary as the Committee deems appropriate) and the
Member or Beneficiary fails to claim his distributive share or make his whereabouts known to the
Committee within three years thereafter, the distributive share of such Member or Beneficiary will
be forfeited and reallocated according to Section 6.2. However, if the Member or his Beneficiary
should, thereafter, make a proper claim for such share, it shall be distributed to him.
18.9
Voting Rights
.
(a) Each Member shall be entitled to direct the Trustee as to the manner in which any
Common Stock allocated to said Members Accounts shall be voted. The Committee shall
furnish to each Member a proxy adequate for such purpose. The Trustee shall vote
specifically in accordance with each Members instructions to the extent of such Members
whole shares and shall, to the extent possible, vote the combined
32
fractional shares of such Members in such manner as to reflect the Members expressed
desires. To the extent permitted under ERISA, the Trustee shall vote shares of Common Stock
with respect to which it does not receive instructions and shares of Common Stock which have
not been allocated to Members Accounts under the Plan in the same proportion as are voted
the shares of Common Stock held under the Plan with respect to which instructions were
received by the Trustee from Members.
(b) Notwithstanding anything to the contrary contained in the Plan, if a cash tender
offer or exchange offer for shares of Common Stock is made, Common Stock allocated to each
Members accounts under the Plan shall be tendered or exchanged by the Trustee pursuant to
such cash tender offer or exchange offer only in accordance with the written instructions
and directions of such Member to the Trustee to so tender or exchange. If a cash tender
offer or exchange offer for shares of Common Stock is made, the Trustee shall use its best
efforts to take those steps reasonably necessary to furnish information to, and allow
decision by, each Member with respect to such cash tender offer or
exchange offer and the shares of Common Stock allocated to such Members accounts under the Plan in substantially
the same manner as would be available to holders of Common Stock generally, and, in that
connection, the Trustee shall:
(i) Inform each Member as to the existence of such cash tender offer or
exchange offer;
(ii) Transmit to each Member as soon as practicable such written information,
explanation and other materials relative to such cash tender offer or exchange offer
as are made available by the Company or by the persons or entities making such cash
tender offer or exchange offer to the holders of shares of Common Stock generally;
(iii) Request detailed written instructions and directions from each Member as
to whether to tender or exchange the shares of Common Stock allocated to such
Members accounts under the Plan and as to the time and manner of such tender or
exchange, if so instructed and directed; and
(iv) Use its best efforts to effect on a nondiscriminatory basis the tender or
exchange of Common Stock held under the Plan with respect to such cash tender offer
or exchange offer solely in accordance with written instructions and directions
received from Members. If written instructions or directions are not timely
received from a Member, the shares of Common Stock allocated to his accounts under
the Plan shall not be tendered or exchanged pursuant to such cash tender offer or
exchange offer.
For purposes of this subparagraph (b), the term cash tender offer shall include a
tender offer for, or request or invitation for tenders of, shares of Common Stock in
exchange for cash, as made to the Plan or to holders of shares of Common Stock generally;
the term exchange offer shall include a tender offer for, or request or invitation for
tenders of, any shares of Common Stock in exchange for any consideration other than for all
cash, as made to the Plan or to holders of shares of Common Stock generally.
33
(c) If any shares of Common Stock held under the Plan are tendered or exchanged
pursuant to a cash tender offer or exchange offer in accordance with subparagraph (b) above,
any cash proceeds obtained by the Trustee in connection therewith shall be temporarily
invested in such short term investments as the Trustee may determine, until such time as
such temporarily invested cash proceeds are reinvested in Common Stock. Any other property
obtained by the Trustee pursuant to an exchange offer shall be temporarily held in kind by
the Trustee, until such time as such temporarily held property is sold and the proceeds
therefrom are reinvested in Common Stock.
18.10
Preretirement Diversification Rights
. If, as of December 31, 2007, a Member has
attained age fifty-five (55) and has been credited with ten (10) years of participation in the Plan
(hereinafter referred to as a Qualified Member), notwithstanding the provisions of Section 15.1
hereof, the following rules shall apply to any distribution made under the Plan to or on behalf of
such Qualified Member.
(a)
Annuity Distributions to Qualified Members
. The Committee shall direct the
Trustee to distribute such Members benefits held in a Qualified Members Individual Account
in the form of a qualified joint and survivor annuity, unless the Qualified Member has a
valid waiver election (described in Section 18.10(b) hereof) in effect. A qualified joint
and survivor annuity is an immediate annuity (a) that is payable for the life of the
Qualified Member, with, if the Qualified Member is married on the annuity starting date, as
defined below, a survivor annuity for the life of the Qualified Members surviving spouse
that is equal to fifty percent (50%) of the amount of the annuity payable during the joint
lives of the Qualified Member and his spouse, and (b) that is the actuarial equivalent of a
single annuity for the life of the Qualified Member. On or before the annuity starting date
(the first day of the first period for which the Qualified Member would receive an amount as
an annuity or in any other form), the Committee shall direct the Trustee to pay the
Qualified Members benefits in a lump sum, in lieu of a qualified joint and survivor
annuity, if the nonforfeitable portion of a Qualified Members Individual Account is not
greater than One Thousand and No/100 Dollars ($1,000.00).
If a Qualified Member who is married dies prior to commencement of payment of his
benefits, the Committee shall direct the Trustee to distribute the Qualified Members
Individual Account, as calculated under Article VIII, to the Qualified Members surviving
spouse in the form of a preretirement survivor annuity, unless the Qualified Member has a
valid waiver election (as described in Section 18.10(c) hereof) in effect. A preretirement
survivor annuity is an annuity that is payable for the life of the Qualified Members
surviving spouse. The surviving spouse may elect to have the preretirement survivor annuity
distributed within a reasonable period after the Qualified Members death. The Committee
shall direct the Trustee to pay the Qualified Members Individual Account in a lump sum, in
lieu of a preretirement survivor annuity, if the nonforfeitable portion of a Qualified
Members Individual Account is not greater than One Thousand and No/100 Dollars ($1,000.00).
The Committee is not required to distribute any survivor annuity described herein to
the spouse of a Qualified Member unless the Qualified Member and his spouse were married
throughout the one-year period ending on the earlier of the Qualified Members
34
annuity starting date or the Qualified Members death; provided, however, this
exception shall not apply if the Qualified Member marries within one year before the annuity
starting date and has been married for at least a one-year period ending on or before the
date of the Qualified Members death.
If the Qualified Member has in effect a valid waiver election regarding the qualified
joint and survivor annuity or the preretirement survivor annuity, and has not elected to
receive a qualified optional survivor annuity, as provided in paragraph (b) below, the
Committee shall direct the Trustee to distribute the Participants Individual Account in
accordance with Section 15.1. Furthermore, the Qualified Members surviving spouse may
elect a qualified optional survivor annuity or the form of payment described in Section 15.1
in lieu of the preretirement survivor annuity. For purposes of applying this Section 18.10,
the Committee shall treat a former spouse as the Qualified Members spouse or surviving
spouse to the extent required under a qualified domestic relations order.
(b)
Waiver Election Qualified Joint and Survivor Annuity
. Within a
reasonable period of time (no less than thirty (30) days and no more than one hundred eighty
(180) days) before the Qualified Members annuity starting date, the Committee shall provide
the Qualified Member a written explanation of the terms and conditions of the qualified
joint and survivor annuity and the qualified optional survivor annuity, the Qualified
Members right to make, and the effect of, an election to waive the qualified joint and
survivor form of benefit, the rights of a married Qualified Members spouse regarding the
waiver election and the Qualified Members right to make, and the effect of, a revocation of
a waiver election.
A Qualified Members waiver election is not valid unless:
(i) the Qualified Member makes the waiver election within the one hundred
eighty (180) day period ending on his annuity starting date;
(ii) in the event the nonforfeitable portion of the Qualified Members
Individual Account exceeds Five Thousand and No/100 Dollars ($5,000.00), the
Qualified Members spouse (to whom the survivor annuity is payable under the
qualified joint and survivor annuity) consents in writing to the waiver election,
the spouses consent acknowledges the effect of the election, and a notary public or
a Committee member (or its representative) witnesses the spouses consent; and
(iii) in the event the nonforfeitable portion of a Qualified Members
Individual Account exceeds Five Thousand and No/100 Dollars ($5,000.00), either the
spouse is the Qualified Members sole primary Beneficiary or the spouse consents to
the Qualified Members Beneficiary designation or to any change in the Qualified
Members Beneficiary Designation.
Additionally, a Qualified Members waiver of the qualified joint and survivor annuity
shall not be effective unless the election designates a form of benefit payment, which may
include a qualified optional survivor annuity, which may not be changed
35
without spousal consent (or the spouse expressly permits designations by the Qualified
Member without any further spousal consent).
The Committee may accept as valid a waiver election that does not satisfy the spousal
consent requirements described in paragraphs (ii) and (iii) above if the Committee
establishes that the Qualified Member does not have a spouse, the Committee is not able to
locate the Qualified Members spouse, or other circumstances prescribed by Treasury
Department regulations.
Any consent by a spouse obtained under this Section (or the establishment that the
consent of a spouse may not be obtained) shall be effective only with respect to such
spouse. A consent that permits designations by the Qualified Member without any requirement
of further consent by such spouse must acknowledge that the spouse has the right to limit
consent to a specific Beneficiary, and a specific form of benefit where applicable, and that
the spouse voluntarily elects to relinquish either or both of such rights. A revocation of
a prior waiver may be made by a Qualified Member without the consent of the spouse at any
time before the commencement of benefits. The number of revocations shall not be limited.
No consent obtained under this Section shall be valid unless the Qualified Member has
received an explanation of the terms and conditions of the qualified joint and survivor
annuity and the qualified optional survivor annuity, as provided herein. For purposes of
this Section 18.10, a qualified optional survivor annuity is an immediate annuity (a) that
is payable for the life of the Qualified Member, with, if the Qualified Member is married on
the annuity starting date, a survivor annuity for the life of the Qualified Members
surviving spouse that is equal to seventy-five percent (75%) of the amount of the annuity
payable during the joint lives of the Qualified Member and his spouse, and (b) that is the
actuarial equivalent of a single annuity for the life of the Qualified Member.
(c)
Waiver Election Preretirement Survivor Annuity
. The Committee shall
provide each Qualified Member, within a reasonable period after the Member becomes a
Qualified Member, a written explanation of the terms and conditions of the preretirement
survivor annuity, the Qualified Members right to make, and the effect of, an election to
waive the preretirement survivor annuity, the rights of the Qualified Members spouse
regarding the waiver election and the Qualified Members right to make, and the effect of, a
revocation of a waiver election.
For purposes of applying this subsection, a reasonable period is the end of the
two-year period beginning one year prior to the date on which the Member becomes a Qualified
Member, and ending one year after that date.
A Qualified Members waiver election of the preretirement survivor annuity is not valid
unless the election satisfies the spousal consent requirements described in Section
18.10(b).
18.11
Qualified Military Service
. Notwithstanding any provision of this Plan to the
contrary, contributions, benefits and service credit with respect to qualified military service
will be provided in accordance with Section 414 (u) of the Code.
36
ARTICLE XIX
TOP-HEAVY RULES
19.1
Definitions
. For purposes of applying the provisions of this Article XIX:
(a) Key Employee shall mean, as of any Determination Date (as defined below), any
Employee or former Employee (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 6.5(b)(iv) 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. The constructive ownership rules of Section 318 of the Code
will apply to determine ownership in the Company.
(b) Non-Key Employee is an Employee who does not meet the definition of Key Employee.
(c) Required Aggregation Group means:
(i) Each qualified plan of the Company or an Affiliated Entity (as defined
below) in which at least one (1) Key Employee participates or participated at any
time during the Plan Year that includes the Determination Date, or during the
preceding four Plan Years (regardless of whether the plan has terminated); and
(ii) Any other qualified plan of the Company that enables a plan described in
(1) to meet the requirements of Section 401(a)(4) or Section 410 of the Code.
(d) Permissive Aggregation Group is the Required Aggregation Group plus any other
qualified plans maintained by the Company, but only if such group would satisfy in the
aggregate the requirements of Section 401(a)(4) and Section 410 of the Code. The Committee
shall determine which plans to take into account in determining the Permissive Aggregation
Group.
(e) Determination Date for any Plan Year is the Allocation Date of the preceding Plan
Year or, in the case of the first Plan Year of the Plan, the Allocation Date of that Plan
Year.
(f) Five Percent (5%) Owner is any person who owns more than five percent (5%) of the
outstanding stock of the Company or stock possessing more than five percent (5%) of the
total combined voting power of all stock of the Company.
37
(g) One Percent (1%) Owner is any person who owns more than one percent (1%) of the
outstanding stock of the Company or stock possessing more than one percent (1%) of the total
combined voting power of all stock of the Company.
(h) Affiliated Entity shall mean all the members of (i) a controlled group of
corporations as defined in Section 414(b) of the Code; (ii) a commonly controlled group of
trades or businesses (whether or not incorporated) as defined in Section 414(c) of the Code;
(iii) an affiliated service group as defined in Section 414(m) of the Code of which the
Company is a part; or (iv) a group of entities required to be aggregated pursuant to Section
414(o) of the Code and the regulations issued thereunder.
19.2
Determination of Top-Heavy Status
. The Plan is top heavy for a Plan Year if the
top heavy ratio as of the Determination Date (as defined in Section 19.1 above) exceeds sixty
percent (60%). The top heavy ratio is a fraction, the numerator of which is the sum of the present
value of the Individual Accounts of all Key Employees (as defined in Section 19.1 above) as of the
Determination Date and the denominator of which is a similar sum determined for all Employees in
the Plan. The present value of the Individual Account balance 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. The Individual Account 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. The Committee shall calculate the top heavy ratio without regard
to any Non Key Employee (as defined in Section 19.1 above) who was formerly a Key Employee. The
Committee shall calculate the top heavy ratio, including the extent to which it must take into
account distributions, rollovers and transfers, in accordance with Section 416 of the Code and the
regulations under that Code Section.
If the Company maintains other qualified plans (including a simplified employee pension plan)
this Plan is top-heavy only if it is part of the Required Aggregation Group (as defined in Section
19.1 above), and the top-heavy ratio for both the Required Aggregation Group and the Permissive
Aggregation Group (as defined in Section 19.1 above) exceeds sixty percent (60%). The Committee
will calculate the top-heavy ratio in the same manner as required by the first paragraph of this
Section 19.2, taking into account all plans within the aggregation group. The Committee shall
calculate the present value of accrued benefits and the other amounts the Committee must take into
account, under defined benefit plans or simplified employee pension plans included within the group
in accordance with the terms of those plans, Section 416 of the Code and the regulations under that
Code Section. The Committee shall calculate the top-heavy ratio with reference to the
Determination Dates that fall within the same calendar year.
19.3
Minimum Company Contribution
. Notwithstanding anything contained herein to the
contrary, for any Plan Year in which this Plan is determined to be top-heavy pursuant to Section
19.2 hereof, each Non-Key Employee who is an eligible Member shall be entitled to a supplemental
contribution equal to three percent (3%) of such Non-Key Employees Annual
38
Compensation, reduced by (i) the amount of Qualified Nonelective Contributions, if any,
allocated to a Members Salary Reduction Contribution Account under the Southwest Airlines Co.
401(k) Plan for the applicable Plan Year and (ii) the amount of Non-Elective Contributions, if
any, allocated to a Members Participants Elective Account under the Southwest Airlines Pilots
Retirement Savings Plan for the applicable Plan Year. For purposes of this Section 19.3, an
eligible Member is a Non-Key Employee who is employed by the Company on the last day of the
applicable Plan Year.
The percentage referred to in the preceding paragraph shall not exceed the percentage of
Annual Compensation at which Company contributions are made or allocated under this Plan and all
other qualified defined contribution plans maintained by the Company, including Salary Reduction
Contributions under the Southwest Airlines Co. 401(k) Plan and Elective Contributions under the
Southwest Airlines Pilots Retirement Savings Plan , to the Key Employee for whom such percentage is
the largest; provided, however, this sentence shall not apply if the Plan is required to be
included in an Aggregation Group and enables a defined benefit plan required to be included in such
group to meet the requirements of Code Sections 401(a)(4) or 410. If the minimum allocation is
made for a Non-Key Employee pursuant to another qualified plan maintained by the Company, then the
minimum allocation requirement will be considered satisfied for purposes of this Plan. Company
Matching Contributions under the Southwest Airlines Co. 401(k) Plan and matching contributions
under the Southwest Airlines Pilots Retirement Savings 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.
ARTICLE XX
FIDUCIARY PROVISIONS
20.1
General Allocation of Duties
. Each fiduciary with respect to the Plan shall have
only those specific powers, duties, responsibilities and obligations as are specifically given him
under the Plan. The board of directors of the Company shall have the sole responsibility for
authorizing its contributions under the Plan. The Company shall have the sole authority to appoint
and remove the members of the Committee and to amend or terminate this Plan, in whole or in part.
The Committee shall have the sole authority to appoint and remove the Trustee and Investment
Managers. However, neither the board nor the Committee shall be liable for any acts or omissions
of the Trustee or Investment Manager or be under any obligation to invest or otherwise manage any
assets of the Trust Fund which are subject to the management of the Trustee or Investment Manager.
Except as otherwise specifically provided, the Committee shall have the sole responsibility for the
administration of the Plan, which responsibility is specifically described herein. Except as
otherwise specifically provided, the Trustee shall have the sole responsibility for the
administration, investment and management of the assets held under the Plan. It is intended under
the Plan that each fiduciary shall be responsible for the proper exercise of its own powers,
duties, responsibilities and obligations hereunder and shall not be responsible for any act or
failure to act of another fiduciary, except to the extent provided by law or as specifically
provided herein.
