EXHIBIT 4.1
SOUTHWEST AIRLINES CO.
2002 SWAPA NON-QUALIFIED
STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 2002 SWAPA Non-Qualified Stock Option Plan.
1. PURPOSE. This Plan is adopted pursuant to proposed Letter of
Agreement No. 26, to the Collective Bargaining Agreement (the "Agreement")
between the Company and the Southwest Airlines Pilots Association ("SWAPA")
ratified on January 12, 1995.
2. ADMINISTRATION. This Plan shall be administered by an Administrative
Committee (the "Committee") consisting of not more than five (5) persons
designated from time to time by the Chief Executive Officer of the Company,
including as one of its members the President of SWAPA or his or her designee.
Members of the Committee (except the President of SWAPA or his designee) may be
removed or replaced at any time by the Chief Executive Officer of the Company.
The Administrative Committee shall select one of its members as Chairman and
shall adopt such rules and regulations as it shall deem appropriate concerning
the holding of its meetings, the transaction of its business and the
administration of this Plan. A majority of the whole Committee shall constitute
a quorum, and the act of a majority of the members of the Committee present at a
meeting at which a quorum is present shall be the act of the Committee; any
decision or determination reduced to writing and signed by a majority of the
members of the Administrative Committee shall be fully as effective as if made
by a majority vote at a meeting duly called and held.
3. GRANT OF OPTIONS; PERSONS ELIGIBLE. The Stock Option Committee of
the Board of Directors of the Company, or such other committee as may be
appointed by the Board, shall have the authority and responsibility, within the
limitations of this Plan, to grant options from time to time to persons employed
as Pilots (including Pilots in management positions retaining seniority numbers
("Management Pilots") by the Company pursuant to the Agreement and as set forth
in the schedule attached as Exhibit A and made a part hereof. Options shall be
granted at an exercise price equal to the fair market value of the Common Stock
of the Company on the date of the grant of the option with initial grants on the
date of ratification of Letter of Agreement No. 26. Only persons who are
employed as Pilots of the Company, including Management
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2002 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 1
Pilots on the date of the grant may be granted options under this Plan; under no
circumstances shall officers of the Company be eligible to receive options
hereunder.
4. DEFINITIONS. An employee receiving any option under this Plan is
hereinafter referred to as an "Optionee." Any reference herein to the employment
of an Optionee with the Company shall include only employment with the Company.
The fair market value of the Common Stock on any day shall be the mean between
the highest and lowest quoted selling prices of the Common Stock on such day as
reported by the primary national stock exchange on which such stock is listed.
If no sale shall have been made on that day, or if the Common Stock is not
listed on a national exchange at that time, fair market value will be determined
by the Committee. If the date of grant is not a business day, the grant price
will be calculated using the immediately preceding business day.
5. STOCK SUBJECT TO OPTIONS. Subject to the provisions of paragraph 12,
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options, granted under this Plan, shall not exceed 32,000,000 shares. If, and
to the extent the options granted under this Plan terminate or expire without
having been exercised, new options may be granted with respect to the shares
covered by such terminated or expired options; provided that the granting and
terms of such new options shall in all respects comply with the provisions of
this Plan.
Shares sold or distributed upon the exercise of any option granted
under this Plan may be shares of the Company's authorized and unissued Common
Stock, shares of the Company's issued Common Stock held in the Company's
treasury, or both.
There shall be reserved at all times for sale or distribution under
this Plan a number of shares of Common Stock (either authorized and unissued
shares or shares held in the Company's treasury, or both) equal to the maximum
number of shares which may be purchased or distributed upon the exercise of
options granted under this Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of shares of Common Stock which may thereafter be available, both for
purposes of this Plan and for sale to any one individual, by the number of
shares as to which the Option is exercised.
6. EXPIRATION AND TERMINATION OF THE PLAN. This Plan will expire on
December 31, 2006, except as to any options then outstanding under this Plan,
which shall remain in effect until they have been exercised or expired.
