-----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, DUXC8235AU8uXuUCP8agofBztlt+EImPlPhaw3NadevMjxdstBZMAG/UMe3DOVvq ilfrgnRgHrOarmUBpP8UIQ== 0000950149-98-001221.txt : 19980710 0000950149-98-001221.hdr.sgml : 19980710 ACCESSION NUMBER: 0000950149-98-001221 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980626 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SKYWEST INC CENTRAL INDEX KEY: 0000793733 STANDARD INDUSTRIAL CLASSIFICATION: 4512 IRS NUMBER: 870292166 STATE OF INCORPORATION: UT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14719 FILM NUMBER: 98654986 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 FOR THE FISCAL YEAR ENDED MARCH 31, 1998 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, 1998 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 (435) 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 16, 1998, was approximately $431,886,095. As of June 16, 1998, there were 24,141,320 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, 1998, 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 1998 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 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
Page No. -------- Item 1. Business.....................................................................1 Item 2. Properties...................................................................6 Item 3. Legal Proceedings............................................................7 Item 4. Submission of Matters to a Vote of Security Holders..........................7 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................................................7 Item 6. Selected Financial Data......................................................8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................8 Item 8. Financial Statements and Supplementary Data..................................8 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure..........8 PART III Item 10. Directors and Executive Officers of the Registrant...........................8 Item 11. Executive Compensation.......................................................8 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................................8 Item 13. Certain Relationships and Related Transactions...............................8 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................9
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 880 daily flights. Pursuant to a joint marketing and code sharing agreement with Delta Airlines, Inc. ("Delta"), SkyWest operates as a Delta Connection in certain SkyWest markets. In October 1995, SkyWest entered into a marketing and code sharing agreement with Continental Airlines, Inc. ("Continental") which allows SkyWest to operate as a Continental Connection in certain markets in and out of Los Angeles. Effective October 1, 1997, SkyWest entered into a new code-sharing agreement ("United Express Agreement") with United Airlines, Inc. ("United") and began operating as United Express in Los Angeles, California. On January 19, 1998, SkyWest executed an addendum to the United Express Agreement to provide service as United Express in San Francisco, California, which began June 1, 1998. On February 9, 1998, SkyWest executed an addendum to the United Express Agreement to provide service as United Express in United's Portland and Seattle/Tacoma markets and in additional Los Angeles markets, which began April 23, 1998. Prior to October 1, 1998, 97 percent of SkyWest's traffic was carried under the DL code and 3 percent was carried under the CO code. In addition, all of SkyWest's flights operated under the DL code and certain flights operating in and out of Los Angeles operated under both DL and CO codes. As of May 31, 1998, 42 percent of SkyWest's traffic was carried under the DL code, 57 percent was carried under the UA code and 1 percent was carried under the CO code. Additionally, 42 percent of SkyWest's flights operated under the DL and CO codes and 58 percent operated under the UA code. SkyWest will no longer provide service as a Continental Connection effective July 15, 1998. With principal hubs located at Los Angeles, Salt Lake City, San Francisco, Portland and Seattle/Tacoma, SkyWest offers a convenient and frequent flight schedule designed to maximize connecting and origin-destination traffic for its major code-sharing partners. SkyWest currently operates a fleet of 69 turboprop 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 at a compounded annual growth rate of 13 percent, from $182.9 million in fiscal 1994 to $297.1 million in fiscal 1998. Total passengers carried by SkyWest have increased from approximately 1,731,000 to approximately 2,989,000 over the same period. In fiscal 1998, the Company achieved record levels of passengers carried, record consolidated operating revenues of $297.1 million, and net income increased 117 percent to $21.9 million or $1.04 per diluted share. All references in this Form 10-K give affect to a stock dividend of one share for each share outstanding declared May 20, 1998. The Company, through two wholly-owned subsidiaries, is also engaged in various other transportation related businesses. Scenic Airlines, Inc. ("Scenic") provides air tours and general aviation services to the scenic regions of Northern Arizona and Southern Utah and operates 36 aircraft. National Parks Transportation, Inc. ("NPT") provides car rental services through a fleet of Avis vehicles located at six airports. In fiscal 1998, Scenic and NPT together accounted for approximately 11.0 percent of the Company's consolidated operating revenues. JOINT MARKETING AND CODE SHARING AGREEMENTS SkyWest's Code-Sharing Agreements with Delta, United and Continental authorize SkyWest to use two-letter flight designator codes ("DL," "UA" and "CO," respectively) to identify its flights and fares in major central reservation systems, to paint its aircraft with the colors and/or logos of its code-sharing partners and to market and advertise its status as the Delta Connection, United Express or Continental Connection carrier. The Code-Sharing Agreements either allocate to SkyWest a portion of the total passenger fare on a formula or other basis, subject to periodic adjustments, or provide for payments for contracted flying on a per departure basis with incentives related to number of passengers carried and customer service. SkyWest's passengers participate in the frequent flyer 1 4 programs of its code-sharing partners. Under the Code-Sharing Agreements, Delta, United and Continental provide additional services to SkyWest, including providing reservation services and ticket stock, issuing tickets, providing ground support services and gate access and coordinating cooperative marketing, advertising and other promotional efforts. SkyWest pays negotiated fees to its code-sharing partners for services provided. The significant terms of each of the Code-Sharing Agreements are as follows: Delta. SkyWest has operated as the Delta Connection at Delta's Salt Lake City and Los Angeles hubs since 1987. The Delta Agreement was revised in 1990 and modified effective April 1, 1997, to facilitate interline connections in Salt Lake City and Los Angeles, to adjust proration formulas (the portion of the passenger fare allocated to SkyWest) and to permit SkyWest to seek other code-sharing relationships in Los Angeles. The Delta Agreement continues until April 2002, but is subject to earlier termination under various circumstances, including upon 180 days' advance notice by either party for any or no reason. The Delta Agreement was modified in April 1997, to be noncancellable (except for cause) for a two-year period. Delta currently owns approximately 13.0 percent of the outstanding Common Stock, which was acquired under the Delta Option Agreement entered into in 1987, concurrently with the Delta Agreement. United. On October 1, 1998, SkyWest and United entered into a United Express Agreement pursuant to which SkyWest became a United Express carrier at United's Los Angeles hub. In January 1998, SkyWest and United also entered into an addendum to the United Express Agreement, pursuant to which SkyWest would become the United Express carrier at United's San Francisco hub, which began June 1, 1998. In February 1998, SkyWest and United entered into an amendment to the United Express Agreement, pursuant to which SkyWest would become the United Express carrier in United's Portland and Seattle/Tacoma markets and in additional Los Angeles markets, which began April 23, 1998. Under the United Express Agreement, SkyWest currently operates flights in Los Angeles city pairs on a contract basis; i.e., United pays SkyWest a flat rate per flight departure, an additional amount per passenger and per passenger incentives based upon on-time performance, flight completion rates and number of passengers carried measured against agreed upon objectives. United controls scheduling, ticketing, pricing and seat inventories in these city pairs. SkyWest also operates as a United Express carrier in certain city pairs where SkyWest receives no contract payments and United controls scheduling, inventory and pricing. United must also concur in any marketing or code-sharing relationships with any other carrier with respect to operations covered by the United Express Agreement. United has consented to SkyWest's Code-Sharing Agreement with Delta in designated city pairs in Los Angeles. The term of the United Express Agreement is for five years ending in September 2002, with respect to operations in Los Angeles and for ten years, ending in May 2008, with respect to operations in San Francisco and the Pacific Northwest, subject to termination by United upon 180 days' prior notice. United may, however, terminate the United Express Agreement for cause upon 30 days' written notice. Continental. SkyWest entered into a Code-Sharing Agreement with Continental in October 1996, which provided for service to selected California markets. The Continental agreement expired in October 1997. SkyWest has continued to operate as the Continental Connection without an agreement, but on the same terms as provided in the expired agreement. SkyWest will no longer provide service as a Continental Connection effective July 15, 1998. ROUTES Operating from its hubs in Los Angeles, Salt Lake City, San Francisco, Portland and Seattle/Tacoma, SkyWest serves approximately 64 cities in 13 states and Canada with approximately 880 scheduled daily flights. 2 5 The following table identifies the cities served by SkyWest as of June 16, 1998: ARIZONA: Santa Rosa Portland Tucson Visalia Redmond Yuma COLORADO: SOUTH DAKOTA: CALIFORNIA: Colorado Springs Rapid City Bakersfield Grand Junction UTAH: Burbank IDAHO: Cedar City Carlsbad Boise Salt Lake City Chico Idaho Falls St. George Cresent City Pocatello Vernal Eureka/Arcata Sun Valley WASHINGTON: Fresno Twin Falls Bellingham Imperial/El Centro MONTANA: Pasco Inyokern Billings Seattle Los Angeles Bozeman Yakima Merced Butte WYOMING: Modesto Helena Casper Monterey Missoula Cody Ontario West Yellowstone Jackson Hole Orange County NEBRASKA: CANADA: Oxnard Omaha Vancouver B.C. Palm Springs NEW MEXICO: Redding Albuquerque Sacramento NEVADA: San Diego Elko San Francisco Las Vegas San Jose Reno San Luis Obispo OREGON: Santa Barbara Eugene Santa Maria Medford
GOVERNMENT REGULATION All interstate air carriers, including SkyWest and Scenic, are subject to regulation by the DOT, the FAA and certain other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates, approval of personnel who may engage in flight, maintenance or operations activities, record keeping procedures in accordance with FAA requirements, and FAA approval of flight training and retraining programs. The DOT and the FAA, as well as other governmental agencies regulating SkyWest and Scenic, enforce their regulations through, among other mechanisms, (i) certifications, which are necessary for SkyWest's and Scenic's continued operations, and (ii) proceedings, which can result in civil or criminal penalties or revocation of operating authority. The FAA can also issue maintenance directives and other mandatory orders relating to, among other things, inspection of aircraft, installation of new safety-related items and the mandatory removal and replacement of aircraft parts that the FAA believes might present a safety hazard. 3 6 SkyWest and Scenic management believe they are operating in compliance with FAA regulations and holds all necessary operating and air worthiness certificates and licenses. SkyWest and Scenic incur substantial costs in maintaining its current certifications and otherwise complying with laws, rules and regulations to which they are subject. SkyWest and Scenic flight operations, maintenance programs, record keeping and training programs are conducted under FAA approved procedures. SkyWest and Scenic do 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. SkyWest and Scenic are also subject to certain other federal and state laws relating to protection of the environment, labor relations and equal employment opportunity. Management believes that SkyWest and Scenic are in compliance in all material respects with these laws and regulations. COMPETITION AND ECONOMIC CONDITIONS The airline industry is highly competitive. SkyWest 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; however, Southwest Airlines Co., a national low fare airline, also operates out of the Salt Lake City International Airport, which results in significant price competition at the Salt Lake City hub. 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 serviced from LAX, SkyWest's principle competitors include Wings West, Inc. (operating as "American Eagle"), Trans States Airlines, Inc. (operating as "US Air Express" and "Trans World Express"). SkyWest believes its principle competitor in San Francisco will be Trans States Airlines, Inc. (operating as "US Air Express"). In its Pacific Northwest markets, SkyWest's principal competitor is Horizon Air Industries, Inc. (operating as "Horizon Airlines"). Certain of SkyWest's competitors are larger and have significantly greater financial and other resources than SkyWest. Moreover, federal deregulation of the industry allows competitors to rapidly enter SkyWest's markets and to quickly discount and restructure fares. The airline industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats. Generally, the airline industry is highly sensitive to general economic conditions, in large part due to the discretionary nature of a substantial percentage of both business and leisure travel. In the past, many airlines have reported decreased earnings or substantial losses resulting from periods of economic recession, heavy fare discounting and other factors. Economic downturns combined with competitive pressures have contributed to a number of bankruptcies and liquidations among major and regional carriers. Negative economic conditions may have a material adverse affect on regional airlines, including SkyWest. EMPLOYEES As of June 16, 1998, the Company employed 2,966 full-time equivalent employees consisting of 1,063 pilots and flight attendants, 360 maintenance personnel, 1,234 customer service personnel, 74 reservation and marketing personnel, and 235 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 YEAR 2000 COMPLIANCE The Company is currently modifying computer systems and application programs for year 2000 compliance, with project completion scheduled for March 31, 1999. The Company believes that the cost to modify its systems or applications will not have a material effect on its financial position or results of operations. Any expenditures will be funded through operating cash flows while any costs for new software will be capitalized and amortized over the software's useful life. Although the Company is working cooperatively with third parties with systems upon which the Company must rely, the Company can not give any assurances that the systems of other parties will be year 2000 compliant on a timely basis. Systems operated by others which the Company would use and/or rely on would include: Federal Aviation Administration Air Traffic Control, computer reservation systems for travel agent sales as well as Delta and United reservation, passenger check-in and ticketing systems. The Company's business, financial condition and/or results of operations could be materially adversely affected by the failure of its system and applications or those operated by others. SEASONALITY As is common in the airline industry, SkyWest's operations are favorably affected by increased travel, historically occurring in the summer months and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which occasionally results in cancelled flights, principally during the winter months. However, SkyWest does expect some mitigation of the historical seasonal trends due to an increase in the portion of its operations in contract flying with United. Scenic's business is also seasonal in nature. A large percentage of Scenic's passengers are tourists visiting the Las Vegas and Grand Canyon areas during the summer months. FORWARD-LOOKING STATEMENTS This Form 10-K contains various forward-looking statements and information that are based on management's belief, as well as assumptions made by and information currently available to management. When used in this document, the words "anticipate," "estimate," "project," "expect," and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Among the key factors that may have a direct bearing on the Company's operating results include, among other things, changes in SkyWest's code-sharing relationships, fluctuations in the economy and the demand for air travel, the degree and nature of competition and SkyWest's ability to expand services in new and existing markets and to maintain profit margins in the face of pricing pressures. 5 8 ITEM 2. PROPERTIES FLIGHT EQUIPMENT As of June 16, 1998, 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 53 30 300 300 5.1 Canadair Regional Jet...... - 10 50 850 530 3.6
SkyWest's aircraft are turboprop and jet 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. Passenger comfort features of these 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. SkyWest operates ten of these aircraft on stage lengths up to 850 miles. During fiscal 1998 SkyWest entered into an agreement to purchase 20 new Brasilia aircraft, related spare parts inventory and support equipment. Two of these aircraft were delivered prior to March 31, 1998. At March 31, 1998, SkyWest had agreed to purchase 18 Brasilia aircraft, related spare parts and support equipment at an aggregate cost of approximately $144.0 million, including estimated cost escalations. SkyWest also has options to acquire 40 additional Brasilia aircraft at fixed prices (subject to cost escalation and delivery schedules) exercisable through fiscal 2000 and options to acquire an additional ten CRJs, exercisable at any time. In connection with SkyWest's expansion in Los Angeles, San Francisco and the Pacific Northwest, SkyWest expects to acquire an additional 14 used Brasilias for a total of 34 new and used aircraft. SkyWest also anticipates that it will incur costs of approximately $24.0 million associated with the acquisition of additional ground and maintenance facilities, support equipment and spare parts inventory related to its expansion. GROUND FACILITIES Employees of SkyWest perform substantially all routine airframe and engine maintenance and periodic inspection of equipment. Maintenance is performed primarily at facilities in Palm Springs, California, Salt Lake City, Utah, and Fresno, California. SkyWest 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 SkyWest's growing hub operations. The facility was constructed and is owned by the Salt Lake City Airport Authority. SkyWest is leasing the facility under an operating lease arrangement over a 36-year term. SkyWest also leases, under an operating lease arrangement over a five year term, a 90,000 square foot maintenance hanger and 15,000 square foot office facility in Fresno, California. SkyWest 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 SkyWest personnel. Delta and United provide ticket handling and/or ground support services for SkyWest in 27 of the 64 airports it serves. 6 9 Scenic 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. Scenic also leases, under an operating lease arrangement over a five year term, a new terminal and hanger facility in Las Vegas, Nevada consisting of 39,500 square feet of office and terminal space and 28,500 square feet of maintenance hanger 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 existing operations and facilities are adequate for the foreseeable future. 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 1998. 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 16, 1997, there were approximately 1,051 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 1998 Fiscal 1997 ----------- ----------- Quarter High Low High Low ------- ------ ------ ----- ----- First $ 8.50 $ 6.00 $9.88 $6.63 Second 10.32 7.69 9.13 7.06 Third 14.81 10.13 7.82 6.32 Fourth 21.06 14.75 7.19 6.00
The transfer agent for the Company's Common Stock is Zions First National Bank, Salt Lake City, Utah. On May 5, 1998, the Company's Board of Directors declared a 100 percent stock dividend (one share for each share outstanding) payable to stockholders of record on May 20, 1998. The dividend was distributed on June 8, 1998. The Company paid cash in lieu of issuing fractional shares. All common shares and per share information included and incorporated by reference in this Form 10-K have been retroactively adjusted to reflect this stock dividend. On May 5, 1998, the Company's Board of Directors declared a regular quarterly cash dividend of $.03 per share payable to stockholders of record on June 30, 1998, distributable July 15, 1998. 7 10 During fiscal 1997, the Board of Directors declared a special dividend of $.04 per share. Thereafter the Board of Directors declared three regular quarterly dividends of $.025 each quarter. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to page one of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1998, 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 OPERATIONS The information required by this item is incorporated herein by reference to pages 12 through 16 of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1998, furnished herewith to the Commission as Exhibit 13.1 to this report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company included on pages 17 through 30 of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1998, 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 1998 annual stockholders meeting to be held August 11, 1998, 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"
8 11 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, 1998, 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, 1998 and 1997 - Consolidated statements of income for the years ended March 31, 1998, 1997 and 1996 - Consolidated statements of stockholders' equity for the years ended March 31, 1998, 1997 and 1996 - Consolidated statements of cash flows for the years ended March 31, 1998, 1997 and 1996 - 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 filed two reports on Form 8-K during the quarter ended March 31, 1998, dated January 21, 1998 and February 11, 1998. 9 12 (c) Exhibits.
