-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R9QR7rHKX5HcPhIkEVwmxpjIL+xUrR7h643GsI6VSMNyCunHzeO+yaJKQuihOUnY ol2iDYgQAY38JWmM2MjJeg== 0000950149-96-000817.txt : 19960702 0000950149-96-000817.hdr.sgml : 19960702 ACCESSION NUMBER: 0000950149-96-000817 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960701 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SKYWEST INC CENTRAL INDEX KEY: 0000793733 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 870292166 STATE OF INCORPORATION: UT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14719 FILM NUMBER: 96589614 BUSINESS ADDRESS: STREET 1: 444 S RIVER RD CITY: ST GEORGE STATE: UT ZIP: 84790 BUSINESS PHONE: 8016343000 MAIL ADDRESS: STREET 1: 444 SOUTH RIVER ROAD CITY: ST GEORGE STATE: UT ZIP: 84790 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-14719 SKYWEST, INC. Incorporated under the Laws of Utah 87-0292166 (IRS Employer ID No.) 444 South River Road St. George, Utah 84790 (801) 634-3000 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, No Par Value Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The aggregate market value of Common Stock held by non-affiliates (based upon the closing sale price of the Common Stock on the NASDAQ National Market System) on June 20, 1996, was approximately $129,231,000. As of June 20, 1996, there were 10,047,208 shares of Common Stock outstanding. Documents Incorporated by Reference Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended March 31, 1996, are incorporated by reference in Part II as specified. Portions of the Registrant's Proxy Statement to be used in connection with the solicitation of proxies to be voted at the Registrant's 1996 Annual Meeting of Shareholders, to be filed with the Commission, are incorporated by reference in Part III as specified. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. /X/ 2 SKYWEST, INC. FISCAL 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
Page ---- No. - --- Item 1. Business.......................................................................... 1 Item 2. Properties........................................................................ 5 Item 3. Legal Proceedings................................................................. 6 Item 4. Submission of Matters to a Vote of Security Holders............................... 6 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters..................................................... 6 Item 6. Selected Financial Data........................................................... 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 6 Item 8. Financial Statements and Supplementary Data....................................... 7 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure............... 7 PART III Item 10. Directors and Executive Officers of the Registrant................................ 7 Item 11. Executive Compensation............................................................ 7 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................................... 7 Item 13. Certain Relationships and Related Transactions.................................... 7 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................................. 7
3 PART I ITEM 1. BUSINESS GENERAL SkyWest, Inc. (the "Company"), through its wholly-owned subsidiary, SkyWest Airlines, Inc. ("SkyWest"), operates one of the larger regional airlines in the United States. SkyWest provides passenger and air freight service and completes over 550 daily flights to 48 cities in twelve western states. Pursuant to a joint marketing and code sharing agreement with Delta Airlines, Inc. ("Delta"), Skywest operates as a Delta Connection in SkyWest's markets. Management believes that during calendar year 1995, approximately 48% of SkyWest's passengers were interline passengers connecting with flights offered by Delta. In October 1995, the Company entered into a marketing and code sharing agreement with Continental Airlines, Inc. ("Continental") which allows SkyWest to operate as a Continental Connection in markets which operate in and out of Los Angeles. Since inception, approximately one percent of SkyWest's passengers were interline passengers connecting with flights offered by Continental. With principal hubs located at the Los Angeles and Salt Lake City International Airports, SkyWest offers a convenient and frequent flight schedule designed to maximize connecting and origin-destination traffic. SkyWest currently operates a fleet of 55 turbo-prop aircraft and 10 regional jet aircraft. Founded in 1972, the Company has experienced significant growth. During the past five fiscal years, consolidated operating revenues have increased from $125.3 million in fiscal 1992 to $251.7 million in fiscal 1996. Total passengers carried by SkyWest have increased from approximately 1,318,000 to approximately 2,340,000 over the same period. In fiscal 1996, the Company achieved record levels of passengers carried, record consolidated operating revenues of $251.7 million, and net income of $4.4 million or $.42 per share. Included in the fiscal 1996 net income is a pretax charge of approximately $6.2 million related to the Company's fleet restructuring and transition plan wherein Metroliner long-term operating leases are being terminated early and are being replaced with Brasilia aircraft. Absent these expenses, net income would have been approximately $8.2 million or $.80 per share. The Company, through two wholly-owned subsidiaries, is also engaged in various other transportation related businesses. Scenic Airlines, Inc. (formerly Aviation Services West, Inc.) ("Scenic") provides air tours and general aviation services to the scenic regions of northern Arizona and southern Utah and operates 55 aircraft. National Parks Transportation, Inc. ("NPT") provides car rental services through a fleet of Avis vehicles located at five airports served by SkyWest. In fiscal 1996, Scenic and NPT together accounted for approximately 16.0% and 8.9% of the Company's consolidated operating revenues and net income, respectively. Effective June 15, 1993, the Company through its wholly-owned subsidiary, Aviation Services West, Inc. ("ASW") consummated an agreement to acquire from an entity then known as Scenic Airlines, Inc. ("Scenic Airlines") the flight tour operations of Scenic Airlines. Subsequent to the acquisition, ASW changed its name to Scenic Airlines, Inc. and has continued the flight tour operations acquired from Scenic Airlines as well as the flight tour business conducted by ASW prior to the acquisition. JOINT MARKETING AND CODE SHARING AGREEMENTS Since April 1987, SkyWest has operated as a Delta Connection in SkyWest's markets pursuant to the terms of a joint marketing and code sharing agreement with Delta. On July 1, 1990, the Company and Delta entered into a revised Delta Connection Agreement (the "Delta Connection Agreement") under which the Company coordinates with Delta to facilitate interline connections at the Los Angeles and Salt Lake City International Airports. At these two airports combined, Delta presently has more passenger enplanements and flight departures than any other carrier. The primary benefit of this affiliation is the use of the Delta designation code (DL) in listing flights in the Official Airline Guide and in the computerized reservation systems used throughout the industry. The Company's code sharing arrangement allocates to the Company a portion of the passenger fare on a formula or other basis, subject to periodic adjustments. The Company also participates in cooperative advertising and marketing activities with Delta, including Delta's Frequent Flyer Program, the Delta Meeting Network and Delta Dream Vacations. The Company believes the arrangement created between SkyWest and Delta is similar to those which exist between other major and regional airlines. The Delta Connection Agreement is subject to termination in various circumstances, including upon 180 days' advance notice by either party for any or no reason. Delta currently owns 15.5% of the Company's outstanding common stock. Pursuant to a Stock Option Agreement between Delta and the Company, Delta holds preemptive rights and registration rights (two demand rights and unlimited "piggy-back" rights) with respect to the Common Stock owned by Delta, as well as the right to designate one nominee for the Company's Board of Directors, so long as Delta owns at least ten percent of all Common Stock. 1 4 Since October 1995, SkyWest has operated as a Continental Connection, in Southern California markets which utilize Los Angeles as a connecting hub, pursuant to the terms of a marketing and code sharing agreement (the "Continental Connection Agreement") with Continental. The benefits under this agreement are similar to those described under the Delta Connection Agreement. The Continental Connection Agreement terminates October 24, 1997, however it is cancellable by either party with generally 90 days written notice for any or no reason. ROUTES The Company's flight schedules are structured to facilitate the connection of its passengers with flights of Delta and Continental at the airports it serves. The following table shows selected information about the cities served by SkyWest as of June 20, 1996.
Served State and City Since (1) - -------------- --------- Arizona: Phoenix.............................................................1979 (2) Yuma................................................................1979 Tucson..............................................................1995 California: San Diego...........................................................1968 Palm Springs........................................................1970 Los Angeles.........................................................1977 Imperial............................................................1979 Burbank.............................................................1980 Ontario.............................................................1981 Santa Maria.........................................................1982 Santa Barbara.......................................................1983 Bakersfield.........................................................1983 Fresno..............................................................1985 Sacramento..........................................................1986 San Francisco.......................................................1995 San Jose............................................................1986 San Luis Obispo.....................................................1986 Orange County.......................................................1986 Monterey............................................................1987 Colorado: Grand Junction......................................................1983 Colorado Springs....................................................1995 Idaho: Pocatello...........................................................1980 Idaho Falls.........................................................1982 Twin Falls..........................................................1983 Boise...............................................................1988 Sun Valley..........................................................1990 Lewiston............................................................1996 Montana: West Yellowstone....................................................1986 (2) Helena..............................................................1988 Bozeman.............................................................1988 Billings............................................................1988 Butte...............................................................1988 New Mexico: Albuquerque.........................................................1995
Served State and City Since (1) - -------------- ---------
2 5 Nevada: Las Vegas...........................................................1974 Elko................................................................1982 Reno................................................................1982 Oregon: Eugene..............................................................1995 Portland............................................................1995 South Dakota: Rapid City..........................................................1994 Utah: Cedar City..........................................................1972 Salt Lake City......................................................1972 St. George..........................................................1972 Vernal..............................................................1982 Washington: Pasco...............................................................1996 Wyoming: Jackson Hole........................................................1986 Casper..............................................................1994 Cody................................................................1995 Gillette............................................................1995
(1) Refers to the calendar year service was initiated. (2) Service is provided on a seasonal basis. SEASONALITY The Company's operations are favorably affected by increased travel usually occurring in the summer months and are unfavorably affected by inclement weather which occasionally results in cancelled flights principally during the winter months. The business related to the flight tour operations of Scenic is seasonal in nature. A large percentage of Scenic's passengers are tourists visiting the Las Vegas and Grand Canyon areas during the summer months. During the first calendar quarter, the operations of Scenic are generally reduced as a result of decreased traffic. RECENT COMMON STOCK TRANSACTIONS On June 21, 1993, the Company completed a public offering of 1,875,000 shares of common stock which generated net proceeds of $28,802,000 after deducting underwriting commissions and other expenses. On July 7, 1993, the underwriters executed an over allotment option for 219,250 shares of common stock which generated net proceeds of $3,412,000 after deducting underwriting commissions. On February 16, 1994, the Company completed another public offering of 1,150,000 shares of common stock which generated net proceeds of $33,456,000 after deducting underwriting commissions and other expenses. A portion of the proceeds were used to fund the acquisition of Scenic Airlines, to pay off certain long-term debt and to facilitate the acquisition of the Canadair Regional Jets. The balance is being used for general corporate purposes. On November 23, 1994, the Company's Board of Directors approved the purchase of up to 1,150,000 shares of the Company's outstanding common stock. The total shares were purchased during the year ended March 31, 1995 at an average price of $13.98. On February 7, 1995, the Company's Board of Directors approved the purchase of up to 500,000 shares of the Company's outstanding common stock. On February 6, 1996, the Company's Board of Directors approved the purchase of up to an additional 500,000 shares of the Company's outstanding stock. During the year ended March 31, 1996, 324,600 shares were purchased at an average price of $12.92. 3 6 GOVERNMENT REGULATION All interstate air carriers, including SkyWest and Scenic, are subject to regulation by the FAA. The FAA requires operating, air worthiness and other certificates; FAA approval of personnel who may engage in flight, maintenance or operation activities; record keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. The Company believes it is operating in material compliance with FAA regulations and holds all necessary operating and air worthiness certificates and licenses. The Company's flight operations, maintenance programs, record keeping and training programs are conducted under FAA approved procedures. The Company does not operate at any airports where landing slots are restricted. All air carriers are required to comply with federal law and regulations pertaining to noise abatement and engine emissions. All air carriers are also subject to certain provisions of the Federal Communications Act of 1934, as amended, because of their extensive use of radio and other communication facilities. Management believes that the Company is in compliance in all material respects with these laws and regulations. COMPETITION The airline industry is highly competitive. The Company not only competes with other regional airlines, some of which are owned by or are operated as code sharing partners of major airlines, but also faces competition from major airlines on certain routes. SkyWest is the dominant regional airline operating out of the Salt Lake City International Airport. Competition in the southern California markets, which are serviced by SkyWest from its hub in Los Angeles, is particularly intense, with a large number of carriers in these markets. In its markets served from the Los Angeles International Airport, SkyWest's principal competitors include Mesa Airlines, Inc. (operating as "Mesa Airlines" and "United Express"), Wings West, Inc. (operating as "American Eagle"), and Trans States, Inc. (operating as "USAir Express" and "Trans World Express"). The Company also faces indirect low-fare competition from carriers such as Southwest Airlines and Shuttle by United. The Company believes that the principal competitive factors affecting decisions by travelers in SkyWest's markets are the frequency, convenience and reliability of flights and, to a lesser extent, the level of fares. EMPLOYEES As of June 20, 1996, the Company employed 2,169 full-time equivalent employees consisting of 793 pilots and flight attendants, 246 maintenance personnel, 872 customer service personnel, 60 reservation and marketing personnel, and 198 employees engaged in accounting, administration and other functions. The Company's employees are not represented by any union. The Company is aware, however, that collective bargaining group organization efforts among its employees occur from time to time and are expected to continue in the future. The Company has never experienced any work stoppages and considers its relationship with its employees to be very good. 4 7 ITEM 2. PROPERTIES FLIGHT EQUIPMENT As of June 20, 1996, SkyWest owned or leased the following types of aircraft:
NUMBER OF SCHEDULED AVERAGE AIRCRAFT FLIGHT CRUISING AVERAGE --------- PASSENGER RANGE SPEED AGE TYPE OF AIRCRAFT OWNED LEASED CAPACITY (MILES) (MPH) (YEARS) - ---------------- ----- ------ ---------- ----------- --------- -------- Brasilia......................... 16 22 30 450 300 3.9 Metroliner....................... - 17 19 300 275 9.3 Canadair Regional Jet............ - 10 50 600 530 1.6
SkyWest's aircraft are primarily turbo-prop, pressurized aircraft designed to operate more economically over short-haul routes with lower passenger load factors than larger jet aircraft. These factors make it economically feasible for SkyWest to provide high frequency service in markets with relatively low volumes of passenger traffic. Although the Metroliner aircraft has been a principal factor in the Company's historical growth, it does not provide the operating efficiencies and customer acceptance offered by the Brasilia aircraft. Management has effected a plan to eliminate these Metroliner aircraft by the end of fiscal 1997. As a result, the Company's turboprop fleet will consist entirely of Brasilia aircraft. Passenger comfort features of the Brasilia aircraft include stand-up headroom, a lavatory, overhead baggage compartments and flight attendant service. Fiscal year 1995 marked the introduction of the Canadair Regional Jet. The Company operates ten of these aircraft on stage lengths up to 600 miles. During fiscal 1996, the Company acquired seven Brasilia aircraft and terminated eight Metroliner long-term operating leases. Subsequent to March 31, 1996, the Company acquired three Brasilia aircraft and terminated one Metroliner long-term operating lease. As part of the effort to upgrade its fleet of aircraft, the Company has agreed to acquire 12 Brasilia aircraft and related parts inventory and support equipment at an aggregate cost of approximately $96.0 million, including cost escalation provisions as of June 20, 1995. The Company is scheduled to take delivery of these aircraft during the remainder of fiscal 1997. The Company has also secured options to purchase an additional 10 Brasilia aircraft at fixed prices (subject to cost escalation and delivery schedules). These options are exercisable through fiscal 1999. Options to acquire an additional ten Canadair Regional Jets have been secured which are exercisable at any time with no expiration. Any decision to acquire additional aircraft will depend upon the Company's future operations, competitive forces, financial resources and other factors. GROUND FACILITIES Employees of the Company perform substantially all routine airframe and engine maintenance and periodic inspection of equipment. Maintenance is performed primarily at facilities in Palm Springs, California and Salt Lake City, Utah. The Company owns a 56,600 square foot maintenance facility in Palm Springs, California and leases a 90,000 square foot aircraft maintenance and training facility at the Salt Lake International Airport. The facility consists of a 40,000 square foot maintenance hangar and 50,000 square feet of training and other facilities to support the Company's growing hub operations. The facility was constructed and is owned by the Salt Lake City Airport Authority. The Company is leasing the facility under an operating lease arrangement over a 36-year term. The Company leases ticket counters, check-in, and boarding and other facilities in the passenger terminal areas in the majority of the airports it serves and staffs these facilities with Company personnel. Delta provides ticket handling and/or ground support services for the Company in 12 of the 48 airports it serves. The Company owns a new terminal and hangar facility in Page, Arizona consisting of 11,500 square feet of office and terminal space and 22,000 square feet of maintenance hangar space. The Company also owns a new terminal and hangar facility in Las Vegas, Nevada consisting of 39,500 square feet of office and terminal space and 28,500 square feet of maintenance hangar space. The Company's corporate headquarters are located in a 63,000 square foot building in St. George, Utah. Management deems the Company's facilities as being suitable and necessary to support exisiting operations and facilities are adequate for the foreseeable future. 5 8 ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine legal proceedings incident to its business. In the opinion of management, none of such proceedings are expected to have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded over-the-counter and quoted in the NASDAQ National Market System under the symbol "SKYW." At June 20, 1996, there were approximately 1,085 stockholders of record. Securities held of record do not include shares held in securities position listings. The following table sets forth the range of high and low closing sales prices for the Company's Common Stock.