39
20.2
Fiduciary Duty
. Each fiduciary under the Plan shall discharge its duties and
responsibilities with respect to the Plan:
(a) solely in the interest of the Members of the Plan, for the exclusive purpose of
providing benefits to such Members and their Beneficiaries, and defraying reasonable
expenses of administering the Plan;
(b) with the care, skill, prudence and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar with such matters would
use in the conduct of an enterprise of a like character and with like aims;
(c) by diversifying the investments of the Plan so as to minimize the risk of large
losses, unless under the circumstances it is prudent not to do so; and
(d) in accordance with the documents and instruments governing the Plan insofar as such
documents and instruments are consistent with applicable law.
20.3
Fiduciary Liability
. A fiduciary shall not be liable in any way for any acts or
omissions constituting a breach of fiduciary responsibility occurring prior to the date it becomes
a fiduciary or after the date it ceases to be a fiduciary.
20.4
Co-Fiduciary Liability
. A fiduciary shall not be liable for any breach of
fiduciary responsibility by another fiduciary unless:
(a) it participates knowingly in, or knowingly undertakes to conceal, an act or
omission of such other fiduciary, knowing such act or omission is a breach;
(b) by its failure to comply with Section 404(a)(1) of ERISA in the administration of
its specific responsibilities which give rise to its status as a fiduciary, it has enabled
such other fiduciary to commit a breach; or
(c) having knowledge of a breach by such other fiduciary, it fails to make reasonable
efforts under the circumstances to remedy the breach.
40
20.5
Delegation and Allocation
. The Committee may appoint subcommittees, individuals
or any other agents as it deems advisable and may delegate to any of such appointees any or all of
the powers and duties of the Committee. Such appointment and delegations must clearly specify the
powers and duties delegated. Upon such appointment and delegation, the delegating Committee
members shall have no liability for the acts or omissions of any such delegate, as long as the
delegating Committee members do not violate their fiduciary responsibility in making or continuing
such delegation.
IN WITNESS WHEREOF, Southwest Airlines Co. has caused its corporate seal to be affixed hereto
and these presents to be duly executed in its name and behalf by its proper officers thereunto duly
authorized this 14th day of December, 2007.
|
|
|
|
|
|
|
SOUTHWEST AIRLINES CO.
|
|
|
|
|
|
|
|
By:
|
|
/s/ Gary C. Kelly
|
|
|
|
|
|
|
|
|
|
Gary C. Kelly, Chief Executive Officer
|
41
EXHIBIT
10.8
SOUTHWEST AIRLINES CO.
401(k) PLAN
SOUTHWEST AIRLINES CO.
401(k) PLAN
Table of Contents
|
|
|
|
|
|
|
Page
|
|
ARTICLE I
Purpose
|
|
|
1
|
|
|
|
|
|
|
ARTICLE II
Definitions and Construction
|
|
|
2
|
|
|
|
|
|
|
2.1
Definitions
|
|
|
2
|
|
2.2
Construction
|
|
|
9
|
|
|
|
|
|
|
ARTICLE III
Eligibility and Participation
|
|
|
9
|
|
|
|
|
|
|
3.1
Eligibility Requirements
|
|
|
9
|
|
3.2
Notification of Eligibility
|
|
|
9
|
|
3.3
Re-entry of Prior Members
|
|
|
10
|
|
|
|
|
|
|
ARTICLE IV
Contributions
|
|
|
10
|
|
|
|
|
|
|
4.1
Salary Reduction Contributions
|
|
|
10
|
|
4.2
Catch-Up Contributions
|
|
|
10
|
|
4.3
Company Matching Contributions
|
|
|
11
|
|
4.3
Qualified Nonelective Contributions
|
|
|
11
|
|
4.4
Reduction of Excess Deferrals
|
|
|
11
|
|
4.5
Deferral Percentage Test
|
|
|
12
|
|
4.6
Contribution Percentage Test
|
|
|
14
|
|
4.7
Rollover Contributions
|
|
|
16
|
|
|
|
|
|
|
ARTICLE V
Adjustment of Individual Accounts
|
|
|
17
|
|
|
|
|
|
|
5.1
Individual Accounts
|
|
|
17
|
|
5.2
Method of Adjustment
|
|
|
18
|
|
5.3
Salary Reduction Elections
|
|
|
18
|
|
|
|
|
|
|
ARTICLE VI
Allocations
|
|
|
20
|
|
|
|
|
|
|
6.1
Salary Reduction, Company Matching, and Rollover Contributions
|
|
|
20
|
|
6.2
Qualified Nonelective Contributions
|
|
|
20
|
|
6.3
Forfeitures
|
|
|
20
|
|
6.4
Notification to Members
|
|
|
20
|
|
6.5
Maximum Annual Addition to Account or Benefit
|
|
|
20
|
|
|
|
|
|
|
ARTICLE VII
Retirement
|
|
|
23
|
|
|
|
|
|
|
7.1
Normal or Late Retirement
|
|
|
23
|
|
7.2
Benefit
|
|
|
23
|
|
|
|
|
|
|
ARTICLE VIII
Death
|
|
|
23
|
|
|
|
|
|
|
8.1
Death of Member
|
|
|
23
|
|
8.2
Designation of Beneficiary
|
|
|
23
|
|
8.3
Benefit
|
|
|
24
|
|
8.4
No Beneficiary
|
|
|
24
|
|
i
|
|
|
|
|
|
|
|
Page
|
|
ARTICLE IX
Disability
|
|
|
24
|
|
|
|
|
|
|
9.1
Disability
|
|
|
24
|
|
9.2
Benefit
|
|
|
24
|
|
|
|
|
|
|
ARTICLE X
Termination of Employment and Forfeitures
|
|
|
24
|
|
|
|
|
|
|
10.1
Eligibility and Benefits
|
|
|
24
|
|
10.2
Time of Payment
|
|
|
25
|
|
10.3
Forfeitures
|
|
|
25
|
|
10.4
Forfeitures for Cause
|
|
|
26
|
|
|
|
|
|
|
ARTICLE XI
Withdrawals and Loans
|
|
|
26
|
|
|
|
|
|
|
11.1
Loans to Members
|
|
|
26
|
|
11.2
Withdrawals
|
|
|
29
|
|
|
|
|
|
|
ARTICLE XII
Investment of the Trust Fund
|
|
|
33
|
|
|
|
|
|
|
12.1
Member Direction of Investment
|
|
|
33
|
|
12.2
Conversion of Investments
|
|
|
35
|
|
|
|
|
|
|
ARTICLE XIII
Administration
|
|
|
36
|
|
|
|
|
|
|
13.1
Appointment of Committee
|
|
|
36
|
|
13.2
Committee Powers and Duties
|
|
|
36
|
|
13.3
Duties and Powers of the Plan Administrator
|
|
|
37
|
|
13.4
Rules and Decisions
|
|
|
38
|
|
13.5
Committee Procedures
|
|
|
38
|
|
13.6
Authorization of Benefit Payments
|
|
|
38
|
|
13.7
Payment of Expenses
|
|
|
38
|
|
13.8
Indemnification of Members of the Committee
|
|
|
39
|
|
|
|
|
|
|
ARTICLE XIV
Notices
|
|
|
39
|
|
|
|
|
|
|
14.1
Notice to Trustee
|
|
|
39
|
|
14.2
Subsequent Notices
|
|
|
39
|
|
14.3
Reliance upon Notice
|
|
|
39
|
|
|
|
|
|
|
ARTICLE XV
Benefit Payments
|
|
|
39
|
|
|
|
|
|
|
15.1
Method of Payment
|
|
|
39
|
|
15.2
Time of Payment
|
|
|
40
|
|
15.3
Cash Out Distribution
|
|
|
42
|
|
15.4
Minority or Disability Payments
|
|
|
42
|
|
15.5
Distributions Under Domestic Relations Orders
|
|
|
42
|
|
15.6
Direct Rollover of Eligible Rollover Distributions
|
|
|
44
|
|
|
|
|
|
|
ARTICLE XVI
Trustee
|
|
|
45
|
|
|
|
|
|
|
16.1
Appointment of Trustee
|
|
|
45
|
|
16.2
Appointment of Investment Manager
|
|
|
45
|
|
16.3
Responsibility of Trustee and Investment Manager
|
|
|
45
|
|
16.4
Bonding of Trustee and Investment Manager
|
|
|
46
|
|
|
|
|
|
|
ARTICLE XVII
Amendment and Termination of Plan
|
|
|
46
|
|
|
|
|
|
|
17.1
Amendment of Plan
|
|
|
46
|
|
17.2
Termination of Plan
|
|
|
46
|
|
17.3
Suspension and Discontinuance of Contributions
|
|
|
46
|
|
17.4
Liquidation of Trust Fund
|
|
|
47
|
|
17.5
Consolidation, Merger or Transfer of Plan Assets
|
|
|
47
|
|
|
|
|
|
|
ARTICLE XVIII
General Provisions
|
|
|
47
|
|
|
|
|
|
|
18.1
No Employment Contract
|
|
|
47
|
|
ii
|
|
|
|
|
|
|
|
Page
|
|
18.2
Manner of Payment
|
|
|
48
|
|
18.3
Nonalienation of Benefits
|
|
|
48
|
|
18.4
Titles for Convenience Only
|
|
|
48
|
|
18.5
Validity of Plan
|
|
|
48
|
|
18.6
Plan Binding
|
|
|
48
|
|
18.7
Return of Contributions
|
|
|
48
|
|
18.8
Missing Members or Beneficiaries
|
|
|
49
|
|
18.9
Qualified Military Service
|
|
|
49
|
|
|
|
|
|
|
ARTICLE XIX
Top-Heavy Rules
|
|
|
49
|
|
|
|
|
|
|
19.1
Definitions
|
|
|
49
|
|
19.2
Determination of Top-Heavy Status
|
|
|
50
|
|
19.3
Minimum Company Contribution
|
|
|
51
|
|
|
|
|
|
|
ARTICLE XX
Fiduciary Provisions
|
|
|
52
|
|
|
|
|
|
|
20.1
General Allocation of Duties
|
|
|
52
|
|
20.2
Fiduciary Duty
|
|
|
52
|
|
20.3
Fiduciary Liability
|
|
|
52
|
|
20.4
Co-Fiduciary Liability
|
|
|
52
|
|
20.5
Delegation and Allocation
|
|
|
53
|
|
iii
SOUTHWEST AIRLINES CO.
401(k) PLAN
PREAMBLE
WHEREAS, SOUTHWEST AIRLINES CO., a corporation formed under the laws of the State of Texas
(the Company) has previously adopted a profit sharing plan and trust designated as the Southwest
Airlines Co. ProfitSharing Plan, effective as of January 1, 1973, which was subsequently amended
and restated in its entirety, effective as of January 1, 1986, and which was again amended and
restated in its entirety, effective as of January 1, 1991, to comply with the Tax Reform Act of
1986 and subsequent legislation and to continue the cash or deferred feature of the plan as a
separate Plan (the Prior Plan); and
WHEREAS, the Company now desires to again amend and restate the Prior Plan in its entirety to
implement certain provisions of, and for compliance with, the Pension Protection Act of 2006, to
add an automatic enrollment feature, to incorporate amendments that have previously been made, and
to reflect certain other operational and administrative practices;
NOW, THEREFORE, in consideration of the premises and to carry out the purposes and intent as
set forth above, effective as of January 1, 2008, except as otherwise specifically provided herein,
the Prior Plan is hereby restated and amended in its entirety, superseded and replaced by this plan
(hereinafter referred to as the Plan), and the Company does hereby adopt this restated Plan for
the benefit of its eligible employees. There will be no gap or lapse in time or effect between
such plans, and the existence of a qualified plan shall be continuous and uninterrupted.
The terms and conditions of this restated Plan are as follows:
ARTICLE I
PURPOSE
The purpose of this Plan is to reward Employees of the Company for their loyal and faithful
service, to help the Employees accumulate funds for their later years, and to provide funds for
their Beneficiaries in the event of death or disability. The benefits provided by this Plan will
be paid from a Trust Fund established by the Company and will be in addition to the benefits
Employees are entitled to receive under any other programs of the Company and under the Social
Security Act.
This Plan and the separate related Trust forming a part hereof are established and shall be
maintained for the exclusive benefit of the Members hereunder and their Beneficiaries. No part of
the Trust Fund can ever revert to the Company, except as hereinafter provided, or be used for or
diverted to purposes other than the exclusive benefit of the Members of this Plan and their
Beneficiaries.
1
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1
Definitions
. Where the following words and phrases appear in this Plan, they
shall have the respective meanings set forth below, unless their context clearly indicates to the
contrary:
(a)
Affiliate
. A member of a controlled group of corporations (as defined in
Section 414(b) of the Code), a group of trades or businesses (whether or not incorporated)
which are under common control (as defined in Section 414(c) of the Code), or an affiliated
service group (as defined in Section 414(m) of the Code) of which the Company is a member,
or any entity otherwise required to be aggregated with the Company pursuant to Section
414(o) of the Code and the regulations issued thereunder.
(b)
Allocation Date
. With respect to Qualified Nonelective Contributions, if
any, the last day of the Plan Year and, with respect to Salary Reduction Contributions and
Company Matching Contributions, the Valuation Date coincident with or next following the
date on which such contributions are transmitted to the Trust.
(c)
Annual Compensation
. The total amounts paid by the Company or any Eligible
Affiliate to an Employee as remuneration for personal services rendered during each Plan
Year, including expense allowances (to the extent includible in the gross income of the
Employee) and any amounts not includible in the gross income of the Employee pursuant to
Sections 402(e)(3), 125(a), or 132(f)(4) of the Code, but excluding (1) directors fees; (2)
expense reimbursements and nontaxable expense allowances; (3) prizes and awards; (4)
expatriate bonuses; (5) items of imputed income; (6) contributions made by the Company under
this Plan or any other employee benefit plan or program it maintains, such as group
insurance, hospitalization or like benefits; (7) amounts realized or recognized from
qualified or nonqualified stock options or when restricted stock or property held by the
Employee either becomes freely transferable or is no longer subject to a substantial risk of
forfeiture; (8) Company contributions to a plan of deferred compensation that are not
included in the Employees gross income for the taxable year in which contributed, or any
distributions from a deferred compensation plan; (9) amounts, if any, paid to an Employee in
lieu of a Company Contribution to the Southwest Airlines Co. ProfitSharing Plan in the event
that such Company Contribution would constitute an annual addition, as defined in Section
415(c)(2) of the Code, in excess of the limitations under Section 415(c) of the Code; and
(10) severance payments. For purposes of this Section 2.1(c), severance payments include
severance pay, unfunded nonqualified deferred compensation benefits and parachute payments
made after an Employees severance from employment, but shall not include amounts
attributable to payments made within 2
1
/
2
months following severance from employment that,
absent a severance from employment, would have been paid to the Employee for services
rendered prior to the severance from employment and for accrued bona fide sick, vacation, or
other leave (to the extent the Employee would have been able to use the leave if employment
had continued). Annual Compensation shall include amounts otherwise includible, as provided
above, which are paid by the Company or an Eligible Affiliate to the Employee
2
through another person, pursuant to the common paymaster provisions of Sections 3121(s)
and 3306(p) of the Code.
The Annual Compensation of each Member or former Member taken into account under the
Plan for any Plan Year shall not exceed $230,000, as adjusted by the Secretary of the
Treasury for increases in the cost of living at the time and in the manner set forth in
Section 401(a)(17)(B) of the Code. If a Plan Year consists of fewer than twelve (12)
months, then the dollar limitation in the preceding sentence will be multiplied by a
faction, the numerator of which is the number of months in the Plan Year, and the
denominator of which is twelve (12). Except as otherwise provided herein, for purposes of
an allocation under the Plan based on Annual Compensation, Annual Compensation shall only
include amounts actually paid to an Employee during the period he is a Member of the Plan.
Notwithstanding the limitation in the preceding sentence, for purposes of an allocation of a
Company Matching Contribution, Annual Compensation shall include amounts actually paid to an
Employee during the applicable Plan Year.
(d)
Beneficiary
. A person designated by a Member or former Member to receive
benefits hereunder upon the death of such Member or former Member.
(e)
Break in Service
. An Employee shall have a Break in Service for each Plan
Year in which he completes fewer than 501 Hours of Service with the Company unless he is on
a leave of absence authorized by the Company in accordance with its leave policy.
(f)
Code
. The Internal Revenue Code of 1986, as amended.
(g)
Committee
. The persons who may be appointed to administer the Plan in
accordance with Article XIII.
(h)
Company
. Southwest Airlines Co., or its successor or successors.
(i)
Company Matching Contributions
. Contributions that may be made by the
Company for any Plan Year on behalf of a Member who has elected to receive Salary Reduction
Contributions for such Plan Year as provided in Section 4.2 hereof. Company Matching
Contributions shall be determined on behalf of Members whose conditions of employment are
governed by a collective bargaining agreement between the Company and a labor union in
accordance with the terms of such collective bargaining agreement, as then in effect, and
shall be determined on behalf of Members whose conditions of employment are not so governed
in the sole and absolute discretion of the board of directors of the Company.
(j)
Company Matching Contribution Account
. A separate subaccount to which is
credited a Members Company Matching Contributions, if any, and any earnings attributable
thereto, adjusted to reflect any withdrawals, distributions, or investment losses
attributable thereto.
(k)
Deemed Election Date
. Except as otherwise provided herein, the Entry Date
on which an eligible Employee commences or recommences participation in the
3
Plan after January 1, 2008, in accordance with Section 3.1 hereof. Notwithstanding the
foregoing, in the event an eligible Employees employment with the Company and all
Affiliates terminates, any deemed election that would otherwise be in effect shall
automatically terminate and such Employee shall have a new Deemed Election Date, which shall
be the first day of the calendar month concurrent with or next following such Employees
completion of thirty (30) consecutive days of Service, beginning on the date on which such
Employee is reemployed. Furthermore, a deemed election in effect with respect to any Member
shall automatically terminate upon the date of a withdrawal from such Members Salary
Reduction Contribution Account in accordance with the provisions of Section 11.2(e) hereof.