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
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2002 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 2
7. EXERCISABILITY AND DURATION OF OPTIONS.
(a) Exercisability. Options granted under this Plan shall become
exercisable pursuant to the vesting schedule and requirements set forth in
Exhibit A attached hereto.
(b) Duration. The unexercised portion of any option granted under this
Plan shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(1) the expiration of eight years from the date of grant;
(2) The expiration of three months from the date of
termination of the Optionee's employment with the Company (unless such
termination was as a result of the circumstances set forth in subparagraphs (3)
or (4) below); provided that if the Optionee shall die during such 3-month
period the provisions of subparagraph (3) below shall apply;
(3) The expiration of 12 months from the Optionee's death, if
the Optionee's death occurs either during his employment with the Company,
during the three-month period following the date of termination of such
employment, or during the 24-month period following retirement as a result of
FAA-imposed mandatory retirement age; or
(4) The expiration of 24 months following the retirement of
the Optionee as a result of FAA-imposed mandatory retirement age; provided that
if the Optionee shall die during such 24-month period, the provisions of
subparagraph (3) above shall apply.
In the case of subparagraphs (2), (3) and (4) above, the
Optionee shall have the right to exercise any Option prior to such expiration to
the extent it was exercisable at the date of such termination of employment and
shall not have been exercised.
8. EXERCISE OF OPTIONS.
(a) Procedure. The option granted herein shall be exercised by the
Optionee (or by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee) as
to all or part of the shares covered by the option by giving notice of the
exercise thereof (the "Notice") to the Company. From time to time the Committee
may establish procedures relating to effecting such exercises. No fractional
shares shall be issued as a result of exercising an Option.
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2002 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 3
(b) Payment. In the Notice, the Optionee shall elect whether he or she
is to pay for his or her shares in cash or in Common Stock of the Company, or
both. If payment is to be made in cash, the Optionee shall deliver to the
Company funds in the amount of the exercise price on or before the exercise
date. If payment is to be made in Common Stock, (a) it shall be valued at its
fair market value on the date of such notice, as determined pursuant to
Paragraph 4 hereof; (b) such Common Stock must have been owned by the Optionee
for at least six months prior to the exercise date; and (c) the Notice shall be
accompanied by documentation as proof of ownership for the number of shares of
Common Stock to be used as payment.
(c) Irrevocable Election. The giving of such notice to the Company
shall constitute an irrevocable election to purchase the number of shares
specified in the notice on the date specified in the notice.
(d) Withholding Taxes. To the extent that the exercise of any Option
granted pursuant to this Plan or the disposition of shares of Common Stock
acquired by exercise of an Option results in compensation income to the Optionee
for federal or state income tax purposes, the Optionee shall deliver to the
Company at the time of such exercise or disposition such amount of money as the
Company may require to meet its obligation under applicable tax laws or
regulations, and, if the Optionee fails to do so, the Company is authorized to
(a) withhold delivery of certificates upon exercise and (b) withhold from
remuneration then or thereafter payable to Optionee any tax required to be
withheld by reason of such resulting compensation income.
(e) Delivery of Shares. The Company shall cause shares to be delivered
to the Optionee (or the person exercising the Optionee's options in the event of
death) as soon as practicable after the exercise date.
9. NONTRANSFERABILITY OF OPTIONS. No option granted under this Plan or
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only the Optionee (or his or her guardian or legal representative) may
exercise his or her options.
In the event of the Optionee's death during his or her employment with
the Company, during the three-month period following the date of termination of
such employment, or during the 24-month period following FAA-mandated
retirement, the Optionee's options shall thereafter be exercisable by his or her
executor or administrator, or by the person who acquires such options by will or
the laws of descent and distribution or otherwise by reason of the death of the
Optionee.
10. RIGHTS OF OPTIONEE. Neither the Optionee nor his or her executors,
administrators, or legal representatives shall have any of the rights of a
shareholder of the Company with respect to the shares subject to an option
granted under this Plan until certificates for such shares shall have been
issued upon the exercise of such option.
