Exhibit 10.4
EMPLOYMENT CONTRACT
THIS EMPLOYMENT CONTRACT (hereinafter referred to as this "Agreement"),
dated as of July 15, 2004, by and between GARY C. KELLY (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 an executive officer of Southwest
for more than the past five years; and
WHEREAS the Employee and Southwest desire to enter into an agreement
for the continuing full-time 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, DUTIES AND RESPONSIBILITIES. The Employee shall serve as
Chief Executive Officer of Southwest, and, for so long as he shall be
elected to the Board of Directors of Southwest, he shall serve as Vice
Chairman of the Board without additional compensation hereunder. The
Employee's duties and responsibilities as Chief Executive Officer shall
include general oversight of the operational performance of Southwest;
managing costs and generating revenues in order to achieve excellent
financial performance; representing Southwest to its multitude of
exterior constituencies; implementing Southwest's current and long
range business policies and programs; handling, or overseeing, major
contract negotiations; and, in general, maintaining employee morale and
esprit de corps. In addition, he shall perform such other corporate
duties and discharge such other corporate responsibilities as are
specified in the bylaws of Southwest or are] designated from time to
time by either the Chairman of the Board of Directors of Southwest or
the full Board of Directors.
B. 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.
C. 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 EFFORT. During the term of his employment hereunder, the
Employee shall devote such time and effort as is required to perform
his duties and to discharge his responsibilities hereunder. The
Employee shall generally conform with all policies of Southwest as they
apply to a person of his level of duties and responsibilities.
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, Pennsylvania, Rhode Island,
Connecticut, North Carolina and Virginia. 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 $399,722, $411,714 and $424,065,
respectively. The Employee's Base Salary shall be payable to the
Employee in equal semi-monthly installments. The Employee's Base
Salary installment payments 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 set aside on its books 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 sixty-five (65) 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, 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 (70). 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, his spouse and
his children under any such Southwest plan or program during the
term of this Agreement.
F. STOCK OPTION GRANT. Southwest shall grant to the Employee, effective
as of the date hereof, ten-year non-qualified options to purchase
180,000 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 and to
discharge his responsibilities hereunder on a full-time basis.
Southwest shall give to the Employee thirty (30) days' 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
and discharge of his responsibilities on a full-time basis (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 in the English language 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/ Herbert D. Kelleher
Herbert D. Kelleher
Chairman of the Board of Directors
THE EMPLOYEE
/s/ Gary C. Kelly
Gary C. Kelly
Address: P.O. Box 36611
Dallas, Texas 75235-1611