An Employee hired prior to January 1, 2008 shall not have a Deemed Election Date unless such
Employee terminates employment and is subsequently rehired after January 1, 2008.
(l)
Disability
. A physical or mental condition which, in the judgment of the
Committee, totally and presumably permanently prevents the Employee from engaging in any
substantial gainful employment with the Company. A determination of Disability shall be
based upon competent medical evidence satisfactory to the Committee. The Committee shall
apply the rules with respect to Disability uniformly and consistently to all Employees in
similar circumstances.
(m)
Effective Date
. January 1, 2008, except as otherwise specifically provided
herein.
(n)
Employee
. Any person who is receiving remuneration for personal services
rendered to the Company, or who would be receiving such remuneration except for an
authorized leave of absence; provided, however, that any individual whose conditions of
employment are governed by a collective bargaining agreement between the Company and a labor
union shall not be considered an Employee unless the collective bargaining agreement
provides for coverage of such individual under the Plan. In no event shall any individual
employed by any Affiliate or subsidiary of the Company be considered an Employee.
Notwithstanding the foregoing, individuals whose conditions of employment are governed by a
collective bargaining agreement that does not provide for coverage of such individual under
the Plan shall nonetheless be deemed to be an Employee for purposes of crediting service
pursuant to the provisions of subsections 2.1(s), (ii) and (mm) hereunder.
The term Employee shall also include any leased employee, as such term is defined
below, deemed to be an employee of an Employer or any Affiliate as provided in Sections
414(n) or (o) of the Code. The term leased employee means any person (other than an
employee of the recipient) who, pursuant to an agreement between the recipient and any other
person (leasing organization), has performed services for the recipient (or for the
recipient and related persons determined in accordance with Section 414(n)(6) of the Code)
on a substantially full-time basis for a period of at least one year, and such services are
performed under the primary direction of or control by the recipient. Contributions or
benefits provided by the leasing organization that are attributable to services performed
for the recipient shall be treated as provided by the recipient. Notwithstanding the
foregoing, a leased employee shall not be considered an employee of
4
the recipient if: (i) such employee is covered by a money purchase pension plan that
provides: (1) a nonintegrated employer contribution rate of at least ten percent (10%) of
compensation, as defined in Section 415(c)(3) of the Code, but including amounts contributed
pursuant to a salary reduction agreement that are excludable from the employees gross
income under Section 125, Section 402(e)(3), Section 402(h)(1)(B), or Section 403(b) of the
Code, (2) immediate participation, and (3) full and immediate vesting; and (ii) leased
employees do not constitute more than twenty percent (20%) of the recipients nonhighly
compensated work force.
(o)
Entry Date
. The first day of each calendar month.
(p)
ERISA
. The Employee Retirement Income Security Act of 1974, as amended.
(q)
Fund or Trust Fund
. All assets of whatsoever kind or nature held from time
to time by the Trustee in the Trust Fund forming a part of this Plan, without distinction as
to income and principal and without regard to source, e.g., allocations, contributions,
earnings, forfeitures, or gifts.
(r)
Highly Compensated Employee
. The term Highly Compensated Employee includes
highly compensated active employees and highly compensated former employees. A highly
compensated active employee includes any Employee who performs Service for the Company
during the determination year and who, during the look-back year received compensation from
the Company in excess of $105,000 (as adjusted pursuant to Section 415(d) of the Code). The
term Highly Compensated Employee also includes Employees who are Five Percent (5%) Owners
(as defined in Section 19.1(f) hereof) at any time during the look-back year or
determination year. For purposes of this Section 2.1(s), the determination year shall be
the Plan Year. The look-back year shall be the twelve-month period immediately preceding
the determination year. For purposes of this Section 2.1(r), the term compensation shall
have the same meaning as set forth in Section 415(c)(3) of the Code.
A highly compensated former employee includes any Employee who separated from service
(or was deemed to have separated from service) prior to the determination year, performs no
Service for the Company during the determination year, and was a highly compensated active
employee for either the separation year or any determination year ending on or after the
Employees 55th birthday. The determination of the identity of Highly Compensated Employees
will be made in accordance with Section 414(q) of the Code and the regulations thereunder.
(s)
Hour of Service
. An Hour of Service shall include all hours for which pay
is received or for which an Employee is entitled to payment, whether worked or not, plus
service credit on the basis of the number of his regularly scheduled working hours for any
other period of absence for which the Employee is paid or entitled to payment and which is
authorized by the Company in accordance with its uniform leave policy for vacation, holiday,
sick leave, illness, Disability, layoff, military service, or civic duty. In no event shall
credit for the number of Hours of Service attributable to a single continuous period
5
for which no duties are performed exceed 501. Service credit shall also be given for
each other leave of absence authorized by the Company for which the Employee is paid or
entitled to payment.
Hours of Service shall be computed on an equivalency basis, whereby for each month
during which an Employee would be credited with at least one Hour of Service (or, in the
case of flight attendants, one trip), such Employee shall be credited with one hundred
ninety (190) Hours of Service.
These hours must be credited to Employees in the computation period during which the
duties were performed, or if no duties were performed, during which the applicable period of
absence occurred, and not when paid, if different. Credit must also be given, without
duplicating any hours described above, for each hour for which back pay, irrespective of
mitigation of damages, has been awarded or agreed to by the Company. These hours must be
credited in the computation period or periods to which the award or agreement pertains
rather than that in which the payment, award, or agreement was made.
In determining the number of Hours of Service to be credited to an Employee in the case
of a payment that is made or due to an Employee under the provisions of the paragraphs
above, the Committee shall apply the rules set forth in Department of Labor Regulations
2530.200 b-2(b) and (c), which rules are incorporated into and made a part of this Plan by
reference.
For purposes of determining whether an Employee has incurred a Break in Service as
defined in Section 2.1(e), the Committee shall credit an Employee with Hours of Service
during absence from work for maternity or paternity reasons that would otherwise have been
credited to such Employee but for such absence. For purposes of this Plan, an Employee
shall be deemed to be on maternity or paternity leave if the Employees absence from work is
(1) by reason of the pregnancy of the Employee, (2) by reason of the birth of a child of the
Employee, (3) by reason of the placement of a child with the Employee in connection with the
adoption of such child by the Employee, or (4) for purposes of caring for such child for a
period beginning immediately following such birth or placement. The Hours of Service
credited under this paragraph shall be limited to the lesser of (1) the number necessary to
prevent the Employee from incurring a Break in Service or (2) 501 Hours of Service. Hours
of Service credited under this paragraph shall be credited in the Plan Year in which the
absence begins, but if the Employee does not need those Hours of Service to prevent a Break
in Service in the Plan Year in which the absence began, then they shall be credited in the
immediately following Plan Year.
(t)
Individual Account
. The account or record maintained by the Committee
showing the monetary value of the individual interest in the Trust Fund of each Member,
former Member, and Beneficiary.
(u)
Investment Managers
. The qualified and acting Investment Managers, as
defined in ERISA, who under this Plan may be appointed by the Company to invest and manage
Plan assets as fiduciaries.
6
(v)
Member
. An Employee who has met the eligibility requirements for
participation in this Plan, as set forth in Article III hereof. A former Member is a Member
who has terminated employment with the Company but who has an Individual Account under the
Plan, and shall include those individuals who have an Individual Account under the Plan and
who were not employed by the Company, but who were formerly employed by Morris Air
Corporation.
(w)
Named Fiduciary
. The Committee shall be the Named Fiduciary designated to
manage the operation and administration of the Plan.
(x)
Normal Retirement Date
. The date on which a Member attains the age of sixty
(60) years.
(y)
Plan
. Southwest Airlines Co. 401(k) Plan, as amended from time to time.
(z)
Plan Administrator
. Such person or persons as designated by the Committee,
which shall be the Committee unless and until it designates such other person or persons.
(aa)
Plan Year
. The annual period beginning January 1st and ending December
31st, both dates inclusive of each year.
(bb)
Prior Plan
. The Southwest Airlines Co. 401(k) Plan, effective January 1,
1991, as heretofore amended and restated from time to time.
(cc)
Qualified Nonelective Contributions
. Contributions which may, at the
election of the Company, be made to the Plan by the Company in an amount necessary to assure
the Plans compliance with the deferral percentage test described in Section 4.5 hereof or
the contribution percentage test described in Section 4.6 hereof.
(dd)
Retirement
. Separation from service after a Member has reached his Normal
Retirement Date. Retirement shall be considered as commencing on the day immediately
following a Members last day of service.
(ee)
Rollover Contributions
. Contributions that may be made to the Plan by a
Member or Employee, as provided in Section 4.7 hereof.
(ff)
Rollover Contribution Account
. A separate subaccount to which is credited
a Members or Employees Rollover Contributions, if any, and any earnings attributable
thereto, adjusted to reflect any withdrawals, distributions, or investment losses
attributable thereto
(gg)
Salary Reduction Contributions
. Contributions made to the Plan by the
Company, at the election of a Member, in lieu of cash compensation, pursuant to a salary
reduction agreement, as provided in Sections 4.1 and 4.2 hereof.
(hh)
Salary Reduction Contribution Account
. A separate subaccount to which is
credited a Members Salary Reduction Contributions, Qualified Nonelective
7
Contributions, if any, and any earnings attributable thereto, adjusted to reflect any
withdrawals, distributions, or investment losses attributable thereto.
(ii)
Service
. A period or periods of employment by an Employee used in
determining eligibility for Plan participation or in determining the amount of benefits. If
the Company is a member of a controlled group of corporations (as defined in Section 414(b)
of the Code), is one of a group of trades or businesses (whether or not incorporated) which
are under common control (as defined in Section 414(c) of the Code), is a member of an
affiliated service group (as defined in Section 414(m) of the Code), or is otherwise
required to be aggregated with any entity pursuant to Section 414(o) of the Code and the
regulations issued thereunder, then Service shall include any employment with any member of
such controlled group of corporations, such group of trades or businesses under common
control, such affiliated service group, or such other entity required to be so aggregated,
including Service prior to the Effective Date.
(jj)
Trust
. Southwest Airlines Co. 401(k) Trust, as amended from time to time,
which was established to hold and invest Salary Reduction Contributions, Company Matching
Contributions, and Qualified Nonelective Contributions, if any, made under the Plan and
Prior Plan for the exclusive benefit of the Members included in the Plan from which the
benefits will be distributed.
(kk)
Trustee
. The qualified and acting Trustee under the Trust, who shall be
the fiduciary designated to invest and manage the Plan assets, other than those that may be
managed exclusively by an Investment Manager, and to operate and administer the Trust Fund.
(ll)
Valuation Date
. Each business day on which the financial markets are open
for trading activity.
(mm)
Vesting Service
. Vesting Service is the period of employment used in
determining eligibility for benefits. A year of Vesting Service shall be granted for each
Plan Year in which an Employee has completed 1,000 or more Hours of Service with the
Company, subject to the following exceptions:
(i) Vesting Service prior to January 1, 1973 shall be excluded.
(ii) Vesting Service completed after December 31, 1972 and prior to January 1,
1976 shall be excluded if such service would have been disregarded under the break
in service rules of the Prior Plan, as then in effect. For this purpose, break in
service rules are those rules that result in the loss of prior vesting because of
service termination or failure to complete a required period of service within a
specified time.
(iii) Prior to January 1, 1985, in the case of an Employee who has any Break in
Service, all years of Vesting Service incurred after such Break shall be disregarded
for purposes of measuring years of Vesting Service before such Break. However,
effective January 1, 1985 and thereafter, in the case of an Employee who has a Break
in Service, his years of Vesting Service before such
8
Break in Service shall not be taken into account until he has completed a year
of Vesting Service following his reemployment. In the case of an Employee who has
five (5) or more consecutive Breaks in Service, all years of Vesting Service
incurred after such Breaks in Service will be disregarded for purposes of measuring
years of Vesting Service before such Breaks in Service.
(iv) Prior to January 1, 1985, if an Employee who does not have any
nonforfeitable right to his Company Matching Contribution Account incurs a period of
consecutive Breaks in Service that equals or exceeds the aggregate number of years
of Vesting Service incurred before such period, then all of his prior years of
Vesting Service before such period shall no longer be credited to him. However,
effective January 1, 1985, and thereafter, if an Employee who does not have any
nonforfeitable right to his Company Matching Contribution Account incurs a period of
five or more consecutive Breaks in Service, then all of his prior years of Vesting
Service before such period shall no longer be credited to him.
2.2
Construction
. The masculine gender, where appearing in the Plan, shall be deemed
to include the feminine gender, unless the context clearly indicates to the contrary. The words
hereof, herein, hereunder, and other similar compounds of the word here shall mean and
refer to the entire Plan, not to any particular provision or section. The Plan and Trust shall
each form a part of the other by reference, and terms shall be used therein interchangeably.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1
Eligibility Requirements
. Every Employee who was a Member in the Prior Plan on
the day before the Effective Date shall continue to be a Member in the Plan. Except as otherwise
provided herein, every other Employee shall become a Member in the Plan as of the first Entry Date
concurrent with or next following such Employees completion of thirty (30) consecutive days of
Service, beginning on his employment commencement date. The employment commencement date is the
first day for which an Employee is entitled to be credited hereunder with an Hour of Service.
Notwithstanding the foregoing, non-resident aliens who receive no earned income from the Company
that constitutes income from sources within the United States shall not be eligible to participate
in the Plan. Furthermore, leased employees (as such term is defined in Section 2.1(n) hereof)
and Employees classified by the Company as interns shall not be eligible to participate in the
Plan. A person who is not treated as an Employee on the Companys books and records (such as a
person who as a matter of practice is treated by the Company as an independent contractor, but who
is later determined to be an Employee as a matter of fact) shall not be an eligible Employee during
any part of a Plan Year in which such person was not treated as an Employee, despite any
retroactive recharacterization.
3.2
Notification of Eligibility
. The Committee shall notify in writing each Employee
of the qualifications for eligibility and shall furnish each Employee a copy of such explanation of
the Plan as the Committee shall provide for that purpose. The Committee shall provide a notice
explaining the Employees rights and obligations under the automatic enrollment arrangement
provided under the Plan. The notice shall explain: (a) the Employees right to elect not to have
9
Salary Reduction Contributions, as described in Section 4.1 hereof, made on the Employees
behalf or to elect to have Salary Reduction Contributions made in a different percentage (including
an election of 0%) and (b) the manner in which Salary Reduction Contributions made under the
arrangement will be invested in the absence of any investment direction by the Employee in
accordance with Section 12.1 hereof. The notice shall also explain that the Employee shall be
given a reasonable period of time following the date of such notice to make an affirmative election
with respect to the percentage of Salary Reduction Contributions to be made (including an election
of 0%) and the manner and applicable percentages in which the Employee desires the Trustee to
invest such contributions.
3.3
Re-entry of Prior Members
. An Employee who terminates employment after becoming a
Member hereunder shall be eligible to participate immediately upon his completion of one Hour of
Service following his reemployment by the Company. An Employee who terminates employment after
satisfying the requirements of Section 3.1 hereof, but prior to the first Entry Date following the
satisfaction of such requirements, shall be eligible to participate immediately upon his completion
of one Hour of Service following his reemployment by the Company, or if later, the first Entry Date
following the satisfaction of such requirements.
ARTICLE IV
CONTRIBUTIONS
4.1
Salary Reduction Contributions
. Each Member may elect to have contributed on his
behalf to the Trust Fund, on a pre-tax basis, any whole percentage of his Annual Compensation that
is not less than one percent (1%) and that does not exceed fifty percent (50%). Salary Reduction
Contributions shall be elected pursuant to a salary reduction election, in accordance with Section
5.3 hereof. If, following notice to the Member, in accordance with Section 3.2 above, the
Committee fails to receive a proper election for a Member prior to the Members Deemed Election
Date, the Member shall, on his Deemed Election Date, be deemed to have made an election under this
Section 4.1 to have contributed on his behalf a percentage of his Annual Compensation equal to
three percent (3%). Notwithstanding any provision herein to the contrary, any percentage of Annual
Compensation elected (or deemed elected) to be contributed to the Trust Fund on the Members behalf
may not exceed the applicable dollar amount for such Plan Year, as provided in Section 402(g) of
the Code, adjusted for increases in the cost of living as provided in Section 402(g)(4) of the
Code. 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 Members paycheck and shall be credited to
the Salary Reduction Contribution Account of the Member as of each Allocation Date, as provided in
Section 6.1.
4.2
Catch-Up Contributions
. Each Member who has attained or would have attained age
fifty (50) prior to the close of the Members taxable year, and who has affirmatively elected, in
accordance with the provisions of Section 4.1, to have Salary Reduction Contributions made to the
Plan on his behalf, shall be deemed to have elected to have Catch-Up Contributions contributed on
his behalf to the Trust Fund on a pre-tax basis, in accordance with, and subject to the limitations
of, Section 414(v) of the Code. Except as otherwise provided under Sections 4.5, 4.6, 4.7 and 6.5
hereof, Catch-Up Contributions shall be made pursuant to a salary reduction election, in accordance
with Section 5.3 hereof. Catch-Up Contributions are at all times one
10
hundred percent (100%) vested and nonforfeitable. Catch-Up Contributions made on behalf of a
Member shall be added to the Trust Fund as soon as practicable after deduction from a Members
paycheck, and shall be credited to the Salary Reduction Contribution Account of the Member as of
each Allocation Date, as provided in Section 6.1. The Plan shall not be treated as failing to
satisfy any provision 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.
4.3
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 Members Salary Reduction Contributions, including, if applicable,
Catch-Up Contributions, not to exceed the specific amount set forth in the collective bargaining
agreement, if applicable, or otherwise established by the board of directors of the Company.