Incorporated by Filed Number Exhibit Reference Herewith - - ------ ------- --------- -------- 3.1 Restated Articles of Incorporation..............................(1) 3.2 Amended By-Laws.................................................(3) 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)....................................................(3) 10.1 SkyWest, Inc. Amended and Combined Incentive and Non-Statutory Stock Option Plan.................................(3) 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 Lease Agreement dated December 1,1989 between Salt Lake City Corporation and SkyWest Airlines, Inc.............................................................(4) 10.5 Purchase Agreement dated July 23,1993 between Bombardier Regional Aircraft Division and SkyWest Airlines, Inc...........................................(5) 10.6 SkyWest, Inc. 1995 Employee Stock Purchase Plan.............................................(6) 10.7 United Express Agreement dated October 1, 1997 and subsequent amendments dated January 15, 1998 and February 9, 1998................................................(7) 10.8 Purchase Agreement No. GCT-008/98 dated March 26, 1998 between Embraer-Empresa Brasileira de Aeronautica S.A. and SkyWest Airlines, Inc (portions of this Exhibit 10.8 have been omitted pursuant to a request for confidential treatment)........................................X
10 13
Incorporated by Filed Number Exhibit Reference Herewith - - ------ ------- --------- -------- 13.1 Certain portions of the Annual Report to Shareholders for the year ended March 31, 1998, 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 27 Financial Data Schedule.........................................................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 Registration Statement on Form S-8, File No. 33-41285. (4) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1992. (5) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1994. (6) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1995. (7) Incorporated by reference to Registrant's Forms 8-K filed on January 21, 1998 and February 11, 1998. 11 14 (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 20, 1998. 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 20, 1998 12 15 SKYWEST, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
Additions Balance at Charged To Balance Beginning Costs and at End Description of Year Expenses Deductions of Year ----------- --------- --------- ---------- --------- Year Ended March 31, 1998: Allowance for obsolescence $ 280,000 $ -- $ 100,000 $ 180,000 Allowance for doubtful accounts receivable 103,978 77,728 57,943 123,763 --------- --------- --------- --------- $ 383,978 $ 77,728 $ 157,943 $ 303,763 ========= ========= ========= ========= Year Ended March 31, 1997: Allowance for obsolescence $ 180,000 $ 100,000 $ -- $ 280,000 Allowance for doubtful accounts receivable 221,345 44,686 (162,053) 103,978 --------- --------- --------- --------- $ 401,345 $ 144,686 $(162,053) $ 383,978 ========= ========= ========= ========= 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 ========= ========= ========= =========
13 16 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. /s/ JERRY C. ATKIN By_____________________________ 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 16, 1998 - - ------------------------ Chief Executive Officer Jerry C. Atkin /s/ SIDNEY J. ATKIN Vice Chairman of the Board June 16, 1998 - - ------------------------ and Director Sidney J. Atkin /s/ BRADFORD R. RICH Executive Vice President, June 16, 1998 - - ------------------------ Chief Financial Officer and Treasurer Bradford R. Rich (principal financial and accounting officer) /s/ J. RALPH ATKIN - - ------------------------ Director June 16, 1998 J. Ralph Atkin /s/ MERVYN K. COX - - ------------------------ Director June 16, 1998 Mervyn K. Cox /s/ IAN M. CUMMING - - ------------------------ Director June 16, 1998 Ian M. Cumming /s/ STEVEN F. UDVAR-HAZY - - ------------------------ Director June 16, 1998 Steven F. Udvar-Hazy /s/ HENRY J. EYRING - - ------------------------ Director June 16, 1998 Henry J. Eyring /s/ HYRUM W. SMITH - - ------------------------ Director June 16, 1998 Hyrum W. Smith
14 EX-10.8 2 PURCHASE AGREEMENT 1 EXHIBIT 10.8 Disclosure Regarding Confidential Information: Portions of pages 2-4, 11, 15 and 16 and of Attachment D to this Exhibit 10.8 to the Annual Report on Form 10-K (consisting of portions of 9 multiple pages) have been omitted from this exhibit filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of the following symbols: *****. PURCHASE AGREEMENT NO. GCT-008/98 EMBRAER - EMPRESA BRASILEIRA DE AERONAUTICA S.A. AND SKYWEST AIRLINES, INC. 2 INDEX
ARTICLE PAGE ---- 1. DEFINITIONS 1 2. SUBJECT 2 3. PRICE 2 4. PAYMENT 3 5. DELIVERY 4 6. CERTIFICATION 5 7. ACCEPTANCE AND TRANSFER OF OWNERSHIP 5 8. STORAGE CHARGE 6 9. DELAYS IN DELIVERY 7 10. INSPECTION AND QUALITY CONTROL 8 11. CHANGES 9 12. WARRANTY 11 13. TECHNICAL ASSISTANCE SERVICES 11 14. SPARE PARTS POLICY 12 15. PUBLICATIONS 12 16. ASSIGNMENT 12 17. RESTRICTIONS AND PATENT INDEMNITY 13 18. MARKETING PROMOTIONAL RIGHTS 13 19. TAXES 13 20. APPLICABLE LAW 13 21. JURISDICTION 14 22. TERMINATION 14 23. OPTIONS 16 24. INDEMNITY 18 25. NOTICES 18 26. CONFIDENTIALITY 19 27. INTEGRATED AGREEMENT 19 28. NEGOTIATED AGREEMENT 19 29. COUNTERPARTS 19 30. ENTIRE AGREEMENT 19
ATTACHMENTS: "A" - AIRCRAFT TECHNICAL DESCRIPTION AND AIRCRAFT SPECIFIC CONFIGURATION "B" - AIRCRAFT FINISHING, REGISTRATION MARKS, FERRY EQUIPMENT, SPARE PARTS POLICY, AND LIST OF PUBLICATIONS "C" - WARRANTY CERTIFICATE - MATERIAL AND WORKMANSHIP "D" - EMB-120 BRASILIA PRICE ESCALATION FORMULA 120ER Purchase Agreement - - -------------------------------------------------------------------------------- 3 PURCHASE AGREEMENT NO. GCT-008/98 THIS AGREEMENT IS ENTERED INTO THIS 26th DAY OF MARCH 1998, BY AND BETWEEN EMBRAER - EMPRESA BRASILEIRA DE AERONAUTICA S.A. AND SKYWEST AIRLINES, INC., FOR THE PURCHASE AND SALE OF EMBRAER AIRCRAFT. THE SALE COVERED BY THIS AGREEMENT SHALL BE GOVERNED SOLELY BY THE TERMS AND CONDITIONS HEREIN SET FORTH, AS WELL AS BY THE PROVISIONS SET FORTH IN THE ATTACHMENTS HERETO. THIS AGREEMENT SHALL NOT BE EFFECTIVE UNLESS AND UNTIL IT IS SIGNED BY AN AUTHORIZED OFFICER OF SKYWEST AIRLINES, INC. AND EXECUTED BY TWO AUTHORIZED OFFICERS OF EMBRAER - EMPRESA BRASILEIRA DE AERONAUTICA S.A. 1. DEFINITIONS: For the purpose of this Agreement, the following definitions are hereby adopted by the parties: a. EMBRAER - shall mean EMBRAER - EMPRESA BRASILEIRA DE AERONAUTICA S.A., a Brazilian corporation with its principal place of business at Sao Jose dos Campos, Sao Paulo, Brazil. b. BUYER - shall mean SkyWest Airlines, Inc., a company with its principal place of business at 444 South River Road, St. George, Utah 84790. C. PARTIES - shall mean EMBRAER and BUYER. d. AIRCRAFT - shall mean the EMB-120ER "BRASILIA" aircraft or, where there is more than one such aircraft, each of the EMB-120ER "BRASILIA" aircraft manufactured by EMBRAER, for sale to BUYER pursuant to this Agreement, according to the Technical Description number TD-120/9801 dated February 1998, and the AIRCRAFT Specific Configuration constituting the Attachment "B" to this Agreement, and equipped with Pratt & Whitney Canada Inc. PW-118B engines, according to PW-118A Turboprop Engine Specification no.1083, dated February 6, 1996. e. SERVICES - shall mean technical assistance services as specified in Article 13 herein. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 1 of 20 4 f. CONTRACTUAL DELIVERY DATE - shall mean the delivery date referred to in Article 5 of this Agreement. g. ACTUAL DELIVERY DATE - shall mean, in respect of each AIRCRAFT, the date on which BUYER obtains title to that AIRCRAFT in accordance with Article 7 hereof. h. CTA - shall mean the Aerospace Technical Center of the Brazilian Ministry of Aeronautics. i. FAA - shall mean the Federal Aviation Administration. j. BASIC PRICE - shall mean the AIRCRAFT total price, effective on the date of execution of this Purchase Agreement, as referred to in its Article 3. k. PURCHASE PRICE - shall mean the AIRCRAFT total price, effective on the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE, *****. 2. SUBJECT: This Agreement covers: a. Twenty (20) firm order AIRCRAFT (the "FIRM AIRCRAFT"), and options for BUYER to purchase up to forty (40) additional AIRCRAFT (the "OPTION AIRCRAFT") on the terms and conditions of this Agreement. b. SERVICES as specified in Article 14 herein. These AIRCRAFT include the exercise by BUYER of its option to purchase EMB-120 Brasilia AIRCRAFT according to the provisions of Purchase Agreement No. DSP/AJV-30B/93, Article 26 - Groups III and IV 3. PRICE: a.**** 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 2 of 20 5 ***** b. The BASIC PRICE as indicated in item "a.1" herinabove shall be escalated according to the formula established in Attachment "D" hereto. Such price as escalated shall be the AIRCRAFT PURCHASE PRICE and will be provided to BUYER two (2) months prior to each AIRCRAFT CONTRACTUAL DELIVERY DATE. Except for the first three aircraft, for which the AIRCRAFT PURCHASE PRICE shall be provided one week after execution of this Purchase Agreement. 4. PAYMENT:***** 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 3 of 20 6 ***** b. Interest will accrue at the rate of one percent (1%) per month or any part thereof on any amount not paid to EMBRAER as set forth in paragraph 4.a of this Article from the date on which such payments should have been made as therein set forth, until the actual receipt by EMBRAER of such amounts. C. Without prejudice to the above, should BUYER fall to make any payment on the due date, EMBRAER shall have the right, at its sole discretion, to (i) terminate this Agreement and in this case BUYER shall release on behalf of EMBRAER all amounts previously paid by BUYER towards this Agreement without prejudice to EMBRAER's rights to indemnity as set forth in this Agreement or by law or (ii) postpone, at its sole discretion, the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE. 5. DELIVERY: Subject to payment in accordance with Article 4 hereof and the provisions of Articles 7 and 9 hereof, the AIRCRAFT shall be offered by EMBRAER to BUYER, by means of a written notice, for inspection, acceptance and subsequent delivery, in Fly Away Factory ("F.A.F.") conditions, at Sao Jose dos Campos, State of Sao Paulo, Brazil, according to the following schedule: FIRST AND SECOND AIRCRAFT on or before March 27, 31, 1998 THIRD AIRCRAFT on or before April 30, 1998 FOURTH AND FIFTH AIRCRAFT on or before May 22, 29, 1998 SIXTH AND SEVENTH AIRCRAFT on or before June 23, 30, 1998 EIGHT AIRCRAFT on or before July 31, 1998 NINTH AIRCRAFT on or before August 31, 1998 TENTH AIRCRAFT on or before September 30, 1998 ELEVENTH AIRCRAFT on or before November 23, 1998 TWELFTH AIRCRAFT on or before March 23, 1999 THIRTEENTH AIRCRAFT on or before April 20, 1999 FOURTEENTH AIRCRAFT on or before May 21, 1999 FIFTEENTH AIRCRAFT on or before August 20, 1999 SIXTEENTH AIRCRAFT on or before September 22, 1999 SEVENTEENTH AIRCRAFT on or before October 20, 1999 EIGHTEENTH AIRCRAFT on or before November 22, 1999 NINETEENTH AIRCRAFT on or before December 20, 1999 TWENTIETH AIRCRAFT on or before December 28, 1999
120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 4 of 20 7 6. CERTIFICATION: The AIRCRAFT shall be delivered to BUYER with an export certificate of airworthiness issued by CTA complying with the requirements of FAR-25 and the requirements of the FAA. The condition of the AIRCRAFT on delivery and the documentation delivered with the AIRCRAFT, including the above-mentioned export certificate of airworthiness, shall be sufficient to enable BUYER to obtain a standard certificate of airworthiness for the AIRCRAFT. Subject to the above, it shall be BUYER's responsibility to obtain such standard certificate of airworthiness for the AIRCRAFT, at BUYER'S sole expense. 7. ACCEPTANCE AND TRANSFER OF OWNERSHIP: a. Unless BUYER is notified otherwise, the AIRCRAFT shall be delivered in accordance with the provisions and schedules specified in Article 5 herein. EMBRAER shall give BUYER fifteen (15) calendar days advance notice of the date on which EMBRAER considers that each AIRCRAFT will be ready for delivery. Upon successful completion of ground and flight tests performed by EMBRAER, BUYER will receive a written confirmation that the AIRCRAFT concerned is ready for delivery, on which date BUYER shall promptly inspect such AIRCRAFT. b. BUYER shall be allowed a reasonable period of time to inspect and conduct an acceptance flight of each AIRCRAFT prior to its delivery. The fuel for the AIRCRAFT's acceptance flight will be provided by EMBRAER. After such acceptance flight, each AIRCRAFT will be delivered by EMBRAER to BUYER in accordance with Article 5 hereof with its wing tanks full. c. If BUYER finds an AIRCRAFT acceptable, BUYER shall promptly make the due payments, if any, according to Article 4 hereof and accept delivery of such AIRCRAFT, whereupon the necessary title and risk transfer documents shall be executed in order to effect title transfer. d. If BUYER declines to accept an AIRCRAFT, BUYER shall immediately give EMBRAER written notice of all specific reasons for such refusal and EMBRAER shall have five (5) business days, commencing on the first business day after receipt of such notice, to take all necessary actions in order to resubmit the AIRCRAFT to BUYER for reinspection. e. BUYER shall reinspect the AIRCRAFT within five (5) calendar days after receipt of notice from EMBRAER that all necessary actions were taken. This period, as well as the one mentioned in item "d" above, shall not be considered as part of the thirty (30) calendar days grace period provided for in Article 9.b.1 hereof. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 5 of 20 8 f. Should BUYER fail to comply with the procedures specified in any of the preceding items, EMBRAER shall not be held liable for any delays in delivery. g. Should BUYER fail to perform the acceptance and receipt of title of the AIRCRAFT within ninety (90) calendar days to be computed from the notification specified in item "a" above, EMBRAER shall be entitled to either terminate this Agreement pursuant to Article 22.f hereinbelow or, at its sole discretion, renegotiate the terms of this Agreement with BUYER. 8. STORAGE CHARGE: a. A storage charge equal to zero point zero three percent (0.03%) of the relevant AIRCRAFT BASIC PRICE per calendar day shall be charged by EMBRAER to BUYER commencing on the fifteenth (15th) calendar day after: 1. BUYER's failure to perform inspection or reinspection of an AIRCRAFT, per the date or time period specified in writing by EMBRAER, according to Articles 5 and/or 7 hereof, as applicable. 2. BUYER's acceptance of an AIRCRAFT when BUYER defaults in the fulfillment of any payment due in taking title to such AIRCRAFT immediately thereafter. b. A storage charge equal to zero point zero three percent (0.03%) of the relevant AIRCRAFT BASIC PRICE per calendar day shall be charged by EMBRAER to BUYER commencing on the thirtieth (30th) calendar day after BUYER's failure after title transfer to remove an AIRCRAFT from EMBRAER's facilities. c. The fifteen (15) and thirty (30) calendar days "GRACE PERIOD" is conditioned to receipt by EMBRAER of a written notification, ten (10) days in advance of the expected delay in the performance of BUYER'S obligations set forth in items "a.1", "a.2" and "b" above. d. In the event an AIRCRAFT CONTRACTUAL DELIVERY DATE must be extended by EMBRAER from that which is designated in Article 5 hereof due to BUYER's failure to perform any action or provide any information contemplated by this Agreement, other than the ones specified in the preceding item", the storage charge shall commence on the fifteenth (15th) calendar day after the CONTRACTUAL DELIVERY DATE relative to such AIRCRAFT. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 6 of 20 9 e. BUYER undertakes to pay the storage charge, as set forth in items "a', "b" or "c" hereinabove, as applicable, in U.S. dollars per each month of delay or part thereof, upon presentation of an invoice by EMBRAER. 9. DELAYS IN DELIVERY: a. EXCUSABLE DELAYS: 1. EMBRAER shall not be held liable or be found in default for any delays in the delivery of an AIRCRAFT or in the performance of any act to be performed by EMBRAER under this Agreement, resulting from, but not restricted to, the following events or occurrences hereinafter referred to as "excusable delays" (a) force majeure (including, but not limited to, war or state of war, civil war, insurrection, fire, accident, explosion, flood, act of government, governmental priorities, requisition, strike, labor troubles); (b) inability despite due and timely diligence to procure any materials, equipment, accessories, parts or means of transport; or (c) any delay resulting from any failure by BUYER to perform any action or provide any information contemplated by this Agreement or delays resulting from any other cause to the extent it is beyond EMBRAER's control or does not result from EMBRAER's fault or negligence. 