Fiscal 1996 Fiscal 1995 ----------- ----------- Quarter High Low High Low ------- ---- ----- ---- ---- First $23.50 $14.13 $40.25 $20.50 Second 25.38 17.00 29.75 22.00 Third 19.75 12.88 22.50 12.50 Fourth 14.75 12.38 15.75 11.38
The transfer agent for the Company's Common Stock is Zions First National Bank, Salt Lake City, Utah. In fiscal 1996, the Board of Directors declared an annual dividend of $.08 per share and a special dividend of $.17 per share. In fiscal 1995, the Board of Directors declared an annual dividend of $.08 per share and a special dividend of $.20 per share. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to page 1 of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1996, furnished herewith to the Commission as Exhibit 13.1 to this report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information required by this item is incorporated herein by reference to pages 10 through 14 of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1996, furnished herewith to the Commission as Exhibit 13.1 to this report on Form 10-K. 6 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company included on pages 15 through 27 of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1996, furnished herewith to the Commission as Exhibit 13.1 to this report on Form 10-K, are incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III All items in Part III are incorporated by reference to the Company's Proxy Statement for its 1996 annual stockholders meeting to be held August 13, 1996, to be filed with the Commission.
Headings in Proxy Statement --------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS "Election of Directors" and OF THE REGISTRANT. "Executive Officers" ITEM 11. EXECUTIVE COMPENSATION. "Executive Officers" and "Executive Compensation" and "Report of the Compensation Committee" ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL "Election of Directors" and OWNERS AND MANAGEMENT. "Security Ownership of Certain Beneficial Owners and Management" ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. "Certain Relationships and Related Transactions"
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed: 1. Financial Statements. The following consolidated financial statements of SkyWest, Inc., included in the Annual Report to Shareholders for the year ended March 31, 1996, are incorporated herein by reference in Item 8 of the Form 10-K. - Report of independent public accountants - Consolidated balance sheets as of March 31, 1996 and 1995 - Consolidated statements of income for the years ended March 31, 1996, 1995 and 1994 7 10 - Consolidated statements of stockholders' equity for the years ended March 31, 1996, 1995 and 1994 - Consolidated statements of cash flows for the years ended March 31, 1996, 1995 and 1994 - Notes to consolidated financial statements 2. Financial Statement Schedules. The following consolidated financial statement schedule of SkyWest, Inc. is included in Item 14(d) hereof. - Report of independent public accountants on financial statement schedule - Schedule II -- Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted. (b) Reports on Form 8-K. The Company did not file a report on Form 8-K during the quarter ended March 31, 1996. (c) Exhibits.
Incorporated by Filed Number Exhibit Reference Herewith ------ ------- --------- -------- 3.1 Restated Articles of Incorporation............................................. (1) 3.2 Amended By-Laws................................................................ (6) 4.1 Articles IV and VI of Restated Articles of Incorporation describing the Common Shares and shareholders rights (included in Exhibit 3.1)................................................................... (1) 4.2 Article II of the Amended By-Laws defining the rights of Common Shareholders (included in Exhibit 3.2)................................................................... (6) 10.1 SkyWest, Inc. Amended and Combined Incentive and Non-Statutory Stock Option Plan................................................ (6) 10.2 Delta Connection agreement dated January 13, 1987 between Delta Air Lines, Inc. and SkyWest Airlines, Inc.................................................................. (2) 10.3 Stock Option agreement dated January 28, 1987 between Delta Air Lines, Inc. and SkyWest, Inc................................................................... (2) 10.4 Purchase Agreement No. 382 COI/85 dated December 27, 1985 between EMBRAER-Empresa Brasileira de Aeronautica S.A. and SkyWest Airlines, Inc., as amended by a Letter Supplement dated December 30, 1985 and an Amendment dated January 30, 1986................................... (1)
8 11
Incorporated by Filed Number Exhibit Reference Herewith - ------ ------- --------- -------- 10.5 Aircraft Lease dated December 29, 1986 between EFA Leasing Company and SkyWest Airlines, Inc. (N2698C)................................................ (3) 10.6 Aircraft Lease dated December 29, 1986 between EFA Leasing Company and SkyWest Airlines, Inc. (N26974)........................................................ (3) 10.7 Aircraft Lease dated December 29, 1986 between EFA Leasing Company and SkyWest Airlines, Inc. (N2699Y)........................................................ (3) 10.10 Aircraft Lease dated October 31, 1988 between CIT Group/Capital Financing, Inc. and SkyWest Airlines, Inc. (N2720B, N27220, N2724S)................................................................ (4) 10.11 Aircraft Lease dated December 12, 1988 between Heleasco Fourteen, Inc. and SkyWest Airlines, Inc. (N27240, N2726N, N2725D)........................................................................ (4) 10.12 Aircraft Lease dated April 10, 1989 between Wilmington Trust Company, and SkyWest Airlines, Inc. (N27297, N27278, N2730P)........................................ (5) 10.13 Lease Agreement dated December 1,1989 between Salt Lake City Corporation and SkyWest Airlines, Inc............................................................................ (7) 10.14 Purchase Agreement No. DSP/AJV-30B/93 dated March 30, 1993, between EMBRAER-Empresa Brasileira de Aeronautica S.A. and SkyWest Airlines, Inc., as amended by a Letter of Supplement dated May 17, 1993........................................ (8) 10.15 Purchase Agreement dated July 23,1993 between Bombardier Regional Aircraft Division and SkyWest Airlines, Inc.......................................................... (9) 10.16 Purchase agreement No. DSP/AJV-042/95 dated June 9, 1995 between Embraer-Empresa Brasileira de Aeronautica S.A. and SkyWest Airlines, Inc......................................................... (10) 10.17 SkyWest, Inc. 1995 Employee Stock Purchase Plan........................................................... (10) 10.18 Marketing and Code Sharing Agreement dated October 24, 1996 between Continental Airlines, Inc. and SkyWest Airlines, Inc................................................ X
9 12
Incorporated by Filed Number Exhibit Reference Herewith - ------ ------- --------- -------- 11.0 Computation of earnings per share................................................. X 13.1 Certain portions of the Annual Report to Shareholders for the year ended March 31, 1996, are incorporated by reference into this report on Form 10-K........................................ X 22.1 Subsidiaries of the Registrant................................................... (1) 24.1 Consent of independent public accountants......................................... X
(1) Incorporated by reference to Registration Statement on Form S-1, File No. 33-5823. (2) Incorporated by reference to Registrant's 10-Q filed for the quarter ended December 31, 1986. (3) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1987. (4) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1989. (5) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1990. (6) Incorporated by reference to Registration Statement on Form S-8, File No. 33-41285. (7) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1992. (8) Incorporated by reference to Registration Statement on Form S-2, File No. 33-61958. (9) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1994. (10) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1995. 10 13 (d) Financial Statement Schedule. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To SkyWest, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in SkyWest, Inc.'s Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated May 24, 1996. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 (a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Arthur Andersen LLP Salt Lake City, Utah May 24, 1996 11 14 SKYWEST, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Additions Balance at Charged To Balance Beginning Costs and at End Description of Year Expenses Deductions of Year ----------- ------- -------- ----------- ------- Year Ended March 31, 1996: Allowance for obsolescence $ 180,000 $ - $ - $ 180,000 Allowance for doubtful accounts receivable 215,262 150,150 (144,067) 221,345 --------- --------- --------- --------- $ 395,262 $ 150,150 $(144,067) $ 401,345 ========= ========= ========= ========= Year Ended March 31, 1995: Allowance for obsolescence $ 180,000 $ - $ - $ 180,000 Allowance for doubtful accounts receivable 143,926 72,246 (910) 215,262 --------- --------- --------- --------- $ 323,926 $ 72,246 $ (910) $ 395,262 ========= ========= ========= ========= Year Ended March 31, 1994: Allowance for obsolescence $ 180,000 $ - $ - $ 180,000 Allowance for doubtful accounts receivable 142,830 32,572 (31,476) 143,926 --------- --------- --------- --------- $ 322,830 $ 32,572 $ (31,476) $ 323,926 ========= ========= ========= =========
12 15 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SKYWEST, INC. By /s/ Jerry C. Atkin -------------------- Jerry C. Atkin Chairman, President and Chief Executive Officer Pursuant to the requirement of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Names Capacities Date ----- ---------- ---- /s/ Jerry C. Atkin Chairman of the Board, President and June 24, 1996 - ----------------------------- Chief Executive Officer Jerry C. Atkin /s/ Sidney J. Atkin Vice Chairman of the Board June 24, 1996 - ----------------------------- and Director Sidney J. Atkin /s/ Bradford R. Rich Executive Vice President - Finance June 24, 1996 - ----------------------------- Chief Financial Officer and Treasurer Bradford R. Rich (principal financial and accounting officer) /s/ J. Ralph Atkin Director June 24, 1996 - ----------------------------- J. Ralph Atkin /s/ Mervin J. Cox Director June 24, 1996 - ----------------------------- Mervyn K. Cox /s/ Ian M. Cumming Director June 24, 1996 - ----------------------------- Ian M. Cumming Director - ----------------------------- Steven F. Udvar-Hazy Director - ----------------------------- W. Martin Braham Director - ----------------------------- Henry J. Eyring Director - ----------------------------- Hyrum W. Smith
13 EX-10.18 2 ANNUAL REPORT 1 CONFIDENTIAL TREATMENT The attached agreement constitutes Exhibit 10.18 to the Annual Report on Form 10-K for SkyWest, Inc. for the period ended March 31, 1996. The Registrant has requested CONFIDENTIAL TREATMENT for portions of this Exhibit pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. The Registrant seeks an exemption from the Freedom of Information Act based on 17 C.F.R. section 200.80(b)(4). 2 MARKETING AND CODE SHARING AGREEMENT This Agreement is made this 24th day of October, 1995, by and between CONTINENTAL AIRLINES, INC. ("CAL"), a Delaware corporation, and SKYWEST AIRLINES, INC. ("SWA"), a Delaware corporation. Recitals CAL and SWA are each certificated air carriers providing air transportation services in their respective areas of operation. CAL and SWA desire to engage in joint marketing activities designed to increase the flow of air passenger traffic on aircraft operated by both parties. CAL and SWA desire to cooperate in the coordination of schedules by allowing SWA to market its flight operations under the CO* designator. NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, CAL and SWA hereby agree as follows: 1. SCHEDULES TO BE OPERATED. To the extent permitted by applicable laws, and as mutually agreed, (i) SWA operated flights to and from Los Angeles International Airport ("LAX") that connect with a CAL operated flight, at LAX, to or from Cleveland Hopkins International Airport, Newark International Airport, Honolulu International Airport, Houston Intercontinental Airport, New Orleans International Airport, San Antonio International Airport, any airports served by CAL or Continental Express, Inc. from the above mentioned airports, and any other mutually agreed to airports and (ii) SWA operated flights that connect with another SWA operated flight at LAX, will be marketed under not only SWA's or another airline's designator code, but also under CAL's "CO*" designator code. Exhibit A hereto sets forth the flight segments operated by SWA that, when connecting at LAX with a flight operated by CAL or SWA, will utilize the CO* designator code (the "CO* Flights") at the commencement of this Agreement. The parties shall meet together every six months that this Agreement is in effect to discuss the appropriateness of expanding or contracting the list of city pairs on Exhibit A. Flights covering an origin and destination market that is created by a CO* Flight connecting at LAX to a flight operated by CAL (or vice versa) are hereinafter referred to as "Through Flights." Except as expressly set forth herein, neither party shall have any obligation to extend CO* Flights to other routes or to maintain operations on any routes and no such obligation can be created by any oral statements or representations or course of dealing by a party, but only by an express written agreement. For purposes of this Agreement, a CAL operated flight does not include flights operated by carriers other than CAL utilizing the CO* designator code, other than those flights operated by Continental Express, Inc. or Continental Micronesia, Inc. -1- 3 2. CODE SHARING LICENSE. (a) Grant of License. Subject to the terms and conditions of this Agreement, CAL hereby grants to SWA a nonexclusive, nontransferable, revocable license to use the CO* designator code on all of its flights operated as CO* Flights. (b) Control of CO* Flights. SWA shall have sole responsibility for and control over, and CAL shall have no responsibility for, control over or obligations or duties with respect to, each and every aspect of SWA's operations including, without limitation, scheduling (except as provided in Section 13 hereof), pricing (except as provided in Section 14 hereof), planning of flight itineraries and routings, reservations, reservations control/yield management, dispatch, fueling, weight and balance, flight release, maintenance, and flight operations and compliance with applicable rules and regulations. 