Company Matching Contributions shall be added to the Trust Fund as soon as practicable after
deduction of the applicable Salary Reduction Contributions, including, if applicable, Catch-Up
Contributions from a Members paycheck and credited, as of each Allocation Date, to the Company
Matching Contribution Account of each eligible Member who has elected to have Salary Reduction
Contributions, including, if applicable, Catch-Up Contributions made to the Trust Fund on his
behalf during the applicable period.
4.3
Qualified Nonelective Contributions
. The Company may, for each Plan Year,
contribute to the Trust Fund Qualified Nonelective Contributions. Qualified Nonelective
Contributions are at all times one hundred percent (100%) vested and nonforfeitable. Qualified
Nonelective Contributions shall be added to and become a part of the Trust Fund, and as of each
Allocation Date, shall be credited to the Individual Accounts of the Members, as provided in
Section 6.2.
4.4
Reduction of Excess Deferrals
. If a Members Salary Reduction Contributions
hereunder should exceed the applicable dollar amount set forth in Section 402(g) of the Code,
adjusted 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 Catch-Up Contributions
previously made and Salary Reduction Contributions 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 4.2 hereof during the Plan Year in
which such excess deferrals were made.
11
(b) If the Member is not eligible to make Catch-Up Contributions, as provided in
Section 4.2 hereof, or to the extent that recharacterization of such excess Salary Reduction
Contributions, together with Catch-Up Contributions previously made and Salary Reduction
Contributions 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), 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
paragraph (b) shall be made to the Member no later than the April 15th immediately following
the close of the Members 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 Members 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 Members Salary Reduction Contribution Account
or (ii) the Members excess deferrals for the Plan Year.
4.5
Deferral Percentage Test
.
(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 (not including Catch-Up
Contributions, if applicable), which shall be the ratio of the amount of such
Employees 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 Employees compensation (as defined in
Section 2.1(r) hereof) for such 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 who
were not included in the highly compensated deferral percentage, in (ii) above.
12
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
Employees deferral percentage shall be determined by aggregating his participation in all
such plans. In addition, if the Company maintains two (2) or more plans subject to the
deferral percentage test and such plans are treated as a single plan for purposes of the
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. If, however, the Company elects to apply
Section 410(b)(4)(B) in determining whether the Plan meets the requirements of Section
410(b)(1) of the Code, the Company may, in determining whether the Plan meets the
requirements of this Section 4.5, either elect to (A) exclude from consideration all
eligible Employees (other than Highly Compensated Employees) who have not met the minimum
age and service requirements of Section 410(a)(1)(A) of the Code or (B) perform the deferral
percentage test separately for the group of Employees who have met the minimum age and
service requirements of Section 410(a)(1)(A) of the Code and the group of Employees who have
not met the minimum age and service requirements of Section 410(a)(1)(A) of the Code.
(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 onefourth (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 4.2 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 Employees 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
Employees compensation (as defined in Section 2.1(r) hereof)
13
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
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
Members Salary Reduction Contribution Account (without regard to Catch-Up Contributions) or
(b) the Members 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 Members
contribution percentage under Section 4.6.
4.6
Contribution Percentage Test
.
(a)
Determination of Contribution Percentages
. As soon as administratively
feasible after the end of each Plan Year (or other applicable period) the Committee shall
determine:
(i)
Contribution Percentage
. The contribution percentage for each
Employee who is then eligible to receive Company Matching Contributions, which shall
be the ratio of the amount of such Employees Company Matching Contributions for
such Plan Year to such Employees compensation (as defined in Section 2.1(r) hereof)
for such Plan Year;
14
(ii)
Highly Compensated Contribution Percentage
. The highly
compensated contribution percentage, which shall be the average of the
contribution percentages for all Highly Compensated Employees then eligible for
Company Matching Contributions; and
(iii)
Nonhighly Compensated Contribution Percentage
. The nonhighly
compensated contribution percentage, which shall be the average of the
contribution percentages for all Employees then eligible for Company Matching
Contributions who were not included in the highly compensated contribution
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 contribution percentage test, then such
Employees contribution percentage shall be determined by aggregating his participation in
all such plans. In addition, if the Company maintains two (2) or more plans subject to the
contribution percentage test and such plans are treated as a single plan for purposes of the
requirements for qualified plans under either Code Section 410(b) or 401(a)(4), then such
plans are treated as a single plan for purposes of the contribution percentage test. If,
however, the Company elects to apply Section 410(b)(4)(B) in determining whether the Plan
meets the requirements of Section 410(b)(1) of the Code, the Company may, in determining
whether the Plan meets the requirements of this Section 4.6, either elect to (A) exclude
from consideration all eligible Employees (other than Highly Compensated Employees) who have
not met the minimum age and service requirements of Section 410(a)(1)(A) of the Code or (B)
perform the contribution percentage test separately for the group of Employees who have met
the minimum age and service requirements of Section 410(a)(1)(A) of the Code and the group
of Employees who have not met the minimum age and service requirements of Section
410(a)(1)(A) of the Code.
(b)
Limitation on Highly Compensated Contribution Percentage
. In no event
shall the highly compensated contribution percentage exceed the greater of: (1) a
contribution percentage equal to one and onefourth (1
1
/
4
) times the nonhighly compensated
contribution percentage or (2) a contribution percentage equal to two (2) times the
nonhighly compensated contribution percentage but not more than two (2) percentage points
greater than the nonhighly compensated contribution percentage.
(c)
Application of Qualified Nonelective Contributions
. If the above
contribution percentage test would otherwise be violated as of the end of the Plan Year,
then subject to satisfaction of the conditions described in Section 1.401(m)-1(b)(5) of the
Treasury Regulations, the contribution percentage, as defined in (a) above, shall instead
be the ratio of the sum of the Employees Company Matching Contributions, Qualified
Nonelective Contributions, if any, and to the extent necessary to satisfy the contribution
percentage test, Salary Reduction Contributions for the applicable Plan Year to the
Employees compensation (as defined in Section 2.1(r) hereof) for the applicable Plan Year.
Any Salary Reduction Contributions or Qualified Nonelective Contributions so utilized to
satisfy the contribution percentage test shall be excluded from consideration for purposes
of the deferral percentage test described in Section 4.5.
15
(d)
Distribution of Excess Aggregate Contributions
. If after consideration of
applicable Salary Reduction Contributions and Qualified Nonelective Contributions, if any,
as described above, the contribution percentage test would still be violated as of the end
of the Plan Year, then notwithstanding any other provision hereof, every Company Matching
Contribution included in the highly compensated contribution percentage for a Member whose
contribution percentage is greater than the permitted maximum shall automatically be revoked
to the extent necessary to comply with such contribution percentage test and the amount of
such contribution, to the extent revoked, shall constitute an excess aggregate
contribution to be distributed to such Member (with earnings thereon) or forfeited, if
applicable, no later than the last day of the Plan Year following the Plan Year for which
such contribution was made. Excess aggregate contributions are allocated to the Highly
Compensated Employees with the largest amounts of Employer contributions taken into account
in calculating the contribution percentage test for the Plan Year in which the excess arose,
beginning with the Highly Compensated Employee with the largest amount of such Employer
contributions and continuing in descending order until all excess aggregate contributions
have been allocated. For purposes of the preceding sentence, the largest amount is
determined after first determining required distributions under Section 4.4 hereof, and then
determining excess contributions under Section 4.5. In the event there is a loss allocable
to an excess aggregate contribution, any distribution to a Member as required by this
Section shall be no greater than the lesser of: (a) the value of the Members Company
Matching Contribution Account or (b) the Members excess aggregate contribution for the Plan
Year.
4.7
Rollover Contributions
.
(a)
Direct Rollovers
. A Member who is entitled to receive an eligible
rollover distribution, as such term is defined in Section 15.6 hereof, 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
. Any Member who has
distributed to him an amount that qualifies as an eligible rollover distribution, as such
term is defined in Section 15.6 hereof, 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
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
16
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). Such transfer must occur on or before the
60
th
day following the Members receipt of such distribution, or such later date
as permitted by the Internal Revenue Service for distributions on and after January 1, 2002.
(c)
Method of Transfer
. The Committee shall develop such procedures, and may
require such information from a Member desiring to make such a transfer, as it deems
necessary or desirable to determine that the proposed transfer will meet the requirements of
this Section. Upon approval by the Committee, the amount transferred shall be deposited in
the Trust and shall be credited, as of the Valuation Date next following such transfer, to a
Rollover Contribution Account for the Member.
(d)
Rollover Contributions Prior to Eligibility as a Member
. An Employee,
prior to satisfying the eligibility conditions of the Plan, as set forth in Section 3.1
hereof, may make a Rollover Contribution to the Trust Fund to the same extent and in the
same manner as a Member. If an Employee makes a Rollover Contribution to the Trust Fund
prior to satisfying the Plans eligibility conditions, the Committee and Trustee shall treat
the Employee as a Member for all purposes of the Plan except for purposes of sharing in
Company Matching Contributions, Salary Reduction Contributions, or Qualified Nonelective
Contributions under the Plan until he actually becomes a Member. If the Employee terminates
employment prior to becoming a Member, the Trustee will distribute his Rollover Contribution
Account to him in accordance with the provisions of Article XV hereof as if such Employee
were a Member of the Plan.
(e)
Vesting and Distribution of Rollover Contribution Account
. Each Members
Rollover Contribution Account shall be 100% vested and nonforfeitable at all times and shall
share in asset adjustments pursuant to Section 5.2 herein, but shall not share in Company
contributions. Upon termination of employment, the total amount of a Members Rollover
Contribution Account shall be distributed in accordance with Article XV hereof.
ARTICLE V
ADJUSTMENT OF INDIVIDUAL ACCOUNTS
5.1
Individual Accounts
. The Committee shall establish an Individual Account for each
Member showing the monetary value of the individual interest in the Trust Fund of each Employee,
former Employee, and Beneficiary. The Individual Account of each Member shall be composed of a
Company Matching Contribution Account, to which Company Matching Contributions, if any, shall be
credited; a Salary Reduction Contribution Account, to which Salary Reduction Contributions, if any,
including 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 Sections 4.5 and 4.6 hereof, if any, shall be
credited; and, if applicable, a Rollover Contribution Account. Such accounts are primarily for
accounting purposes and do not require a segregation of the Trust Fund, except as otherwise
provided herein.
17
5.2
Method of Adjustment
. As of each Valuation Date, before any restoration of
accounts as required pursuant to Section 15.3 hereof and before taking into account contributions
of the Company for the period since the last preceding Valuation Date, the Committee or the
Trustee, as directed by the Committee, shall value the assets of each investment fund and adjust
the Individual Accounts of all Members who have elected to participate in such investment fund as
follows:
(a) The Committee shall determine the market value of the investment fund, including
the effect of expenses of administration and other charges against such investment fund
since the last Valuation Date.
(b) The Committee shall determine the total aggregate value of all Individual Accounts
participating in the investment fund as shown in its records as of the prior Valuation Date.
The Individual Account balances of Employees, former Employees, and Beneficiaries shall be
reduced by any amounts paid to them from the investment fund since the last Valuation Date.
(c) The Committee shall then adjust the value of each Individual Account participating
in the investment fund by crediting each Individual Account with its proportion of the
difference between (a) and (b) if (a) is the larger or charging it with its proportion of
the difference between (a) and (b) if (b) is larger; the proportion to be so credited or
charged to each Individual Account shall be calculated by multiplying the difference between
(a) and (b) by a fraction, the numerator of which is the then value of said Individual
Account and the denominator of which is the then aggregate value of all Individual Accounts
participating in such investment fund.
5.3
Salary Reduction Elections
. Each Member who desires to make Salary Reduction
Contributions (including an election to contribute 0% of his Annual Compensation) shall indicate
such intent by making a salary reduction 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 payroll period. Such election must be made in the manner and within the time period
prior to such Entry Date (or subsequent payroll period) prescribed by the Committee. Each Member
with respect to whom a deemed election has been made pursuant to Section 4.1 hereof shall be deemed
to have filed a salary reduction election to be effective as of the Deemed Election Date. Each
Member with respect to whom a deemed election has been made pursuant to Section 4.2 hereof shall be
deemed to have filed a salary reduction election to be effective with respect to Catch-Up
Contributions made on his behalf. Salary reduction elections (including deemed elections) shall be
effective for each payroll period thereafter until modified or amended, as provided below.
Salary reduction elections (including deemed elections) shall constitute a payroll withholding
agreement between the Member and the Company, and shall constitute authorization for the reduction
in Annual Compensation described above. The terms of such election shall evidence the Members
intent to have the Company withhold from his compensation each payroll period any whole percentage
of his Annual Compensation, subject to the applicable limitations of Article IV. The Company will
make a contribution to the Trust Fund on behalf of the Member for each payroll period in an amount
equal to the total amount by which the Members
18
Annual Compensation from the Company was reduced during such payroll period pursuant to a
salary reduction election.
Notwithstanding any provision of this Section 5.3 to the contrary, salary reduction elections
shall be governed by the following general guidelines:
(a) A salary reduction election shall be made in the manner determined by the
Committee. All salary reduction elections (including deemed elections) shall apply to each
payroll period during which such election is in effect. Upon termination of employment,
such election will become void.
(b) A Member may revoke a salary reduction election (including a deemed election under
Section 4.1) at any time upon advance notice to the Committee, within the time period
established by the Committee, and thus discontinue all future withholding thereafter. A
revocation of a salary reduction election under Section 4.1 shall automatically revoke any
deemed election under Section 4.2. Following the revocation of a salary reduction
election, a Member may elect to resume withholding effective as of the first day of the
first full payroll period next following the payroll period in which the revocation occurs,
or as of the first day of any payroll period thereafter next following timely receipt by the
Committee of such notice. A resumption of withholding following the revocation of a salary
reduction election may be made only upon advance notice to the Committee, within the time
period established by the Committee. A Member may increase the percentage to be withheld
from his Annual Compensation or decrease the percentage to be withheld from his Annual
Compensation upon advance notice to the Committee, within the time period established by the
Committee, and in the manner prescribed by the Committee, such increase or decrease to be
effective as of the first day of the first full payroll period next following timely receipt
by the Committee of such notice. Any revocation of or change in the terms of a salary
reduction election shall be made in the manner prescribed by the Committee.
(c) The Company may unilaterally amend or revoke a salary reduction election (including
a deemed election) 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 insure that a Members 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 4.2 hereof have been satisfied with respect to the amount that may be
withheld and contributed on behalf of a Member. Furthermore, a deemed election in effect
with respect to any Member shall automatically terminate upon the date of a withdrawal from
such Members Salary Reduction Contribution Account in accordance with the provisions of
Section 11.2(e) hereof.
19
ARTICLE VI
ALLOCATIONS
6.1
Salary Reduction, Company Matching, and Rollover Contributions
. Salary Reduction
Contributions and Company Matching Contributions shall be credited to the Individual Accounts of
the Members and former Members, as of each Allocation Date, in accordance with each Members or
former Members salary reduction election and the Company Matching Contribution, if any, made with
respect to such Salary Reduction Contributions. Rollover Contributions shall be credited to the
Individual Accounts of Members as provided in Section 4.7 hereof.
6.2
Qualified Nonelective Contributions
. As of each Allocation Date, but after any
adjustment of Individual Accounts as provided in Section 5.2 and other applicable provisions
herein, the Committee shall allocate Qualified Nonelective Contributions, if any, for the Plan Year
ending with said Allocation Date to the Individual Accounts of all Members and former Members who
are not Highly Compensated Employees for the Plan Year. The amount of the contribution allocated
under this Section 6.2 to the Individual Account of each such Member or former Member shall be in
the proportion that his Annual Compensation bears to the total Annual Compensation of all such
Members and former Members.
6.3
Forfeitures
. If a Member or former Member forfeits a portion of his Individual
Account as provided in Section 10.3 or Section 11.2(e) hereof, such forfeited amount shall be used
first to restore the Individual Accounts of rehired Members as required under Section 15.3 hereof.
Any remaining forfeitures shall be used to reduce the Company Matching Contribution. If a Member
or former Member who does not have any nonforfeitable right to his Individual Account terminates
his employment and thereby forfeits his Individual Account, then in the event such Member or former
Member is reemployed before he has incurred five (5) or more consecutive Breaks in Service, his
Individual Account that was forfeited shall be restored by the Company at the time of his
reemployment.
6.4
Notification to Members
. At least annually, the Committee shall advise each
Member, former Member, and Beneficiary for whom an Individual Account is held hereunder of the then
balance in such account.
6.5
Maximum Annual Addition to Account or Benefit
.
(a)
Limitations
. If the Employer maintains, or has ever maintained, this Plan
and one or more other qualified defined contribution plans, the Annual Additions (as defined
in subsection (b) below) allocated under this Plan to any Members Individual Account shall
be limited in accordance with the allocation provisions of this subsection 6.5(a).
The amount of the Annual Additions that may be allocated under this Plan to the
Individual Account of any Member as of any Allocation Date, together with Annual Additions
allocated on behalf of any such member under any other defined contribution plan of the
Employer for the Limitation Year (as defined in subsection (b) below) in which such
Allocation Date occurs, shall not exceed the Maximum Permissible DC
20
Amount (as defined in subsection (b) below), based upon Annual Compensation up to such
Allocation Date for such Limitation Year.
If the Annual Additions allocated on behalf of a Member or former Member under this
Plan and any other defined contribution plan of the Employer are to be reduced as of any
Allocation Date as a result of exceeding the limitations described in the next preceding two
paragraphs, such reduction shall be, to the extent required, effected by first reducing the
Annual Additions to be allocated on behalf of such Member or former Member under such other
defined contribution plan of the Employer as of such Allocation Date.