2. Within sixty (60) calendar days after the occurrence of any of the above-mentioned events which constitute causes of excusable delays in delivery of an AIRCRAFT or in the performance of any act to be performed by EMBRAER under this Agreement, EMBRAER undertakes to send a written notice to BUYER, with requested acknowledgment of receipt, including a description of details involved and an estimate of the effects expected upon the timing of the performance of its contractual obligations. 3. Any such delays shall extend the time for delivery of an AIRCRAFT by the same number of calendar days required for the cause of delay to be remedied. EMBRAER undertakes to use its best efforts whenever applicable to avoid or remove any such causes of delay and to minimize their effect on the CONTRACTUAL DELIVERY DATE of an AIRCRAFT- 4. If the cause of such excusable delays is such as to last longer than three hundred (300) calendar days or to render the performance of this Agreement impossible, then this Agreement shall be considered terminated without liability to either party, except as provided for in Article 22-b hereof. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 7 of 20 10 b. NON-EXCUSABLE DELAYS: 1. if the delivery of an AIRCRAFT is delayed, without any excusable reason, by more than ten (10) calendar days after the CONTRACTUAL DELIVERY DATE for such AIRCRAFT, BUYER will be entitled to claim from EMBRAER liquidated damages equal to US$ 5,000.00 (five thousand US Dollars) per day, for each calendar day of delay in excess of the above-mentioned ten (10) calendar days, up to the date EMBRAER notices BUYER such AIRCRAFT will be ready for delivery via written notice per Article 7.a hereof, it being understood that such liquidated damages will not, in any event, exceed three percent (3%) of the BASIC PRICE of the delayed item. 2. The grace period of ten (10) calendar days granted by BUYER to EMBRAER as mentioned herein shall only prevail should BUYER receive a written notification from EMBRAER advising the expected delay and provided such written notification is presented to BUYER forty (40) calendar days prior to the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE. 3. It is agreed between the PARTIES that if, with respect to a delayed AIRCRAFT, EMBRAER does not receive a claim for liquidated damages as mentioned in item "b.1" above from BUYER within ninety (90) calendar days after the CONTRACTUAL DELIVERY DATE of such AIRCRAFT, BUYER shall be deemed to have fully waived its rights to such liquidated damages. C. DELAY DUE TO LOSS OR STRUCTURAL DAMAGE OF THE AIRCRAFT: Should any AIRCRAFT be destroyed or damaged before its acceptance to the extent that it becomes commercially useless, BUYER may, at its sole discretion, either take a replacement AIRCRAFT at a later delivery date to be agreed by the PARTIES or terminate this Agreement with respect to such AIRCRAFT by notice to EMBRAER given in accordance with Article 24 hereof, without any liability to either party. 10. INSPECTION AND QUALITY CONTROL: a. BUYER is hereby allowed to have one or more authorized representatives at EMBRAER's facilities in order to assure that the AIRCRAFT and SERVICES were developed in accordance with this Agreement and according to all applicable quality control standards. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 8 of 20 11 b. BUYER shall present and communicate to EMBRAER the names of its authorized representatives, by means of a written notice, at least thirty (30) calendar days prior to the earliest delivery date specified in Article 5 hereof. C. Such representatives shall also be authorized to sign the acceptance and transfer of title and risk documents and accept delivery of the AIRCRAFT pursuant to Article 7 hereof. d. For the purposes subject hereof, EMBRAER shall provide reasonable communication facilities for BUYER's authorized representatives, as well as the necessary tools, measuring devices, test equipment and technical assistance as may be necessary to perform acceptance tests. e. It is agreed by the PARTIES that BUYER's authorized representatives shall observe EMBRAER's administrative rules and instructions while at EMBRAER's facilities. f. The BUYER's authorized representatives shall be allowed exclusively in those areas related to the subject matter hereof and BUYER agrees to hold harmless EMBRAER from and against all and any kind of liabilities in respect to such representatives, for whom BUYER is solely and fully responsible under all circumstances and in any instance. 11. CHANGES: a. Each AIRCRAFT will comply with the standards defined in the Attachment "A" hereto and shall incorporate all modifications which are classified as Airworthiness Directives (AD's) mandatory by CTA or FAA-or those agreed upon by BUYER and EMBRAER in accordance with this Article 11. b. All the specified tray-mounted avionic equipment installed in the AIRCRAFT shall be of the latest modification standard made available to EMBRAER by the relevant vendor at such time as not to violate the delivery schedule of the AIRCRAFT. All other parts will be of the latest modification standard available at the moment of scheduled installation in the AIRCRAFT. C. The PARTIES hereby agree that changes can be made by EMBRAER in the design of the AIRCRAFT; the definition of which and its respective classification shall be in compliance to the AIRCRAFT Type Specification as follows: 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 9 of 20 12 1. Minor changes - defined as those modifications which shall not adversely affect the AIRCRAFT in any of the following: - Performance, weight or balance; - Structural strength, flight qualities; operation and/or characteristics; - Interchangeability of parts; defined by EMBRAER as interchangeable - AIRCRAFT delivery and prices; - Operational safety; - Ease of maintenance; - Noise and environmental control. 2. Major changes - defined as those modifications which affect at least one of the topics mentioned in item "c. 1" hereinabove. d. EMBRAER shall have the right, without the prior consent of BUYER, to make minor changes, as referred to in item "c.1" hereinabove, in the design of AIRCRAFT. The costs of any such changes shall be borne by EMBRAER. e. Major changes as referred to in item "c.2" hereinabove which are classified as Airworthiness Directives (AD's) mandatory by CTA and/or FAA shall be conveyed to BUYER by means of Service Bulletins, approved by said authorities and incorporated by EMBRAER in all AIRCRAFT delivered or to be delivered to BUYER at EMBRAER's own costs during the term of the AIRCRAFT's Warranty Certificate validity, in a reasonable period of time. When flight safety is affected, such changes will be immediately incorporated. EMBRAER shall not be liable for any delays, in the AIRCRAFT CONTRACTUAL DELIVERY DATE resulting from the execution of any change classified as mandatory by CTA or FAA when the AIRCRAFT shall have already surpassed the specific production stage affected by the incorporation of said change. f. Major changes (any other than those which are Airworthiness Directives mandatory as per item "e" above), any change developed by EMBRAER as product improvement and any change required by BUYER, including those changes required by BUYER's country authorities as a consequence of alterations, amendments and/or innovations of its present airworthiness regulations, shall be considered as optional and, as such, the corresponding cost proposals shall be submitted by EMBRAER to BUYER for consideration and approval. Should BUYER not approve any such change, it shall not be incorporated in the AIRCRAFT. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 10 of 20 13 g. Any change made by EMBRAER in accordance with the preceding items which affect the provisions of Attachment "A" hereto shall be incorporated in said Attachment by means of an amendment. The amendments shall be submitted to BUYER for signature thirty (30) calendar days prior to the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE, a copy of which shall be received by EMBRAER, duly signed, prior to the relevant AIRCRAFT ACTUAL DELIVERY DATE. 12. WARRANTY: The materials and workmanship relative to the AIRCRAFT subject of this Agreement will be warranted in accordance with the terms and conditions specified in Attachment "C" hereto. If BUYER intends to place the AIRCRAFT on lease to another party or to assign the rights and obligations as specified in Article 16 hereof, it is BUYER's responsibility to obtain EMBRAER's prior consent as well as to provide EMBRAER written notice within five (5) business days of any changes as to BUYER's designated lessee or assignee complying with Article 6 of the Attachment "C" hereof. 13. TECHNICAL ASSISTANCE SERVICES: ***** Notwithstanding the eventual use of the term "training" in this Article 13 or in the Agreement, the intent of the SERVICES provided hereunder is to familiarize BUYER's pilots with the operation of the AIRCRAFT. It is not the intent of EMBRAER to provide basic training to any representatives of BUYER. Simulator Training - Provided that BUYER's pilots are duly qualified as regards AIRCRAFT systems, weight and balance, performance and normal/emergency procedures, simulator training of no more than twelve (12) hours per pilot, for six (6) pilots per aircraft, shall be provided at EMBRAER's facilities in Ft. Lauderdale, Florida, United States of America or at such other location as EMBRAER shall reasonably designate, or, at BUYER's option, at any FlightSafety facility that offers such training, to the extent time is available. BUYER must give written notification to EMBRAER thirty (30) calendar days in advance of BUYER's expected training schedules. ***** Any other additional SERVICES shall depend on mutual agreement between the PARTIES and shall be charged by EMBRAER accordingly. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 11 of 20 14 The presence of BUYER's authorized trainees and representatives at EMBRAER's facilities shall be allowed exclusively in those areas related to the subject matter hereof and BUYER agrees to hold harmless EMBRAER from and against all and any kind of liabilities in respect to such trainees and representatives for whom BUYER is solely and fully responsible under all aspects and in any instance. 14. SPARE PARTS POLICY: EMBRAER guarantees the supply of spare parts and Aircraft Ground Equipment for the AIRCRAFT, in accordance with Article 4 of Attachment "B" hereto, for a period of ten (10) years after production of the last aircraft of the same type. Such spare parts and Aircraft Ground Equipment shall be supplied according to the prevailing availability, sale conditions, delivery schedule and effective price on the date of acceptance by EMBRAER of the purchase order. The spare parts and Aircraft Ground Equipment may be supplied either by EMBRAER or through its subsidiaries or branch offices located abroad. 15. PUBLICATION: a. Aircraft Publications - EMBRAER shall supply for each AIRCRAFT, at no cost to BUYER, copies of operational and maintenance publications applicable thereof in the English language and in the quantities as specified in Article 5 of Attachment "B" hereof. Such publications are issued under A.T.A. 100 Specification (as applicable) and are available in hard copies. The revision service for these publications is provided free-of-charge, including mailing services (except for air cargo shipping), for the first two (2) years and subsequently at a nominal fee. Such publications, except for one set of operational publications supplied with each AIRCRAFT to accomplish airworthiness requirements, will be delivered to BUYER no later than one (1) month after the execution of this Purchase Agreement. b. Vendor Items Publications - With respect to vendor items installed in the AIRCRAFT which have their own publications, the BUYER will receive them in the quantity specified in Article 5 of Attachment "B" hereto, in their original content and printed form, directly from the suppliers, who are also in charge of keeping them continuously updated through a direct communication system with the BUYER. 16. ASSIGNMENT: BUYER's rights and obligations hereunder may not be assigned without EMBRAER's previous written consent. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 12 of 20 15 17. RESTRICTIONS AND PATENT INDEMNITY: This sale does not include the transfer of designs, copyrights, patents and other similar rights to BUYER. Subject to BUYER's duty to immediately advise EMBRAER of any alleged copyright or patent infringement, EMBRAER shall indemnify and save BUYER harmless with respect to any claims made against BUYER if the AIRCRAFT infringes copyright patents or the proprietary rights of others. 18. MARKETING PROMOTIONAL RIGHTS: EMBRAER shall have the right to show free of any charge, for marketing purposes, the image of BUYER's AIRCRAFT, painted with BUYER's colors and emblems, affixed in photographs, drawings, films, slides, audiovisual works, models or any other medium of expression (pictorial, graphic, and sculptural works), through all mass communications media such as billboards, magazines, newspapers, television, movies, theaters, as well as in posters, catalogs, models and all other kinds of promotional material. In the event such AIRCRAFT is sold to or operated by or for another company or person, EMBRAER shall be entitled to disclose such fact, as well as to continue to show the image of the AIRCRAFT, free of any charge, for marketing purposes, either with the original or the new colors and emblems, unless otherwise notified, provided that such notification shall be subject to the reasonable satisfaction and agreement of EMBRAER. If accepted, said prohibition, however, shall in no way apply to the promotional materials or pictorial, graphic or sculptural works already existing or to any contract for the display of such materials or works already binding EMBRAER at the time of receipt of the notification. The provisions of this Article shall be included in all future sales or lease agreements concerning the AIRCRAFT. 19. TAXES: EMBRAER shall pay all taxes arising from the sale subject of this Agreement as may be imposed on it under the Brazilian laws. All other taxes, imposts, fees, withholding taxes, stamp taxes and any other similar or dissimilar taxes, as well as any duties as may be imposed on the sale subject of this Agreement, shall be borne by BUYER. 20. APPLICABLE LAW: This Agreement shall be construed in accordance with and its performance shall be governed by the laws of the Federative Republic of Brazil. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 13 of 20 16 21. JURISDICTION: All disputes arising in connection with this Agreement shall be finally settled in the courts of the city of Sao JOSE dos Campos, Sao Paulo, Brazil. The PARTIES hereby waive any other court of Jurisdiction that may be competent for settlement of disputes arising from this Agreement. 22. TERMINATION: a. Should either party fail to comply partially or completely with its obligations hereunder, the other party shall be entitled to give notice of such failure and to require that such failure be remedied within the period specified in that notice, which period shall not be less than five (5) calendar days. Should such failure not be remedied within the period so specified, then the party who gave notice of such failure shall be entitled to terminate this Agreement provided always that the foregoing shall not apply in any circumstances where a specific right of termination is available or will be available upon the expiry of a specific period of time. Should termination occur in accordance with the foregoing, the defaulting party shall pay to the non-defaulting party, as liquidated damages, an amount determined by mutual agreement or by law. b. BUYER shall have the right to terminate this Agreement, in respect to the relevant AIRCRAFT, upon the occurrence of any excusable delay of three hundred (300) calendar days or longer and any non-excusable delay of ninety (90) calendar days or longer after such AIRCRAFT CONTRACTUAL DELIVERY DATE. Such right to be exercisable by giving EMBRAER a written notice to such effect no earlier than the three hundredth (300th) or ninetieth (90th) calendar day as applicable. Upon receipt of such notice of termination, EMBRAER shall return to BUYER an amount equal to the amounts previously paid by BUYER relative to the relevant AIRCRAFT less the value of equipment or services previously delivered or performed by EMBRAER, it being hereby agreed by the PARTIES that, in this case, no kind of other indemnity shall be due by EMBRAER to BUYER. C. In the event of a force majeure occurring prior to the ACTUAL DELIVERY DATE of any AIRCRAFT which causes BUYER to determine not to purchase such AIRCRAFT, BUYER may by written notice to EMBRAER, terminate the Purchase Agreement with respect to such AIRCRAFT, and BUYER shall only be liable to EMBRAER for the following amounts on account of such AIRCRAFT: 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 14 of 20 17 ***** d. EMBRAER agrees that BUYER has the option to terminate the Purchase Agreement with no penalty assessed against BUYER by EMBRAER, in the event EMBRAER fails to deliver any six (6) consecutive AIRCRAFT due to force majeure reasons (and in case of this item "d", excluding acts of government, governmental priorities, requisition, strike and labor troubles from the concept of force majeure) and/or if such delay is due to reasons detailed in Article 1O.a.1 (b) (except to the extent that the delay is as a consequence of a general work force strike of EMBRAER or of a supplier of EMBRAER, if the supplier provides to EMBRAER a major component of the AIRCRAFT) and for which Article 22.c has not been invoked, within sixty (60) days of each relevant AIRCRAFT CONTRACTUAL DELIVERY DATE as specified in Article 6 herein. If EMBRAER fails to deliver any six (6) consecutive AIRCRAFT within such sixty (60) day period as above mentioned, BUYER's right to terminate the Purchase Agreement may be exercised by written notice to EMBRAER as provided in Article 25 herein, within five (5) days after the expiration of the sixty (60) day period following the CONTRACTUAL DELIVERY DATE of the third consecutive AIRCRAFT delayed more than sixty (60) days. In this case, all amounts paid by BUYER to EMBRAER under the Purchase Agreement, and specifically with regard to the non-delivered AIRCRAFT, shall be returned to BUYER, less the value of equipment or services previously delivered or performed by EMBRAER, it being hereby agreed by the PARTIES that, in this case, no other kind of indemnity shall be due by EMBRAER to BUYER. e. If EMBRAER terminates this Agreement pursuant to Article 7.g hereof, EMBRAER may, at its sole option, retain all amounts previously paid by BUYER as liquidated damages resulting from such default on the part of BUYER. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 15 of 20 18 23. OPTIONS: a. In addition to the FIRM AIRCRAFT, and subject to the conditions set forth hereinbelow, BUYER shall have the option to purchase another forty (40) AIRCRAFT (the "OPTION AIRCRAFT") at the unit BASIC PRICE per OPTION AIRCRAFT, with adjustments for any additions and/or deletions of equipment and/or provisioning agreed to by BUYER and EMBRAER. This basic price shall be escalated in accordance with the escalation formula provided in Attachment "D" to this Agreement. b. For option exercise purposes, the OPTION AIRCRAFT are divided into four (4) groups of ten (10) OPTION AIRCRAFT each as defined in item "c" hereinbelow. c. *****