3. CONFIDENTIAL INFORMATION. Neither SWA nor CAL shall disclose the terms of this Agreement or any proprietary information with respect to the other obtained as a result of this Agreement, either during the term hereof or thereafter except as may be required by law or by any order of a court or administrative agency, and then on ten days' notice to the other. The parties hereto recognize that, in the course of the performance of each of the provisions hereof, each party may be given and may have access to confidential and proprietary information of the other party, including proposed schedule and fare changes, statistical data regarding loads and fares, sales and promotional programs and other operating and competitive information ("Confidential Information"). Each party shall preserve, and shall ensure that each of its officers, agents, consultants and employees who receive Confidential Information preserve, the confidentiality of the other party's Confidential Information. 4. QUALITY OF SERVICE. SWA shall perform its service in a timely, expert and quality manner, in accordance with the standards of customer service reasonably established by CAL. Without limitation, SWA shall maintain its aircraft in an airworthy, clean, attractive and comfortable condition and strive to maintain a completion factor of at least 98% (without considering delays caused by air traffic control or weather). SWA will, in conducting CO* Flight operations, employ prudent safety and loss prevention policies. 5. AUDIT. CAL shall have the right, at its own cost, to inspect, review, and observe SWA's operations of CO* Flights, and/or to conduct a full safety and/or service audit of SWA's operations, manuals and procedures reasonably related to CO* Flights, at such intervals as CAL shall reasonably request. In the exercise of such right, CAL does not undertake any responsibility for the performance of SWA's operations. CAL shall coordinate its safety and service audits with SWA so as to avoid disruptions of SWA's operations. Any safety audit may include, without limitation, maintenance and operation procedures, crew planning, reservations, passenger and baggage handling, customer service, personnel records, spare parts, inventory records, training records and manuals, flight, flight training and operational personnel records. Each party shall have the right, upon reasonable notice, at its expense and no more than once during a six month period, to inspect and audit the financial books and records of the other party as they relate to this Agreement. Such financial audit may be conducted by the auditing party's officers, employees -2- 4 or third party advisors and the party being audited will reasonably cooperate with such individuals in the performance of the audit. 6. SALES AND MARKETING PROGRAMS. The parties will work to develop mutually agreeable joint sales and marketing programs to help promote the code share relationship and increase revenues from same. The parties will conduct quarterly joint sales and marketing meetings to discuss possible sales and marketing programs and strategies. SWA will participate in CAL's frequent flyer program, OnePass, in accordance with the terms and conditions of a separate agreement entered into by the parties hereto, and attached hereto as Exhibit B. SWA shall have a nonexclusive, nontransferable, revocable license to use the CAL Service Marks (as defined below) in its marketing programs for the purpose of promoting CO* Flights. All advertising programs using any CAL Service Marks shall be subject to CAL's prior approval. In general, SWA's use of the CAL Service Marks shall do no more than identify the code share relationship between CAL and SWA, and advertise that schedules are coordinated to provide convenient connections. Any marketing program, advertising brochures, schedules, signs or information disseminated to the public or intended to be disseminated to the public ("Advertising Material") shall reflect that CAL and SWA are operated separately and shall comply with any DOT policy on airline designator code sharing. SWA is specifically prohibited from using any of the CAL Service Marks on its aircraft or other equipment, on its stationary, or elsewhere unless SWA has received prior specific authorization in writing from CAL. SWA hereby acknowledges CAL's exclusive ownership of the CAL Service Marks and agrees that it will not do anything that would infringe, abridge or adversely affect, impair or reduce the value or validity of the CAL Service Marks. In no event shall SWA allow the use of any CAL Service Marks in marketing, selling, promoting or otherwise identifying or referencing any flight which is not a CO* Flight. SWA hereby grants to CAL a nonexclusive, nontransferable, revocable license to use the name SkyWest Airlines and any other SWA Service Marks in CAL's marketing programs, for the purpose of promoting the CO* Flights. As used herein the term "Service Marks" shall include, without limitation: (i) with respect to CAL: "Continental", the "CO" and "CO*" designator codes, and "OnePass", and (ii) with respect to SWA: "SkyWest" and various trademarks, service marks and logos used by it, but not including its designator code. 7. PUBLIC RELATIONS. In the event of any irregularity in CO* Flights' operations, including, without limitation, any event causing damage to persons or property, SWA shall identify itself as being operated independently of CAL, and as being solely responsible for its operations. SWA may state that it holds a code sharing license from CAL and that it obtains certain services from CAL if third parties inquire as to such relationship. 8. IRREGULARITIES IN OPERATIONS. SWA shall promptly notify CAL of all irregularities involving a CO* Flight which result in any damage to persons or property as soon as such information is available and shall furnish to CAL as much detail as practicable. -3- 5 9. REPORTING OBLIGATION. (a) Changes of Service. Each party shall give the other party 60 days' advance written notice (or notice as far in advance as possible if 60 days is impracticable) of any intended (i) changes to its operating specifications, or (ii) material changes to the manner of conducting its business or the nature of its product. In the event any such change materially affects the value or risk to the other party of this Code Sharing Agreement in the other party's reasonable judgment, the other party shall be entitled to terminate this agreement if the change is implemented. In addition, each party will give the other party 60 days' advance written notice (or notice as far in advance as possible if 60 days is impracticable) prior to making a schedule change that affects a Through Flight. (b) Correspondence from Government Authorities. SWA shall immediately provide CAL copies of any correspondence received from any government authority which, with respect to CO* Flights, references (i) any alleged noncompliance with rules or regulations affecting air transportation, or (ii) any investigation of SWA performed or proposed by any government authority, including, without limitation, any communication issued by a government authority concerning the airworthiness of SWA's aircraft, the compliance of SWA's personnel with required operational or training procedures or any other matter relating to the safe operation of SWA aircraft. (c) Notice of Complaints. SWA shall monthly furnish CAL a summary of complaints, notices of violation, requests to cease activity or similar correspondence which reasonably relate to CO* Flights and which are received by SWA from passengers, any government authority, or other parties. SWA shall comply with CAL's reasonable requests for actual copies of any such documents. (d) Operations. SWA shall provide CAL monthly written reports containing the following data for the CO* Flights: (i) the total number of scheduled, actual and canceled departures for the month, by flight and city pair; (ii) the load factor and the total number of revenue passengers and (separately) non-revenue passengers boarded, by flight number and city pair and separated by passengers connected to CAL and passengers carried locally; and (iii) completion and on-time performance data by system and market. 10. FLIGHT DISPLAY. (a) All Through Flights will be included in the availability and fare displays of all computerized reservations systems in which CAL and SWA participate, the Official Airline Guide (to the extent agreed upon) and CAL's and SWA's internal reservation systems under the CAL designator code (CO or CO*) as well as, with respect to the CO* Flights, SWA's designator code, to the extent possible. CAL and SWA will take the -4- 6 appropriate measures necessary to ensure the display of Through Flights in accordance with the preceding sentence. (b) CAL and SWA will disclose and identify the CO* Flights utilizing the CO* designator code to the public as actually being flights of and operated by the operating party, in at least the following ways: (i) a symbol will be used in timetables and computer reservation system indicating that CO* Flights are actually operated by SWA; (ii) to the extent reasonable, messages on airport flight information displays will identify the operator of flights shown as CO* Flights; (iii) CAL and SWA advertising concerning CO* Flights and CAL and SWA reservationists will disclose the operator of each flight; and (iv) in any other manner prescribed by law. 11. TERMS AND CONDITIONS OF CARRIAGE AND CLAIMS PROCEDURES. (a) In all cases, the contract of carriage between a passenger and a carrier on a Through Flight will be that of the party that operates the flight. (b) The parties will use existing IATA procedures when handling and settling claims made by customers in connection with Through Flights. 12. IRREGULARITY HANDLING. (a) In the event of flight delays, cancellations or other schedule irregularities that affect CO* Flights, SWA will inform CAL of a pertinent information concerning an irregularity for customer information purposes. (b) The parties agree that they will cooperate in all available ways to accommodate passengers experiencing flight irregularities in connection with a Through Flight and that neither will forbear from providing such assistance because the other may have been responsible for the flight irregularity. In the event of a flight irregularity, the party causing or experiencing the irregularity shall bear all related costs associated with accommodating the passengers who have been delayed. The parties will review existing procedures for accommodating interline passengers with respect to flight irregularities and oversales to determine their adequacy for the purposes of this Agreement and will make such adjustments in existing procedures as they find necessary or appropriate. 13. AIRPORT OPERATIONAL ASSISTANCE. The parties intend to work to establish a seamless connection for passengers connecting from a CO* Flight to a flight operated by CAL (or vice versa) while traveling on a Through Flight. CAL and SWA will cooperate to coordinate and maintain their schedules to minimize the waiting time and to maximize convenience of passengers -5- 7 who are connecting from a CAL to a SWA flight segment (or vice versa) on Through Flights. Each party will provide the other with the airport operational assistance that is required to assure schedule compatibility for Through Flights. The parties will use their respective reasonable efforts to align gates and ticket counter space where CO* Flights operate. 14. PRICING AND CAPACITY CONTROL OF SHARED CODE SEGMENTS. CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 15. REVENUE ALLOCATION. CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 16. TICKET HANDLING. (a) Passenger Ticket Stock and Accounting Procedures. CAL will provide SWA with CAL passenger ticket stock in accordance with the following procedures: (i) CAL will supply SWA with adequate supplies of all necessary passenger ticket forms, bag tags, boarding passes, validator plates and other documents and materials necessary to enable SWA to operate in a manner consistent with CAL procedures, upon request to the office designated by CAL from time to time. A receipt for all ticket forms delivered to SWA shall be signed by an appropriate representative of SWA, and SWA shall comply with CAL's procedures with -6- 8 respect to the control of, safeguarding of and accounting for ticket stock and validator plates. All tickets and other documents and materials supplied by CAL for use in connection with this Agreement shall be and remain the property of CAL and shall be held in trust for CAL by SWA and issued or otherwise utilized only as provided in this Agreement. (ii) SWA shall be responsible for the safe and secure custody and care of all tickets and other documents and materials furnished by CAL. The tickets and other documents of CAL shall be secured in a manner satisfactory to CAL and consistent with any applicable LATA standards and specifications. Such tickets and documents and all records relating to them and to the sale of transportation on CAL shall at all times be made available for inspection by CAL or its designated representative. (iii) All tickets shall be issued by SWA in accordance with the currently effective tariffs and contract of carriage applicable to the transportation being purchased and applicable trade manuals, all in accordance with appropriate instructions which may be issued form time to time by CAL. (iv) All tickets shall be issued by SWA in numerical sequence and all must be accounted for at each reporting period. All tickets issued by SWA and all coupons of voided tickets shall be sent to the office or offices designated by CAL from time to time on the work day following issuance. (v) All checks accepted for the sale of tickets on CAL ticket stock shall be payable to CAL and acceptance of checks shall conform to CAL's acceptance procedures. Any losses resulting from returned checks where SWA has failed to follow CAL's acceptance procedures, will be charged to SWA after CAL exhausts reasonable efforts to collect. (vi) All tickets for payment other than cash or check shall be supported by such documents as shall be specified by CAL. (vii) SWA shall assume full liability for and agrees to defend, indemnify and hold CAL harmless from and against any and all claims, demands, liability, expenses, losses, costs or damages whatsoever in any manner arising out of or