If as a result of the first three paragraphs of this subsection 6.5(a) the allocation
of Annual Additions under this Plan is to be reduced, such reduction shall be made as
follows:
(i) To the extent that the excess Annual Additions of such Member do not exceed
the applicable dollar amount under Section 414(v) of the Code, reduced by Catch-Up
Contributions previously made and Salary Reduction Contributions previously treated
as Catch-Up Contributions for the taxable year in which the Plan Year ends, whether
under this Plan or another elective deferral program (as defined under Section
402(g)(3) of the Code), the amount of the excess Annual Additions of such Member
shall be recharacterized as Catch-Up Contributions, if such Member is otherwise
eligible to make Catch-Up Contributions under Section 4.2 during the taxable year in
which the excess Annual Addition arises.
(ii) To the extent permitted under applicable Treasury Regulations, the amount
of such reduction consisting of Salary Reduction Contributions, and earnings
attributable thereto, shall be paid to the Member or former Member as soon as
administratively feasible.
(iii) If an excess amount still exists after applying subparagraph (1), the
excess amount shall be allocated to a suspense account as of such Allocation Date
and held therein until the next succeeding Valuation Date or Dates on which Company
Matching Contributions or Qualified Nonelective Contributions, if any, may be
allocated under the provisions of the Plan, at which time such excess amount shall
be used to reduce such Company Matching Contributions and Qualified Nonelective
Contributions, if any. In the event of termination of the Plan, the suspense
account shall revert to the Company.
(iv) If a suspense account is in existence at any time during a Limitation Year
pursuant to this Section, it will not participate in the allocation of the Trust
Funds investment gains and losses.
(b)
Definitions Applicable to Section 6.5
. For purposes of Section 6.5, the
following definitions shall apply:
21
(i)
Annual Additions
. Annual Additions are the sum of the following
amounts allocated on behalf of a Member or former Member for a Limitation Year:
(1) all Employer contributions;
(2) forfeitures, if any;
(3) all Employee contributions, other than Catch-Up Contributions; and
(4) amounts allocated after March 31, 1984, to an individual medical
benefit account, as defined in Code Section 415(l)(2), which is part of a
pension or annuity plan maintained by the Employer, and amounts derived from
contributions paid or accrued after December 31, 1985, in taxable years
ending after such date, which are attributable to post-retirement medical
benefits allocated to the separate account of a key employee (as defined in
Code Section 419A(d)(3)) under a welfare benefit plan (as defined in Code
Section 419(e)) maintained by the Employer.
The Annual Additions for any Limitation Year beginning before January 1, 1987,
shall not be recomputed to treat all Employee Contributions as Annual Additions.
Nothing in this definition of Annual Additions shall be construed as requiring the
allocation of forfeitures to the Individual Accounts of Members, former Members, or
Beneficiaries rather than to reduce Company Matching Contributions, as provided in
Section 6.3 hereof.
(ii)
Employer
. Employer shall mean, in addition to the Company (as
defined in Section 2.1(i) hereof, all members of a controlled group of corporations
(as defined in Section 414(b) of the Code as modified by Section 415(h)), all
commonly controlled trades or businesses (as defined in Section 414(c) as modified
by Section 415(h)) or affiliated service groups (as defined in Section 414(m)) of
which the Company is a part, and any other entity required to be aggregated with the
Company pursuant to regulations under Section 414(o) of the Code.
(iii)
Limitation Year
. The Limitation Year shall be the twelve (12)
consecutive month period ending on the last day of December or any other twelve (12)
consecutive month period for all qualified plans of the Company pursuant to a
written resolution the Company adopts.
(iv)
Maximum Permissible DC Amount
. The Maximum Permissible DC Amount
for a given Limitation Year is equal to the lesser of (i) 100% of compensation or
(ii) $46,000, as adjusted for increases in the cost-of-living under section 415(d)
of the Code. The compensation limit referred to in this subparagraph (iv) 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. For
22
purposes of this subparagraph (b)(iv), 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 Companys trade or business) for which
the Company is required to furnish the Employee a written statement under Sections
6041(d), 6051(a)(3), and 6052 of the Code without regard to any rules under Section
3401(a) that limit the remuneration included in wages based on the nature or
location of the employment or the services performed. For Limitation Years
beginning after December 31, 1997, compensation shall include any amounts not
includable in the gross income of an Employee pursuant to Sections 125, 132(f)(4),
402(e)(3), 403(b), 457, or 402(h)(l)(B) of the Code applicable to such Limitation
Year. If a short Limitation Year is created because of an amendment changing the
Limitation Year to a different twelve (12) consecutive month period, the dollar
limitation referred to above is multiplied by a fraction, the numerator of which is
equal to the number of months in the short Limitation Year and the denominator of
which is twelve.
ARTICLE VII
RETIREMENT
7.1
Normal or Late Retirement
. A Member, upon reaching his Normal Retirement Date for
the purposes of this Plan, shall be one hundred percent (100%) vested in his Individual Account,
and such amount contained therein shall be nonforfeitable. If a Member continues in the service of
the Company beyond his Normal Retirement Date, he shall continue to participate in the Plan.
7.2
Benefit
. Upon Retirement (whether normal or late Retirement in accordance with
Section 7.1), a Member shall be entitled to the entire amount to the credit of his Individual
Account as of the Valuation Date concurrent with or next following his date of Retirement,
including his portion, if any, of Qualified Nonelective Contributions allocated after his date of
Retirement, adjusted for earnings and losses, if any, that accrue to the Valuation Date immediately
preceding the date of distribution, if later. Upon his Retirement under this Article VII, a Member
shall receive the benefits to which he is entitled at the time and in the manner provided in
Article XV hereof.
ARTICLE VIII
DEATH
8.1
Death of Member
. Upon the death of a Member while employed by the Company, such
Members Individual Account shall thereupon become one hundred percent (100%) vested, and the
amount contained therein shall be nonforfeitable.
8.2
Designation of Beneficiary
. Each Member and former Member may, from time to time,
designate one or more Beneficiaries and alternate Beneficiaries to receive benefits pursuant to
this Article in the event of the death of such Member or former Member. Such designation shall be
made in writing upon a form provided by the Committee and shall be effective only when filed with
the Committee. The last such designation filed with the Committee shall control.
23
If a member is married, his spouse shall automatically be designated his Beneficiary;
provided, however, a Beneficiary other than his spouse may be designated if (1) his spouse consents
in writing to such designation, the consent acknowledges the effect of such designation, and the
designation is witnessed by a member of the Committee or a notary public; or (2) it is established
to the satisfaction of the Committee that there is sufficient reason why the consent may not be
obtained. Notwithstanding the foregoing, divorce after the filing of a designation or designations
that name the spouse as beneficiary shall be deemed to revoke such designation or designations if
written notice of such divorce is received by the Committee before payment has been made in
accordance with existing designation or designations on file with the Committee.
8.3
Benefit
. Upon the death of a Member or former Member, his designated Beneficiary
shall be entitled to the entire amount to the credit of his Individual Account as of the Valuation
Date concurrent with or next following his date of death including his portion, if any, of
Qualified Nonelective Contributions allocated after the date of his death, adjusted for earnings
and losses, if any, that accrue to the Valuation Date immediately preceding the date of
distribution, if later. Payment shall be made at the time and in the manner provided in Article XV
hereof.
8.4
No Beneficiary
. If a Member or former Member dies without a designated
Beneficiary surviving him, or if all his Beneficiaries die before receiving the payment to which
they are entitled, then any amounts to which such Member, former Member, or Beneficiary is entitled
hereunder shall be paid to his estate.
For the purpose of this Plan, the production of a certified copy of the death certificate of
any Employee or other person shall be sufficient evidence of death, and the Committee shall be
fully protected in relying thereon. In the absence of such proof, the Committee may rely upon such
other evidence of death as it deems necessary or advisable.
ARTICLE IX
DISABILITY
9.1
Disability
. If a Members employment with the Company terminates as a result of
his Disability, such Members Individual Account shall thereupon become one hundred percent (100%)
vested, and the amount contained therein shall be nonforfeitable.
9.2
Benefit
. In the event of the Disability of a Member or former Member, he shall be
entitled to the entire amount to the credit of his Individual Account as of the Valuation Date
concurrent with or next following the date on which his termination of employment occurs as a
result of his Disability including his portion, if any, of Qualified Nonelective Contributions
allocated after the date of his termination of employment, adjusted for earnings and losses, if
any, that accrue to the Valuation Date immediately preceding the date of distribution, if later.
Payments shall be made at the time and in the manner provided in Article XV hereof.
ARTICLE X
TERMINATION OF EMPLOYMENT AND FORFEITURES
10.1
Eligibility and Benefits
.
24
(a)
Salary Reduction, Rollover and Qualified Nonelective Contributions
. If a
Members employment with the Company shall terminate for any reason other than his
Retirement under Article VII, death under Article VIII, or Disability under Article IX, such
Member shall be entitled to all of his Salary Reduction Contribution Account and all of his
Rollover Contribution Account as of the Valuation Date concurrent with or next following the
date on which his termination of employment occurs, including his portion, if any, of Salary
Reduction Contributions and Qualified Nonelective Contributions allocated after the date of
his termination of employment, adjusted for earnings and losses, if any, that accrue to the
Valuation Date immediately preceding the date of distribution, if later.
(b)
Company Matching Contributions
. In addition, such Member shall be entitled
to a percentage of the amount in his Company Matching Contribution Account as of the
Valuation Date concurrent with or next following the date on which his termination of
employment occurs, including his portion, if any, of Company Matching Contributions
allocated after the date of his termination of employment, adjusted for earnings and losses,
if any, that accrue to the Valuation Date immediately preceding the date of distribution, if
later. The percentage of a Members Company Matching Contribution Account to which he is
entitled shall be determined in accordance with the following schedule:
|
|
|
|
|
|
|
Percentage
|
Completed Years of Service
|
|
Payable
|
Less than 1 year
|
|
|
0
|
%
|
1 year but less than 2 years
|
|
|
20
|
%
|
2 years but less than 3 years
|
|
|
40
|
%
|
3 years but less than 4 years
|
|
|
60
|
%
|
4 years but less than 5 years
|
|
|
80
|
%
|
5 years or more
|
|
|
100
|
%
|
The provisions of this paragraph (b) shall be subject to the provisions of Section 17.3
hereof, which shall be given full effect.
10.2
Time of Payment
. The amount to which a Member shall be entitled under Section
10.1 shall be paid to him at the time and in the manner provided in Article XV hereof.
10.3
Forfeitures
. A Member to whom Section 10.1 is applicable shall forfeit that
portion of the amount in his Individual Account to which he is not entitled under Section 10.1, and
the amount thus forfeited shall be used to reduce Company Matching Contributions pursuant to the
provisions of Section 6.3. A Member who does not have any nonforfeitable right to his Individual
Account shall be deemed to have received a cashout distribution pursuant to Section 15.3 hereof,
and shall forfeit the amount in such Individual Account in the Plan Year in which his 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
25
hundred percent (100%) vested in such Individual Account and who does not receive a cashout
distribution under Section 15.3, shall forfeit that portion of his Individual Account to which he
is not entitled under Section 10.1 in the Plan Year in which he incurs five (5) consecutive Breaks
in Service.
10.4
Forfeitures for Cause
. In the event a Member who has not completed at least
three (3) years of Vesting Service is discharged due to his dishonest or criminal act (proven by
conclusive evidence to the unanimous satisfaction of the Committee) or due to embezzlement, fraud,
or dishonesty against and damaging to the Company whereby the reasons for such discharge are
confirmed by resolution of the board of directors or other governing authority of the Company, the
entire amount credited to the benefit of such Member in his Company Matching Contribution Account
shall be forfeited and neither he nor his Beneficiary shall be entitled to any benefit hereunder
with respect to such amounts. Likewise, any amounts credited to, but not distributed from, the
Company Matching Contribution Account of a former Member who has not completed at least three (3)
years of Vesting Service shall be forfeited upon the discovery of any embezzlement, fraud, or
dishonesty of such former Member against and damaging to the Company. Notwithstanding the
foregoing, in the event the Plan is top-heavy for any Plan Year, pursuant to Section 19.2 hereof,
the provisions of Section 10.1 shall supersede this Section 10.4 and shall be controlling for all
purposes hereunder.
ARTICLE XI
WITHDRAWALS AND LOANS
11.1
Loans to Members
.
(a)
General
. Subject to such rules and regulations as may from time to time be
promulgated by the Committee, the Committee upon application of a Member may, in its sole
and absolute discretion, direct the Trustee to make a loan or loans to such Member from his
Rollover Contribution Account, and upon depletion of the funds in his Rollover Contribution
Account, from his Salary Reduction Contribution Account upon such terms as the Committee
deems appropriate, subject to the following requirements.
The maximum amount that may be loaned is the lesser of (i) $50,000.00, reduced as
provided below, or (ii) one-half of the sum of the value of the Members Rollover
Contribution Account and the value of the Members Salary Reduction Contribution Account as
of the Valuation Date next preceding the date on which the Committee receives the Members
loan application. The $50,000.00 limitation shall be reduced by the excess (if any) of:
(i) the highest outstanding balance of loans from the Plan to the Member during
the one-year period ending on the day before the date on which such loan was made,
over
(ii) the outstanding balance of loans from the Plan to the Member on the date
on which such loan was made.
The minimum amount that may be loaned is the sum of: (i) One Thousand and No/100
Dollars ($1,000.00) and (ii) an amount equal to the Plans loan administration fee
26
in effect on the date on which the loan is made. Only one loan from the Plan per
calendar year may be approved for any Member, and no more than one such loan may be
outstanding at any time. Notwithstanding the foregoing, if, immediately prior to the merger
of the Morris Air Corporation Employee Retirement Plan (the Morris Air Plan) into this
Plan, a Member had an outstanding loan under this Plan and an outstanding loan under the
Morris Air Plan, then both such loans may remain outstanding. Loans shall be granted by the
Committee in a uniform and nondiscriminatory manner. Each loan shall bear a reasonable rate
of interest and be adequately secured and shall by its terms require repayment in no later
than five years, unless such loan is used to acquire any dwelling unit that within a
reasonable time is to be used (determined at the time the loan is made) as a principal
residence of the Member. All loans shall be repaid pro rata to the applicable account from
which the loan proceeds were paid pursuant to a salary deduction procedure established by
the Company unless the Member is on an authorized leave of absence or transfers to a
location that does not participate in a salary deduction procedure, in which case payment
shall be made to the principal office of the Company by check.
All loans to Members granted under this provision are to be considered a directed
investment of such Member. The loan shall remain an asset of the Trust, but to the extent
of the outstanding balance of any such loan at any time, the Rollover Contribution Account
and, if applicable, Salary Reduction Contribution Account of the Member to whom such loan is
made alone shall share in any interest paid on such loan and alone shall bear any expense or
loss incurred in connection with such loan. The Trustee may retain any principal or
interest paid on any such loan in an interest-bearing segregated account held on behalf of
the Member to whom such loan is made until the Trustee deems it appropriate to add such
amounts to a Members Rollover Contribution Account, and if applicable, Salary Reduction
Contribution Account. Each loan applicant shall receive a clear statement of the charges
involved in each loan transaction. This statement shall include the dollar amount and
annual interest rate of the finance charge. Any outstanding loan or loans to a Member
shall, if not paid when due, be liquidated out of the interest of such Member; provided,
however, that no such liquidation shall occur prior to the time a Member is entitled to
receive a distribution under Article VII, VIII, IX or X hereof or a withdrawal under Section
11.2(b) hereof. No distribution shall be made to any Member or former Member, or to a
Beneficiary or Beneficiaries, or the estate of a Member unless and until all unpaid loans to
such Member, together with interest, have been liquidated, as described above, or paid in
full.
(b)
Qualified Hurricane Loans
. Notwithstanding any provision of this Plan to
the contrary, any Member whose principal place of abode was located in a Hurricane Disaster
Area on the date applicable to such hurricane, as indicated below, and who sustained an
economic loss by reason of such hurricane, shall be eligible to request a Qualified
Hurricane Loan, regardless of any other outstanding loans from this Plan.
Applicable Date for Location of Principal Place of Abode
|
|
|
|
|
Hurricane Katrina
|
|
August 28, 2005
|
Hurricane Rita
|
|
September 23, 2005
|
Hurricane Wilma
|
|
October 23, 2005
|
27
For purposes of this subsection (b), a Member shall be deemed to have sustained an
economic loss on account of loss, damage to, or destruction of real or personal property
from fire, flooding, looting, vandalism, theft, wind, or other cause; loss related to
displacement from such Members home; loss of livelihood due to temporary or permanent
layoff, and such other economic loss as the Committee, in its sole discretion, shall
determine. A Qualified Hurricane Loan is a loan from the Plan that is made to a Member on
or before December 31, 2006, in an amount that does not exceed the lesser of: (1) one
hundred percent (100%) of such Members vested Individual Account balance or (2) $100,000,
reduced by the excess of:
(i) the highest outstanding balance on loans from the Plan to the Member during
the one-year period ending on the day before the date on which such loan was made,
over
(ii) the outstanding balance of loans from the Plan to the Member on the date
on which such loan was made.
A Qualified Hurricane Loan made with respect to Hurricane Katrina must be made on or
after September 24, 2005, and a Qualified Hurricane Loan made with respect to Hurricanes
Rita or Wilma must be made on or after December 21, 2005.
(c)
Suspension of Plan Loans
. Any Member who is eligible to receive a
Qualified Hurricane Loan, as set forth in subsection (b) above, may suspend for one year any
loan payments under an outstanding loan from the Plan to such Member originally due during
the following periods:
(i) August 25, 2005 through December 31, 2006 for Members whose principal place
of abode was located in the Hurricane Katrina Disaster Area;
(ii) September 23, 2005 through December 31, 2006 for Members whose principal
place of abode was located in the Hurricane Rita Disaster Area; and
(iii) October 23, 2005 through December 31, 2006 for Members whose principal
place of abode was located in the Hurricane Wilma Disaster Area.