GROUP OPTION EXERCISE DATE ----- -------------------- I OPTION Aircraft 21 - 30 March 31, 1998 II OPTION Aircraft 31 - 40 December 31, 1998 III OPTION Aircraft 41 - 50 May 31, 1999 IV OPTION Aircraft 51 - 60 November 30, 1999
d. Delivery for OPTION Aircraft in Groups I -through IV shall occur in accordance with option delivery dates below specified, subject to availability of delivery positions at the time Buyer elects to exercise its option:
GROUP 1 OPTION AIRCRAFT DELIVERY DATE: ----------------------- -------------- 21st A/C December 29, 1998 22nd A/C January 20, 1999 23rd & 24th A/C February 19, 1999 25th A/C April 25, 1999 26th & 27th A/C June 22, 1999 28th A/C July 30, 1999 29th A/C August 31, 1999 30th A/C October 29, 1999
120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 16 of 20 19
GROUP 2 OPTION AIRCRAFT DELIVERY DATE: - - ----------------------- -------------- 31st & 32nd A/C January 2000 33rd & 34th A/C February 2000 35th & 36th A/C March 2000 37th & 38th A/C April 2000 39th & 40th A/C May 2000
GROUP 3 OPTION AIRCRAFT DELIVERY DATE: - - ----------------------- -------------- 41st & 42nd A/C June 2000 43rd & 44th A/C July 2000 45th & 46th A/C August 2000 47th & 48th A/C September 2000 49th A/C October 2000 50th A/C November 2000
GROUP 4 OPTION AIRCRAFT DELIVERY DATE: - - ----------------------- -------------- 51st A/C December 2000 52nd A/C January 2001 53rd A/C February 2001 54th A/C March 2001 55th A/C April 2001 56th A/C May 2001 57th A/C June 2001 58th A/C July 2001 59th A/C August 2001 - 60th A/C September 2001
Upon exercise of each Group of OPTION AIRCRAFT and confirmation that delivery positions are available, BUYER shall purchase and EMBRAER shall sell such AIRCRAFT pursuant to the terms of this Purchase Agreement. e. Buyer many not purchase any OPTION AIRCRAFT unless BUYER has purchased all twenty (20) FIRM AIRCRAFT, and receipt by EMBRAER of any and all payments due, pursuant thereto. Should BUYER fail to purchase and receive any of the FIRM AIRCRAFT, or fail to cause EMBRAER to receive full payment therefore in accordance with this Purchase Agreement, then any right for BUYER to purchase the OPTION AIRCRAFT shall be considered null and void. f. Should BUYER fail to exercise a Group of OPTIONS on the OPTION exercise dates determined in item "c" of this Article 23, or on any other dates in lieu thereof that may be agreed by EMBRAER and BUYER in writing, EMBRAER shall be entitled to consider the OPTION contemplated in this Article 23 terminated for that Group. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 17 of 20 20 g. OPTION Aircraft pricing is offered to BUYER provided that delivery of all forty (40) OPTION AIRCRAFT shall occur on or before September 30, 2001 . Any OPTION AIRCRAFT contracted for delivery after such date shall be subject to a price adjustment according to the EMBRAER pricing criteria then prevailing. 24. INDEMNITY: BUYER agrees to indemnify and hold harmless EMBRAER and EMBRAER's officers, agents and employees from and against all liabilities, damages, losses, judgments, claims and suits, including costs and expenses incident thereto, which may be suffered by, accrued against, be charged to or recoverable from EMBRAER and/or EMBRAER's officers, agents and employees by reason of loss or damage to property or by reason of injury or death of any person resulting from or in any way connected with the performance of services by employees, representatives or agents of EMBRAER for or on behalf of BUYER related to AIRCRAFT delivered by EMBRAER to BUYER, including, but not limited to, technical operations, maintenance and training services and assistance performed while on the premises of EMBRAER or BUYER, while in flight on BUYER owned AIRCRAFT or while performing any other services, at any place, in conjunction with the AIRCRAFT operations of BUYER. 25. NOTICES: All notices permitted or required hereunder shall be in writing in the English language and sent, by registered mail or facsimile, to the attention of the Senior Manager - Contracts as to EMBRAER and of the Vice President -- Planning as to the BUYER, to the addresses indicated below or to such other address as either party may, by written notice, designate to the other. a. EMBRAER: EMBRAER - Empresa Brasileira de Aeronautica S.A. Av. Brigadeiro Faria Lima, 2170 12225 Sao Jose dos Campos - SP BRAZIL Telephone: (011)(55)(12)345-1410 Facsimile: (011)(55)(12)345-1257 b. BUYER: SkyWest Airlines, Inc. 444 South River Road St. George, Utah 84790 Telephone: (435) 634-3000 Facsimile: (435) 634-3305 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 18 of 20 21 26. CONFIDENTIALITY: BUYER does not have the right to disclose the terms of this Agreement except as required by law or in order to obtain AIRCRAFT financing. BUYER agrees not to disclose any portion of this Agreement or its Attachments, amendments or any other supplement to any third party without EMBRAER's written consent, except as necessary to obtain AIRCRAFT financing. Without limiting the foregoing, in the event BUYER is legally required to disclose the terms of this Agreement, BUYER agrees to exert its best efforts to request confidential treatment of the clauses and conditions of this Agreement relevantly designated by EMBRAER as confidential. 27. INTEGRATED AGREEMENT: All attachments referred to in this Agreement and attached hereto are, by such reference and attachment, incorporated in this Agreement. This Purchase Agreement, including all Attachments and all amendments, modifications and supplements, is herein and hereinafter called the "Agreement" or the "Purchase Agreement". 28. NEGOTIATED AGREEMENT: BUYER and EMBRAER agree that this Agreement, including all of its Attachments, has been the subject of discussion and negotiation and is fully understood by the PARTIES, and that the rights, obligations and other mutual agreements of the PARTIES contained in this Agreement were arrived at in consideration of such complete discussion and negotiation between the PARTIES. 29. COUNTERPARTS: This Agreement may be signed by the PARTIES hereto in any number of separate counterparts with the same effect as if the signatures thereto and hereto whereupon the same instrument and all of which when taken together shall constitute but one and the same instrument. 30. ENTIRE AGREEMENT: This Agreement constitutes the entire agreement of the PARTIES hereto with respect to the sale described as its subject and supersedes all previous and connected negotiations, representations and agreements between the PARTIES. This Agreement may not be altered, amended or supplemented except by a written instrument executed by the PARTIES. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Page 19 of 20 22 IN WITNESS WHEREOF, the PARTIES have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers and to be effective as of the day and year first above written. EMBRAER BUYER By: [SIG] By: /s/BRADFORD R. RICH -------------------------------- -------------------------------- Name: [ILLEGIBLE] Name: Bradford R. Rich ------------------------------ ------------------------------ Title: [ILLEGIBLE] Title: Exec. VP, CFO & Treasurer ----------------------------- ----------------------------- By: [SIG] By: /s/ ERIC CHRISTENSEN -------------------------------- -------------------------------- Name: Name: Eric Christensen ------------------------------ ------------------------------ Title: Title: VP Planning and Corporate ----------------------------- Secretary Date: March 5, 1998 Date: March 29, 1998 ------------------------------ ------------------------------ Place: San Jose dos Campos - SP Brazil Place: St. George, UT ------------------------------ ----------------------------- Witness: [SIG] Witness:/s/AIMEE WORAM --------------------------- --------------------------- Name: [ILLEGIBLE] Name: Aimee Woram ------------------------------ ------------------------------ 120ER Purchase Agreement - - -------------------------------------------------------------------------------- PAGE 20 OF 20 23 PURCHASE AGREEMENT NO. GCT-008198 ATTACHMENT "A" In addition to the standard equipment detailed in Technical Description number TD-120/9801, dated February 1998, as referred to in the Purchase Agreement, the equipped AIRCRAFT configuration as selected by BUYER will include some non-standard items. The complete list of equipment is detailed hereinbelow. In case of any conflict between this Attachment and TD-120/9801, this Attachment shall control. DESCRIPTION A) STANDARD EMB-120ER BRASILIA AIRCRAFT: Basic commuter configuration, incorporating the following equipment and features: - Four-blade, constant speed, full feathering and unfeathering, beta mode, overspeed protection and synchrophasing, Hamilton Standard propellers, model 14 RF-9 - Pressurization system, with nominal differential pressure of 7.0 psi - Air conditioning supplied by two air cycle machines and intake for external supply - Oxygen system: demand masks for crew and drop-out masks for pax - Fuel system with two gravity refueling points and one pressure refueling point - Four electric fuel booster pumps - Complete anti-ice/de-ice system - Complete Bruce Lighting system interior lighting with cabin light control at attendant post station - Logotype lights - Two Rotating Beacons 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment A Page 1 of 6 24 - Dual flight controls and instruments - Adjustable SICMA seats for pilot and copilot - Rear plug-in baggage cargo/baggage door (1.30m x 1.36m) - Front pax airstairs door (0.77m x 1.70m) - Complete carpeting, sidewall and headliner with finishing B) BASIC AVIONICS PANEL: 1 (one) SMITHS Counter Pointer Encoding Altimeter 2 (two) SMITHS Vertical Speed Indicators 2 (two) SMITHS Airspeed Indicators 1 (one) JET Stand-by Gyro Horizon I (one) AMETEK Outside Air Temperature Indicator 2 (two) Digital Clocks 1 (one) AMETEK Stand-by Compass 1 (one) DORNE & MARGOLIN DMELT-8 Emergency Locator Transmitter 1 (one) AVTECH Remote Audio Unit for ground crew 2 (two) AVTECH Audio Control Units 1 (one) AVTECH Public Address/Cabin Interphone Unit 2 (two) COLLINS VHF-22A VHF/COMM 2 (two) COLLINS VIR-32 VHF/NAV Receivers 1 (one) COLLINS ADF-60A ADF System 2 (two) COLLINS RMI-36 Radio Magnetic Indicators 2 (two) COLLINS AHRS-85 Attitude and Heading Ref Systems 120ER Purchase Agree - - -------------------------------------------------------------------------------- Attachment A Page 2 of 6 25 2 (two) COLLINS EADI-86 Electronic Attitude Director Indicators (5"x6") 2 (two) COLLINS EHSI-86 Electronic Horizontal Situation Indicators (5"x6"), including DPU-86. 1 (one) COLLINS Automatic Pilot System (APS-65), composed of: - Autopilot/Flight Director Computers - Air Data Sensors - 2 Flight Control Panels - Autopilot Panel 1 (one) COLLINS DME42 DME System 2 (two) COLLINS TDR-94 Transponder System 1 (one) COLLINS WXR-350 Color Weather Radar 1 (one) COLLINS ALT-55 Radio Altimeter C) OPTIONAL AVIONICS: 1. Third Collins VHF-22A VHF/COMM with CTL-22 2. Second Collins DME-42 System 3. CVR - Solid State 4. FDR - Solid State 5. IDC Altitude Preselect System with Servo Encoding Altimeter 6. GPWS - Sundstrand Mark VI Ground Proximity Warning System 7. Complete Installation of TCAS-1 - B. F. Goodrich 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment A Page 3 of 6 26 D) OPTIONAL SYSTEMS/OTHER EQUIPMENT: 1. P&W 118B Engines 2. Complete APU System with Garrett unit FTCP36-150 (AA) 3. High Altitude Oxygen System (Gaseous type) 4. Polyurethane painting 5. Cargo Door Anti-blockage Barrier 6. Reinforced 700 kg cargo compartment bulkhead 7. Advanced Version (EMB-120ER) 8. Engine Oil Aero Exxon Turbo Oil 2380 E) INTERIOR: The first four (4) AIRCRAFT shall have the following interior configuration: 1. External flushing dry toilet (FDT1), including toilet seat, paper towel dispenser, miscellaneous items, toilet paper and waste container, 2. Afterward left-hand side galley (FGL2), including miscellaneous items, two (2) hot jugs (1 gal.) - 28VDC (Manufacturer: Midland Ross - model 306-140 or equivalent), two (2) ice box, two (2) miscellaneous, one (1) provisions of half size trolley, one (1) paper napkins, one (1) folding work table, 3. 30 Pax Carbon fiber Seats 9G certified, according to FAR 25.561 and 25.785 - Amendment 25-63 4. Observer Station - includes folding seat; oxygen mask connected to the crew system; seat belts; audio unit 5. Flight Attendant Station - includes: folding seat; oxygen mask: cabin interphone handset; seat belts; flashlight; fire extinguisher; control panel for: air conditioning, cabin light, main door; life vest behind headset 6. Overhead baggage bins - 6 units 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment A Page 4 of 6 27 The fifth AIRCRAFT and all subsequent AIRCRAFT shall have the following interior configuration: 1. External flushing dry toilet (ADT1), including toilet seat, paper towel dispenser, miscellaneous items, toilet paper and waste container. 2. Afterward left-hand side galley (AGL1), including miscellaneous items, two (2) hot jugs (1 gal.) - 28VDC (Manufacturer: Midland Ross - model 306-140 or equivalent), two (2) standard' units provisions and waste container. 3. Afterward right-hand side galley (AGR3), including miscellaneous items, icebox, three (3) standard units provisions, galley service door and folding table. Note Neither galley includes standard unit equipment and optional interphone. 4. 30 Pax Carbon fiber Seats 9G certified, according to FAR 25.561 and 25.785 - Amendment 25-63. 5. Observer Station - includes folding seat; oxygen mask connected to the crew system; seat belts; audio unit 6. Flight Attendant Station - includes: folding seat; oxygen mask; cabin interphone handset; seat belts; flashlight; fire extinguisher; control panel for: air conditioning, cabin light, main door, life vest behind headset 7. Overhead baggage bins - 6 units F) WEIGHT For the first four (4) AIRCRAFT, EMBRAER hereby represents that (i) the Basic Empty Weight (BEW) of the first four (4) AIRCRAFT, in the specific configuration described in this Attachment "A", shall not be greater than 16,387 Lbs, with a tolerance of plus or minus one percent (+/- 1%), and (ii) the Maximum Baggage Allowed (with 30 pax) shall be 1,477 Lbs. For the fifth AIRCRAFT and all subsequent AIRCRAFT, EMBRAER hereby represents as follows: 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment A Page 5 of 6 28 EMBRAER hereby represents that (i) the Basic Empty Weight (BEW) of the AIRCRAFT, in the specific configuration described in this Attachment "A", shall not be greater than 16,405 Lbs, with a tolerance of plus or minus one percent (+/- 1%), and (ii) the Maximum Baggage Allowed (with 30 pax) shall be 1,543 Lbs. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment A Page 6 OF 6 29 ATTACHMENT "B" AIRCRAFT FINISHING, REGISTRATION MARKS,_FERRY EQUIPMENT, SPARE PARTS POLICY AND LIST OF PUBLICATIONS 1. FINISHING a. Exterior Finishing: The AIRCRAFT shall be painted according to BUYER's color and paint scheme which shall be supplied to EMBRAER by BUYER on or before six (6) months prior to the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE, except in the case of the FIRST AND SECOND AIRCRAFT which will be delivered in the current EMBRAER paint scheme. For the third through twentieth AIRCRAFT the paint scheme shall be agreed by the PARTIES within one week after signature of the Purchase Agreement. b. Interior Finishing: BUYER shall inform EMBRAER on or before seven (7) months prior to the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE of its choice of materials and colors of all and any item of interior finishing, such as seat covers, carpet, floor lining on galley areas, side walls and overhead lining, galley lining and curtain, except in the case of the FIRST AND SECOND AIRCRAFT, which will be delivered as is. For the third through twentieth AIRCRAFT, the choice of materials and colors shall be agreed by the PARTIES within one week after signature of the Purchase Agreement. c. The above-mentioned schedule for definition of interior finishing shall only be applicable if BUYER selects its materials from the choices offered and available by EMBRAER. In case BUYER opts to use different materials and/or patterns, such schedule shall be mutually agreed between the PARTIES at the time of signature of this Purchase Agreement. 2. REGISTRATION MARKS Each AIRCRAFT shall be delivered to BUYER with the registration marks painted on it, which shall be supplied to EMBRAER by BUYER no later than ninety (90) days before the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE, except in the case of the first three AIRCRAFT, which shall be supplied to EMBRAER by BUYER no later than the date of signature of the Purchase Agreement. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment B Page 1 of 4 30 3. FERRY EQUIPMENT If it is necessary for any ferry equipment to be installed by EMBRAER for the ferry flight between Brazil and Fort Lauderdale, Florida, United States of America. EMBRAER may provide such equipment to BUYER, for a price to be previously agreed between the PARTIES. In this case, BUYER shall remove such ferry equipment from the AIRCRAFT at EMBRAER AIRCRAFT CORPORATION's facilities at Fort Lauderdale, Florida, United States of America. Such equipment shall be turned over to a representative of EMBRAER AIRCRAFT CORPORATION for the purpose of it being returned to EMBRAER in Brazil at BUYER's own expense. If such equipment is utilized for any reason, or if such equipment is not returned by BUYER, in EMBRAER's sole judgment in complete and perfect condition, BUYER shall fully indemnify EMBRAER for the value of such equipment, provided that in case of partial utilization of or damage to any such equipment, the value to be charged shall be the price of a new complete set of equipment. In such case the original equipment shall become property of BUYER. The above-mentioned payment shall be made to EMBRAER by BUYER upon presentation of a sight draft by EMBRAER. The presence of an EMBRAER qualified crew member during the ferry flight on the way to BUYER's facilities, to act as second in command and to assist in handling communication with Air Traffic Control (ATC) while overflying Brazilian airspace, shall depend on a previous agreement between the PARTIES provided that a written advance notice shall be given from BUYER to EMBRAER at least thirty (30) days prior to the date of such ferry flight. 4. SPARE PARTS 4.1. Policy: EMBRAER's spare parts policy is to provide the following categories of spares as specified in the respective EMBRAER publications and available to be purchased through EMBRAER: - Line Replaceable Units (LRU's); - Parts to repair and overhaul components manufactured under EMBRAER specification to be used only on the EMB- 120 BRASILIA; - Parts to line maintenance; - Parts to fulfill all maintenance tasks per maintenance manual and/or maintenance plan issued by EMBRAER; 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment B Page 2 of 4 31 - EMBRAER-made parts; - Aircraft Ground Equipment (AGE); - Aircraft Ground Equipment spare parts manufactured under - EMBRAER specifications; - Special tools; - Bulk material. 4.2. Emergency Spare Parts Service: EMBRAER will maintain emergency spare parts service twenty-four (24) hours a day, seven (7) days a week. EMBRAER will deliver in F.C.A. condition at Sao Jose dos Campos, State of Sao Paulo, Brazil, or at any other port of clearance that may be chosen by EMBRAER and informed to BUYER, spare parts in inventory needed for aircraft-on-ground (AOG) orders within twenty-four (24) hours after receipt. EMBRAER will notify BUYER of the action taken to satisfy each emergency in accordance with the following schedule: -AOG (Aircraft-On-Ground).................................within 4 hours -Critical (Imminent AOG or Work Stoppage)................within 24 hours -Expedite (Less than published or quoted lead time)........within 7 days 4.3 Parts Exchange Program: According to its prevailing availability, EMBRAER may offer an "exchange program" for repairable parts whenever the vendor does not have its own exchange program. 4.4. Parts Repair Program: For any repair required by BUYER on any EMBRAER or vendor repairable item, EMBRAER may assist BUYER to perform such repair in order to ensure the shortest turn around time (TAT). 4,5. Pricing: EMBRAER will maintain a spare parts price list updated periodically. Items not shown on the list will be quoted on request. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment B Page 3 of 4 32 5. LIST OF PUBLICATIONS As provided for in Article 16 of this Agreement, the technical publications covering operation and maintenance shall be delivered to BUYER in accordance with the following list:
QTY TITLE (Copies) ----- -------- 01. AIRPLANE FLIGHT MANUAL (1) 6 02. SUPPLEMENTARY PERFORMANCE MANUAL (1) 6 03. OPERATION MANUAL (1) 6 04. WEIGHT & BALANCE (1) 6 05. QUICK REFERENCE HANDBOOK (1) 6 06. WIRING MANUAL 6 07. MAINTENANCE MANUAL 6 08. MAINTENANCE REVIEW BOARD (FAA) 6 09. AIRPORT PLANNING GUIDE 6 10. ILLUSTRATED PARTS CATALOG 6 11. MAINTENANCE PLANNING GUIDE 6 12. STRUCTURAL REPAIR 6 13. ILLUSTRATED TOOL EQUIPMENT LIST 6 14. POWERPLANT BUILD-UP 6 15. AUXILIARY POWER UNIT BUILD UP 6 16. INSTRUCTIONS FOR GROUND FIRE EXTINGUISHING AND RESCUE 6 17. DISPATCH DEVIATION PROCEDURES MANUAL (1) 6 18. FAULT ISOLATION MANUAL 6 19. RAMP ISOLATION MANUAL 6 20. SERVICE & INFORMATION BULLETIN SET 6 21. VENDOR SERVICE PUBLICATIONS (2) 6 22. OPERATIONS BULLETIN 6
(1) Extra copy with each AIRCRAFT (2) To be delivered by the supplier. In the event BUYER elects not to take all or any portion of the publications referred to hereinabove, no refund or other financial adjustment of the contract price or additional concession/credit will be made since the publications are offered to BUYER by EMBRAER free of charge. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment B Page 4 of 4 33 ATTACHMENT "C" WARRANTY CERTIFICATE - MATERIAL AND WORKMANSHIP EMB-120 BRASILIA 1. EMBRAER subject to the conditions and limitations hereby expressed, warrants all EMB-120 BRASILIA AIRCRAFT as follows: a. For a period of twenty-four (24) months from the date of delivery to the first BUYER, the AIRCRAFT will be free from: - Defects in materials, workmanship and manufacturing processes in relation to parts manufactured by EMBRAER or by its subcontractors holding an EMBRAER part number; - Defects inherent to the design of the AIRCRAFT and its parts designed and manufactured by EMBRAER or by its subcontractors holding an EMBRAER part number. b. For a period of twelve (12) months from the date of delivery to the first BUYER, the AIRCRAFT will be free from: - Defects in operation of vendor (EMBRAER's supplier) manufactured parts, not including the engines and their accessories and the landing gear system parts, as well as failures of mentioned parts due to incorrect installation or installation not complying with the instructions issued or approved by their respective manufacturers; - Defects due to non-conformity to the technical specification referred to in the purchase agreement of the AIRCRAFT. c. For a period of twelve (12) months or six thousand (6,000) landings, whichever occurs first, from the date of delivery to the first BUYER, the AIRCRAFT will be free from: - Defects in operation of the landing gear system parts supplied by ERAM, as well as failures of mentioned parts due to incorrect installation or installation not complying with the instructions issued or approved by the manufacturer. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment C Page 1 of 4 34 Once the above-mentioned periods have expired, EMBRAER will transfer to BUYER the original Warranty issued by the vendors, if it still exists. 2. EMBRAER, subject to the conditions and limitations hereby expressed, warrants that: a. All spare parts or Aerospace Ground Equipment, which have been manufactured by EMBRAER or by its subcontractors holding an EMBRAER part number which will permit their particular identification and which have been sold by EMBRAER or its representatives, will, for a period of twelve (12) months from the date of the invoice, be free from defects of material, workmanship, manufacturing processes and defects inherent to the design of the above mentioned parts or Aerospace Ground Equipment. b. All spare parts or Aerospace Ground Equipment which have been designed and manufactured by vendors, not including engines and their accessories, and stamped with a serial number which will permit their particular identification and which have been sold by EMERAER or its representatives, will, for a period of six (6) months from the date of the invoice, be free from malfunction, defect of material and manufacture. 3. The obligations of EMBRAER as expressed in this Warranty are limited to replace or repair, depending solely upon its own judgment, the parts that are returned to EMBRAER or its representatives, at BUYER's own expenses, adequately packed, within a period of sixty (60) days after the occurrence of the defect, provided that EMBRAER agrees that such components are indeed defective and that the defect has occurred within the periods stipulated in this certificate. NOTE: Notification of any defect claimed under Article 3 above must be given to EMBRAER within thirty (30) days after such defect is found. Parts supplied to BUYER as replacement for defective parts are warranted for the balance of the warranty period still available from the original Warranty of the exchanged parts. However, freight, insurance, taxes and other costs eventually incurred during the shipment to EMBRAER or its representatives, reinstallation and adjustments are BUYER's responsibility. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment C Page 2 of 4 35 4. EMBRAER will accept no warranty claims under any of the circumstances listed below: a. When the AIRCRAFT has been used in an attempt to break records, or subjected to experimental flights, or any other way not in conformity with the flight manual or the airworthiness certificate, or subjected to any manner of use in contravention of the applicable aerial navigation or other regulations and rules issued or recommended by government authorities of whatever country in which the AIRCRAFT is operated, when accepted and recommended by I.C.A.O.; b. When the AIRCRAFT or any of its parts have been altered or modified by BUYER, without prior approval from EMBRAER or from the manufacturer of the parts through a Service Bulletin; c. Whenever the AIRCRAFT or any of its parts have been involved in an accident, or when parts either defective or not complying to manufacturer's design or specification have been used; d. Whenever parts have had their identification marks, designation, seal or serial number altered or removed; e. In the event of negligence, misuse or maintenance services done on the AIRCRAFT or any of its parts not in accordance with the respective maintenance manual; f. In cases of deterioration, wear, breakage, damage or any other defect resulting from the use of inadequate packing methods when returning items to EMBRAER or its representatives. 5. This Warranty does not apply to defects presented by expendable items, whose service life or maintenance cycle is lower than the warranty period, and to materials or parts subjected to deterioration. 6. The Warranty hereby expressed is established between EMBRAER and the first BUYER, and it cannot be transferred or assigned to others, unless by written consent of EMBRAER, according to Article 16 of the Purchase Agreement of which this is an Attachment. 7. THE WARRANTIES, OBLIGATIONS AND LIABILITIES OF EMBRAER AND REMEDIES OF BUYER SET FORTH IN THIS WARRANTY CERTIFICATE ARE EXCLUSIVE AND IN SUBSTITUTION FOR, AND BUYER HEREBY WAIVES, RELEASES AND RENOUNCES, ALL OTHER 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment C Page 3 of 4 36 WARRANTIES, OBLIGATIONS AND LIABILITIES OF EMBRAER AND ANY ASSIGNEE OF EMBRAER AND ALL OTHER RIGHTS, CLAIMS AND REMEDIES OF BUYER AGAINST EMBRAER OR ANY ASSIGNEE OF EMBRAER, EXPRESSED OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY NON-CONFORMANCE OR DEFECT OR FAILURE FOR ANY OTHER REASON, IN ANY AIRCRAFT OR OTHER THING DELIVERED UNDER THE PURCHASE AGREEMENT OF WHICH THIS IS AN ATTACHMENT INCLUDING DATA, DOCUMENT, INFORMATION OR SERVICE, INCLUDING BUT NOT LIMITED TO: a. ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS; b. ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE; c. ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM THE NEGLIGENCE OR OTHER RELATED CAUSES OF EMBRAER OR ANY ASSIGNEE OF EMBRAER, WHETHER ACTIVE, PASSIVE OR IMPUTED; AND d. ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO ANY AIRCRAFT, FOR LOSS OF USE, REVENUE OR PROFIT WITH RESPECT TO ANY AIRCRAFT OR FOR ANY OTHER DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES. 8. No representative or employee of EMBRAER is authorized to establish any other warranty than the one hereby expressed, nor to assume any additional obligation relative to the matter, in the name of EMBRAER and therefore any such statements eventually made by or in the name of EMBRAER shall be void and without effect. 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment C Page 4 of 4 37 ATTACHMENT "D" EMB - 120 --------- ESCALATION FORMULA ------------------ ***** 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment D Page 1 of 3 38 ***** 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment D Page 2 of 3 39 ***** 120ER Purchase Agreement - - -------------------------------------------------------------------------------- Attachment D Page 3 of 3 EX-13.1 3 CERTAIN PORTIONS OF ANNUAL REPORT 1 EXHIBIT 13.1 SUMMARY FINANCIAL AND OPERATING DATA
Year Ended March 31,1998 - - -------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Operating revenues (000) $ 297,098 $ 278,110 $ 245,520 $ 218,075 $ 182,908 Operating income (000) $ 33,958 $ 15,417 $ 5,710 $ 20,341 $ 24,680 Net income (000) $ 21,944 $ 10,111 $ 4,366 $ 13,701 $ 14,396 Net income per common share(1): Basic $ 1.06 $ .50 $ .21 $ .62 $ .73 Diluted $ 1.04 $ .50 $ .21 $ .61 $ .72 Weighted average shares (000)(1): Basic 20,799 20,170 20,568 22,224 19,766 Diluted 21,168 20,248 20,736 22,428 20,126 Total assets (000) $ 330,406 $ 232,898 $ 227,550 $ 188,182 $ 184,017 Current assets (000) $ 192,801 $ 90,295 $ 76,462 $ 71,642 $ 87,088 Current liabilities (000) $ 49,692 $ 45,022 $ 43,644 $ 25,603 $ 20,473 Long-term debt (000) $ 49,571 $ 47,337 $ 53,736 $ 29,553 $ 26,647 Stockholders' equity (000) $ 211,133 $ 124,552 $ 115,800 $ 117,684 $ 122,788 Return on average equity 14.8% 8.3% 3.7% 11.1% 17.4% SKYWEST AIRLINES, INC. OPERATING DATA Passengers carried 2,989,062 2,656,602 2,340,366 2,073,885 1,730,993 Revenue passenger miles (000) 745,386 717,322 617,136 488,901 345,414 Available seat miles (000) 1,463,975 1,413,170 1,254,334 976,095 727,059 Load factor 50.9% 50.8% 49.2% 50.1% 47.5% Break-even load factor 45.0% 47.9% 48.4% 45.5% 41.2% Yield per revenue passenger mile 34.8c 33.3c 33.2c 36.3c 43.9c Revenue per available seat mile 18.1c 17.3c 16.9c 18.8c 21.6c Cost per available seat mile 16.0c 16.3c 16.6c 17.1c 18.8c Average passenger trip length 249 270 264 236 200 Number of aircraft at end of year 60 60 63 60 55
2 QUARTERLY FINANCIAL AND STOCK PRICE DATA
Fiscal Year 1998 ---------------------------------------------------- First Second Third Fourth Year ------- ------- ------- ------- -------- Operating revenues (000) $72,115 $80,302 $73,266 $71,415 $297,098 Operating income (000) $ 6,703 $12,248 $ 7,752 $ 7,255 $ 33,958 Net income (000) $ 4,345 $ 7,510 $ 5,422 $ 4,667 $ 21,944 Net income per common share (1): Basic $ .22 $ .37 $ .27 $ .21 $ 1.06 Diluted $ .22 $ .37 $ .26 $ .21 $ 1.04 Stock price data (1): High $ 8.50 $ 10.32 $ 14.81 $ 21.06 $ 21.06 Low $ 6.00 $ 7.69 $ 10.13 $ 14.75 $ 6.00