attributed to SWA's possession, issuance, loss, misapplication, theft, or forgery of tickets, other travel documents, or supplies furnished by CAL to SWA including but not limited to lost ticket forms, bag tags, boarding passes or other documents and errors in ticket issuance. In the event SWA loses or has stolen any ticket, fails to return tickets or other documents to CAL upon demand, fails to remit pursuant to this Agreement the monies to which CAL is entitled from the sale of any such ticket or document, or fails to account properly for any such tickets or document, SWA shall be liable to CAL for the agreed value of any such ticket or document, which is agreed to be the actual damages or loss sustained by CAL from usage of any such ticket or document, as measured by -7- 9 the then current, non-discounted retail price of the transportation or other service obtained with the ticket or document or, if such value cannot be determined, $2,000.00 U.S. per ticket. (viii) SWA may accept all credit cards honored by CAL and is appointed CAL's agent for such purpose, provided: 1. SWA observes the floor limits for each credit card set by the issuer of the credit card ("Card Issuer") as amended by the Card Issuer from time to time; 2. SWA accepts each credit card within the terms of the contracts between CAL and Card Issuer; 3. SWA complies with Part 374 of DOT's Economic Regulations; 4. SWA does not accept blacklisted cards; 5. SWA shall reimburse CAL for any losses incurred by CAL as a result of Contractor's failure to observe the terms of this section or of the contracts between CAL and the Card Issuer; 6. SWA complies with all of CAL's procedures; and 7. SWA shall reimburse CAL for all charge backs, returns and other charges attributable to or arising from SWA's acceptance of credit cards, unless either (i) CAL has realized an offsetting credit (including through the return and cancellation of a previously issued ticket) or (ii) such charge back, return or other charge resulted from the gross negligence, recklessness, or willful misconduct of CAL. (ix) SWA shall reimburse CAL for any credit card fees, commissions, discounts, etc., paid by CAL or deducted from payments made to CAL with respect to sales of tickets for travel on SWA, and for any bad debt expense realized by CAL with respect to tickets sold by SWA. (x) SWA shall prepare and furnish to CAL all written reports, accounts, and documentation with regard to ticket handling that CAL may require daily or at such lesser frequency as CAL may prescribe, at its sole discretion, from time to time during the life of this Agreement. SWA will comply with all reasonable procedures specified by CAL with regard to ticket handling. Within two business days after the termination of this Agreement for any reason, SWA will return to CAL all passenger ticket forms, bag tags, boarding passes and other documents provided to SWA by CAL pursuant to this Agreement. - 8 - 10 (b) Deposits. SWA shall deposit all funds, both cash and checks, realized from the sale of tickets on CAL ticket stock by it in CAL accounts maintained at depositories from time to time designated by CAL on or before the first banking day following receipt of such funds. (c) Delta Ticket Stock. SWA will be permitted to use Delta Airlines' ticket stock to ticket passengers for travel on Through Flights, with the understanding that CAL will suffer no adverse effects as a result of such use. SWA shall hold harmless and indemnify CAL from and against any such adverse effects resulting from such use of Delta Airlines' ticket stock. The parties will work together to minimize any such adverse effects. (d) Ticket Acceptance. For the term of this Agreement, CAL hereby authorizes SWA to accept flight coupons written for CO* Flights in accordance with any applicable restrictions. SWA shall not endorse or refund any such coupons without CAL's written consent, except in accordance with CAL's contract of carriage. In addition, SWA shall accept and is authorized to accept the coupons and certificates set forth on Exhibit C hereto in accordance with the terms and conditions applicable thereto. 17. COMPLIANCE WITH LAWS AND REGULATIONS. CAL and SWA each represent, warrant, and agree that performance of its respective obligations under this Agreement shall be conducted and all of its personnel shall at all times meet, be in full compliance with an have all required licenses under any and all applicable statutes, orders, rules and regulations, and satisfy all applicable insurance requirements, whether in effect or hereafter promulgated of the United States National Transportation Safety Board, Department of Transportation or Federal Aviation Administration, Department of Defense or any country or territory with jurisdiction over the Through Flights. 18. INDEPENDENT PARTIES. (a) Independent Contractors. It is expressly recognized and agreed that each party, in its performance and otherwise under this Agreement, is and shall be engaged and acting as an independent contractor and in its own independent and separate business; that each party shall retain complete and exclusive control over its staff and operations and the conduct of its business; and that each party shall bear and pay all expenses, costs, risks and responsibilities incurred by it in connection with its obligations under this Agreement. Neither CAL nor SWA nor any officer, employee, representative, or agent of CAL or SWA shall in any manner, directly or indirectly, expressly or by implication, be deemed to be, or make any representation or take any action which may give rise to the existence of, any employment, agent, partnership, of other like relationship as between CAL and SWA but each party's relationship as respects the other party in connection with this Agreement is and shall remain that of an independent contractor. (b) Status of Employees. The employees, agents and/or independent contractors of SWA shall be employees, agents, and independent contractors of SWA for all purposes, and under no circumstances shall be deemed to be employees, agents or independent contractors of CAL. The employees, agents and independent contractors of CAL shall be employees, agents and independent contractors of CAL for all purposes, and under no -9- 11 circumstances shall be deemed to be employees, agents or independent contractors of SWA. In its performance under this Agreement, each party shall act as an independent contractor and not as an agent for the other. CAL shall have no supervisory power or control over any employees, agents or independent contractors employed by SWA, and SWA shall have no supervisory power or control over any employees, agents and independent contractors employed by CAL. (c) Liability For Employee Costs. Each party, with respect to its own employees (hired directly or through a third party), accepts full and exclusive liability for the payment of worker's compensation and/or employer's liability (including insurance premiums where required by law) and for the payment of all taxes, contributions or other payments for unemployment compensation, vacations, or old age benefits, pensions and all other benefits now or hereafter imposed upon employers with respect to its employees by any government or agency thereof or any other party (whether measured by the wages, salaries, compensation or other remuneration paid to such employees or otherwise) and each party further agrees to make such payments and to make and file all reports and returns, and to do everything necessary to comply with the laws imposing such taxes, contributions or other payments. 19. INDEMNIFICATION AND INSURANCE. (a) Indemnification. (i) SWA hereby assumes liability for, and shall indemnify, defend, protect, save and hold harmless CAL, its officers, agents, and employees from and against any and all liabilities, claims, judgements, damages, and losses, including all costs, fees, and expenses incidental thereto, of every type and nature whatsoever, including without limitation those involving (i) death of or injury to any person including, but not limited to, SWA's officers, employees and agents, (ii) loss of, damage to, or destruction of any property whatsoever, including any loss of use thereof, and (iii) trademark, service mark or trade name infringement, provided that such liabilities, claims, judgements, damages or losses are caused by or arise out of (or are alleged to be caused by or arise out of) any alleged acts or omissions of SWA or its officers, employees, or agents which are in any way related to the services contemplated by this Agreement. CAL shall give SWA prompt notice of any claim made or suit instituted against CAL which, if successful, would result in indemnification of CAL hereunder, and CAL shall have the right to compromise or participate in the defense of same to the extent of its own interest. (ii) CAL hereby assumes liability for, and shall indemnify, defend, protect, save and hold harmless SWA, its officers, agents, and employees from and against any and all liabilities, claims, judgements, damages, and losses, including all costs, fees, and expenses incidental thereto, of every type and nature whatsoever, including without limitation those involving (i) death of or injury to any person including, but not limited to, CAL's officers, employees -10- 12 and agents, (ii) loss of, damage to, or destruction of any property whatsoever, including any loss of use thereof, and (iii) trademark, service mark or trade name infringement, provided that such liabilities, claims, judgements, damages or losses are caused by or arise out of (or are alleged to be caused by or arise out of any alleged acts or omissions of CAL or its officers, employees, or agents which are in any way related to the services contemplated by this Agreement. SWA shall give CAL prompt notice of any claim made or suit instituted against SWA which, if successful, would result in indemnification hereunder, and SWA shall have the right to compromise or participate in the defense of same to the extent of its own interest. (b) Insurance Coverage. CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. (i) Subject to Section 19(b)(i) above, each party as appropriate shall cause the policies of insurance described in such Section 19(b)(i) to be duly and properly endorsed by that party's insurance underwriters as follows: 1. as to the policies of insurance described in paragraphs (b)(i)1 and (b)(i)2 of Section 19: (A) to provide that any waiver of rights of subrogation against other parties by one party will not affect the coverage provided thereunder with respect to the other party; and -11- 13 20. TERM AND TERMINATION. (a) Term. The term of this Agreement shall commence on October 24, 1995 and shall continue for a period of two years, unless earlier terminated as provided herein, and shall continue thereafter until either party gives the other party notice of termination at least 90 days prior to the effective date of such termination. In no event shall termination or expiration pursuant to this Section 20(a) be effective unless such 90 days' notice is provided. (b) Termination as a Result of Changes of Law. In the event there is any change in treaties, statues or regulations of air transportation that materially affects the rights and/or obligations presently in force with respect to the air transportation services of CAL or SWA or both, relating to CO* Flights or the Through Flights, then the parties will consult, within 30 days after any of the occurrences described herein, in order to determine or seek mutual agreement as to what, if any changes to this Agreement are necessary or appropriate, including but not limited to the early termination and cancellation of this Agreement. (c) Other Termination Rights. CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. -13- 14 CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 21. BOOKING FEE. CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 22. ENTIRE AGREEMENT, WAIVERS AND AMENDMENTS. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof superseding all prior discussions and agreements, written or oral. This Agreement may not be amended, nor may any of its provisions be waived, except by writing signed by both parties. No delay on the part of either party in exercising any right power or privilege hereunder shall operate as a waiver hereof, nor shall any waiver operate as a continuing waiver of any right, power or privilege. -14- 15 23. NOTICES. All notices given hereunder shall be in writing delivered by hand, certified mail, telex, or telecopy to the parties at the following addresses: If to CAL: Continental Airlines, Inc. Telephone No.: 713-834-2966 2929 Allen Parkway Telecopier No.: 713-520-6329 Houston, Texas 77019 Attention: Vice President Alliance Development With copy to: Continental Airlines, Inc. Telephone No.: 713-834-2948 2929 Allen Parkway Telecopier No.: 713-520-6329 Houston, Texas 77019 Attention: Senior Vice President and General Counsel If to SWA: SKYWEST AIRLINES, INC. Telephone No.: Telecopier No.: With copy to: SKYWEST AIRLINES, INC. Telephone No.: Telecopier No.: 24. SUCCESSORS AND ASSIGNS. Neither party may assign its rights or delegate its duties under this Agreement without the prior written consent of the other party, and any such purported assignment or delegation shall be void. This Agreement shall be binding on the lawful successors of each party. 25. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 26. HEADINGS. The headings in this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 27. COUNTERPARTS. This Agreement may be executed in counterparts, all of which taken together shall constitute one agreement. -15- 16 28. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REFERENCE TO PRINCIPLES OF CHOICE OR CONFLICTS OF LAW. 29. EQUAL OPPORTUNITY. EEO clauses contained at 11 C.F.R. sections 60-1.4, 60-250.4 and 60-741.4 are hereby incorporated by reference. Each party shall comply with all equal opportunity laws and regulations which apply to or must be satisfied by that party as a result of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. CONTINENTAL AIRLINES, INC. SKYWEST AIRLINES, INC. By: /s/ By: /s/ _________________________ __________________________ Title: VP Alliance Operations Title: Executive V.P. - Chief Operating Officer ---------------------- ---------------------------------------- -16- 17 EXHIBIT A CO* Flights NONSTOP ONESTOP LAX - BFL LAX - BFL - SMF LAX - FAT LAX - ONT - FAT LAX - IPL LAX - SBA - SJC LAX - MRY LAX - SBP - SMF LAX - ONT LAX - SNA - MRY LAX - PSP LAX - SNA - PSP LAX - SAN LAX - SBA LAX - SBP LAX - SJC LAX - SMX LAX - SNA LAX - YUM 18 EXHIBIT B CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 19 SCHEDULE B CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 20 SCHEDULE C CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 21 EXHIBIT C CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 22 SPECIAL PRORATE AGREEMENT BETWEEN CONTINENTAL AIRLINES AND SKYWEST AIRLINES CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 23 ATTACHMENT A CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 24 ATTACHMENT B CONFIDENTIAL INFORMATION APPEARING HERE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. 25 SUMMARY FINANCIAL AND OPERATING DATA
