Exhibit 10.3
EMPLOYMENT CONTRACT
THIS EMPLOYMENT CONTRACT (hereinafter referred to as this "Agreement"),
dated as of July 15, 2004, by and between HERBERT D. KELLEHER (hereinafter
referred to as the "Employee"), a resident of Dallas, Texas, and SOUTHWEST
AIRLINES CO.(hereinafter referred to as "Southwest", which term shall include
its subsidiary companies where the context so admits), a Texas corporation,
W I T N E S S E T H:
WHEREAS the Employee has served as permanent President and Chief Executive
Officer of Southwest since February 1, 1982, initially pursuant to an
Employment Contract dated as of February 1, 1982, later pursuant to Employment
Contracts dated as of January 1, 1985, as amended, January 1, 1988, January 1,
1992 and January 1, 1996 and most recently pursuant to an Employment Contract
dated as of January 1, 2001 (such Employment Contracts being referred to
collectively as the "Old Contracts"); and
WHEREAS the Employee and Southwest desire to enter into a successor
agreement for the continuing services of the Employee;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and promises contained herein, Southwest and the Employee agree as
follows:
I. POSITION, DUTIES AND AUTHORITY
A. POSITIONS. The Employee shall perform such corporate duties and discharge
such corporate responsibilities as are designated by the Board of Directors
and, if elected to the Board of Directors of Southwest and so designated
annually by the Board, he shall serve as both Chairman of the Board and
Chairman of the Executive Committee of the Board without additional
compensation hereunder.
B. DUTIES. The Employee's duties shall include responsibility for overseeing
the implementation of Southwest's current and long range business policies
and programs and handling such other functions or segments of Southwest's
business as may be directed from time to time by the Board of Directors.
C. AUTHORITY. The Employee shall be vested with all authority reasonably
necessary to carry out his duties and responsibilities as set forth in this
Article I.
D. NECESSARY SUPPORT AND ENVIRONMENT. The Employee shall be provided with
the secretarial and other support personnel (including a full-time
administrative assistant)and general working environment (including a
private, furnished office) reasonably necessary for him to carry out his
duties and responsibilities as set forth in this Article I.
II. EMPLOYEE'S OBLIGATIONS
A. TIME AND EFFORTS. During the term of his employment hereunder, the
Employee shall devote such time and effort as is required to discharge his
duties hereunder.
B. NON-COMPETITION. The Employee recognizes and understands that in performing
the duties and responsibilities of his employment as outlined in this
Agreement and pursuant to his employment at Southwest prior to the
execution of this Agreement, the Employee has occupied and will occupy a
position of trust and confidence, pursuant to which the Employee has
developed and acquired and will develop and acquire experience and
knowledge with respect to various aspects of the business of Southwest
and the manner in which such business is conducted. It is the expressed
intent and agreement of the Employee and Southwest that such knowledge and
experience shall be used in the furtherance of the business
interests of Southwest and not in any manner which would be detrimental to
such business interests of Southwest. The Employee therefore agrees that,
so long as the Employee is employed pursuant to this Agreement, unless he
first secures the consent of the Board of Directors of Southwest, the
Employee will not invest, engage or participate in any manner whatsoever,
either personally or in any status or capacity (other than as a shareholder
of less than one percent [1%] of the capital stock of a publicly owned
corporation), in any business or other entity organized for profit engaged
in significant competition with Southwest in the conduct of its air carrier
operations anywhere in the States of Texas, Louisiana, Oklahoma,
New Mexico, Missouri, Arizona, Nevada, California, Arkansas, Alabama,
Tennessee, Kentucky, Michigan, Indiana, Ohio, Maryland, Illinois, Utah,
Washington, Oregon, Nebraska, Florida, Idaho, Mississippi, New Hampshire,
New York, Rhode Island, Connecticut, North Carolina, Virginia and
Pennsylvania. Although the Employee and Southwest regard such restrictions
as reasonable for the purpose of preserving Southwest and its proprietary
rights, in the event that the provisions of this Paragraph II-B should ever
be deemed to exceed the time or geographic limitations permitted by
applicable laws, then such provisions shall be reformed to the maximum time
or geographic limitations permitted by applicable laws.