Fiscal Year 1997 ---------------------------------------------------- First Second Third Fourth Year ------- ------- ------- ------- -------- Operating revenues (000) $70,569 $75,819 $63,651 $68,071 $278,110 Operating income (loss) (000) $ 7,678 $ 7,999 $(1,736) $ 1,476 $ 15,417 Net income(loss) (000) $ 4,834 $ 4,990 $ (821) $ 1,108 $ 10,111 Net income (loss) per common share (1): Basic $ .24 $ .25 $ (.04) $ .06 $ .50 Diluted $ .24 $ .25 $ (.04) $ .06 $ .50 Stock price data (1): High $ 9.88 $ 9.13 $ 7.82 $ 7.19 $ 9.88 Low $ 6.63 $ 7.06 $ 6.32 $ 6.00 $ 6.00
(1) On May 5, 1998, the Company's Board of Directors declared a 100 percent stock dividend (one share for each share outstanding) payable to stockholders of record on May 20, 1998. The dividend was distributed on June 8, 1998. The Company paid cash in lieu of issuing fractional shares. All common shares and per share information in the accompanying consolidated financial statements have been retro-actively adjusted to reflect this stock dividend. As of April 30, 1998, there were 1,041 holders of common stock. Cash dividends of $.10 and $.12 per share of outstanding common stock were paid in fiscal years 1998 and 1997, respectively. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company, through SkyWest Airlines Inc., operates a regional airline offering scheduled passenger service with approximately 580 daily departures to 46 cities in 12 western states and Canada. Total operating revenues and passengers carried have grown consistently from fiscal 1994 through fiscal 1998, at compound annual growth rates of approximately 13.0 percent and 15.0 percent, respectively. In fiscal 1994, SkyWest generated approximately 727 million available seat miles ("ASMs") with its fleet of twenty-eight 19-seat Metroliners, twenty-three 30-seat Brasilias and four Canadair Regional Jets ("CRJs") at fiscal year end. As a result of the introduction of the 50-seat CRJs beginning in fiscal 1994, the expansion of the Brasilia fleet and the strategic transition out of the Metroliner aircraft as of December 1996, SkyWest generated approximately 1.5 billion ASMs in fiscal 1998 with a fleet of 50 Brasilias and 10 CRJs at fiscal year end. The transition out of the Metroliner aircraft enabled SkyWest to upgrade its aircraft to an all cabin-class fleet of Brasilias and CRJs, which offer increased passenger acceptance and capacity and higher operating efficiencies. The transition resulted in one-time pre-tax fleet restructuring and transition expenses of $6.2 million, or $.19 per share, in fiscal 1996. In fiscal 1998, the Company generated net income of $21.9 million, compared to $10.1 million in fiscal 1997 and $4.4 million in fiscal 1996. The improvement since fiscal 1996 reflects, among other factors, the addition of United Airlines, Inc. ("United") as a code-sharing partner and the completion of SkyWest's transition to an all cabin-class fleet. SkyWest has been a code-sharing partner with Delta Air Lines, Inc. ("Delta") and Continental Airlines, Inc. ("Continental") since 1987 and 1995, respectively. SkyWest recently expanded its code-sharing relationships to include United effective October 1, 1997. SkyWest operates as the Delta Connection in Salt Lake City and Los Angeles, as United Express in Los Angeles and as the Continental Connection in selected California markets. On January 19, 1998, SkyWest executed an addendum to the United Express Agreement, expanding SkyWest's operations to serve as the United Express carrier in San Francisco which began June 1, 1998. On February 9, 1998, SkyWest executed an amendment to the United Express Agreement to provide service as United Express in United's Portland and Seattle/Tacoma markets and in additional Los Angeles markets which began April 23, 1998. SkyWest believes that its success in attracting multiple code-sharing relationships is attributable to its delivery of high quality customer service with an all cabin-class fleet. Multiple code-sharing relationships have enabled SkyWest to reduce reliance on any single major airline code and to enhance and stabilize operating results through a mix of SkyWest-controlled flying and United Express contract flying. On flights operated by SkyWest, SkyWest controls scheduling, ticketing, pricing and seat inventories and receives a prorated portion of passenger fares. On United Express contract routes, United controls scheduling, ticketing, pricing and seat inventories with SkyWest receiving from United negotiated minimum payments per flight departure and incentives related to passenger volumes and levels of customer service. As of March 31, 1998, 68 percent of the Company's capacity was generated in the Delta and Continental codes and 32 percent in the United code. As a result of SkyWest's Los Angeles, San Francisco and Pacific Northwest expansion, management expects that the percentages of SkyWest capacity in the United Express contract flying will increase. The Company has continued to emphasize cost management and better utilization of existing resources. During the period from fiscal 1994 through fiscal 1998, cost per ASM decreased from 18.8 cents to 16.0 cents. This reduction was due primarily to the introduction of the CRJs, which offer lower unit operating costs on longer stage lengths. In addition, the transition to an all-Brasilia turboprop fleet has resulted in fewer flight interruptions and lower maintenance costs. Furthermore, increased employee productivity has enabled the Company to grow with few additional employees, except for flight crews to operate the larger Brasilia and CRJ aircraft. 4 RESULTS OF OPERATIONS The following table sets forth information regarding the Company's operating expense components. Airline operating expenses are expressed as a percentage of total airline operating revenues. Nonairline expenses are expressed as a percentage of total nonairline revenues. Total operating expenses and interest are expressed as a percentage of total consolidated revenues.
Fiscal Year Ended March 31, ------------------------------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------------------------------ 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 . . . . . . . . . . . . . . . . . $ 67,591 25.5% 4.6c $ 60,759 24.8% 4.3c $ 56,005 26.5% 4.5c Aircraft costs . . . . . . . . . . . . . . . 52,357 19.8 3.6 49,822 20.4 3.5 43,009 20.3 3.5 Maintenance . . . . . . . . . . . . . . . . 20,535 7.8 1.4 20,929 8.6 1.4 20,779 9.8 1.6 Fuel . . . . . . . . . . . . . . . . . . . . 28,510 10.8 2.0 30,713 12.6 2.2 23,084 10.9 1.8 Other . . . . . . . . . . . . . . . . . . . 62,701 23.7 4.3 66,323 27.0 4.7 56,794 26.9 4.5 Interest . . . . . . . . . . . . . . . . . . 2,066 .8 .1 2,431 1.0 .2 2,160 1.0 .2 Fleet restructuring and transition expenses . . . . . . . . . . . . . . . . . -- -- -- -- -- -- 6,247 3.0 .5 -------- ---- ---- -------- ----- ---- -------- ---- ---- Total airline expenses . . . . . . . . . . . 233,760 88.4 16.0c 230,977 94.4 16.3c 208,078 98.4 16.6c -------- ---- ==== -------- ----- ==== -------- ---- ==== Nonairline expenses . . . . . . . . . . . . 32,319 98.8 34,147 102.0 33,895 99.6 -------- ---- -------- ----- -------- ---- Total operating expenses and interest . . . . . . . . . . . . . . . . . $266,079 89.6% $265,124 95.3% $241,973 98.6% ======== ==== ======== ===== ======== ====
FISCAL 1998 COMPARED TO FISCAL 1997 During fiscal 1998, the Company enplaned a record number of passengers, reported record consolidated net income and experienced continued growth in revenue passenger miles ("RPMs") and ASMs. In fiscal 1998, consolidated net income increased 117.0 percent to $21.9 million, or $1.04 per diluted share, after retroactively giving effect to a 100 percent stock dividend (one share for each share outstanding) declared May 5, 1998, compared to $10.1 million, or $.50 per diluted share in fiscal 1997. Consolidated operating revenues increased to a record $297.1 million in fiscal 1998 compared to $278.1 in fiscal 1997. Passenger revenues, which represented 87.3 percent of total operating revenues, increased 8.4 percent to $259.3 million in fiscal 1998 compared to $239.2 million or 86.0 percent of total operating revenues in fiscal 1997. The increase is due to a 4.5 percent increase in yield per RPM and a 3.9 percent increase in RPMs. SkyWest entered into a new code-sharing relationship with United and began operating as United Express in Los Angeles beginning October 1, 1997. This operation has resulted in both increased RPMs and increased yield per RPM. The 4.5 percent increase in yield per RPM also resulted from an increase in the Company's portion of prorated fares with Delta in certain markets. SkyWest has also acquired a new state-of-the-art revenue management and control system which utilizes historical booking data and trends to optimize revenue. The combination of these factors resulted in an increase in revenue per ASM to 18.1 cents in fiscal 1998 compared to 17.3 cents in fiscal 1997. Management has continued its efforts to reduce airline operating costs per ASM and as a percentage of airline operating revenues. Total airline operating expenses and interest were 88.4 percent of total airline operating revenues in fiscal 1998 compared to 94.4 percent in fiscal 1997. This percentage decrease is due to an 8.1 percent increase in total airline operating revenues and only a 1.2 percent increase in total airline operating expenses. This improvement is primarily the result of the increase in revenues from the new United contract flying as well as the Company not incurring expenses such as traffic commissions and certain traffic handling expenses related to contract flying. Airline operating costs per ASM decreased to 16.0 cents in fiscal 1998 from 16.3 cents in fiscal 1997. 5 Salaries, wages and employee benefits increased as a percentage of airline operating revenues to 25.5 percent in fiscal 1998 from 24.8 percent in fiscal 1997. The increase is primarily the result of incentive payments to employees, which are based on the Company's profitability. The average number of employees was 1,915 for fiscal 1998 compared to 1,852 for fiscal 1997. The increase is due to the addition of crewmembers required for the Company's expansion. Salaries, wages and employee benefits per ASM increased to 4.6 cents in fiscal 1998 from 4.3 cents in fiscal 1997. Aircraft costs, including aircraft rent and depreciation, decreased slightly as a percentage of airline operating revenues to 19.8 percent in fiscal 1998 from 20.4 percent in fiscal 1997. The decrease is due to airline operating revenues increasing at a faster rate than aircraft costs. Aircraft costs per ASM were 3.6 cents in fiscal 1998 compared to 3.5 cents in fiscal 1997. Maintenance expense decreased slightly as a percentage of airline operating revenues to 7.8 percent in fiscal 1998 from 8.6 percent in fiscal 1997. The decrease is due to airline operating revenues increasing while maintenance expenses decreased, in fiscal 1998, due to the utilization of newer Brasilia aircraft. Maintenance cost per ASM was 1.4 cents in fiscal 1998 and 1997. Fuel costs decreased as a percentage of airline operating revenues to 10.8 percent in fiscal 1998 from 12.6 percent in fiscal 1997. The decrease is due to airline operating revenues increasing 8.1 percent while fuel costs decreased 7.2 percent in fiscal 1998 compared to fiscal 1997. The decrease in fuel costs was due to a reduction in the average fuel price per gallon from 95 cents in fiscal 1997 to 81 cents in fiscal 1998. As a result, fuel costs per ASM decreased to 2.0 cents in fiscal 1998 from 2.2 cents in fiscal 1997. Other expenses, which consist primarily of commissions, landing fees, station rents, computer reservation systems and hull and liability insurance, decreased as a percentage of airline operating revenues to 23.7 percent in fiscal 1998 compared to 27.0 percent in fiscal 1997. The decrease is primarily the result of the Company not incurring commissions on United contract related passenger revenues. Due to the decrease in other expenses, cost per ASM decreased to 4.3 cents in fiscal 1998 from 4.7 cents in fiscal 1997. Nonairline revenues decreased 2.3 percent to $32.7 million in fiscal 1998 compared to $33.5 million in fiscal 1997. Nonairline revenues decreased due to weather related flight cancellations and as a result of lowering average fares in order to increase market share in the Scenic Airlines operations. Nonairline expenses decreased 7.9 percent to $31.4 million in fiscal 1998 compared to $34.1 million in fiscal 1997. The decrease was primarily due to the implementation of cost control measures and the restructuring of the financing of flight equipment and facilities. FISCAL 1997 COMPARED TO FISCAL 1996 Consolidated operating revenues increased 13.3 percent to $278.1 million in fiscal 1997 compared to $245.5 million in fiscal 1996. The Company also experienced continued growth in passenger enplanements, RPMs and ASMs during fiscal 1997 compared to fiscal 1996. Consolidated net income increased to $10.1 million, or $.50 per diluted share in fiscal 1997 compared to $4.4 million, or $.21 per diluted share, in fiscal 1996. The fiscal 1996 results included a pretax fleet restructuring expense of $6.2 million, or $.19 per diluted share, resulting from a fleet rationalization plan that required a restructuring of the Company's turboprop fleet. Passenger revenues, which represented 86.0 percent of total operating revenues, increased 16.7 percent to $239.2 million in fiscal 1997 from $205.0 million in fiscal 1996. The increase was primarily due to a 16.2 percent increase in RPMs, while yield per RPM remained relatively constant at 33.3 cents in fiscal 1997 compared to 33.2 cents in fiscal 1996. The increase in RPMs was due to a 20.3 percent increase in ASMs generated by Canadair Regional Jets, which were used to provide service to destinations such as San Francisco, California, Pasco, Washington and Colorado Springs, Colorado. Additionally, the Company acquired 15 new Brasilia aircraft to replace the 18 remaining 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 12.7 percent increase in ASMs. The growth in RPMs exceeded the growth in ASMs and resulted in a passenger load factor of 50.8 percent in fiscal 1997 compared to 49.2 percent in fiscal 1996. As a result of the increased passenger load factor and a .3 percent increase in yield per RPM, revenue per ASM increased 2.4 percent to 17.3 cents in fiscal 1997 from 16.9 cents in fiscal 1996. 6 Total airline operating expenses and interest were 94.4 percent of total airline operating revenues in fiscal 1997 compared to 98.4 percent in fiscal 1996. Exclusive of the one-time charge related to the fleet restructuring and transition from Metro to Brasilia aircraft recorded in fiscal 1996, total operating expenses and interest, as a percentage of total airline operating revenues, decreased to 94.4 percent from 95.4 percent in fiscal 1996. This percentage decrease was due to a 16.7 percent growth rate in passenger revenues compared to a 14.4 percent increase in operating expenses and interest. The 14.4 percent increase in operating expenses and interest was exclusive of the one-time fleet restructuring and transition expense recorded in fiscal 1996. Airline operating costs per ASM decreased to 16.3 cents in fiscal 1997 from 16.6 cents in fiscal 1996. Exclusive of the one-time fleet restructuring and transition expense, airline operating costs per ASM would have been 16.1 cents for fiscal 1996. The slight increase in cost per ASM in fiscal 1997 was primarily due to increased fuel costs. Salaries, wages and employee benefits decreased as a percentage of airline operating revenues to 24.8 percent in fiscal 1997 from 26.5 percent in fiscal 1996. The decrease was primarily due to airline operating revenues increasing at a faster rate than employee related expenses. The average number of employees was 1,852 for 1997 compared to 1,753 for fiscal 1996. The increase was primarily due to the addition of flight attendants to crew new Brasilia aircraft. Salaries, wages and employee benefits per ASM decreased to 4.3 cents in fiscal 1997 from 4.5 cents in fiscal 1996. Aircraft costs, including aircraft rent and depreciation, increased slightly as a percentage of airline operating revenues to 20.4 percent in fiscal 1997 from 20.3 percent in fiscal 1996, as a result of the fleet transition to Brasilia aircraft. Aircraft costs per ASM were 3.5 cents in fiscal 1997 and 1996. Maintenance expense decreased slightly as a percentage of airline operating revenues to 8.6 percent in fiscal 1997 from 9.8 percent in fiscal 1996. Maintenance cost per ASM decreased to 1.4 cents in fiscal 1997 from 1.6 cents in fiscal 1996 due to the efficiency of additional new Brasilia aircraft. Fuel costs increased as a percentage of airline operating revenues to 12.6 percent in fiscal 1997 compared to 10.9 percent in fiscal 1996. The increase was primarily due to an 18.8 percent increase in the average fuel price per gallon to $.95 in fiscal 1997 from $.80 in fiscal 1996. As a result, fuel costs per ASM increased to 2.2 cents in fiscal 1997 from 1.8 cents in fiscal 1996. 