Year ended March 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------------------------------------------------------------ Operating revenues (000) $ 251,734 $ 225,398 $ 187,993 $ 146,800 $ 125,310 Operating income (000) $ 5,710 $ 20,341 $ 24,680 $ 11,465 $ 3,802 Net income (000) $ 4,366 $ 13,701 $ 14,396 $ 6,704 $ 1,986 Weighted average shares (000) $ 10,284 $ 11,112 $ 9,883 $ 7,927 $ 7,823 Net income per common share $ .42 $ 1.23 $ 1.46 $ .85 $ .25 Total assets (000) $ 227,550 $ 188,182 $ 184,017 $ 86,945 $ 72,383 Current assets (000) $ 76,462 $ 71,642 $ 87,088 $ 28,243 $ 24,330 Current liabilities (000) $ 43,644 $ 25,603 $ 20,473 $ 15,909 $ 13,012 Long-term debt (000) $ 53,736 $ 29,553 $ 26,647 $ 18,391 $ 13,753 Stockholders' equity (000) $ 115,800 $ 117,684 $ 122,788 $ 42,766 $ 35,310 Return on average equity 3.7% 11.1% 17.4% 17.2% 5.8% Passengers carried 2,340,366 2,073,885 1,730,993 1,523,384 1,317,693 Revenue passenger miles (000) 617,136 488,901 345,414 294,276 250,615 Available seat miles (000) 1,254,334 976,095 727,059 669,724 604,633 Load factor 49.2% 50.1% 47.5% 43.9% 41.4% Break-even loan factor 48.4% 45.5% 41.2% 41.1% 40.8% Yield revenue per passenger mile $ .332 $ .363 $ .439 $ .450 $ .455 Cost per available seat mile $ .166 $ .171 $ .188 $ .191 $ .192 Average passenger trip length 264 236 200 193 190 Number of aircraft at end of year 63 60 55 50 50
QUARTERLY FINANCIAL AND STOCK PRICE DATA
Fiscal Year 1996 ------------------------------------------------------------------ FIRST SECOND THIRD FOURTH YEAR ------------------------------------------------------------------ Operating revenues (000) $ 60,381 $ 69,175 $ 58,991 $ 63,187 $ 251,734 Operating income (loss) (000) $ 4,799 $ 6,565 $ (1,668) $ (3,986) $ 5,710 Net income (loss) (000) $ 3,089 $ 4,109 $ (682) $ (2,150) $ 4,366 Net income (loss) per common share $ .30 $ .40 $ (.07) $ (.21) $ .42 Stock price data: High $ 23.50 $ 25.38 $ 19.75 $ 14.75 $ 25.38 Low $ 14.13 $ 17.00 $ 12.88 $ 12.38 $ 12.38
Fiscal Year 1995 ------------------------------------------------------------------ FIRST SECOND THIRD FOURTH YEAR ------------------------------------------------------------------ Operating revenues (000) $ 58,871 $ 65,551 $ 51,448 $ 49,528 $ 225,398 Operating income (loss) (000) $ 8,448 $ 10,954 $ 1,618 $ (679) $ 20,341 Net income (000) $ 5,367 $ 6,857 $ 1,422 $ 55 $ 13,701 Net income per common share $ .47 $ .60 $ .13 $ .01 $ 1.23 Stock price data: High $ 40.25 $ 29.75 $ 22.50 $ 15.75 $ 40.25 Low $ 20.50 $ 22.00 $ 12.50 $ 11.38 $ 11.38
As of April 30, 1996, there were 1,103 holders of common stock. Cash dividends of $.25 and $.28 per share of outstanding common stock were paid in fiscal years 1996 and 1995, respectively. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS The following table sets forth information regarding the Company's operating cost components:
Fiscal Year ended March 31, -------------------------------------------------------------------------------------------------- 1996 1995 1994 -------------------------------------------------------------------------------------------------- Percent Cents Percent Cents Percent Cents of per of per of per Amount Revenue ASM Amount Revenue ASM Amount Revenue ASM - ------------------------------------------------------------------------------------------------------------------------------------ Salaries, wages and employee benefits $ 56,005 26.5% 4.5 cents $ 49,684 27,0% 5.1 cents $ 44,725 28.4% 6.2 cents Aircraft costs 43,009 20.3 3.5 35,355 19.2 3.6 25,672 16.3 3.5 Maintenance 20,779 9.8 1.6 18,350 10.0 1.9 15,336 9.8 2.1 Fuel 23,084 10.9 1.8 16,625 9.0 1.7 13,094 8.3 1.8 Other 56,794 26.9 4.5 45,742 24.9 4.7 35,684 22.7 4.9 Interest 2,160 1.0 .2 1,086 0.6 0.1 1,816 1.2 0.3 Fleet restructuring and transition 6,247 3.0 .5 -- -- -- -- -- -- -------- ---- --- -------- ---- ---- -------- ---- ---- Total airline expense 208,078 98.4 16.6 cents 166,842 90.7 17.1 cents 136,347 86.7 18.8 cents -------- ---- ---- -------- ---- ---- -------- ---- ---- Non-airline expenses 40,109 99.7 39,315 94.4 28,944 94.0 -------- ---- -------- ---- -------- ---- Total operating expenses and interest $248,187 98.6% $206,157 91.4% $165,291 87.9% -------- ---- -------- ---- -------- -----
Airline operating costs are expressed as a percentage of total airline operating revenues. Non-airline expenses are expressed as a percentage of total non-airline revenues. Total operating expenses and interest are expressed as a percentage of total consolidated revenues. FISCAL 1996 COMPARED TO FISCAL 1995 The Company experienced continued growth in revenue passenger miles ("RPMs"), available seat miles ("ASMs") and passenger enplanements during fiscal 1996 compared to fiscal 1995. Consolidated operating revenues increased 11.7 percent to a record $251.7 million in fiscal 1996 compared to $225.4 million in fiscal 1995. Consolidated net income decreased to $4.4 million, or $.42 per share in fiscal 1996 compared to $13.7 million, or $1.23 per share in fiscal 1995. The fiscal 1996 results include a pretax fleet restructuring and transition expense of $6.2 million, or $.38 per share resulting from a fleet rationalization plan that required a restructuring of the Company's turboprop fleet. The $6.2 million fleet restructuring and transaction expense primarily represents crew related costs associated with the discontinuance of Metroliner aircraft operations as well as accelerated maintenance costs associated with the early termination of Metroliner leases. The amount consists of $2.5 million of costs incurred in fiscal 1996 and an accrual for $3.7 million of fiscal 1997 restructuring costs. The fleet rationalization plan will result in an all Brasilia turboprop fleet and will be completed by the end of fiscal 1997. Passenger revenues, which represented 81.5 percent of total operating revenues, increased 15.5 percent to $205.0 million in fiscal 1996 from $177.6 million in fiscal 1995. The increase is due to a 26.2 percent increase in RPMs offset by an 8.5 percent decrease in yield per RPM to $.332 in fiscal 1996 from $.363 in fiscal 1995. The increase in RPMs is due to the addition of four new Canadair Regional Jets and seven new Brasilia aircraft which replaced eight Metroliner aircraft as their leases expired or were terminated as part of the fleet rationalization program. These aircraft fleet additions and changes resulted in a 28.5 percent increase in ASMs. The growth in ASMs exceeded the growth in RPMs and resulted in a decrease in passenger load factor to 49.2 percent in fiscal 1996 from 50.1 percent in fiscal 1995. Although the passenger load factor was only down .9 points and in spite of a strong trend of growth in demand exceeding growth in capacity during the fourth quarter, passenger enplanements did not meet management's expectations during the first nine months due to the following factors: 1) growing reluctance of airline passengers to book flights on Metroliner aircraft which do not have cabin-class amenities, 2) the schedule restructuring by Delta Airlines, Inc. ("Delta") at the Los Angeles hub which reduced daily departures by 31 percent effective May 1, 1995, thereby reducing the Company's connection opportunities, 3) the impact of indirect competition from low-fare carriers and 4) a continuing reluctance of travel agents to book passengers on the Delta 27 system after Delta instigated commission caps last spring as well as commission overrides being offered by the Company's competitors. Yield per revenue passenger mile decreased 8.5 percent to $.332 in fiscal 1996 compared to $.363 in fiscal 1995. The decrease is due to an 11.9 percent increase in the average passenger trip length resulting from growing regional jet operations. The 8.5 percent decrease coupled with a lower passenger load factor resulted in a decrease in revenue per ASM to $1.69 in fiscal 1996, compared to $1.88 in fiscal 1995. Non-airline revenues, which consist of operations of Scenic Airlines, Inc. and National Parks Transportation, Inc. decreased 3.3 percent to $40.3 million in fiscal 1996 from $41.6 million in fiscal 1995. Non-airline net income decreased to $.4 million in fiscal 1996, from $1.6 million in fiscal 1995. The decreases are due to the following factors: 1) a 13 percent decrease in the overall tourist traffic Grand Canyon/Las Vegas market; 2) the impact of new low-fare competition and 3) the Company's difficulty in differentiating its premium touring packages from low price transportation alternatives. Total airline operating expenses and interest were 98.4 percent of total airline operating revenues in fiscal 1996 compared to 90.7 percent in fiscal 1995. This percentage increase is due to passenger enplanements not meeting expectations which resulted in passenger revenues falling short of internal plans as well as the airline incurring a one-time fleet restructuring and transition expense. Exclusive of the one-time fleet restructuring and transition expense, total airline operating expense increased only 21.0 percent for fiscal 1996 over fiscal 1995 airline operating expenses while ASMs increased 28.5 percent. Due to the continuing fleet rationalization program, management has continued to reduce airline operating costs per ASM. Airline operating costs per ASM decreased to 16.6 cents in fiscal 1996 from 17.1 cents in fiscal 1995. Exclusive of the one-time fleet restructuring and transition expense, airline operating costs per ASM would have been 16.1 cents for fiscal 1996. Salaries, wages and employee benefits decreased as a percentage of airline operating revenues to 26.5 percent in fiscal 1996 from 27.0 percent in fiscal 1995. The decrease is primarily due to lower employee incentive payments resulting from the decrease in profitability for fiscal 1996 compared to fiscal 1995. The average number of full-time equivalent employees was 1,753 for 1996 compared to 1,760 for fiscal 1995. Salaries, wages and employee benefits per ASM decreased to 4.5 cents in fiscal 1996 from 5.1 cents in fiscal 1995. Aircraft costs, including aircraft rent and depreciation, increased as a percentage of airline operating revenues to 20.3 percent in fiscal 1996 from 19.2 percent in fiscal 1995. This percentage increased as a result of the utilization of additional Brasilia and regional jet aircraft as well as passenger traffic falling short of management's expectation resulting in lower operating revenues. Aircraft costs per ASM decreased slightly to 3.5 cents in fiscal 1996 from 3.6 cents in fiscal 1995. Maintenance expense decreased slightly as a percentage of airline operating revenues to 9.8 percent in fiscal 1996 from 10.0 percent in fiscal 1995. Maintenance cost per ASM decreased to 1.6 cents in fiscal 1996 from 1.9 cents in fiscal 1995 due to the increased ASMs generated from operations. Fuel costs increased as a percentage of airline operating revenues to 10.9 percent in fiscal 1996 compared to 9.0 percent in fiscal 1995. The increase is primarily due to an increase in the average fuel price per gallon to $.80 in fiscal 1996 from $.74 in fiscal 1995. As a result, fuel costs per ASM increased slightly to 1.8 cents in fiscal 1996 from 1.7 cents in fiscal 1995. Other expenses, which consist primarily of commissions, landing fees, station rents, computer reservation systems and hull and liability insurance, increased as a percentage of airline operating revenues to 26.9 percent in 28 fiscal 1996 compared to 24.9 in fiscal 1995. The increase is due primarily to significant rate increases in customer reservation system booking fees. In addition, the Company has experienced rate increases in landing fees and general passenger handling charges. Interest expense increased as a percentage of airline operating revenues to 1.0 percent in fiscal 1996 from .6 percent in fiscal 1995. The increase is due to an increase in debt financings of new Brasilia aircraft. Non-airline expenses increased 2.0 percent to $40.1 million for fiscal 1996 compared to $39.3 million for fiscal 1995. These expenses remained relatively constant as no major operational changes were made. FISCAL 1995 COMPARED TO FISCAL 1994 The Company reported a record number of passenger enplanements and consolidated operating revenues of $225.4 million in fiscal 1995 compared to $188.0 million in fiscal 1994. Consolidated net income was $13.7 million, or $1.23 per share in fiscal 1995 compared to $14.4 million, or $1.46 per share in fiscal 1994. The decrease was due to slower traffic growth resulting from negative publicity regarding the safety of regional airlines as well as the continued discount fare environment in which the Company operates. Passenger revenues, which represented 78.8 percent of total operating revenues, increased 17.1 percent to $177.6 million in fiscal 1995 from $151.7 million in fiscal 1994. This increase was due primarily to a 41.5 percent increase in RPMs offset by a 17.3 percent decrease in yield per RPM to $.363 in fiscal 1995 from $.439 in fiscal 1994. The increase in RPMs was due to the introduction of six new Canadair Regional Jets. These jets were being utilized in new service points consisting of Rapid City and Sioux Falls, South Dakota; Eugene, Oregon; Casper, Wyoming; and Burbank, California. With the exception of Eugene, these markets were previously served by Delta and represent markets where Delta successfully transitioned service entirely to the Delta Connection program. The Company was also utilizing these Regional Jets in the Boise, Idaho and Butte, Montana markets where service was upgraded from Brasalia aircraft. During the first seven months of fiscal 1995, the Company continued a positive trend of RPM growth outpacing ASM growth. October 1994 was the 37th out of the previous 38 months that growth in demand exceeded growth in capacity which generated higher passenger load factors. Beginning in October 1994 and continuing through the end of 1995, the Company experienced several factors which negatively affected traffic. First, negative publicity regarding the safety of regional airlines became an issue when other airlines experienced