After any period during which a Member elects to suspend the payment(s) on an
outstanding loan, the outstanding balance of the loan(s) shall be reamortized to include the
interest accruing during such delay. Any delay elected by a Member shall increase the
repayment period for such loan, and the maximum repayment period determined under subsection
(a) above for such loan shall be increased by the period of up to one year when no payments
were made. Notwithstanding subsection (a) above, a Member may pledge up to 100% of his
Individual Account as collateral for a Qualified Hurricane Loan.
28
(d)
Hurricane Disaster Areas
. For purposes of subsections (b) and (c) above,
the following Hurricane Disaster Areas shall apply:
Hurricane Katrina Disaster Area
: The States of Alabama, Florida,
Louisiana and Mississippi.
Hurricane Rita Disaster Area:
The States of Louisiana and Texas.
Hurricane Wilma Disaster Area:
The State of Florida.
11.2
Withdrawals.
(a)
Financial Hardship
. A Member may, upon the approval of the Committee,
withdraw on account of financial hardship any portion of his Rollover Contribution Account
and upon depletion of the funds in his Rollover Contribution Account, any portion of his
Salary Reduction Contribution Account other than amounts attributable to Qualified
Nonelective Contributions, if any, and income on such Members Salary Reduction
Contributions and Qualified Nonelective Contributions, if any. A Member may not withdraw,
on account of hardship, amounts in his Company Matching Contribution Account. A Member who
wishes to request a hardship withdrawal shall file with the Committee a written request for
withdrawal on a form provided by the Committee. The Committee shall adopt uniform and
nondiscriminatory rules regarding the granting of such requests and shall evaluate hardship
requests made under this Section. For purposes of this Plan, a financial hardship means an
immediate and heavy financial need of the Member for which funds are not reasonably
available from other resources of the Member. The determination of whether a Member suffers
sufficient hardship to justify the granting of his written request and of the amount
permitted to be withdrawn under this Section shall be made in the sole and absolute
discretion of the Committee after a full review of the Members written request and evidence
presented by the Member showing financial hardship. Upon a Members receipt of a withdrawal
for financial hardship, such Member shall be prohibited from making Salary Reduction
Contributions, including Catch-Up Contributions, if applicable, for a period of at least six
(6) months, beginning on the date on which the hardship withdrawal is made. A Member may
elect to resume Salary Reduction Contributions, including Catch-Up Contributions, if
applicable, under this Plan as of the first day of any new payroll period following the last
day of such six (6) month period by filing a new salary reduction election within the time
period prior to the first day of such payroll period established by the Committee.
If approved by the Committee, any withdrawal for financial hardship may not exceed the
amount deemed necessary to meet the immediate financial need created by the hardship,
including any amounts necessary to pay any federal, state, or local income taxes or
penalties reasonably anticipated to result from the withdrawal. The request of any Member
for a hardship withdrawal shall be deemed necessary to meet the immediate financial need of
the Member if the Member has theretofore (i) obtained all currently available distributions,
other than hardship distributions, (ii) obtained all nontaxable loans permitted under all
plans maintained by the Company; and (iii) agreed to suspend his or her Salary Reduction
Contributions, including Catch-Up Contributions, if applicable,
29
under this Plan and elective contributions and employee contributions under all other
plans (other than a health or welfare benefit plan) maintained by the Company for a period
of at least six (6) months following receipt of the hardship distribution. A Member may
elect to resume Salary Reduction Contributions, including Catch-Up Contributions, if
applicable, under this Plan in the manner described hereinabove and may elect to resume
elective contributions and employee contributions under all other plans in accordance with
their respective terms.
Notwithstanding the foregoing, a request for a hardship withdrawal will generally be
treated as necessary to satisfy a financial hardship if the Committee relies upon the
Members representation (made in writing or such other form as may be prescribed by the
Commissioner), unless the Committee has actual knowledge to the contrary, that the hardship
cannot reasonably be relieved:
(i) through reimbursement or compensation by insurance or otherwise;
(ii) by liquidation of the Members assets;
(iii) by cessation of Salary Reduction Contributions, including Catch-Up
Contributions, if applicable, under the Plan;
(iv) by other distributions or nontaxable (determined at the time of the loan)
loans from plans maintained by the Company, or any other employer of such Member, or
(v) by borrowing from commercial sources on reasonable commercial terms in an
amount sufficient to satisfy the financial hardship.
Expenses that may warrant approval of a Members request for a hardship withdrawal
include:
(vi) Expenses for (or necessary to obtain) medical care that would be
deductible under Section 213 of the Code (determined without regard to whether the
expenses exceed 7.5% of adjusted gross income);
(vii) Expenses (excluding mortgage payments) incurred to purchase a principal
residence of the Member;
(viii) Payment of tuition, related educational fees, and room and board
expenses for the next twelve (2) months of post-secondary education for the Member,
his or her spouse, or children or dependents (as defined in Section 152 of the Code,
without regard to Section 152(b)(1), (b)(2) and (d)(1)(B) of the Code);
(ix) Payments necessary to prevent the eviction of the Member from his
principal residence or foreclosure on the mortgage of the Members principal
residence;
30
(x) Payments incurred for burial or funeral expenses for the Members deceased
parent, spouse, children or dependents (as defined in Section 152 of the Code,
without regard to Section 152(b)(1), (b)(2) and (d)(1)(B) of the Code);
(xi) Expenses for the repair of damage to the Members principal residence that
would qualify for the casualty deduction under Section 165 of the Code (determined
without regard to whether the loss exceeds 10% of adjusted gross income); and
(xii) Such other expenses as the Committee may determine to be within the
intent of this Section.
(b)
Attainment of Age 59-1/2
. A Member who has attained the age of fifty-nine
and one-half (59
1
/
2
) may elect, in writing, within the time period established by the
Committee for such elections, to withdraw all or any portion of his vested interest
(determined pursuant to Section 10.1 hereof) in his Individual Account. Any partial
withdrawal shall be taken from such Members Individual Account as follows: first, from the
after-tax amounts, if any, in the Members Individual Account until such amounts are fully
depleted; second, from the Members Rollover Contribution Account until such account is
fully depleted; third, from the Members Salary Reduction Contribution Account until such
account is fully depleted; and fourth, from the Members Company Matching Contribution
Account until such account is fully depleted. No more than one such withdrawal may be made
by the Member during any Plan Year. The amount available for withdrawal shall be determined
as of the Valuation Date next following the date on which the Committee receives the
Members withdrawal election, and the withdrawal amount shall be distributed to the Member
as soon as practicable thereafter.
(c)
Withdrawals from Rollover Contribution Account
. A Member may elect, in
writing, within the time period established by the Committee for such elections, to withdraw
all or any portion of his Rollover Contribution Account. No more than one such withdrawal
may be made by the Member during any Plan Year. The amount available for withdrawal shall
be determined as of the Valuation Date next following the date on which the Committee
receives the Members withdrawal election, and the withdrawal amount shall be distributed to
the Member as soon as practicable thereafter.
(d)
Qualified Hurricane Distributions
. A Member may, upon the approval of the
Committee, take a Qualified Hurricane Distribution from his Individual Account.
(i)
Amount
. The Qualified Hurricane Distribution shall not exceed the
lesser of: (i) 100% of the Members vested Individual Account balance or (ii) the
excess of (A) $100,000 over (B) the aggregate amounts treated as Qualified Hurricane
Distributions in all prior taxable years.
(ii)
Recontributions
. At any time during the three-year period
beginning on the day after the date on which a Member receives a Qualified Hurricane
Distribution from the Plan, such Member may recontribute the amount of the Qualified
Hurricane Distribution to the Plan through one or more
31
contributions. Such contributions will be treated in the same manner as
Rollover Contributions, as provided in Section 4.7, and shall be credited to the
Members Rollover Contribution Account.
(iii)
Definitions
.
(1)
Qualified Hurricane Distribution means
:
(A) Any distribution from the Plan made on or after August 25,
2005, and before January 1, 2007, to a Member whose principal place
of abode on August 28, 2005, was located in the Hurricane Katrina
Disaster Area and who has sustained an economic loss by reason of
Hurricane Katrina;
(B) Any distribution from the Plan made on or after September
23, 2005, and before January 1, 2007, to a Member whose principal
place of abode on September 23, 2005, was located in the Hurricane
Rita Disaster Area and who has sustained an economic loss by reason
of Hurricane Rita; and
(C) Any distribution from the Plan made on or after October 23,
2005, and before January 1, 2007, to a Member whose principal place
of abode on October 23, 2005, was located in the Hurricane Wilma
Disaster Area and who has sustained an economic loss by reason of
Hurricane Wilma.
For purposes of this subparagraph (i), a Member shall be deemed to have
sustained an economic loss on account of loss, damage to, or destruction of
real or personal property from fire, flooding, looting, vandalism, theft,
wind, or other cause; loss related to displacement from such Members home;
loss of livelihood due to temporary or permanent layoff; and such other
economic loss as the Committee, in its sole discretion, shall determine. As
long as a Member has sustained an economic loss by reason of Hurricane
Katrina, Hurricane Rita or Hurricane Wilma, Qualified Hurricane
Distributions are permitted without regard to the Members need, and the
amounts of such distributions are not required to correspond to the amount
of economic loss suffered by the Member.
(2) The
Hurricane Katrina Disaster Area
consists of the States
of Alabama, Florida, Louisiana and Mississippi.
(3) The
Hurricane Rita Disaster Area
consists of the States of
Louisiana and Texas.
(4) The
Hurricane Wilma Disaster Area
consists of the State of
Florida.
32
(e)
Automatic Enrollment Contributions
: Any Member may elect, within the
ninety (90) day period following the first date on which amounts are contributed on his
behalf pursuant to a deemed election under Section 4.1 hereof, and in the manner prescribed
by the Committee, to withdraw the entire amount of such Salary Reduction Contributions made
prior to the date of such withdrawal election (adjusted for earnings and/or losses
attributable thereto). The amount available for withdrawal shall be determined as of the
Valuation Date next following the date on which the Committee receives the Members
withdrawal election, and the withdrawal amount shall be distributed to the Member as soon as
practicable thereafter. In the event a Member elects to withdraw the Salary Reduction
Contributions made on his behalf pursuant to a deemed election, as provided above, all
Company Matching Contributions (adjusted for earnings and/or losses attributable thereto)
made on behalf of such Member and attributable to the Salary Reduction Contributions
withdrawn under this subparagraph (e) shall be forfeited and the amount thus forfeited shall
be used to reduce Company Matching Contributions pursuant to the provisions of Section 6.3.
Furthermore, the deemed election of such Member under Section 4.1 shall automatically
terminate on the date of an election to withdraw under this subparagraph (e) and no further
Salary Reduction Contributions shall be made on behalf of such Member until the later of:
(i) the date on which the Member makes an affirmative election under Section 4.1 hereof to
have Salary Reduction Contributions made on his behalf or (ii) a subsequent Deemed Election
Date of such Member.
(f)
Qualified Reservist Withdrawal
. Effective November 15, 2007, a Member who
(by reason of being a member of a reserve component, as such term is defined in Section 101
of Title 37, United States Code), is ordered or called to active duty after September 11,
2001 and prior to December 31, 2007 (or such later date as may be set forth in Section
72(t)(2)(G)(iv) of the Code) for a period in excess of one hundred seventy-nine (179) days,
or for an indefinite period, may, upon the approval of the Committee, take a Qualified
Reservist Withdrawal, as such term is defined below, from his Salary Reduction Contribution
Account. A Qualified Reservist Withdrawal is a withdrawal of all or any portion of a
Members Salary Reduction Contribution Account that is made during the period beginning on
the date of a Members order or call to active duty, as set forth above, and ending on the
last day of the active duty period. The amount available for withdrawal shall be determined
as of the Valuation Date next following the date on which the Committee receives the
Members withdrawal election, and the withdrawal amount shall be distributed to the Member
as soon as practicable thereafter.
ARTICLE XII
INVESTMENT OF THE TRUST FUND
12.1
Member Direction of Investment
.
(a)
Investment of Contributions
. Each Member shall have the right, within the
guidelines established by the Committee, to direct the Committee to instruct the Trustee to
invest any whole percentage, up to one hundred percent (100%), of the contributions made by
or on behalf of such Member in one or more of such investment media as the Committee may
designate from time to time. The Committee shall direct
33
the Trustee or, if applicable, an Investment Manager as to the investments in which
Members may invest. The Committee may determine to offer as investment media any investment
fund, program, or other vehicle that is suitable as a proper and permissible investment of
contributions made to a retirement plan qualified pursuant to Section 401(a) of the Code.
The investment directions of the Members shall be implemented by the Trustee or, if
applicable, an Investment Manager; provided, however, that the Trustee or, if applicable, an
Investment Manager shall not be obligated to follow the investment direction of a Member if
such direction would result in a prohibited transaction described in Section 406 of ERISA or
Section 4975 of the Code, would generate income that would be taxable to the Plan, or:
(i) would not be in accordance with the documents and instruments governing the
Plan insofar as such documents and instruments are consistent with the provisions of
Title I of ERISA;
(ii) would cause a fiduciary to maintain the indicia of ownership of any assets
of the Plan outside the jurisdiction of the district courts of the United States
other than as permitted by Section 404(b) of ERISA and Department of Labor
Regulations §2550.404b-1;
(iii) would jeopardize the Plans tax qualified status under the Code;
(iv) could result in a loss in excess of a Members or Beneficiarys account
balance; or
(v) would result in a direct or indirect:
(1) sale, exchange, or lease of property between the Company (or any
affiliate of the Company) and the Plan except for the acquisition or
disposition of any interest in a fund, subfund or portfolio managed by the
Company (or an affiliate of the Company), or the purchase or sale of any
qualifying employer security (as defined in Section 407(d)(5) of ERISA)
which meets the conditions of Section 408(e) of ERISA and subparagraph (4)
below;
(2) loan to the Company or any affiliate of the Company;
(3) acquisition or sale of any employer real property (as defined in
Section 407(d)(2) of ERISA); or
(4) acquisition or sale of any employer security.
(b)
Modification of Investment Media
. The Committee shall be authorized at any
time, and from time to time, to modify, alter, delete, or add to the funds available for
investment at the direction of a Member. In the event a modification occurs, the Committee
shall notify those Members whom the Committee, in its sole and absolute discretion,
determines are affected by the change and shall give such persons such
34
additional time as is determined by the Committee to designate the manner and
percentage in which amounts invested in those funds thereby affected shall be invested.
The Committee shall not be obligated to substitute funds of similar investment criteria
for existing funds, nor shall it be obligated to continue the types of investments presently
available to the Members. Nothing contained herein shall constitute any action by the
Committee as a direction of investment of the assets or an attempt to control such
direction.
(c)
Investment Direction
. Any Member, on or before entry into the Plan, within
the time period established by the Committee, may designate the manner and the percentage in
which the Member desires the Trustee or, if applicable, an Investment Manager to invest his
current contributions, pursuant to the provisions set forth above, which designation shall
continue in effect until revoked or modified by the Member. If a Member fails to designate
the investment of his current contributions on or before his entry into the Plan, or if a
Member wishes to change such designation, the Member may make such designation or change,
within the time period established by the Committee, to become effective for all future
contributions as soon as practicable following the date of receipt by the Committee of such
designation or change, and such designation or change shall continue in effect until revoked
by the Member in accordance with this Plan.
Any amounts with respect to which the Trustee or, if applicable, an Investment Manager
fails to receive a proper investment direction from any Member shall be invested, as
directed by the Committee, in a qualified default investment alternative, as defined in
Department of Labor Regulations §2550.404c-5 and such other subsequent guidance as may be
promulgated by the Department of Labor, and with respect to which the other conditions set
forth in Department of Labor Regulations §2550.404c-5 are met, including, but not limited
to, the delivery to the Member of any material provided to the Plan that relates to the
Members investment therein. All investment designations shall be made in the manner
prescribed by the Committee.
The Committee shall maintain separate subaccounts in the name of each Member within his
Individual Account to reflect such Members accrued benefit attributable to his directed
investment in the above investment media.
12.2
Conversion of Investments
.
(a)
Members Individual Account
. Effective as of any Valuation Date, within
the time period prior thereto established by the Committee, and subject to any restrictions
on transfer imposed under particular investment funds, a Member who has an account balance
in his Individual Account in excess of any loan receivables from such Member may, pursuant
to guidelines established by the Committee, direct the Committee to instruct the Trustee to
convert any whole percentage, up to one hundred percent (100%), of such amount in his
Individual Account (in excess of the loan receivables) that is invested in any of the
investment media offered for investment under the Plan into one or more other of such
investment media. Such direction shall be effective as soon as practicable following the
date of receipt by the Committee of such direction to convert.
35
Notwithstanding any provision herein to the contrary, applicable fund redemption and
short-term trading fees may be imposed upon the Members Individual Account in connection
with any direction by such Member to convert investments hereunder.
(b)
Conversion Directions
. A direction to convert by any eligible Member shall
be irrevocable and shall be made in the manner prescribed by the Committee within the time
period established by the Committee. Any conversion of investments pursuant to this Section
12.2 shall not affect a Members direction of investments with respect to his future
contributions pursuant to Section 12.1.
(c)
Direction of Spouse
. If a Members spouse who is not a Member in this Plan
acquires an interest in a Members Individual Account pursuant to a qualified domestic
relations order, then the Members spouse may direct the Committee to convert the investment
of the interest to which such spouse is thus entitled in the same manner and at the same
time as the Member may direct a conversion of investments, as provided above. If such
spouse becomes a Member of the Plan, the spouse shall be entitled to convert such
investments in accordance with the rights of Members in the Plan.
(d)
Miscellaneous
. The Committee is authorized to establish such other rules
and regulations, including adding additional times to convert investments, as it determines
are necessary to carry out the provisions of Section 12.1 and this Section 12.2, the
specific dates of conversion to be determined by the Committee, and all earnings on the
Members investments after such dates shall be allocated in accordance with the Members
Individual Accounts, as adjusted on such dates. The Committee shall be authorized to modify
the allocations of earnings, provided such change is made on a reasonable and
nondiscriminatory basis.