III. TERM
A. TERM. This Agreement and the Employee's employment hereunder shall
commence and become effective on and as of July 15, 2004. The term of such
employment shall expire on July 15, 2007, unless extended by consent of the
parties hereto or earlier terminated pursuant to the provisions of Article
V.
IV. EMPLOYEE'S COMPENSATION
A. BASE SALARY. The Employee's annual Base Salary for the years ending July
15, 2005, 2006 and 2007 shall be $450,000 or such greater amount as shall
be determined by the Board of Directors of Southwest. The Employee's Base
Salary shall be payable to the Employee in equal semi-monthly installments
and shall be subject to such payroll and withholding deductions as may be
required by law.
B. PERFORMANCE BONUS. The Board of Directors of Southwest (or the
Compensation Committee thereof) may grant a Performance Bonus to the
Employee, in addition to his Base Salary, at such times and in such amounts
as such Board (or Committee) may determine.
C. DEFERRED COMPENSATION. In addition to the Base Salary provided for in
Paragraph IV-A above, Southwest shall continue to set aside on its books,
as provided in Paragraph IV-C of each of the Old Contracts, a special
ledger Deferred Compensation Account (the "Account") for the Employee, and
shall credit thereto Deferred Compensation determined as hereinafter
provided. (Southwest at its election may fund the payment of Deferred
Compensation by setting aside and investing such funds as Southwest may
from time to time determine. Neither the establishment of the Account, the
crediting of Deferred Compensation thereto, nor the setting aside of any
funds shall be deemed to create a trust. Legal and equitable title to any
funds set aside shall remain in Southwest, and the Employee shall have no
security or other interest in such funds. Any funds so set aside or
invested shall remain subject to the claims of the creditors of Southwest,
present and future.) For each full or partial calendar year as the
Employee shall remain in the employment of Southwest under this Agreement,
Deferred Compensation shall accumulate in an amount equal to any
contributions (including forfeitures but excluding any elective deferrals
actually returned to the Employee) which would otherwise have been made by
Southwest on behalf of the Employee to the Southwest Airlines Co.
Profitsharing Plan but which exceed maximum annual additions under such
Plan on his behalf under federal tax law. If such employment shall
terminate prior to December 31 in any calendar year, then Deferred
Compensation shall accumulate and be calculated as provided under the terms
of Southwest's Profitsharing Plan. The Deferred Compensation credited to
the Account (including the Interest hereinafter provided) shall be paid to
the Employee (or to the executors or administrators of his estate) at the
rate of $100,000 per calendar year (subject to such payroll and withholding
deductions as may be required by law), commencing with the calendar year
following the year in which (i) the Employee shall become seventy-six (76)
or (ii) the Employee's employment with Southwest shall terminate (whether
such termination is under this Agreement or otherwise and whether it is
before, on or after the expiration of the initial term set forth in
Paragraph III-A above, and irrespective of the cause thereof), whichever
shall occur later, and continuing until the entire amount of Deferred
Compensation and Interest credited to the Account shall have been paid.
Although the total amount of Deferred Compensation ultimately payable to
the Employee hereunder shall be computed in accordance with the provisions
set forth above, there shall be accrued and credited to the Account,
beginning on January 1, 2004 (if not so accrued and credited pursuant to
the Old Contracts, and if so accrued and credited, then beginning on January
1, 2005) and continuing annually thereafter, amounts equal to simple
interest at the rate of ten percent (10%) per annum, compounded annually
("Interest"), on the accrued and unpaid balance of the Deferred Compensation
credited to the Account as of the preceding December 31. The Deferred
Compensation and Interest to be paid in any one calendar year shall be paid
on the first business day of such calendar year. Notwithstanding the
foregoing, in the event of the Employee's death, Southwest, in its sole
discretion, shall have the right to pay the unpaid balance of the Deferred
Compensation (together with any accrued Interest thereon) to the executors
or administrators of the Employee's estate in cash in one lump sum on the
first business day of the calendar year next following the calendar year in
which the Employee shall have died. No right, title, interest or benefit
under this Paragraph IV-C shall ever be liable for or charged with any of
the torts or obligations of the Employee or any person claiming under him,
or be subject to seizure by any creditor of the Employee or any person
claiming under him. Neither the Employee nor any person claiming under him
shall have the power to anticipate or dispose of any right, title, interest
or benefit under this Paragraph IV-C in any manner until the same shall
have been actually distributed by Southwest.
