Southwest Airlines 2008 Annual Report Download - page 92

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has excluded 82 million,
49 million, and 20 million shares from its
calculations of net income per share, diluted, in 2008,
2007, and 2006, respectively, as they represent
antidilutive stock options for the respective periods
presented.
18. Contingencies
On March 6, 2008, the F.A.A. notified the
Company that it was seeking to fine the Company
approximately $10 million in connection with an
incident concerning the Company’s potential
non-compliance with an airworthiness directive. The
Company accrued the proposed fine as an operating
expense in first quarter 2008 and is currently in
settlement discussions with the F.A.A.
In connection with the above incident, during
the first quarter and early second quarter of 2008, the
Company was named as a defendant in two putative
class actions on behalf of persons who purchased air
travel from the Company while the Company was
allegedly in violation of F.A.A. safety regulations.
Claims alleged by the plaintiffs in these two putative
class actions include breach of contract, breach of
warranty, fraud/misrepresentation, unjust enrichment,
and negligent and reckless operation of an aircraft.
The Company believes that the class action lawsuits
are without merit and intends to vigorously
defend itself. Also in connection with the above
incident, during the first quarter and early second
quarter of 2008, the Company received four letters
from Shareholders demanding the Company
commence an action on behalf of the Company
against members of its Board of Directors and any
other allegedly culpable parties for damages resulting
from an alleged breach of fiduciary duties owed by
them to the Company. In August 2008, Carbon
County Employees Retirement System and Mark
Cristello filed a related Shareholder derivative action
in Texas state court naming certain directors and
officers of the Company as individual defendants and
the Company as a nominal defendant. The derivative
action claims breach of fiduciary duty and seeks
recovery by the Company of alleged monetary
damages sustained as a result of the purported breach
of fiduciary duty, as well as costs of the action. A
Special Committee appointed by the Independent
Directors of the Company is currently evaluating the
Shareholder demands.
The Company is subject to various legal
proceedings and claims arising in the ordinary course
of business, including, but not limited to,
examinations by the IRS. The IRS regularly
examines the Company’s federal income tax returns
and, in the course thereof, proposes adjustments to
the Company’s federal income tax liability reported
on such returns. It is the Company’s practice to
vigorously contest those proposed adjustments it
deems lacking of merit.
The Company’s management does not expect
that the outcome in any of its currently ongoing legal
proceedings or the outcome of any proposed
adjustments presented to date by the IRS,
individually or collectively, will have a material
adverse effect on the Company’s financial condition,
results of operations or cash flow.
73