ARTICLE XIII
ADMINISTRATION
13.1
Appointment of Committee
. The Plan shall be administered by a Committee
consisting of at least three or more persons who shall be appointed by and serve at the pleasure of
the board of directors of the Company. All usual and reasonable expenses of the Committee shall be
paid by the Trustee out of the principal or income of the Trust and, to the extent not so paid,
shall be paid by the Company. The members of the Committee shall not receive compensation with
respect to their services for the Committee. The members of the Committee may serve without bond
or security for the performance of their duties hereunder unless applicable law makes the
furnishing of such bond or security mandatory or unless required by the Company. Any member of the
Committee may resign by delivering his written resignation to the Company and to the other members
of the Committee.
13.2
Committee Powers and Duties
. The Committee shall have such powers as may be
necessary to discharge its duties hereunder, including, but not by way of limitation, the following
powers and duties:
(a) to construe and interpret the Plan, decide all questions of eligibility and
determine the amount, manner, and time of payment of any benefits hereunder;
36
(b) to prescribe procedures to be followed by distributees in obtaining benefits;
(c) to make a determination as to the right of any person to a benefit and to afford
any person dissatisfied with such determination the right to a hearing thereon;
(d) to receive from the Company and from Members such information as shall be necessary
for the proper administration of the Plan;
(e) to delegate to one or more of the members of the Committee the right to act in its
behalf in all matters connected with the administration of the Plan and Trust;
(f) to receive and review reports of the financial condition and of the receipts and
disbursements of the Trust Fund from the Trustee;
(g) to appoint or employ for the Plan any agents it deems advisable, including, but not
limited to, legal counsel; and
(h) to take any and all further actions from time to time as the Committee, in its sole
and absolute discretion, shall deem necessary for the proper administration of the Plan.
The Committee shall have no power to add to, subtract from or modify any of the terms of the
Plan, nor to change or add to any benefits provided by the Plan, nor to waive or fail to apply any
requirements of eligibility for benefits under the Plan. The Committee shall have full and
absolute discretion in the exercise of each and every aspect of its authority under this Plan,
including without limitation, all of the rights, powers and authorities specified in this Section
13.2 and, if applicable, in Section 13.3 hereof.
A majority of the members of the Committee shall constitute a quorum for the transaction of
business. No action of the Committee shall be taken except upon a majority vote of the Committee
members other than as described in subparagraph (e) above. An individual shall not vote or decide
upon any matter relating solely to himself or vote in any case in which his individual right or
claim to any benefit under the Plan is particularly involved. If in any case in which a Committee
member is so disqualified to act, and the remaining members cannot agree, the board of directors of
the Company will appoint a temporary substitute member to exercise all the powers of the
disqualified member concerning the matter in which he is disqualified.
13.3
Duties and Powers of the Plan Administrator
. The Plan Administrator shall have
such powers as may be necessary to discharge its duties hereunder, including, but not by way of
limitation, the following powers and duties:
(a) to file with the Secretary of Labor the annual report and other pertinent documents
that may be requested by the Secretary;
(b) to file with the Secretary of Labor such terminal and supplementary reports as may
be necessary in the event of the termination of the Plan;
37
(c) to furnish each Member, former Member and each Beneficiary receiving benefits
hereunder a summary plan description explaining the Plan;
(d) to furnish any Member, former Member or Beneficiary, who requests in writing,
statements indicating such Members, former Members or Beneficiarys total accrued benefits
and nonforfeitable benefits, if any;
(e) to furnish to a Member a statement containing information contained in a
registration statement required by Section 6057(a)(2) of the Code;
(f) to maintain all records necessary for verification of information required to be
filed with the Secretary of Labor;
(g) to allocate the assets of the Plan available to provide benefits to Members in the
event the Plan should terminate; and
(h) to report to the Trustee all available information regarding the amount of benefits
payable to each Member, the computations with respect to the allocation of assets, and any
other information that the Trustee may require in order to terminate the Plan.
13.4
Rules and Decisions
. The Committee may adopt such rules as it deems necessary or
desirable. All rules and decisions of the Committee shall be uniformly and consistently applied to
all Employees in similar circumstances. The Committee is required to provide a notice in writing
to any person whose claim for benefits under the Plan has been denied, setting forth the specific
reasons for such denial. The Committee shall adopt rules or procedures to carry out the intent of
this Section and to provide a basis for a full and fair review by the Committee of the decision
denying the claim and provide such person with an opportunity to supply any evidence he has to
sustain the claim.
13.5
Committee Procedures
. The Committee may adopt such bylaws as it deems desirable.
The Committee shall elect one of its members as chairman. The Committee shall advise the Trustee
of such election in writing. The Committee shall keep a record of all meetings and forward all
necessary communications to the Trustee.
13.6
Authorization of Benefit Payments
. The Committee shall issue directions to the
Trustee concerning all benefits that are to be paid from the Trust Fund pursuant to the provisions
of the Plan. The Committee shall keep on file, in such manner as it may deem convenient or proper,
all reports from the Trustee.
13.7
Payment of Expenses
. All expenses incident to the administration of the Plan and
Trust, including but not limited to, actuarial, legal, accounting, investment advisory, investment
education, recordkeeping, Trustees fees, and any other plan administrative expenses, shall be paid
by the Trustee from the Trust Fund and until paid, shall constitute a first and prior claim and
lien against the Trust Fund. To the extent such expenses are not paid by the Trustee from the
Trust Fund, they shall be paid by the Company.
38
13.8
Indemnification of Members of the Committee
. The Company shall, to the maximum
extent permitted under the Companys bylaws, indemnify the members of the Committee against
liability or loss sustained by them by an act or failure to act in their capacity as members of the
Committee.
ARTICLE XIV
NOTICES
14.1
Notice to Trustee
. As soon as practicable after a Member ceases to be in the
employ of the Company for any of the reasons set forth in Articles VII through X, inclusive, the
Committee shall give notice to the Trustee, which notice shall include such of the following
information and directions as are necessary or advisable under the circumstances:
(a) name and address of the Member;
(b) name and address of the Beneficiary or Beneficiaries in case of a Members death;
(c) amount to which the Member is entitled in case of termination of employment
pursuant to Article X; and
(d) manner and amount of payments to be made pursuant to Article XV.
If a former Member dies, the Committee shall give a like notice to the Trustee, but only if
the Committee learns of his death.
14.2
Subsequent Notices
. At any time and from time to time after giving the notice as
provided for in Section 14.1, the Committee may modify such original notice or any subsequent
notice by means of a further notice or notices to the Trustee; but any action theretofore taken or
payments theretofore made by the Trustee pursuant to a prior notice shall not be affected by a
subsequent notice.
14.3
Reliance upon Notice
. Upon receipt of any notice as provided in this Article, the
Trustee shall promptly take whatever action and make whatever payments are called for therein, it
being intended that the Trustee may rely upon the information and directions in such notice
absolutely and without question. However, the Trustee may call to the attention of the Committee
any error or oversight that the Trustee believes to exist in any notice.
ARTICLE XV
BENEFIT PAYMENTS
5.1
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.
39
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 Members or former Members Individual Account exceeds One Thousand and No/100 Dollars
($1,000.00), 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 one hundred eighty (180) 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 one
hundred eighty (180) 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 Members or former
Members 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 Members entire Individual Account shall be made in a
single lump sum on or before such Members 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 Members
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 Members 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 Members
date of death.
40
Effective January 1, 2003, during such Members lifetime, the minimum amount that will be
distributed for each distribution calendar year is the lesser of:
(a) the quotient obtained by dividing the Members 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 Members age as of the Members birthday in the distribution
calendar year; or
(b) if the Members sole designated beneficiary for the distribution calendar year is
the Members spouse, the quotient obtained by dividing the Members 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 Members and spouses attained ages as
of the Members and spouses 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 Members 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 Members 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 Members designated Beneficiary is his 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
41
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 10
th
anniversary of the year in which the Member or former Member
commenced participation in the Plan, or
(c) the Member or former Member terminates service with the Company.
15.3
Cash Out Distribution
. If a Member or former Member who has received a
distribution of his benefits hereunder on or before the last day of the second Plan Year following
the year in which his 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 Members or former Members 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 Members or former Members Individual Account
shall be credited with the exact amount that was nonvested at the time of separation from service.
15.4
Minority or Disability Payments
. During the minority or Disability of any person
entitled to receive benefits hereunder, the Committee may direct the Trustee to make payments due
such person directly to him or to his spouse or a relative or to any individual or institution
having custody of such person. Neither the Committee nor the Trustee shall be required to see to
the application of payments so made, and the receipt of the payee (including the endorsement of a
check or checks) shall be conclusive as to all interested parties.
15.5
Distributions Under Domestic Relations Orders
. Nothing contained in this Plan
shall prevent the Trustee, in accordance with the direction of the Committee, from complying with
the provisions of a qualified domestic relations order (as defined in Section 414(p) of the Code).
The Plan specifically permits distribution to an alternate payee under a qualified domestic
42
relations order at any time, irrespective of whether the Member or former Member has attained
his earliest retirement age under the Plan, as defined in Section 414(p) of the Code; provided,
however, that a distribution to an alternate payee prior to the Member or former Members
attainment of earliest retirement age is available only if: (1) the order specifies distribution
at that time or permits an agreement between the Plan and the alternate payee to authorize an
earlier distribution; (2) the order specifies such distribution to be in the form of a single,
lump-sum payment; and (3) if the amount to which the alternate payee is entitled under the Plan
exceeds $1,000, and the order so requires, the alternate payee consents to any distribution
occurring prior to the Member or former Members attainment of earliest retirement age. If an
alternate payee has not previously received a distribution of the entire interest to which such
alternate payee is entitled hereunder, distribution shall be made to such alternate payee as soon
as practicable following the alternate payees attainment of age sixty-two (62). Nothing in this
Section 15.5 gives a Member or former Member a right to receive distribution at a time otherwise
not permitted under the Plan nor does it permit the alternate payee to receive a form of payment
not otherwise permitted under the Plan.
The Plan Administrator shall establish reasonable procedures to determine the qualified status
of a domestic relations order. Upon receiving a domestic relations order, the Plan Administrator
shall promptly notify the Member or former Member and any alternate payee named in the order, in
writing, of the receipt of the order and the Plans procedures for determining the qualified status
of the order. Within a reasonable period of time after receiving the domestic relations order, the
Plan Administrator shall determine the qualified status of the order and shall notify the Member or
former Member and each alternate payee, in writing, of its determination. The Plan Administrator
shall provide notice under this paragraph by a mailing to the individuals address specified in the
domestic relations order, or in a manner consistent with Department of Labor regulations. The Plan
Administrator may treat as qualified any domestic relations order entered prior to January 1, 1985,
irrespective of whether it satisfies all the requirements described in Section 414(p) of the Code.
If any portion of an Individual Account is payable during the period the Plan Administrator is
making its determination of the qualified status of the domestic relations order, the Committee
shall direct the Trustee to segregate the amounts that are payable into a separate account and to
invest the segregated account solely in fixed income investments. If the Plan Administrator
determines the order is a qualified domestic relations order within eighteen (18) months of
receiving the order, the Committee shall direct the Trustee to distribute the segregated account in
accordance with the order. If the Plan Administrator does not make its determination of the
qualified status of the order within eighteen (18) months after receiving the order, the Committee
shall direct the Trustee to distribute the segregated account in the manner in which the Plan would
otherwise distribute if the order did not exist and shall apply the order prospectively if the Plan
Administrator later determines the order is a qualified domestic relations order.
To the extent it is not inconsistent with the provisions of the qualified domestic relations
order, the Committee may direct the Trustee to invest any amount that is subject to being paid to
an alternate payee pursuant to said order into a segregated subaccount or separate account and to
invest the account in federally insured, interest-bearing savings account(s) or time deposit(s) (or
a combination of both), or in other fixed income investments. A segregated subaccount shall
43
remain a part of the Trust, but it alone shall share in any income it earns, and it alone
shall bear any expense or loss it incurs.
The Trustee shall make any payments or distributions required under this Section 15.5 by
separate benefit checks or other separate distribution to the alternate payee(s).
15.6
Direct Rollover of Eligible Rollover Distributions
. Effective November 15,
2007, an individual who is entitled to a benefit hereunder (including a Participants surviving
spouse, a Participants spouse or former spouse who is the alternate payee under a qualified
domestic relation order, as defined in Section 414(p) of the Code, and a non-spouse Beneficiary
designated in accordance with Section 8.2 hereof), the distribution of which would qualify as an
eligible rollover distribution, as such term is hereinafter defined, may, in lieu of receiving
any payment or payments from the Plan, direct the Trustee to transfer all or any portion of such
payment or payments directly to the trustee of one or more eligible retirement plans, as such
term is hereinafter defined. For purposes of this Section 15.6, the term eligible rollover
distribution is defined as any distribution of all or any portion of the balance to the credit of
the distributee, including any portion of such balance that consists of amounts that are not
includible in gross income, except that an eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the distributee or the joint lives (or
joint life expectancies) of the distributee and the distributees designated beneficiary, or for a
specified period of ten years or more; any distribution to the extent such distribution is required
under Code Section 401(a)(9); and any hardship distribution described in Code Section
401(k)(B)(i)(IV). For purposes of this Section 15.6, the term eligible retirement plan 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.. Notwithstanding the foregoing, in the case of a non-spouse Beneficiary, the term
eligible retirement plan shall refer only to a plan described in clauses (i) and (ii) above that
is established on behalf of the designated Beneficiary and that is required to be treated as an
inherited IRA pursuant to the provisions of Section 402(c)(11) of the Code. Also, in this case,
the determination of any required minimum distribution under Section 401(a)(9) of the Code that is
ineligible for rollover shall be made in accordance with IRS Notice 2007-7, Q&A 17 and 18, 2007-5
I.R.B. 395.
A portion of a distribution that consists of after-tax employee contributions 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 or defined benefit plan described in
Section 401(a) or an annuity contract described in Section 403(b) 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 (as defined in Section 401(a)(31)(D) of the Code).
44
Any such election of a direct rollover must be made on a form provided by the Committee for
that purpose and received by the Committee no later than the date established by the Committee
preceding the date on which the distribution is to occur. Any election made pursuant to this
Section 15.6 may be revoked at any time prior to the date established by the Committee preceding
the date on which the distribution is to occur. If an individual who is so entitled has not
elected a direct rollover within the time and in the manner set forth above, such distributee shall
be deemed to have affirmatively waived a direct rollover. A distributee who wishes to elect a
direct rollover shall provide to the Committee, within the time and in the manner prescribed by the
Committee, such information as the Committee shall reasonably request regarding the eligible
retirement plan or plans to which the payment or payments are to be transferred. The Committee
shall be entitled to rely on the information so provided, and shall not be required to
independently verify such information. The Committee shall be entitled to delay the transfer of
any payment or payments pursuant to this Section 15.6 until it has received all of the information
which it has requested in accordance with this Section 15.6.
ARTICLE XVI
TRUSTEE
16.1
Appointment of Trustee
. A Trustee (or Trustees) shall be appointed by the
Committee to administer the Trust Fund. The Trustee shall serve at the pleasure of the Committee
and shall have such rights, powers, and duties as are provided to a Trustee under ERISA for the
investment of assets and for the administration of the Trust Fund.
16.2
Appointment of Investment Manager
. An Investment Manager (or Investment
Managers) may be appointed by the Committee to manage (including the power to acquire and dispose
of) any part or all of the assets of the Trust Fund. The Investment Manager shall serve at the
pleasure of the Committee, and shall have the rights, powers, and duties provided to a named
fiduciary under ERISA for the investment of the assets assigned to it. (The Investment Manager may
be referred to from time to time hereafter as he, they, or it, or may be referred to in the
singular or plural, but all such references shall be to the then acting Investment Manager or
Investment Managers serving hereunder.)
16.3
Responsibility of Trustee and Investment Manager
. All contributions under this
Plan shall be paid to and held by the Trustee. The Trustee shall have responsibility for the
investment and reinvestment of the Trust Fund except with respect to the management of those assets
specifically delegated to the Investment Manager and those funds invested pursuant to the
provisions of Section 15.5. The Investment Manager shall have exclusive management and control of
the investment and/or reinvestment of the assets of the Trust Fund assigned to it in writing by the
Trustee. All property and funds of the Trust Fund, including income from investments and from all
other sources, shall be retained for the exclusive benefit of Members or former Members, as
provided herein, and shall be used to pay benefits to Members or former Members or their
Beneficiaries, or to pay expenses of administration of the Plan and Trust Fund.
This Plan and the related Trust are intended to allocate to each fiduciary the individual
responsibilities of the prudent execution of the functions assigned to each. None of the allocated
responsibilities or any other responsibility shall be shared by the fiduciaries or the Trustee
unless such sharing shall be provided for by a specific provision in this Plan or related Trust.
45
16.4
Bonding of Trustee and Investment Manager
. Neither the Trustee nor the
Investment Manager shall be required to furnish any bond or security for the performance of their
powers and duties hereunder unless the applicable law makes the furnishing of such bond or security
mandatory.
ARTICLE XVII
AMENDMENT AND TERMINATION OF PLAN
17.1
Amendment of Plan
. The Company may, without the assent of any other party, make
from time to time any amendment or amendments to this Plan that do not cause any part of the Trust
Fund to be used for, or diverted to, any purpose other than the exclusive benefit of Members or
former Members of the Plan. Any such amendment shall be by a written instrument executed by the
Company, and shall become effective as of the date specified in such instrument. Notwithstanding
the foregoing, no amendment to the Plan shall be effective to the extent that it has the effect of
decreasing a Members or former Members accrued benefit, except as provided in Section 412(c)(8)
of the Code. For purposes of the preceding sentence, an amendment which has the effect of
decreasing a Members or former Members Individual Account or eliminating an optional form of
benefit, with respect to benefits attributable to service prior to such amendment, shall be treated
as reducing an accrued benefit. If any amendment changes the vesting schedule set forth in Section
10.1, then a Members or former Members nonforfeitable percentage in his Individual Account
because of a change to the vesting schedule shall not be less than his nonforfeitable percentage
computed under the vesting schedule in effect prior to the amendment. Furthermore, if any
amendment changes the vesting schedule set forth in Section 10.1, then each Member or former Member
having at least three (3) Years of Vesting Service may elect to be governed under the vesting
schedule set forth in the Plan without regard to the amendment. The Member or former Member must
file his written election with the Committee within sixty (60) days after receipt of a copy of the
amendment. The Committee shall furnish the Member or former Member with a copy of the amendment
and with notice of the time within which his election must be returned to the Committee.