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 27.0 percent in fiscal 1997 compared to 26.9 percent in fiscal 1996. The increase was due primarily to rate increases in customer reservation systems booking fees. In addition, the Company has experienced rate increases in landing fees and general passenger handling charges. Interest expense as a percentage of airline operating revenues was 1.0 percent in fiscal 1997 and 1996. This percentage was the same since no new debt financings were entered into during fiscal 1997. Nonairline revenues decreased 1.7 percent to $33.5 million in fiscal 1997 compared to $34.0 million in fiscal 1996. The decrease is due to decreased passenger enplanements in fiscal 1997. Nonairline expenses increased 0.8 percent to $34.1 million for fiscal 1997 compared to $33.9 million for fiscal 1996. The slight increase was primarily due to increased fuel costs. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $143.1 million and a current ratio of 3.9:1 at March 31, 1998 compared to working capital of $45.3 million and a current ratio of 2.0:1 at March 31, 1997. The principal sources of funds during fiscal 1998 were $48.4 million generated from operations, $65.7 million from the sale of common stock, $11.5 million from the issuance of long-term debt, $11.2 million of proceeds from the sale of property and equipment, $3.3 million of proceeds from the sale of available-for-sale securities and $1.1 million of tax benefit from exercise of common stock options. During fiscal 1998 the Company invested $22.8 million in flight equipment and $7.0 million in buildings, ground equipment and other assets. The Company also reduced long-term debt by $7.4 million and paid $2.0 million in cash dividends. These factors resulted in a $102.0 million increase in cash and cash equivalents during fiscal 1998. The Company's position in available-for-sale securities, consisting primarily of bonds and commercial paper, decreased to $14.6 million at March 31, 1998 compared to $18.0 million at March 31, 1997. 7 During fiscal 1998, the Company entered into an agreement to purchase 20 new Brasilia aircraft related spare parts inventory and support equipment. Two of these aircraft were delivered prior to March 31, 1998. At March 31, 1998 the Company had agreed to purchase 18 Brasilia aircraft and related spare parts and support equipment at an aggregate cost of approximately $144.0 million, including estimated cost escalations. The Company also has options to acquire 40 additional Brasilia aircraft at fixed prices (subject to cost escalation and delivery schedules) exercisable through fiscal 2000 and options to acquire an additional ten CRJs, exercisable at any time. In connection with SkyWest's expansion in Los Angeles, San Francisco and the Pacific Northwest, SkyWest expects to acquire an additional 14 used Brasilias for a total of 34 new and used aircraft. The Company also anticipates that SkyWest will incur costs of approximately $24.0 million associated with the acquisition of additional ground and maintenance facilities, support equipment and spare parts inventory related to its expansion. The Company has significant long-term lease 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, 1998, the Company leased 44 SkyWest aircraft and 8 Scenic Airlines aircraft under leases with remaining terms of up to 14.0 years. Future minimum lease payments due under all long-term operating leases were approximately $441.5 million at March 31, 1998. At March 31, 1998, the Company had outstanding long-term debt, including current maturities, of approximately $57.8 million. The interest rates on $7.1 million of the $57.8 million of long-term debt are floating based on one month and three month LIBOR. Long-term debt of $47.4 million 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 subsidy payments reduced the stated interest rates on the $47.4 million of long-term debt to an average effective rate of approximately 4.0 percent as of March 31, 1998. The debt is payable in either monthly, quarterly or semi-annual installments through January 2, 2006. These subsidy payments are at risk to the Company if the Federative Republic of Brazil does not meet its obligations under the export support program. While the Company has no reason to believe, based on information currently available, that the Company will not continue to receive these subsidy payments from the Federative Republic of Brazil in the future, there can be no assurance that such a default will not occur. The Company expended approximately $11.3 million for non-aircraft capital expenditures during the year ended March 31, 1998, consisting primarily of aircraft engine overhauls, aircraft modifications to be made pursuant to industry-wide FAA directives, buildings and ground equipment, and rental vehicles. 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 8.25 percent at March 31, 1998. The Company believes that in the absence of unusual circumstances the working capital available to the Company will be sufficient to meet its present requirements, including expansion, capital expenditure, lease payment and debt service requirements for at least the next 12 months. YEAR 2000 COMPLIANCE The Company is currently modifying computer systems and application programs for year 2000 compliance, with project completion scheduled for March 31, 1999. The Company believes that the cost to modify its systems or applications will not have a material effect on its financial position or results of operations. Any expenditures will be funded through operating cash flows while any costs for new software will be capitalized and amortized over the software's useful life. Although the Company is working cooperatively with third parties with systems upon which the Company must rely, the Company can not give any assurances that the systems of other parties will be year 2000 compliant on a timely basis. Systems operated by others which the Company would use and/or rely on would include: Federal Aviation Administration Air Traffic Control, computer reservation systems for travel agent sales as well as Delta and United reservation, passenger check-in and ticketing systems. The Company's business, financial condition and/or results of operations could be materially adversely affected by the failure of its system and applications or those operated by others. SEASONALITY As is common in the airline industry, the Company's operations are favorably affected by increased travel, historically occurring in the summer months and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which occasionally results in cancelled flights, principally during the winter months. However, the Company does expect some mitigation of the historical seasonal trends due to an increase in the portion of its operations in contract flying with United. Scenic's business is also seasonal in nature. A large percentage of Scenic's passengers are tourists visiting the Las Vegas and Grand Canyon areas during the summer months. 8 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
ASSETS March 31, ------------------------- 1998 1997 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 139,772 $ 37,786 Available-for-sale securities 14,627 17,970 Receivables, less allowance for doubtful accounts of $124 in 1998 and $104 in 1997 10,699 10,851 Inventories 11,200 9,987 Prepaid aircraft rents 12,145 8,612 Other current assets 4,358 5,089 --------- --------- Total current assets 192,801 90,295 --------- --------- PROPERTY AND EQUIPMENT, at cost: Aircraft and rotable spares 185,712 171,239 Buildings and ground equipment 42,663 43,508 Rental vehicles 3,148 3,291 --------- --------- 231,523 218,038 Less - accumulated depreciation and amortization (98,053) (80,295) --------- --------- 133,470 137,743 OTHER ASSETS 4,135 4,860 --------- --------- $ 330,406 $ 232,898 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. 9 LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, ------------------------- 1998 1997 --------- --------- CURRENT LIABILITIES: Current maturities of long-term debt $ 8,238 $ 6,399 Trade accounts payable 31,202 29,213 Accrued salaries, wages and benefits 7,317 6,095 Taxes other than income taxes 1,698 1,537 Air traffic liability 1,237 1,488 Fleet restructuring accrual -- 290 --------- --------- Total current liabilities 49,692 45,022 --------- --------- LONG-TERM DEBT, less current maturities 49,571 47,337 --------- --------- DEFERRED INCOME TAXES PAYABLE 20,010 15,987 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) STOCKHOLDERS' EQUITY: Preferred stock, 5,000,000 shares authorized; none issued -- -- Common stock, no par value; 40,000,000 shares authorized; 26,959,110 and 23,249,622 shares issued, respectively 155,917 89,146 Retained earnings 75,501 55,691 Treasury stock, at cost, 2,949,200 shares (20,285) (20,285) --------- --------- Total stockholders' equity 211,133 124,552 --------- --------- $ 330,406 $ 232,898 ========= =========
10 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the year ended March 31, -------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Operating revenues: Passenger $ 259,314 $ 239,222 $ 205,034 Freight 3,810 4,174 4,291 Public service and other 1,278 1,243 2,159 Nonairline 32,696 33,471 34,036 ------------ ------------ ------------ Total operating revenues 297,098 278,110 245,520 ------------ ------------ ------------ Operating expenses: Flying operations 103,636 101,689 85,117 Aircraft, traffic and passenger service 38,957 37,044 32,522 Maintenance 29,299 29,149 28,713 Promotion and sales 25,505 29,606 25,965 Depreciation and amortization 19,305 18,481 15,392 General and administrative 14,992 12,577 11,962 Fleet restructuring and transition -- -- 6,247 Nonairline 31,446 34,147 33,892 ------------ ------------ ------------ Total operating expenses 263,140 262,693 239,810 ------------ ------------ ------------ Operating income 33,958 15,417 5,710 ------------ ------------ ------------ Other income (expense): Interest expense (2,939) (2,431) (2,163) Interest income 4,283 2,481 2,707 Gain on sales of property and equipment 374 1,113 556 ------------ ------------ ------------ Total other income 1,718 1,163 1,100 ------------ ------------ ------------ Income before provision for income taxes 35,676 16,580 6,810 Provision for income taxes 13,732 6,469 2,444 ------------ ------------ ------------ Net income $ 21,944 $ 10,111 $ 4,366 ============ ============ ============ Net income per common share: Basic $ 1.06 $ .50 $ .21 Diluted $ 1.04 $ .50 $ .21 ============ ============ ============ Weighted average number of common shares outstanding: Basic 20,799,000 20,170,000 20,568,000 Diluted 21,168,000 20,248,000 20,736,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. 11 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, 1995 22,936,112 $ 87,658 (2,300,000) $(16,091) $ 46,117 Net income -- -- -- -- 4,366 Exercise of common stock options (at prices ranging from $1.92 to $2.75 per share) 55,000 114 -- -- -- Sale of common stock under employee stock purchase plan 52,504 287 -- -- -- Tax benefit from exercise of common stock options -- 41 -- -- -- Compensation expense related to grant of stock options -- 83 -- -- -- Purchase of treasury stock -- -- (649,200) (4,194) -- Cash dividends ($.13 per share) -- -- -- -- (2,581) ---------- -------- ---------- -------- -------- Balance at March 31, 1996 23,043,616 88,183 (2,949,200) (20,285) 47,902 Net income -- -- -- -- 10,111 Exercise of common stock options (at a price of $2.75 per share) 102,500 282 -- -- -- Sale of common stock under employee stock purchase plan 103,506 588 -- -- -- Tax benefit from exercise of common stock options -- 93 -- -- -- Cash dividends ($.12 per share) -- -- -- -- (2,322) ---------- -------- ---------- -------- -------- Balance at March 31, 1997 23,249,622 89,146 (2,949,200) (20,285) 55,691 Net income -- -- -- -- 21,944 Exercise of common stock options (at prices ranging from $6.32 to $16.63 per share) 383,420 3,465 -- -- -- Sale of common stock under employee stock purchase plan 106,068 663 -- -- -- Sale of common stock, net of offering Costs of $3,648 3,220,000 61,557 -- -- -- Tax benefit from exercise of common stock options -- 1,086 -- -- -- Cash dividends ($.10 per share) -- -- -- -- (2,134) ---------- -------- ---------- -------- -------- Balance at March 31, 1998 26,959,110 $155,917 (2,949,200) $(20,285) $ 75,501 ========== ======== ========== ======== ========
The accompanying notes are an integral part of these consolidated statements. 12 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
For the year ended March 31, 1998 1997 1996 --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 21,944 $ 10,111 $ 4,366 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,305 18,481 15,392 Nonairline depreciation and amortization 4,848 3,585 2,742 Maintenance expense related to disposition of rotable spares 322 286 173 Gain on sales of property and equipment (374) (1,113) (556) Increase (decrease) in allowance for doubtful accounts 20 (117) 6 Increase in deferred income taxes 4,023 1,617 1,336 Amortization of deferred credits -- (1,614) (1,497) Compensation expense related to grant of stock options -- -- 83 Changes in operating assets and liabilities: Decrease (increase) in receivables 132 2,159 (5,895) Increase in inventories, net of dispositions (1,749) (1,064) (1,744) Increase in other current assets (2,802) (2,681) (2,286) Increase in trade accounts payable 1,896 4,965 9,951 (Decrease) increase in fleet restructuring accrual (290) (3,498) 3,788 Increase in other current liabilities 1,132 854 1,005 --------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 48,407 31,971 26,864 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of available-for-sale securities 3,343 1,127 2,212 Acquisition of property and equipment: Aircraft and rotable spares (22,812) (11,979) (48,508) Deposits on aircraft and rotable spares -- -- (3,053) Buildings and ground equipment (4,572) (4,886) (10,281) Rental vehicles (2,392) (2,850) (2,842) Proceeds from sales of property and equipment 11,238 2,945 4,114 Decrease in deposits on aircraft and rotable spares -- 3,603 8,715 (Increase) decrease in other assets (29) 413 (447) --------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (15,224) (11,627) (50,090) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 65,685 870 401 Purchase of treasury stock -- -- (4,194) Tax benefit from exercise of common stock options 1,086 93 41 Payment of cash dividends (2,041) (1,814) (2,581) Reduction of long-term debt (7,427) (6,236) (4,329) Proceeds from issuance of long-term debt 11,500 -- 31,001 --------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 68,803 (7,087) 20,339 --------- -------- -------- Increase (decrease) in cash and cash equivalents 101,986 13,257 (2,887) Cash and cash equivalents at beginning of year 37,786 24,529 27,416 --------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 139,772 $ 37,786 $ 24,529 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 3,012 $ 2,399 $ 2,060 Income taxes 8,221 3,950 3,090
The accompanying notes are an integral part of these consolidated statements. 13 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. ("SkyWest"), Scenic Airlines, Inc. ("Scenic") and National Parks Transportation, Inc. ("NPT"), 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 - 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. 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 - 39.5 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. 14 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. 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. As of March 31, 1998 and 1997, the Company had recorded current deferred tax assets of $2,065,000 and $2,046,000, respectively (which are included in other current assets), and deferred tax liabilities of $20,010,000 and $15,987,000, respectively. DEFERRED CREDITS - In order to assist the Company in integrating new aircraft into its fleet, certain manufacturers provided the Company with cash or credits for spare parts. With respect to purchased aircraft, these amounts reduced the capitalized cost of the aircraft. With respect to leased aircraft (operating leases), the Company had deferred these amounts and amortized them over the terms of the related aircraft leases as a reduction of rent expense. Amounts amortized during the years ended March 31, 1997 and 1996 were $1,614,000 and $1,497,000, respectively. As of March 31, 1997, the Company had no remaining deferred credits to amortize. NET INCOME PER COMMON SHARE - Basic net income per common share ("Basic EPS") excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the fiscal year. Diluted net income per common share ("Diluted EPS") reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an antidilutive effect on net income per common share. Net income per common share amounts and share data have been restated for all periods presented to reflect Basic and Diluted EPS and the subsequent stock dividend described in Note 5. Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all periods presented (in thousands, except per share amounts):