D. DISABILITY INSURANCE. Southwest shall provide long term disability
insurance providing for payment, in the event of disability of the
Employee, of $10,000 per month to age seventy-six (76). Except as to
amounts payable, the terms and conditions of such policy shall be
identical, or substantially similar, to the disability insurance provided
by Southwest for its other officers as of the date of this Agreement.
E. MEDICAL AND DENTAL EXPENSES. During the term of this Agreement, the
Employee shall remain eligible to participate in any medical benefit plan
or program that Southwest makes available to its employees generally. Upon
termination of his employment with Southwest, the Employee shall be
eligible to participate in any non-contract retiree medical benefit plan or
program that Southwest may then make available to its retirees generally.
Southwest shall reimburse the Employee for all his out-of-pocket expenses
(including specifically all premiums and deductibles) that the Employee may
incur for himself and his spouse under any such Southwest plan or program
during the term of this Agreement. In addition, Southwest shall reimburse
the Employee for all medical and dental expenses paid by the Employee in
excess of $10,000 per calendar year and incurred by his children, their
spouses and the Employee's grandchildren, such expenses being deemed to
include all amounts paid by the Employee with respect to hospital bills,
doctor and dental bills and prescription drugs that are not covered by
insurance.
F. STOCK OPTION GRANT AND AMENDMENTS. Southwest shall grant to the
Employee, effective as of the date hereof, ten-year non-qualified options
to purchase 200,000 shares of its common stock at a price per share equal
to the fair market value thereof at the date hereof, with one-third of
such options to be exercisable immediately and one-third to become
exercisable on each of July 15, 2005 and July 15, 2006.
G. OTHER BENEFITS. The Employee shall be eligible to continue to participate
in all employee pension, profit-sharing, stock purchase, group insurance
and other benefit plans or programs in effect for Southwest managerial
employees generally to the extent of and in accordance with the rules and
agreements governing such plans or programs, so long as same shall be in
effect, with full service credit where relevant for the Employee's prior
employment by Southwest. Southwest shall reimburse the Employee for
reasonable expenses incurred by him in the performance of his duties and
responsibilities hereunder. The Employee shall be entitled to vacation of
three (3) weeks per year or such longer period as may be established from
time to time by Southwest for its managerial employees generally.
V. TERMINATION PROVISIONS
A. EXPIRATION OR DEATH. The Employee's employment hereunder shall terminate
on July 15, 2007 (or such later date to which the term of this Agreement
may be extended by consent of the parties hereto, in either case without
prejudice to the Employee's privilege to remain an employee of Southwest
thereafter), or upon the Employee's death, whichever shall first occur,
without further obligation or liability of either party hereunder, except
for Southwest's obligation to pay Deferred Compensation as provided in
Paragraph IV-C of this Agreement.
B. TERMINATION FOR CAUSE. Southwest may terminate the Employee's employment
hereunder upon the determination by a majority of its whole Board of
Directors that the Employee has willfully failed and refused to perform
his duties and to discharge his responsibilities hereunder. Such
determination shall be final and conclusive. If the Board of Directors of
Southwest makes such determination, Southwest may (a) terminate the
Employee's employment, effective immediately or at a subsequent date, or
(b) condition his continued employment upon the circumstances and place a
reasonable limitation upon the time within which the Employee shall comply
with such considerations or requirements. If termination is so effected,
Southwest shall have no further liability to the Employee hereunder except
for the obligation to pay Deferred Compensation as provided in Paragraph
IV-C hereof.
C. TERMINATION FOR DISABILITY. Southwest may terminate the Employee's
employment hereunder on account of any disabling illness, hereby defined to
include any emotional or mental disorders, physical diseases or injuries as
a result of which the Employee is, for a continuous period of ninety (90)
days, unable to perform his duties hereunder. Southwest shall give to the
Employee thirty (30) dayss' notice of its intention to effect such
termination pursuant to this Paragraph V-C. If, within such notice period,
the Employee shall have recovered from his disability sufficiently well to
resume performance of his duties (although still undergoing treatment or
rehabilitation), Southwest shall not have the right to effect such
termination. If such disabling illness occurs as a result of a job-related
cause, Southwest shall continue to pay the Employee regular installments of
his Base Salary in effect at the time of such termination for the remainder
of the term of this Agreement. It is expressly understood and agreed,
however, that any obligation of Southwest to continue to pay the Employee
his Base Salary pursuant to this Paragraph V-C shall be reduced by the
amount of any proceeds of long-term disability insurance provided for the
Employee pursuant to Paragraph IV-D above, and shall also be reduced by the
amount of the proceeds of any worker's compensation or other benefits which
the Employee receives as a result of or growing out of his disabling
illness.