17.2
Termination of Plan
. The Company may at any time, effective as specified,
terminate the Plan by resolution of its board of directors. A certified copy of such resolution
shall be delivered to the Trustee.
17.3
Suspension and Discontinuance of Contributions
. In the event the Company decides
it is impossible or inadvisable for it to continue to make its contributions as provided in Article
IV, it shall have the power by appropriate resolution to either:
(a) suspend its contributions to the Plan;
(b) discontinue its contributions to the Plan; or
(c) terminate the Plan.
Suspension shall be a temporary cessation of contributions and shall not constitute or require
a termination of the Plan. Such a suspension which has not ripened into a complete discontinuance
shall not constitute or require a termination of the Plan or Trust or any vesting of Individual
Accounts, other than as prescribed by the provisions of Section 10.1. A complete
46
discontinuance of contributions by the Company shall not constitute a formal termination of
the Plan and shall not preclude later contributions, but all Individual Accounts of Members or
former Members not theretofore fully vested shall be and become 100% vested and nonforfeitable in
the respective Members or former Members, irrespective of the provisions of Section 10.1. In such
event, Employees who become eligible to enter the Plan subsequent to the discontinuance shall
receive no benefit, and no additional benefits shall accrue to any of such Employees unless such
contributions are resumed. After the date of a complete discontinuance of contributions, the Trust
shall remain in existence as provided in this Section 17.3, and the provisions of the Plan and
Trust shall remain in force as may be necessary in the sole and absolute discretion of the
Committee.
17.4
Liquidation of Trust Fund
. Upon termination or partial termination of the Plan,
the Individual Accounts of all Members, former Members, and Beneficiaries shall thereupon be and
become fully vested and nonforfeitable. Thereupon, the Trustee shall convert the Trust Fund to
cash after deducting all charges and expenses. The Committee shall then adjust the balances of all
Individual Accounts, as provided in Section 5.2. Thereafter, the Trustee shall distribute the
amount to the credit of each affected Member, former Member, and Beneficiary, in accordance with
the provisions of Article XV hereof.
17.5
Consolidation, Merger or Transfer of Plan Assets
. This Plan shall not be merged
or consolidated with, nor shall any assets or liabilities be transferred to, any other plan, unless
the benefits payable on behalf of each Member or former Member, if the Plan were terminated
immediately after such action, would be equal to or greater than the benefits to which such Member
or former Member would have been entitled if this Plan had been terminated immediately before such
action. Further, except to the extent such transfer constitutes a direct rollover of an eligible
rollover distribution pursuant to Section 15.6 hereof or constitutes an elective transfer, as
described in Treasury Regulations Section 1.411(d)-4, Q&A-3(b)(1), to another qualified cash or
deferred arrangement under Code Section 401(k), no assets of this Plan shall be transferred to
another plan unless the Committee demonstrates to the Trustees reasonable satisfaction that any
portion of the transfer attributable to Salary Reduction Contributions, including Catch-Up
Contributions, if applicable, Qualified Nonelective Contributions and Qualified Matching
Contributions shall remain subject to the limitations on distributions prescribed under Treasury
Regulations Section 1.401(k)-1(d). The Trustee shall not accept a direct transfer of assets from a
plan subject to the requirements of Section 417 of the Code.
ARTICLE XVIII
GENERAL PROVISIONS
18.1
No Employment Contract
. Nothing contained in this Plan shall be construed as
giving any person whomsoever any legal or equitable right against the Committee, the Company, its
stockholders, officers or directors, or against the Trustee, except as the same shall be
specifically provided for in this Plan. Nor shall anything in this Plan give any Member, former
Member, or other Employee the right to be retained in the service of the Company, and the
employment of all persons by the Company shall remain subject to termination by the Company to the
same extent as if this Plan had never been executed.
47
18.2
Manner of Payment
. Wherever and whenever it is herein provided for payments or
distributions to be made, whether in money or otherwise, said payments or distributions shall be
made directly into the hands of the Member or former Member, his Beneficiary, his administrator,
executor or guardian, or an alternate payee pursuant to Section 15.5 herein, as the case may be. A
deposit to the credit of a person entitled to payment in any bank or trust company selected by such
person shall be deemed payment into his hands, and provided further that in the event any person
otherwise entitled to receive any payment or distribution shall be a minor or an incompetent, such
payment or distribution may be made to his guardian or other person as may be determined by the
Committee.
18.3
Nonalienation of Benefits
. Subject to Code Section 414(p) and Section 15.5
herein relating to qualified domestic relations orders, the interest of any Member, former Member,
or Beneficiary hereunder shall not be subject in any manner to any indebtedness, judgment, process,
creditors bills, attachments, garnishment, levy, execution, seizure or receivership, nor shall
such interest be in any manner reduced or affected by any transfer, assignment, conveyance, sale,
encumbrance, act, omission, or mishap, voluntary or incidental, anticipatory or otherwise, of or to
said Member, former Member, or Beneficiary, and they and any of them shall have no right or power
to transfer, convey, assign, sell, or encumber said benefits and their interest therein, legal or
equitable, during the existence of this Plan; provided, however, that a Member may assign or pledge
his vested interest in the Fund as security for a loan made pursuant to the provisions of Section
11.1 hereof. Notwithstanding the foregoing, no provision of this Plan shall preclude the
enforcement of a Federal tax levy made pursuant to Section 6331 of the Code or collection by the
United States on a judgment resulting from an unpaid tax assessment.
18.4
Titles for Convenience Only
. Titles of the Articles and Sections hereof are for
convenience only and shall not be considered in construing this Plan. Also words used in the
singular or the plural may be construed as though in the plural or singular where they would so
apply.
18.5
Validity of Plan
. This Plan and each of its provisions shall be construed and
their validity determined by the laws of the State of Texas, and all provisions hereof shall be
administered in accordance with the laws of said State, provided that in case of conflict, the
provisions of ERISA shall control.
18.6
Plan Binding
. This Plan shall be binding upon the successors and assigns of the
Company and the Trustee and upon the heirs and personal representatives of those individuals who
become Members hereunder.
18.7
Return of Contributions
. This Plan and the related Trust are designed to qualify
under Sections 401(a) and 501(a) of the Code. Anything contained herein to the contrary
notwithstanding, if the initial determination letter is issued by the District Director of Internal
Revenue to the effect that this Plan and related Trust hereby created, or as amended prior to the
receipt of such letter, do not meet the requirements of Section 401(a) and 501(a) of the Code, the
Company shall be entitled at its option to withdraw all contributions theretofore made, in which
event the Plan and Trust shall then terminate.
48
Each contribution to the Plan is specifically conditioned on the deductibility of such
contribution under the Code. The Trustee, upon written request from the Company, shall return to
the Company the amount of the Companys contribution made as a result of a mistake of fact or the
amount of the Companys contribution disallowed as a deduction under Section 404 of the Code. Such
return of contribution must be made within one (1) year after (a) the Company made the contribution
by mistake of fact or (b) the disallowance of the contribution as a deduction. The amount of
contribution subject to being returned hereunder shall not be increased by any earnings
attributable to the contribution, but such amount subject to being returned shall be decreased by
any losses attributable to it.
18.8
Missing Members or Beneficiaries
. Each Member shall file with the Committee from
time to time in writing a mailing address and any change of mailing address for himself and his
designated Beneficiary. Any communication, statement or notice addressed to a Member or
Beneficiary at the last mailing address filed with the Committee, or if no such address is filed
with the Committee, then at his last mailing address as shown on the Companys records, shall be
binding on the Member or his Beneficiary for all purposes of the Plan. The Committee shall not be
required to search for or locate a Member or Beneficiary. If the Committee notifies any Member or
Beneficiary that he is entitled to a distribution and also notifies him of the provisions of this
Section 18.8 (or makes reasonable effort to so notify such Member or Beneficiary by certified
letter, return receipt requested, to the last known address, or such other further diligent effort,
including consultation with the Internal Revenue Service or the Social Security Administration, to
ascertain the whereabouts of such Member or Beneficiary as the Committee deems appropriate) and the
Member or Beneficiary fails to claim his distributive share or make his whereabouts known to the
Committee within three years thereafter, the distributive share of such Member or Beneficiary will
be forfeited and applied to reduce the Company Matching Contribution. However, if the Member or
his Beneficiary should, thereafter, make a proper claim for such share, it shall be distributed to
him.
18.9
Qualified Military Service
. Notwithstanding any provision of this Plan to the
contrary, contributions, benefits, and service credit with respect to qualified military service
will be provided in accordance with Section 414(u) of the Code.
ARTICLE XIX
TOP-HEAVY RULES
19.1
Definitions
. For purposes of applying the provisions of this Article XIX:
(a) Key Employee shall mean, as of any Determination Date (as defined below), any
Employee or former Employee (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 6.5(b)(iv) 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
49
thereunder. The constructive ownership rules of Section 318 of the Code will apply to
determine ownership in the Company.
(b) Non-Key Employee is an Employee who does not meet the definition of Key Employee.
(c) Required Aggregation Group means:
(i) Each qualified plan of the Company or an Affiliated Entity (as defined
below) in which at least one (1) Key Employee participates or participated at any
time during the Plan Year that includes the Determination Date, or during the
preceding four Plan Years (regardless of whether the plan has terminated); and
(ii) Any other qualified plan of the Company that enables a plan described in
(1) to meet the requirements of Section 401(a)(4) or Section 410 of the Code.
(d) Permissive Aggregation Group is the Required Aggregation Group plus any other
qualified plans maintained by the Company, but only if such group would satisfy in the
aggregate the requirements of Section 401(a)(4) and Section 410 of the Code. The Committee
shall determine which plans to take into account in determining the Permissive Aggregation
Group.
(e) Determination Date for any Plan Year is the last day of the preceding Plan Year
or, in the case of the first Plan Year of the Plan, the last day of that Plan Year.
(f) Five Percent (5%) Owner is any person who owns more than five percent (5%) of the
outstanding stock of the Company or stock possessing more than five percent (5%) of the
total combined voting power of all stock of the Company.
(g) One Percent (1%) Owner is any person who owns more than one percent (1%) of the
outstanding stock of the Company or stock possessing more than one percent (1%) of the total
combined voting power of all stock of the Company.
(h) Affiliated Entity shall mean all the members of (i) a controlled group of
corporations as defined in Section 414(b) of the Code; (ii) a commonly controlled group of
trades or businesses (whether or not incorporated) as defined in Section 414(c) of the Code;
(iii) an affiliated service group as defined in Section 414(m) of the Code of which the
Company is a part; or (iv) a group of entities required to be aggregated pursuant to Section
414(o) of the Code and the regulations issued thereunder.
19.2
Determination of Top-Heavy Status
. The Plan is top heavy for a Plan Year if the
top heavy ratio as of the Determination Date (as defined in Section 19.1 above) exceeds sixty
percent (60%). The top heavy ratio is a fraction, the numerator of which is the sum of the present
value of the Individual Accounts of all Key Employees (as defined in Section 19.1 above) as of the
Determination Date and the denominator of which is a similar sum determined for all Employees in
the Plan. The present value of the Individual Account balance of an Employee as
50
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. The Individual Account 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. The Committee shall calculate the top heavy
ratio without regard to any Non Key Employee (as defined in Section 19.1 above) who was formerly a
Key Employee. The Committee shall calculate the top heavy ratio, including the extent to which it
must take into account distributions, rollovers and transfers, in accordance with Section 416 of
the Code and the regulations under that Code Section.
If the Company maintains other qualified plans (including a simplified employee pension plan),
this Plan is top-heavy only if it is part of the Required Aggregation Group (as defined in Section
19. 1 above), and the top-heavy ratio for both the Required Aggregation Group and the Permissive
Aggregation Group (as defined in Section 19.1 above) exceeds sixty percent (60%). The Committee
will calculate the top-heavy ratio in the same manner as required by the first paragraph of this
Section 19.2, taking into account all plans within the aggregation group. The Committee shall
calculate the present value of accrued benefits and the other amounts the Committee must take into
account under defined benefit plans or simplified employee pension plans included within the group,
in accordance with the terms of those plans, Section 416 of the Code, and the regulations under
that Code Section. The Committee shall calculate the top-heavy ratio with reference to the
Determination Dates that fall within the same calendar year.
19.3
Minimum Company Contribution
. Notwithstanding anything contained herein to the
contrary, for any Plan Year in which this Plan is determined to be top-heavy (as determined under
Section 19.2 hereof), each Non-Key Employee who is an eligible Member shall be entitled to a
supplemental contribution equal to three percent (3%) of such Non-Key Employees Annual
Compensation, reduced by the amount of Qualified Nonelective Contributions, if any, allocated to
his Salary Reduction Contribution Account for the applicable Plan Year. For purposes of this
Section 19.3, an eligible Member is a Non-Key Employee who is employed by the Company on the last
day of the applicable Plan Year.
The percentage referred to in the preceding paragraph shall not exceed the percentage of
Annual Compensation at which Company contributions, including Salary Reduction Contributions, are
made or allocated under this Plan, and all other qualified defined contribution plans maintained by
the Company, to the Key Employee for whom such percentage is the largest; provided, however, this
sentence shall not apply if the Plan is required to be included in an Aggregation Group and enables
a defined benefit plan required to be included in such group to meet the requirements of Code
Sections 401(a)(4) or 410. If the minimum allocation is made for a Non-Key Employee pursuant to
another qualified plan maintained by the Company, then the minimum allocation requirement will be
considered satisfied for purposes of this Plan. 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 shall be
51
treated as matching contributions for purposes of the actual contribution percentage test and
other requirements of Section 401(m) of the Code.
ARTICLE XX
FIDUCIARY PROVISIONS
20.1
General Allocation of Duties
. Each fiduciary with respect to the Plan shall have
only those specific powers, duties, responsibilities, and obligations as are specifically given him
under the Plan. The board of directors of the Company shall have the sole responsibility for
authorizing its contributions under the Plan. The Company shall have the sole authority to appoint
and remove the members of the Committee and to amend or terminate this Plan, in whole or in part.
The Committee shall have the sole authority to appoint and remove the Trustee and Investment
Managers. However, neither the board nor the Committee shall be liable for any acts or omissions
of the Trustee or Investment Manager or be under any obligation to invest or otherwise manage any
assets of the Trust Fund which are subject to the management of the Trustee or Investment Manager.
Except as otherwise specifically provided, the Committee shall have the sole responsibility for the
administration of the Plan, which responsibility is specifically described herein. Except as
otherwise specifically provided, the Trustee shall have the sole responsibility for the
administration, investment, and management of the assets held under the Plan. It is intended under
the Plan that each fiduciary shall be responsible for the proper exercise of its own powers,
duties, responsibilities, and obligations hereunder and shall not be responsible for any act or
failure to act of another fiduciary, except to the extent provided by law or as specifically
provided herein.
20.2
Fiduciary Duty
. Each fiduciary under the Plan shall discharge its duties and
responsibilities with respect to the Plan:
(a) solely in the interest of the Members of the Plan, for the exclusive purpose of
providing benefits to such Members and their Beneficiaries, and defraying reasonable
expenses of administering the Plan;
(b) with the care, skill, prudence and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar with such matters would
use in the conduct of an enterprise of a like character and with like aims;
(c) by diversifying the investments of the Plan so as to minimize the risk of large
losses, unless under the circumstances it is prudent not to do so; and
(d) in accordance with the documents and instruments governing the Plan insofar as such
documents and instruments are consistent with applicable law.
20.3
Fiduciary Liability
. A fiduciary shall not be liable in any way for any acts or
omissions constituting a breach of fiduciary responsibility occurring prior to the date it becomes
a fiduciary or after the date it ceases to be a fiduciary.
20.4
Co-Fiduciary Liability
. A fiduciary shall not be liable for any breach of
fiduciary responsibility by another fiduciary unless:
52
(a) it participates knowingly in, or knowingly undertakes to conceal, an act or
omission of such other fiduciary, knowing such act or omission is a breach;
(b) by its failure to comply with Section 404(a)(1) of ERISA in the administration of
its specific responsibilities which give rise to its status as a fiduciary, it has enabled
such other fiduciary to commit a breach; or
(c) having knowledge of a breach by such other fiduciary, it fails to make reasonable
efforts under the circumstances to remedy the breach.
20.5
Delegation and Allocation
. The Committee may appoint subcommittees, individuals,
or any other agents as it deems advisable and may delegate to any of such appointees any or all of
the powers and duties of the Committee. Such appointment and delegations must clearly specify the
powers and duties delegated. Upon such appointment and delegation, the delegating Committee
members shall have no liability for the acts or omissions of any such delegate, as long as the
delegating Committee members do not violate their fiduciary responsibility in making or continuing
such delegation.
IN WITNESS WHEREOF, Southwest Airlines Co. has caused its corporate seal to be affixed hereto
and these presents to be duly executed in its name and behalf by its proper officers thereunto duly
authorized this 14
th
day of December, 2007.
|
|
|
|
|
|
SOUTHWEST AIRLINES CO.
|
|
|
By:
|
/s/
Gary C. Kelly
|
|
|
|
Gary C. Kelly, Chief Executive Officer
|
|
|
|
|
|
|
53