accidents. Second, the Company experienced greater exposure to indirect low-fare competition, primarily in the California corridor. Third, the Company experienced several challenges with equipment dispatch reliability when completion and on-time factors decreased to unacceptable levels. The Company also experience severe weather conditions at certain times, including the flooding in California, and had a Regional jet grounded. The 17.3 percent decrease in yield per RPM was primarily from the introduction of the Canadair Regional Jets where average passenger trip lengths were 425 miles. The remaining decrease was due to the Company experiencing indirect low-fare competition. In order to continue to migrate the impact of this competition, the Company continued to make refinements in the total revenue management system whereby seats were made available based on historical demand as well as future booking curves. To achieve the objective of maximizing revenue, the Company sought to be innovative in designing pricing strategies to optimize the relationship between yield per RPM and load factor. Subsequent to year end, the Company agreed to acquire ten more Brasilia aircraft. These additional aircraft will be used to replace Metroliners wherein the long-term operating leases will be terminated early. This transaction will result in an all Brasilia turboprop fleet by the end of fiscal 1997. On June 15, 1993, Aviation Services West, Inc. ("ASW") acquired from an entity then known as Scenic Airlines, Inc. ("Scenic Airlines") the flight tour operations of Scenic Airlines. Scenic Airlines provided flight tours on a scheduled basis between Las Vegas and the Grand Canyon using specially modified VistaLiner sight-seeing aircraft. Following the acquisition of Scenic Airlines, ASW changed its name to Scenic Airlines, Inc. and has continued the flight tour operations acquired from Scenic Airlines as well as the flight tour business conducted by ASW prior to the acquisition. Non-airline revenues, which consist of the operations of Scenic Airlines, Inc. and National Parks Transportation, Inc., increased 35.2 percent to $41.6 million in fiscal 1995 from $30.8 million in fiscal 1994. This increase was primarily due to having a full year of operations from the acquisition, previously 29 mentioned. Non-airline net income increased 41.4 percent to $1.6 million in fiscal 1995 from $1.2 million in fiscal 1994. ASMs increased 34.3 percent in fiscal 1995 primarily due to Regional Jets being utilized for the full year as well as three additional Brasilia aircraft. The Company replaced two 19-passenger Metroliners as part of the Company's continuing transition to upgrade its fleet. Although passenger enplanements did not meet management's expectation, the Company still had RPM growth in excess of ASM growth causing passenger load factor to increase 50.1 percent in fiscal 1995 from 47.5 percent in fiscal 1994. As a result of passenger traffic not meeting expectations, in conjunction with the decrease in yield per RPM, the positive spread between actual and break-even load factor decreased to 4.6 points in fiscal 1995 compared to 6.3 points in fiscal 1994. As part of the continuing fleet transition, management has continued to reduce airline operating costs per ASM. Total airline operating expenses and interest were 90.7 percent of total airline operating revenues in fiscal 1995 compared to 86.7 percent in fiscal 1994. This percentage increase was due to passenger enplanements not meeting expectations which resulted in passenger revenues falling short of internal plans. Total airline operating costs increased only 22.4 percent for fiscal 1995 over fiscal 1994 airline operating costs on a 34.3 percent increase in ASMs. The Company has continued cost reduction measures with respect to most of its primary operating cost components. As a result, airline operating costs per ASM decreased to 17.1 cents in fiscal 1995 from 18.8 cents in fiscal 1994. Salaries, wages and employee benefits decreased as a percentage of airline operating revenues to 27.0 percent in fiscal 1995 from 28.4 percent in fiscal 1994. The decrease resulted primarily from the Company's efforts to provide an expanded level of service while at the same time creating operational efficiencies. The average number of employees was 1,760 for fiscal 1995 compared to 1,543 for fiscal 1994. The increase in employees was due to hiring additional pilots, flight attendants and customer service personnel for Regional Jet operations. Salaries, wages and employee benefits per ASM decreased to 5.1 cents in fiscal 1995 from 6.2 cents in fiscal 1994 due to the increased ASMs generated from Regional Jet operations. Aircraft costs, including aircraft rent and depreciation, increased as a percentage of airline operating revenues to 19.2 percent in fiscal 1995 from 16.3 percent in fiscal 1994. This percentage increased as a result of the passenger traffic falling short of management's expectations which created a revenue shortfall. Aircraft costs per ASM increased slightly to 3.6 cents in fiscal 1995 from 3.5 cents in fiscal 1994. Maintenance expense increases slightly as a percentage of airline operating revenues to 10.0 percent in fiscal 1995 from 9.8 percent in fiscal 1994. The slight increase was due to the use of the accrual method in accounting for jet engine overhauls which is somewhat offset by the utilization of more Brasilia aircraft which have increased time intervals between engine overhauls. Maintenance cost per ASM decreased to 1.9 cents in fiscal 1995 from 2.1 cents in fiscal 1994 due to the increased ASMs generated from Regional Jet operations. Fuel costs increased as a percentage of airline operating revenues to 9.0 percent in fiscal 1995 compared to 8.3 percent in fiscal 1994. The increase was due to a larger number of gallons used in operations, primarily from jet operations. The increase in usage was somewhat offset by a decrease in the average fuel price per gallon to $.74 in fiscal 1995 from $.78 in fiscal 1994. Fuel costs per ASM decreased to 1.7 cents in fiscal 1995 from 1.8 cents in fiscal 1994 due to the operation of additional Brasilia aircraft which are more fuel efficient, on a cost per ASM basis, than Metroliners and due to the increased ASMs generated from Regional Jet operations. Other expenses, which consist primarily of commissions, landing fees, station rents, computer reservation systems and hull and liability insurance increased as a percentage of airline operating revenues to 24.9 percent in fiscal 1995 compared to 22.7 in fiscal 1994. The increase was due primarily to significant rate increases in customer reservation systems booking fees. In addition, the Computer experienced rate increases in landing fees and general passenger handling charges. Interest expense decreased as a percentage of airline operating revenues to .6 percent in fiscal 1995 from 1.2 percent in fiscal 1994. The decrease was due to the Company reducing its effective interest rate on debt subsidized by the Federative Republic of Brazil. Interest income increased 164.4 percent in fiscal 1995 to $2.8 million compared to $1.1 million in fiscal 1994. The increase was the result of the Company having a larger average amount of cash and short-term investments throughout the year as well as from higher interest rates. 30 Non-airline expenses increased 35.8 percent to $39.3 million for fiscal 1995 compared to $28.9 million for fiscal 1994. The increase was due to having a full year of operations from the acquisition consummated on June 15, 1993, consisting of flight tour operations between Las Vegas and the Grand Canyon. Additionally, the average number of employees was 300 for fiscal 1995 compared to 244 for fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $32.8 million and a current ratio of 1.8:1 at March 31, 1996, compared to working capital of $46.0 million and a current ratio of 2.8:1 at March 31, 1995. The principal sources of funds during fiscal 1996 were $26.9 million generated from operations, $31.0 million in proceeds from the issuance of long-term debt, $5.7 million of net deposits related to aircraft acquisitions, $4.1 million of proceeds from the sale of property and equipment and $2.2 million from the sale of available-for-sale securities. During fiscal 1996 the Company invested $48.5 million in flight equipment and $13.2 million in buildings, ground equipment and other assets. The Company also repurchased $4.2 million of its outstanding common stock, reduced long-term debt by $4.3 million and paid $2.6 million in cash dividends. These factors contributed to a $2.9 million decrease in cash and cash equivalents during fiscal 1996. The Company's position in available-for-sale securities, consisting primarily of bonds and commercial paper, has decreased to $19.1 million at March 31, 1996, compared to $21.3 million at March 31, 1995. The Company took delivery of seven new Brasilia aircraft during the year ended March 31, 1996 as part of the strategy to upgrade its fleet. At March 31, 1996, the Company had agreed to purchase 15 additional Brasilia aircraft and related spare parts inventory and support equipment at an aggregate cost of approximately $120 million, including estimated cost escalations. These aircraft are scheduled for delivery in fiscal 1997. The Company took delivery of four Canadair Regional Jets during the year ended March 31, 1996. There have been ten Regional Jets delivered to date. Depending in large part upon the state of the aircraft financing market and general economic conditions at the time, management will determine whether to purchase aircraft with available cash or acquire the aircraft through third-party, long-term lease arrangements. The Company also has options to acquire ten additional Brasilia aircraft at fixed prices (subject to cost escalation and delivery schedules) exercisable through fiscal 1999. Options to acquire an additional ten Canadair Regional Jets have been obtained and are exercisable at anytime with no expiration. The Company has significant long-term obligations primarily relating to its aircraft fleet. These leases are classified as operating leases and therefore are not reflected as liabilities in the Company's consolidated balance sheets. At March 31, 1996, the Company leased 65 aircraft, including Scenic Airlines aircraft, under leases with remaining terms of up to 16.5 years. Future minimum lease payments due under all long-term operating leases were approximately $378.5 million at March 31, 1996. At March 31, 1996, the Company had outstanding long-term debt, including current maturities, of approximately $60.0 million. All of the long-term debt was incurred in connection with the acquisition of Brasilia aircraft and is subject to subsidy payments through the export support program of the Federative Republic of Brazil. The interest rates on $14.4 million of the $60.0 million long-term debt are floating based on one month and three month LIBOR. The subsidy payments reduced the stated interest rates on the $60.0 million of long-term debt to an average effective rate of approximately 4.0 percent as of March 31, 1996. The debt is payable in installments through January 2006. The Company expended approximately $28.5 million for non-aircraft capital expenditures during the year ended March 31, 1996, consisting primarily of aircraft engine overhauls and aircraft modifications to be made pursuant to industry-wide FAA directives as well as Scenic Airlines' terminal and maintenance facilities. The Company has available $5.0 million in an unsecured bank line of credit with interest payable at the bank's base rate less one-quarter percent, which was 8.0 percent at March 31, 1996. The Company also has available $1.0 million in a revolving line of credit facility issued by the same bank and secured by a lien against the Company's corporate headquarters in St. George, Utah. The $1.0 million revolving facility bears interest at the bank's base rate plus one-half percent. The amount available under the facility will be reduced to $.5 million on December 1, 1996, and will expire on December 1, 1997. 31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To SkyWest, Inc.: We have audited the accompanying consolidated balance sheets of SkyWest, Inc. (a Utah corporation) and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 financial position of SkyWest, Inc. and subsidiaries as of March 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. Arthur Andersen LLP Salt Lake City, Utah May 24, 1996 REPORT OF MANAGEMENT The integrity and objectivity of the information presented in this Annual Report are the responsibility of SkyWest, Inc. management. The consolidated financial statements contained in this report have been audited by Arthur Andersen LLP, independent public accountants, whose report appears on this page. The Company maintains a system of internal controls that provides reasonable assurance as to the integrity and reliability of the financial statements, the safeguarding of its assets against loss or unauthorized use and the prevention and detection of fraudulent financial reporting. The Board if Directors pursues its responsibility for these statements through its Audit Committee, which consists solely of directors who are neither officers nor employees of the Company. The Audit Committee meets periodically with the independent public accountants, the internal auditors and representatives of management to discuss internal accounting control, auditing and financial reporting matters. /s/ Jerry C. Atkin /s/ Bradford R. Rich Jerry C. Atkin Bradford R. Rich Chairman, President and Executive Vice President-Finance, Chief Executive Officer Chief Financial Officer and Treasurer 32 CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 31, - ---------------------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 24,529 $ 27,416 Available-for-sale securities 19,097 21,309 Receivables, less allowance for doubtful accounts of $221 in 1996 and $215 in 1995 12,893 7,004 Inventories 8,923 7,179 Other current assets 11,020 8,734 -------------------- Total current assets 76,462 71,642 -------------------- PROPERTY AND EQUIPMENT, AT COST: Aircraft and rotable spares 171,840 127,004 Buildings and ground equipment 39,092 28,866 Deposits on aircraft and rotable spares 3,603 9,265 Rental vehicles 2,237 1,849 -------------------- 216,772 166,984 Less-accumulated depreciation and amortization (71,701) (56,743) -------------------- 145,071 110,241 -------------------- OTHER ASSETS 6,017 6,299 -------------------- $227,550 $188,182 -------------------- The accompanying notes are an integral part of these consolidated balance sheets.