D. CHANGE OF CONTROL TERMINATION. In the event of any change of control of
Southwest, the Employee may, at his option, terminate his employment
hereunder by giving to Southwest notice thereof no later than sixty (60)
days after the Employee shall have determined or ascertained that such
change has occurred, irrespective whether Southwest shall have purported to
terminate this Agreement after such event but prior to receipt of such
notice. If termination is so effected, no later than the date of such
termination Southwest shall pay the Employee as "severance pay" a lump sum
equal to (i) $750,000 plus (ii) an amount equal to the unpaid installments
of his Base Salary in effect at the time of such termination for the
remaining term of this Agreement. If termination is so effected, Southwest
shall have no other further liability to the Employee hereunder except for
its obligation to pay Deferred Compensation as provided in Paragraph IV-C
above. For purposes of this Paragraph V-D, a "change of control of
Southwest" shall be deemed to occur if (i) a third person, including a
"group" as determined in accordance with Section 13(d)(3) of the Securities
Exchange Act of 1934, becomes the beneficial owner of shares of Southwest
having twenty percent (20%) or more of the total number of votes that may
be cast for the election of directors of Southwest, or (ii) as a result
of, or in connection with, any cash tender or exchange offer, merger or
other business combination, sale of assets or contested election, or any
combination of the foregoing transactions (herein called a "Transaction"),
the persons who were directors of Southwest before the Transaction shall
cease to constitute a majority of the Board of Directors of Southwest or
any successor to Southwest.
E. VOLUNTARY TERMINATION. The Employee's employment hereunder shall terminate
forthwith upon his resignation and its acceptance by Southwest, without
further obligation or liability of either party hereunder, except for
Southwest's obligation to pay Deferred Compensation as provided in Paragraph
IV-C above.
VI. MISCELLANEOUS
A. ASSIGNABILITY, ETC. The rights and obligations of Southwest hereunder
shall inure to the benefit of and shall be binding upon the successors and
assigns of Southwest; provided, however, Southwest's obligations hereunder
may not be assigned without the prior approval of the Employee. This
Agreement is personal to the Employee and may not be assigned by him.
B. NO WAIVERS. Failure to insist upon strict compliance with any provision
hereof shall not be deemed a waiver of such provision or any other
provision hereof.
C. AMENDMENTS. This Agreement may not be modified except by an agreement in
writing executed by the parties hereto.
D. NOTICES. Any notice required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been given to the person
affected by such notice when personally delivered or when deposited in the
United States mail, certified mail, return receipt requested and postage
prepaid, and addressed to the party affected by such notice at the address
indicated on the signature page hereof.
E. SEVERABILITY. The invalidity or unenforceability of any provision hereof
shall not affect the validity or enforceability of any other provision
hereof.
F. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original but all of which taken together
shall constitute a single instrument.
G. ENTIRE AGREEMENT. This Agreement contains all of the terms and conditions
agreed upon by the parties hereto respecting the subject matter hereof, and
all other prior agreements, oral or otherwise, regarding the subject matter
of this Agreement shall be deemed to be superseded as of the date of this
Agreement and not to bind either of the parties hereto.
H. GOVERNING LAW. This Agreement shall be subject to and governed by the laws
of the State of Texas.
IN WITNESS WHEREOF, the Employee has set his hand hereto and Southwest has
caused this Agreement to be signed in its corporate name and behalf by one of
its officers thereunto duly authorized all as of the day and year first above
written.
SOUTHWEST AIRLINES CO.
By: /s/ Gary C. Kelly
Gary C. Kelly
Vice Chairman and Chief Executive Officer
THE EMPLOYEE
/s/ Herbert D. Kelleher
Herbert D. Kelleher
Address: P.O. Box 36611
Dallas, Texas 75235-1611