Year ended March 31, 1998 1997 1996 - - ------------------------------------------------------------------------------ Numerator: Net Income $21,944 $10,111 $ 4,366 ======= ======= ======= Denominator: Weighted Average Common Shares Outstanding 20,799 20,170 20,568 Effect of Options 369 78 168 ------- ------- ------- 21,168 20,148 20,736 ======= ======= ======= Basic EPS $ 1.06 $ .50 $ .21 Diluted EPS $ 1.04 $ .50 $ .21 ======= ======= =======
15 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 $56,262,000 as of March 31, 1998, as compared to the carrying amount of $57,809,000. RECENT ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components and SFAS 131 establishes new standards for public companies to report information about their operating segments, products and services, geographic areas and major customers. Both statements are effective for financial statements issued for periods beginning after December 15, 1997. Accordingly, the Company will adopt SFAS 130 and SFAS 131 in its fiscal 1999 consolidated financial statements. Management believes the adoption of SFAS 130 and 131 will not have a material impact on the consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made to the fiscal 1997 and 1996 consolidated financial statements in order to conform to the current fiscal year presentations. (2) LONG-TERM DEBT Long-term debt consists of the following:
As of March 31, ------------------------- 1998 1997 ------- ------- (in thousands) Note payable to bank, due in monthly installments of $223,094 including interest at 7.4% through September 2002, secured by aircraft $10,400 $ -- Note payable to bank, due in monthly installments of $90,394 including interest at 6.95% through December 2005, secured by aircraft 6,485 7,096 Note payable to bank, due in monthly installments of $88,737 including interest at 6.7% through January 2006, secured by aircraft 6,476 7,085 Note payable to bank, due in monthly installments of $91,290 including interest at 7.37% through October 2005, secured by aircraft 6,350 6,953 Note payable to bank, due in monthly installments of $64,319 plus interest at 6.36% through November 2000. Balloon payment of $3,937,000 due December 2000, secured by aircraft 6,046 6,818 Note payable to bank, due in quarterly installments of $177,906 plus interest at 8.58% through March 2005, secured by aircraft 4,981 5,693
16 (2) LONG-TERM DEBT (continued) Note payable to bank, due in monthly installments of $77,265 including interest at 7.33% through June 2003, secured by aircraft 4,031 4,638 Note payable to bank, due in quarterly installments of $167,246 plus interest based on three month LIBOR (7.39% at March 31, 1998) through September 2003, secured by aircraft 3,679 4,348 Note payable to bank, due in monthly installments of $54,702 plus interest based on one month LIBOR (7.44% at March 31, 1998) through June 2003, secured by aircraft 3,446 4,103 Note payable to financing company, due in quarterly installments of $155,000 plus interest at 7.64% through July 2003, secured by aircraft 3,483 4,030 Note payable to bank, due in semi-annual installments of $270,186 plus interest at 8.5% through May 2002, secured by aircraft 2,432 2,972 57,809 53,736 Less - current maturities (8,238) (6,399) ------- ------- $49,571 $47,337 ======= =======
The aggregate amounts of principal maturities of long-term debt as of March 31, 1998, are as follows (in thousands):
Year ending March 31, --------------------- 1999 $ 8,238 2000 8,627 2001 9,048 2002 9,502 2003 8,562 Thereafter 13,832 ------- $57,809
The Company's long-term debt, excluding $10,400,000, was incurred in connection with the acquisition of Brasilia aircraft and is supported by subsidy payments through the export support program of the Federative Republic of Brazil. The subsidy payments reduce the stated interest rates to an average effective rate of approximately 4.0 percent at March 31, 1998. These subsidy payments are at risk to the Company if the Federative Republic of Brazil does not meet its obligations under the export support program. While the Company has no reason to believe, based on information currently available, that the Company will not continue to receive these subsidy payments from the Federative Republic of Brazil in the future, there can be no assurance that such a default will not occur. As of March 31, 1998, 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 8.25 percent at March 31, 1998. Certain of the Company's long-term debt arrangements contain limitations on, among other things, sale or lease of assets and ratio of long-term debt to tangible net worth. As of March 31, 1998, the Company was in compliance with all the debt covenants. 17 (3) INCOME TAXES The provision for income taxes includes the following components (in thousands):
Year ended March 31, ---------------------------------- 1998 1997 1996 ------- ------- ------- Current tax provision: Federal $ 7,587 $ 3,315 $ 2,656 State 2,141 355 204 9,728 3,670 2,860 Deferred tax provision (benefit): Federal 3,363 2,344 (348) State 641 455 (68) 4,004 2,799 (416) ------- ------- ------- Provision for income taxes $13,732 $ 6,469 $ 2,444 ======= ======= =======
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, ----------------------------- 1998 1997 1996 ------- ------ ------ Computed "expected" provision for income taxes at the statutory rates $12,387 $5,703 $2,315 Increase (decrease) in income taxes resulting from: State income taxes, net of Federal income tax benefit 1,391 711 292 Other, net (46) 55 (163) ------- ------ ------ Provision for income taxes $13,732 $6,469 $2,444 ======= ====== ======
The significant components of the net deferred tax assets and liabilities are as follows (in thousands):
As of March 31, ------------------------ Deferred tax assets: 1998 1997 -------- -------- Accrued benefits $ 1,038 $ 979 Engine overhaul accrual 2,216 1,909 AMT credit carryforward 216 3,939 Accrued expense reserves and other 1,465 1,256 -------- -------- Total deferred tax assets 4,935 8,083 -------- -------- Deferred tax liabilities: Accelerated depreciation (22,285) (21,047) Other (595) (977) -------- -------- Total deferred tax liabilities (22,880) (22,024) -------- -------- Net deferred tax liability $(17,945) $(13,941) ======== ========
18 (4) COMMITMENTS AND CONTINGENT LIABILITIES Lease Obligations The Company leases 44 SkyWest aircraft and 8 Scenic 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 the 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, 1998 (in thousands):
Year ending March 31, --------------------- 1999 $ 40,939 2000 39,658 2001 38,938 2002 38,279 2003 36,426 Thereafter 247,220 -------- $441,460 ========
Total rental expense for noncancelable operating leases was approximately $35,188,000, $35,058,000, and $31,369,000 for the years ended March 31, 1998, 1997 and 1996, respectively. The above minimum rental payments do not include landing fees, which amounted to approximately $6,505,000, $6,259,000, and $4,460,000 for the years ended March 31, 1998, 1997 and 1996, respectively. PURCHASE COMMITMENTS AND OPTIONS During fiscal 1998, the Company entered into an agreement to purchase 20 new Brasilia aircraft, related spare parts inventory and support equipment. Two of these aircraft were delivered prior to March 31, 1998. At March 31, 1998, the Company had agreed to purchase 18 Brasilia aircraft and related spare parts and support equipment at an aggregate cost of approximately $144.0 million, including estimated cost escalations. The Company also has options to acquire 40 additional Brasilia aircraft at fixed prices (subject to cost escalation and delivery schedules) exercisable through fiscal 2000 and options to acquire an additional ten Canadair Regional Jets, exercisable at any time. LEGAL MATTERS The Company is the subject of certain legal actions, which it considers routine to its business activities. As of March 31, 1998, management believes that any potential liability to the Company under such actions will not materially effect the accompanying consolidated financial statements. STANDBY LETTERS OF CREDIT As of March 31, 1998, the Company has outstanding letters of credit totaling approximately $2,265,000 related to requirements of certain airports, port authorities and workers compensation agreements. CASH AND CASH EQUIVALENTS As of March 31, 1998, the Company has demand deposits and money market accounts totaling $360,000 with Wells Fargo Bank, $432,000 with Bank of America, $631,000 with Edward D. Jones, $2,357,000 with Citibank and $53,151,000 with Zions First National Bank. These balances exceed the $100,000 limit for insurance by the Federal Deposit Insurance Corporation. 19 (5) CAPITAL TRANSACTIONS PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of preferred stock from time to time in one or more series without stockholder approval. No shares of preferred stock are presently outstanding. The Board of Directors is authorized, without any further action by the stockholders of the Company, to (i) divide the preferred stock into series; (ii) designate each such series; (iii) fix and determine dividend rights; (iv) determine the price, terms and conditions on which shares of preferred stock may be redeemed; (v) determine the amount payable to holders of preferred stock in the event of voluntary or involuntary liquidation; (vi) determine any sinking fund provisions; and (vii) establish any conversion privileges. STOCK OFFERING On February 20, 1998, the Company completed a public offering of 1,610,000 shares of common stock which generated net proceeds of $61,557,000 after deducting underwriting commissions and other expenses. SUBSEQUENT STOCK DIVIDEND On May 5, 1998, the Company's Board of Directors declared a 100 percent stock dividend (one share for each share outstanding) payable to stockholders of record on May 20, 1998. The dividend was distributed on June 8, 1998. The Company paid cash in lieu of issuing fractional shares. All common shares and per share information in the accompanying consolidated financial statements have been retroactively adjusted to reflect this stock dividend. SUBSEQUENT CASH DIVIDEND On May 5, 1998, the Company's Board of Directors declared a regular quarterly cash dividend of $.03 per share payable to stockholders of record on June 30, 1998, distributable July 15, 1998. STOCK OPTIONS The Company's Board of Directors and Stockholders have approved 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 3,000,000 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 are granted at not less than 100 percent of the market value of the underlying common stock on the date of grant. Non-statutory stock options are 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, 1997 and 1998.
Average Number of Weighted Options Price --------- -------- Outstanding at March 31, 1995 907,498 $8.56 Granted 210,000 8.11 Exercised (55,000) 2.07 --------- ---- Outstanding at March 31, 1996 1,062,498 8.81 Granted 238,000 7.48 Exercised (102,500) 2.75 Canceled (65,648) 6.90 --------- ----- Outstanding at March 31, 1997 1,132,350 9.19
20 (5) CAPITAL TRANSACTIONS (continued) Granted 346,000 6.65 Exercised (383,420) 9.04 Canceled (104,214) 9.33 --------- ----- Outstanding at March 31, 1998 990,716 $8.34 ========= =====
As of March 31, 1998, there were 596,590 shares available for future grant of stock options under the Option Plan. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans, which include the Option Plan and the Stock Purchase Plan (see Note 6). SFAS No. 123, "Accounting for Stock-Based Compensation," requires pro forma information regarding net income and net income per share as if the Company had accounted for its stock options and employee stock purchases granted or sold subsequent to April 1, 1996, under the fair value method of the statement. The fair value of these stock options and employee stock purchases was estimated at the grant date using the Black-Scholes option pring model with the following assumptions used for grants in fiscal 1998, 1997 and 1996: a risk-free interest rate of 5.6 percent for fiscal 1998 and 6.5 percent for fiscal 1997 and 1996, a dividend yield of .5 percent for fiscal 1998 and 1.5 percent for fiscal 1997 and 1996, a volatility factor of the expected common stock price of .390 for fiscal 1998 and .508 for fiscal 1997 and 1996 and a weighted average expected life of four years for the stock options and six months for employee stock purchases for all the years presented. For purposes of the pro forma disclosures, the estimated fair value of the stock options and employee stock purchases is amortized over the estimated life of the respective stock options and employee stock purchases. Following are the pro forma disclosures and the related impact on net income and net income per share (in thousands, except per share information):
Year Ended March 31, ---------------------------- 1998 1997 1996 ------- ------- ------ Net Income: As Reported $21,944 $10,111 $4,366 Pro Forma 21,213 9,838 4,232 Net Income Per Common Share: Diluted as reported $ 1.04 $ .50 $ .21 Diluted pro forma $ 1.00 $ .49 $ .20
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to April 1, 1996, and due to the nature and timing of option grants, the resulting pro forma compensation cost may not be indicative of future years. (6) RETIREMENT PLAN AND EMPLOYEE STOCK PURCHASE PLAN RETIREMENT PLAN The Company sponsors the SkyWest Airlines Employee's 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's combined contribution was $2,729,000, $1,960,000 and $1,728,000 to the Plan for the years ended March 31, 1998, 1997 and 1996, respectively. EMPLOYEE STOCK PURCHASE PLAN On February 7, 1996, the Company's Board of Directors approved the SkyWest, Inc. 1996 Employee Stock Purchase Plan ("the Stock Purchase Plan"). 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 21 (6) RETIREMENT PLAN AND EMPLOYEE STOCK PURCHASE PLAN (continued) 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. For the fiscal year ended March 31, 1998, 106,068 shares had been purchased by employees at prices of $5.90 and $6.64. For the fiscal year ended March 31, 1997, 103,506 shares had been purchased by employees at prices of $5.47 and $5.90. For the fiscal year ended March 31, 1996, 52,504 shares had been purchased by employees at a price of $5.47 per share. In addition, as of March 31, 1998, $244,000 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) SEGMENT INFORMATION Nonairline operating revenues and expenses primarily represent the operations of Scenic and 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 six airports. Information related to this segment of the Company's business is as follows (in thousands):
For the Year Ended March 31, ------------------------------ 1998 1997 1996 ------ ----- ------ Operating revenues $32,696 $33,471 $34,036 Operating (loss) income 1,250 (676) 144 Depreciation and amortization 4,848 3,585 2,742 Capital expenditures 15,499 5,476 14,209
As of March 31, -------------------- 1998 1997 ------- ------- Identifiable assets $28,635 $28,338
(8) 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 certain flights in the automated airline reservation systems used throughout the industry. During fiscal 1997, the Company entered into a code-sharing agreement with Continental Airlines, Inc. ("Continental"). The Company uses the Continental two letter designator code (CO) in displaying schedules on certain flights in the automated airline reservation systems used throughout the industry. During fiscal 1998, the Company entered into a code-sharing agreement with United Airlines, Inc. ("United"). The Company uses the United two letter designator code (UA) in displaying schedules on certain flights in the automated airline reservation systems used throughout the industry. As of March 31, 1998, Delta owned 3,107,798 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 $8,893,000, $11,218,000 and $9,181,000 during the years ended March 31, 1998, 1997 and 1996, respectively. United provides services to the Company consisting of passenger and ground handling-services. The Company paid $742,000 to United for their services for the year ended March 31, 1998. The Company had a net payable to Delta of $65,000 as of March 31, 1998 and a net receivable from Delta of $780,000 as of March 31, 1997. The Company had net receivables from Continental of $182,000 and $284,000 as of March 31, 1998 and 1997, respectively and a net receivable from United of $1,687,000 as of March 31, 1998. EX-24.1 4 CONSENT OF INDEPENDENT PUBLIC 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 20,1998 included in SkyWest, Inc.'s Annual Report to Shareholders for the fiscal year ended March 31, 1998. We further consent to the incorporation of our report dated May 20, 1998, incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement No. 33-41285 and No. 33-60173. /s/ Arthur Andersen LLP Arthur Andersen LLP Salt Lake City, Utah June 25, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS YEAR MAR-31-1998 APR-01-1997 MAR-31-1998 1 139,772 14,627 10,823 124 11,200 192,801 231,523 98,053 330,406 49,692 49,571 0 0 135,632 75,501 330,406 297,098 297,098 0 263,140 0 0 2,939 35,676 13,732 21,944 0 0 0 21,944 1.06 1.04
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