33
March 31, ------------------------------- 1996 1995 -------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 6,236 $ 3,747 Current portion of deferred credits 1,614 803 Trade accounts payable 23,740 13,789 Accrued salaries, wages and benefits 5,451 4,647 Taxes other than income taxes 1,330 1,353 Air traffic liability 1,485 1,264 Fleet restructuring accrual 3,788 -- -------- -------- Total current liabilities 43,644 25,603 -------- -------- LONG-TERM DEBT, less current maturities 53,736 29,553 -------- -------- DEFERRED CREDITS, less current portion -- 2,308 -------- -------- DEFERRED INCOME TAXES PAYABLE 14,370 13,034 -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES (Notes 3 and 7) STOCKHOLDERS' EQUITY: Preferred stock, 5,000,000 shares authorized; none issued -- -- Common stock, no par value; 40,000,000 shares authorized; 11,521,808 and 11,468,056 issued, respectively 88,183 87,658 Retained earnings 47,902 46,117 Treasury stock, at cost; 1,474,600 and 1,150,000 shares, respectively (20,285) (16,091) -------- -------- Total stockholders' equity 115,800 117,684 -------- -------- $227,500 $118,182 -------- --------
34 CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts)
For the years ended March 31, ------------------------------------------------------------------------------- 1996 1995 1994 ------------------------------------------------------------------------------- OPERATING REVENUES: Passenger $ 205,034 $ 177,588 $ 151,699 Freight 4,291 3,802 3,099 Public service and other 2,159 2,401 2,411 Non-airline 40,250 41,607 30,784 ------------------------------------ Total operating revenues 251,734 225,398 187,993 ------------------------------------ OPERATING EXPENSES: Flying operations 85,117 68,135 52,256 Aircraft, traffic and passenger service 32,522 28,218 22,621 Maintenance 28,713 25,530 21,853 Promotion and sales 25,965 20,369 16,527 Depreciation and amortization 15,392 11,896 8,967 General and administrative 11,962 11,605 12,306 Fleet restructuring and transition 6,247 -- -- Non-airline 40,106 39,304 28,783 ------------------------------------ Total operating expenses 246,024 205,057 163,313 ------------------------------------ OPERATING INCOME 5,710 20,341 24,680 ------------------------------------ OTHER INCOME (EXPENSE): Interest expense (2,163) (1,100) (1,978) Interest income 2,707 2,826 1,069 Gain on sales of property and equipment 556 713 74 ------------------------------------ Total other income (expense), net 1,100 1,899 (835) ------------------------------------ INCOME BEFORE PROVISION FOR INCOME TAXES 6,810 22,240 23,845 PROVISION FOR INCOME TAXES 2,444 8,539 9,449 ------------------------------------ NET INCOME $ 4,366 $ 13,701 $ 14,396 ------------------------------------ NET INCOME PER COMMON SHARE $ .42 $ 1.23 $ 1.46 ------------------------------------ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,283,918 11,111,596 9,883,036 ------------------------------------
The accompanying notes are an integral part of these consolidated statements. 35 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands, except per share amounts)
Common Stock Treasury Stock ---------------------- ---------------------- Retained Shares Amount Shares Amount Earnings - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 1993 8,055,618 $20,079 - $ - $22,687 Net income - - - - 14,396 Exercise of common stock options (at prices ranging from $3.83 to $4.58 per share) 145,188 635 - - - Tax benefit from exercise of common stock options - 861 - - - Sale of common stock 3,244,250 65,670 - - - Cash dividends (at $.15 per share) - - - - (1,540) --------------------------------------------------------------------------- BALANCE AT MARCH 31, 1994 11,445,056 87,245 - - 35,543 Net income - - - - 13,701 Exercise of common stock options (at prices ranging from $3.83 to $5.50 per share) 23,000 116 - - - Tax benefit from exercise of common stock options - 228 - - - Compensation expense related to grant of stock options - 69 - - - Purchase of treasury stock - - (1,150,000) (16,091) - Cash dividends (at $.28 per share) - - - - (3,127) --------------------------------------------------------------------------- BALANCE AT MARCH 31, 1995 11,468,056 87,658 (1,150,000) (16,091) 46,117 Net income - - - - - Exercise of common stock options (at prices ranging from $3.83 to $5.50 per share) 27,500 114 - - - Sale of common stock under employee stock purchase plan 26,252 287 - - - Tax benefit from exercise of common stock options - 41 - - - Compensation expenses related to grant of stock options - 83 - - - Purchase of treasury stock - - (324,600) (4,194) - Cash dividends (at $.25 per share) - - - - (2,581) --------------------------------------------------------------------------- BALANCE AT MARCH 31, 1996 11,521,808 $88,183 (1,474,600) $(20,285) $47,902 ===========================================================================
The accompanying notes are an integral part of these consolidated statements. 36 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
For the years ended March 31, - ------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,366 $ 13,701 $ 14,396 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,392 11,896 8,967 Compensation expense related to grant of stock options 83 69 - Gain on sales of property and equipment (556) (173) (74) Increase in allowance for doubtful accounts 6 71 1 Maintenance expense related to disposition of rotable spares 173 240 165 Deferred income taxes 1,336 2,050 5,047 Amortization of deferred credits (1,497) (817) (818) Non-airline depreciation and amortization 2,742 2,090 1,589 Tax benefit from exercise of common stock options 41 228 861 Changes in operating assets and liabilities: (Increase) decrease in receivables (5,895) 2,721 (1,467) (Increase) decrease in inventories (1,744) (1,305) 218 Increase in other current assets (2,286) (5,267) (1,643) Increase in trade accounts payable 9,951 3,762 4,222 Increase in fleet restructuring accrual 3,788 - - Increase in other current liabilities 1,005 692 1,337 ------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 26,905 29,958 32,801 ==================================== CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities - (9,760) (9,385) Proceeds from sale of available-for-sale securities 2,212 - - Acquisition of property and equipment: Aircraft and rotable spares (48,508) (23,538) (35,916) Deposits on aircraft and rotable spares (3,053) (7,653) (5,382) Buildings and ground equipment (10,281) (5,851) (2,799) Rental vehicles (2,842) (2,229) (1,548) Proceeds from sales of property and equipment 4,114 1,370 861 Decrease in deposits on aircraft and rotable spares 8,715 4,275 1,000 Increase in other assets (447) (38) (5,089) ------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (50,090) (43,424) (58,258) ==================================== CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 401 116 66,305 Purchase of treasury stock (4,194) (16,091) - Payment of cash dividends (2,581) (3,127) (1,540) Reduction of long-term debt (4,329) (3,534) (18,751) Proceeds from issuance of long-term debt 31,001 7,116 26,012 ------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 20,298 (15,520) 72,026 ==================================== (Decrease) increase in cash and cash equivalents (2,887) (28,986) 46,569 Cash and cash equivalents at beginning of year 27,416 56,402 9,833 ------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,529 $ 27,416 $ 56,402 ==================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 2,060 $ 1,074 $ 2,074 Income taxes 3,090 6,917 5,287
The accompanying notes are an integral part of these consolidated statements. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying consolidated financial statements include the accounts of SkyWest, Inc. (a Utah corporation) and its wholly owned subsidiaries, SkyWest Airlines, Inc., National Parks Transportation, Inc. and Scenic Airlines, Inc., collectively (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. AVAILABLE-FOR-SALE SECURITIES Effective April 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Investments in Debt and Equity Securities" ("SFAS No. 115"). The adoption of SFAS No. 115 had no effect on net income. In accordance with the provisions of SFAS No. 115, all of the Company's investments in debt and equity securities have been classified as available-for-sale securities and are recorded at fair market value. Significant unrealized holding gains and losses will be recorded as a separate component of stockholders' equity. INVENTORIES Inventories include expendable parts, fuel and supplies and are valued at weighted average cost less an allowance for obsolescence. Expendable parts are charged to expense as used. INCOME TAXES The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Investment tax credits have been accounted for by the flow-through method. As of March 31, 1996 and 1995, the Company had recorded current deferred tax assets of $3,228,000 and $1,476,000, respectively (which are included in other current assets), and deferred income taxes payable of $14,370,000 and $13,034,000, respectively. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows: ---------------------------------------------------- Aircraft and rotable spares 3-14 years Buildings and ground equipment 3-31.5 years Rental vehicles 4 years
MAINTENANCE The Company operates under an FAA approved continuous inspection and maintenance program. The cost of maintenance is charged to expense when incurred. The Company uses the deferred method of accounting for EMB-120 engine overhauls and uses the accrual method of accounting for regional jet engine overhauls. PASSENGER AND FREIGHT REVENUES Passenger and freight revenues are recognized when service is provided. Passenger tickets sold but not used and the liability to other airlines are recorded as air traffic liability. NET INCOME PER COMMON SHARE Net income per common share is calculated using the weighted average number of common shares outstanding during the year. No material dilution results from common stock equivalents which are outstanding options to purchase common stock. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, available-for-sale securities, receivables and accounts payable approximate fair values because of the immediate or short-term maturity of these financial instruments. The fair value of the Company's long-term debt is estimated based on current rates offered to the Company for similar debt and approximates $58,121,000 as of March 31, 1996, as compared to the carrying amount of $59,972,000. RECENT ACCOUNTING PRONOUNCEMENT In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 is effective for fiscal years beginning after December 15, 1995. Management does not expect that the adoption of SFAS No. 121 will have a material impact on the Company's financial position or results of operations. (2) ACQUISITION OF FLIGHT TOUR OPERATIONS OF SCENIC AIRLINES, INC. AND SEGMENT INFORMATION ACQUISITION On April 9, 1993, the Company, through its wholly-owned subsidiary Aviation Services West, Inc. ("ASW"), entered into an agreement to acquire certain assets of the flight tour operations (the "Flight Tour Operations") of an entity then known as Scenic Airlines, Inc. (such assets are defined herein as "Scenic Airlines") located in Las Vegas, Nevada. Scenic Airlines provided air transportation and air tours on a scheduled basis between Las Vegas and the Grand Canyon. On June 15, 1993, the acquisition was consummated and was accounted for using the purchase method. The purchase price was allocated to the following assets (in thousands): ------------------------------------------------------ License agreement and noncompete agreement $4,000 Receivables 1,342 Equipment 488 Inventory and other 311 ------ $6,141 ======
In addition, the agreement included a commitment by ASW, which at the time of the acquisition leased four Twin Otter VistaLiner aircraft, to lease an additional 14 VistaLiner aircraft pursuant to renewable operating leases with terms ranging between one to six years. Since the acquisition occurred in the first quarter of fiscal year 1994, the pro forma impact would not differ significantly from the actual results reported. Subsequent to the acquisition, ASW changed its name to Scenic Airlines, Inc. and has continued the flight tour operations acquired from Scenic Airlines as well as the flight tour business conducted by ASW prior to the acquisition. SEGMENT INFORMATION Non-airline operating revenues and expenses primarily represent the operations of Scenic Airlines, Inc. ("Scenic") and National Parks Transportation, Inc. ("NPT"), both wholly-owned subsidiaries of SkyWest, Inc. Scenic provides air tours and general aviation services to the scenic regions of northern Arizona, southern Utah and southern Nevada, commonly referred to as the "Grand Circle." The primary aircraft used to accomplish scenic tours are 19-passenger deHavilland Twin Otter VistaLiners. NPT provides car rental services through a fleet of Avis vehicles located at five airports served by SkyWest Airlines, Inc. Information related to this segment of the Company's business is as follows (in thousands):
For the Year Ended March 31, --------------------------------------- 1996 1995 1994 ----------------------------------------------------------------------- Operating revenues $40,250 $41,607 $30,784 Operating income 144 2,303 2,001 Depreciation and amortization 2,742 2,090 1,589 Capital expenditures 14,209 5,613 3,939 As of March 31, ----------------------- 1996 1995 ------------------------------------------------------- Identifiable assets $28,209 $20,135
39 (3) LEASE OBLIGATIONS The Company leases 65 aircraft as well as airport facilities, office space and various other property and equipment under noncancelable operating leases which are generally on a long-term net rent basis where the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. Management expects that, in normal course of business, leases that expire will be renewed or replaced by other leases. The following summarizes future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of March 31, 1996 (in thousands):
Year ending March 31, ---------------------------------------- 1997 $ 35,719 1998 32,563 1999 32,310 2000 31,276 2001 29,780 Thereafter 216,829 -------- $378,477 ========
Total rental expense for noncancelable operating leases was approximately $31,369,000, $27,494,000 and $21,299,000 for the years ended March 31, 1996, 1995 and 1994, respectively. The above minimum rental payments do not include landing fees, which amounted to approximately $4,460,000, $4,145,000 and $3,433,000 for the years ended March 31, 1996, 1995 and 1994, respectively. (4) INCOME TAXES The provision for income taxes includes the following components (in thousands):
Year Ended March 31, ---------------------- 1996 1995 1994 - ------------------------------------------------------------------------------ Current tax provision: Federal $2,656 $4,893 $6,132 State 204 1,119 1,402 ---------------------- 2,860 6,012 7,534 ---------------------- Deferred tax (benefit provision: Federal (348) 2,041 1,363 State (68) 486 350 Impact of federal rate increase on deferred taxes - - 202 ---------------------- (416) 2,527 1,915 ---------------------- Provision for income taxes $2,444 $8,539 $9,449 ======================
The following is a reconciliation between the statutory Federal income tax rates (at a blended rate of 34 percent on taxable income up to $10,000,000 and 35 percent for taxable income in excess of $10,000,000) and the effective rate which is derived by dividing the provision for income taxes by income before provision for income taxes (in thousands).
Year Ended March 31, ---------------------- 1996 1995 1994 - ------------------------------------------------------------------------------ Computed "expected" provision for income taxes at the statutory rate $2,315 $7,684 $8,246 Increase (decrease) in income taxes resulting from: State income taxes, net of Federal income tax benefit 292 727 911 Other, net (163) 128 292 ---------------------- Provision for income taxes $2,444 $8,539 $9,449 ======================
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The components of the net deferred tax assets and liabilities as of March 31, 1996 and 1995, are as follows (in thousands):
1996 1995 - ------------------------------------------------------------------- Deferred tax assets: Inventory reserves $ 222 $ 222 Vacation accrual 905 747 Air traffic liability reserves 340 340 Workers compensation accrual 251 80 Engine accrual 1,343 512 AMT credit carryforward 2,766 752 Fleet restructuring accrual 1,515 - Other 392 289 ----------------------- Total deferred tax assets 7,734 2,942 ----------------------- Deferred tax liabilities: Accelerated depreciation (17,505) (13,517) Preoperating costs (278) (371) Other (1,093) (612) ----------------------- Total deferred tax liabilities $(18,876) $(14,500) ----------------------- Net deferred tax liability $(11,142) $(11,558) =======================
(5) LONG-TERM DEBT Long-term debt as of March 31, 1996 and 1995, consists of the following (in thousands):
- ----------------------------------------------------------------------------------------------------------------------- Note payable to bank, due in quarterly installments of $177,906 plus interest at 8.58% through March 2005, secured by aircraft $ 6,405 $ 7,116 Note payable to bank, due in quarterly installments of $167,246 plus interest based on three month LIBOR (7.1% at March 31, 1996) through September 2003, secured by aircraft 5,017 5,686 Note payable to bank, due in monthly installments of $77,265 including interest at 7.33% through June 2003, secured by aircraft 5,203 5,728 Note payable to bank, due in monthly installments of $54,702 plus interest based on one month LIBOR (7.13% at March 31, 1996) through June 2003, secured by aircraft 4,759 5,416 Note payable to finance company, due in quarterly installments of $155,000 plus interest based on three month LIBOR (7.19%) at march 31, 1996) through July 2003, secured by aircraft 4,650 5,270 Note payable to bank, due i semi-annual installments of $270,186 plus interest at 8.5% through May 2002, secured by aircraft 3,513 4,053 Note payable to bank, due in monthly installments of $91,290 including interest at 7.37% through October 2005, secured by aircraft 7,513 - Note payable to finance company, due in monthly installments of $90,394 including interest at 6.95% through December 2005, secured by aircraft 7,666 - Note payable to finance company, due in monthly installments of $88,737 including interest at 6.7% through January 2006, secured by aircraft 7,654 - Note payable to bank, due in monthly installments of $64,319 plus interest at 6.36% through November 200, with balance due December 2000, secured by aircraft 7,590 - Other 2 31 -------------------- 59,972 33,300 Less--current maturities (6,236) (3,747) -------------------- $53,736 $29,553 ====================
41 The aggregate amounts of principal maturities of long-term debt as of March 31, 1996, are as follows (in thousands):
Year ending March 31, -------------------------------------------- 1997................................ $ 6,236 1998................................ 6,399 1999................................ 6,577 2000................................ 6,768 2001................................ 6,973 Thereafter.......................... $27,019 ------- $59,972 =======
The Company has approximately $60.0 million of long-term debt that has been incurred in connection with the acquisition of Brasilia aircraft and is subject to subsidy payments through the export support program of the Federative Republic of Brazil. The subsidy payments reduced the stated interest rates to an average effective rate of approximately 4.0 percent at March 31, 1996. As of March 31, 1996, the Company had available $5,000,000 in an unsecured bank line of credit with interest payable at the bank's base rate less one-quarter percent, which was 8.00 percent at March 31, 1996. In addition, as of March 31, 1996, the Company had available $1,000,000 in a reducing, revolving line of credit facility bearing interest at the bank's base rate plus 1/2 percent and secured by a lien against the Company's corporate headquarters in St. George, Utah. The amount available under the revolving facility reduces to $500,000 on the first day of December 1, 1996, and expires December 1, 1997. The Company has a note payable arrangement that contains, among other things, a limitation on minimum tangible net worth. As of March 31, 1996, the Company was in compliance with all the debt covenants. (6) RETIREMENT PLAN AND EMPLOYEE STOCK PURCHASE PLAN RETIREMENT PLAN The Company sponsors the SkyWest Airlines Employees Retirement Plan (the "Plan"). Employees who have completed one year of service and are 21 years of age are eligible for participation in the Plan. Employees may elect to make contributions to the Plan. The Company matches 100 percent of such contributions up to 2 percent, 4 percent or 6 percent of the individual participant's compensation, based upon length of service. Additionally, a discretionary contribution may be made by the Company. The Company contributed $1,728,000, $1,869,000 and $1,646,000 to the Plan for the years ended March 31, 1996, 1995 and 1994, respectively. EMPLOYEE STOCK PURCHASE PLAN On February 7, 1995, the Company's Board of Directors approved the SkyWest, Inc. 1995 Employee Stock Purchase Plan ("the Stock Purchase Plan") which became effective July 1, 1995. All employees who have completed 90 days of employment are eligible to participate, except officers who are highly compensated employees under Section 414(q) of the Internal Revenue Code. The Stock Purchase Plan enables employees to purchase shares of the Company's common stock at a 15 percent discount through payroll deductions. Employees can contribute two to 15 percent of their base pay, not to exceed $21,250, each calendar year for the purchase of shares. During the year ended March 31, 1996, 26,252 shares of common stock were purchased under the plan for $287,000 and as of March 31, 1996, $162,000 had been withheld for the future purchase of shares. Shares are purchased semi-annually at the lower of the beginning or the end of the period price. Employees can terminate from the Stock Purchase Plan at anytime upon written notice. (7) COMMITMENTS AND CONTINGENT LIABILITIES PURCHASE COMMITMENTS At March 31, 1996, the Company had agreed to purchase 15 Brasilia aircraft and related spare parts inventory and support equipment at an aggregate future cost of approximately $120 million including estimated cost escalations. These 15 aircraft are scheduled to be delivered in fiscal year 1997. The Company will determine whether to finance the acquisition of the above aircraft through third party long-term loans or lease arrangements based upon circumstances existing immediately prior to each acquisition. The Company has options to acquire 10 additional Brasilia aircraft at fixed prices (subject to cost escalation and delivery schedules). These options are exercisable through fiscal year 1999. The Company also has options to acquire an additional ten Canadair Regional Jets and are exercisable at any time with no expiration. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED LEGAL MATTERS The Company is the subject of certain legal actions, which it considers routine to its business activities. As of March 31, 1996, management believes that any potential liability to the Company under such actions will not materially effect the Company's financial position or results of operations. STANDBY LETTERS OF CREDIT As of March 31, 1996, the Company has outstanding letters of credit totaling approximately $1,408,000 in order to comply with requirements of certain airports, port authorities and workers compensation agreements. CASH AND CASH EQUIVALENTS As of March 31, 1996, the Company has demand deposits and money market accounts totaling approximately $319,000 with First Interstate Bank, $1,999,000 with Bank of America, $579,000 with Banc One and $7,146,000 with Zions First National Bank. These balances exceed the $100,000 limit for insurance by the Federal Deposit Insurance Corporation. (8) STOCK OPTIONS Effective April 16, 1991, the Company's Board of Directors and Stockholders approved a merger of the previously existing incentive and nonqualified stock option plans into the SkyWest, Inc. Amended and Combined Incentive and Non-statutory Stock Option Plan ("the Option Plan"). The Option Plan provides for the issuance of a maximum of 1,500,000 shares of common stock to officers, directors and other key employees. The Option Plan is administered by the Board of Directors who designate option grants as either incentive or non-statutory. Incentive stock options will be granted at not less than 100% of the market value of the underlying common stock on the date of grant. Non-statutory stock options will be granted at a price as determined by the Board of Directors. Both types of options are exercisable for the period as defined by the Board of Directors at the date granted; however, no stock option will be exercisable before six months have elapsed from the date it is granted and no incentive stock option shall be exercisable after ten years from the date of grant. The following table summarizes the stock option activity for fiscal years 1996, 1995 and 1994.
Number of Price Per Options Share Range ----------------------------- Outstanding at March 31, 1995 246,397 $3.83-$5.50 Granted 127,000 $16.67 Exercised (145,188) $3.83-$4.58 ----------------------------- Outstanding at March 31, 1994 228,749 $3.83-$16.67 Granted 250,500 $13.75-$33.25 Exercised (23,000) $3.83-$5.50 Canceled (2,500) $16.67-$33.25 ----------------------------- Outstanding at March 31 1995 453,749 $3.83-$33.25 Granted 105,000 $15.00-$23.00 Exercised (27,500) $3.83-$5.50 ----------------------------- Outstanding at March 31, 1996 531,249 $5.50-$33.25 =============================
As of March 31, 1996, there are 537,188 shares available for future grant of shares of common stock upon the exercise of stock option under the Option Plan. 43 (9) DEFERRED CREDITS In order to assist the Company in integrating new aircraft into its fleet, certain manufacturers provide the Company with cash or credits for spare parts. With respect to purchased aircraft, these amounts reduce the capitalized cost of the aircraft. With respect to leased aircraft (operating leases), the Company has deferred these amounts and amortizes them over the terms of the related aircraft leases as a reduction of rent expenses. Amounts amortized during the years ended March 31, 1996, 1995 and 1994 were $1,497,000, $817,000 and $818,000 respectively. (10) RELATED-PARTY TRANSACTIONS The Company and Delta Air Lines, Inc. ("Delta") operate under a joint marketing and code-sharing agreement under which the Company uses the Delta two letter designator code (DL) in displaying its schedules on all flights in the automated airline reservation systems used throughout the industry. During the year ended March 31, 1996, the Company entered into a code-sharing agreement with Continental Airlines, Inc. ("Continental") under which the Company uses the Continental two letter designator code (CO) in displaying schedules on certain flights in the automated airline registration system. As of March 31, 1996, Delta owned 1,553,899 shares of common stock which represents approximately 13 percent of the outstanding common stock of the Company. The Company leases various terminal facilities from Delta and Delta provides certain services to the Company, including advertising, reservation and ground handling services. Expenses paid to Delta under these agreements were approximately $9,181,000, $5,024,000, and $3,493,000 during the years ended March 31, 1996, 1995 and 1994, respectively. The Company had a net receivable from Delta of $2,761,000 as of March 31, 1996, and a net payable to Delta of $941,000 as of March 31, 1995. The Company had a net receivable from Continental of $414,000 as of March 31, 1996. (11) COMMON STOCK STOCK OFFERINGS On June 21, 1993, the Company completed a public offering of 1,875,000 shares of common stock which generated net proceeds of $28,802,000 after deducting underwriting commissions and other expenses. On July 7, 1993, the underwriters executed an overallotment option for 219,250 shares of common stock which generated net proceeds of $3,412,000 after deducting underwriting commissions. On February 16, 1994, the Company completed another public offering of 1,150,000 shares of common stock which generated net proceeds of $33,456,000 after deducting underwriting commissions and other expenses. A portion of the proceeds were used to fund the acquisition of Scenic Airlines and to pay off certain long-term debt. The balance is being used for general corporate purposes. PURCHASE OF TREASURY STOCK On November 23, 1994, the Company's Board of Directors approved the purchase of up to 1,150,000 shares of the Company's outstanding common stock. The total shares were purchased during the year ended March 31, 1995 at an average price of $13.98. On February 7, 1995, the Company's Board of Directors approved the purchase of up to 500,000 shares of the Company's outstanding common stock. On February 6, 1996, the Company's Board of Directors approved the purchase of up to an additional 500,000 shares of the Company's outstanding stock. During the year ended March 31, 1996, 324,600 shares were purchased at an average price of $12.92. SUBSEQUENT CASH DIVIDEND On May 7, 1996, the Company's Board of Directors declared a special cash dividend of $.08 per share payable to stockholders of record on June 5, 1996, distributable June 21, 1996. (12) FLEET RESTRUCTURING AND TRANSITION EXPENSE During fiscal 1996, the Company's management developed a fleet restructuring and transition plan whereby all remaining Fairchild Metroliner III aircraft will be replaced by Brasilia aircraft. As a result, the Company incurred approximately $2.5 million in the current fiscal year of charges related to crew training, hiring new flight attendants, accelerated aircraft maintenance charges and engine overhauls associated with the early termination of Metroliner leases. The Company's management also accrued $3.8 million in the fourth quarter of fiscal 1996 related to charges to be incurred in fiscal 1997. The charges accrued consist primarily of accelerated aircraft maintenance and engine overhauls to meet lease return requirements, inventory write downs for Metro III aircraft parts, lease payments and insurance for parking certain Metro III aircraft prior to their lease termination dates. The total expenses of $6.2 million, less approximately $.8 million for crew training, have been determined to be one-time non-recurring charges and have been classified as fleet restructuring and transition expense in the accompanying consolidated financial statements. EX-11 3 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
FISCAL YEAR ENDED MARCH 31, --------------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands, except per share data) Basic - ----- Weighted average common shares outstanding ..................................... 10,284 11,112 9,883 ======= ======= ======= Net income ..................................................................... $ 4,366 $13,701 $14,396 ======= ======= ======= Per share amount ............................................................... $ .42 $ 1.23 $ 1.46 ======= ======= ======= Primary - ------- Weighted average common shares outstanding ..................................... 10,284 11,112 9,883 Net effect of dilutive common stock options -- based on the treasury stock method using average market price of $16.92, $22.48 and $25.77, respectively, net of tax benefit ..................................... 84 102 180 ------- ------- ------- Total ................................................................. 10,368 11,214 10,063 ======= ======= ======= Net income ..................................................................... $ 4,366 $13,701 $14,396 ======= ======= ======= Per share amount ............................................................... $ .42 $ 1.22 $ 1.43 ======= ======= ======= Fully Diluted - ------------- Weighted average common shares outstanding ..................................... 10,284 11,112 9,883 Net effect of dilutive stock options -- based on the treasury stock method using the greater of year-end market price or the average market price, of $16.92, $22.48 and $34.75 respectively, net of tax benefit ........................... 84 102 204 ------- ------- ------- Total ................................................................. 10,368 11,214 10,087 ======= ======= ======= Net income ..................................................................... $ 4,366 $13,701 $14,396 ======= ======= ======= Per share amount ............................................................... $ .42 $ 1.22 $ 1.43 ======= ======= =======
15 EX-24.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 24.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated May 24, 1996 included in SkyWest, Inc's Annual Report to Shareholders for the fiscal year ended March 31, 1996. We further consent to the incorporation of our report dated May 24, 1996, incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File No.'s 33-41285 and 33-60173. /s/ Arthur Andersen LLP Arthur Andersen LLP Salt Lake City, Utah May 24, 1996 14 EX-27 5 EXHIBIT 27
5 0000793733 SKYWEST, INC. 1,000 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 24,529 19,097 13,114 221 8,923 76,462 216,772 71,701 227,550 43,644 53,736 0 0 67,898 47,902 227,550 251,734 251,734 0 246,024 0 0 2,163 6,810 2,444 4,366 0 0 0 4,366 .42 .42
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