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11. RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any
option granted under this Plan shall confer upon any Optionee the right to
continue in the employment of the Company or affect the right of the Company or
any of its subsidiaries to terminate the Optionee's employment at any time;
subject, however, to the provisions of the Agreement.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
(a) The existence of the Plan and the options granted hereunder shall
not affect in any way the right or power of the Board of Directors or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of debt or equity securities ahead of or affecting Common Stock or the rights
thereof, the dissolution or liquidation of the Company or any sale, lease,
exchange or other disposition of all or any part of its assets or business or
any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased; likewise, the
number of shares to be granted pursuant to the schedule set forth in Exhibit A
shall be appropriately adjusted. In the event of any such change in the
outstanding Common Stock, the aggregate number of shares available under the
Plan shall be appropriately adjusted by the Board of Directors of the Company,
whose determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Optionee had been the holder of record of
the number of shares of Common Stock as to which such option is then
exercisable. If the Company shall not be the surviving entity in any merger or
consolidation (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Company) or if the Company is to be
dissolved or liquidated, then unless a surviving corporation assumes or
substitutes new options for Options then outstanding hereunder (i) the time at
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2002 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 5
which such Options may be exercised shall be accelerated and such Options shall
become exercisable in full on or before a date fixed by the Company prior to the
effective date of such merger or consolidation or such dissolution or
liquidation, and (ii) upon such effective date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or to be granted
or the purchase price per share.
13. PURCHASE FOR INVESTMENT AND LEGALITY. The Optionee, by acceptance
of any option granted under this Plan, shall represent and warrant to the
Company that the purchase or receipt of shares of Common Stock upon the exercise
thereof shall be for investment and not with a view to distribution, provided
that such representation and warranty shall be inoperative if, in the opinion of
counsel to the Company, a proposed sale or distribution of such shares is
pursuant to an applicable effective registration statement under the Securities
Act of 1933 or is, without such representation and warranty, exempt from
registration under such Act. The Company shall file a Registration Statement on
Form S-8 pursuant to the Securities Act of 1933, as amended, covering the shares
to be offered pursuant to the Plan and will use its best efforts to maintain
such registration at all times necessary to permit holders of options to
exercise them.
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon the exercise of any option
granted under this Plan.
14. EFFECTIVE DATE OF PLAN. This Plan shall become effective upon its
adoption by the Board of Directors of the Company; provided, however, if the
Agreement is not ratified by SWAPA on or before August 20, 2002, this Plan shall
be null and void.
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2002 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 6
Exhibit A
STOCK OPTION GRANTS
On the date of ratification of Letter Agreement No. 26 to the
Agreement, options will be granted to persons employed as Pilots by the Company
(including Management Pilots) according to the following schedule. Pilots hired
subsequent to August 19, 2002 will be granted options on their date of hire.
<Table>
<Caption>
MONTH OF TOTAL MONTH OF TOTAL MONTH OF TOTAL MONTH OF TOTAL MONTH OF TOTAL
HIRE GRANT HIRE GRANT HIRE GRANT HIRE GRANT HIRE GRANT
- ---------------------------------------------------------------------------------------------------------------------
Before 7,728
Sep-93 7,728 May-96 7,548 Jan-99 7,328 Sep-01 4,452 May-04 3,052
Oct-93 7,725 Jun-96 7,542 Feb-99 7,321 Oct-01 4,417 Jun-04 2,979
Nov-93 7,722 Jul-96 7,536 Mar-99 7,314 Nov-01 4,382 Jul-04 2,906
Dec-93 7,719 Aug-96 7,530 Apr-99 7,307 Dec-01 4,347 Aug-04 2,833
Jan-94 7,716 Sep-96 7,524 May-99 7,300 Jan-02 4,312 Sep-04 2,760
Feb-94 7,713 Oct-96 7,516 Jun-99 7,293 Feb-02 4,277 Oct-04 2,617
Mar-94 7,710 Nov-96 7,508 Jul-99 7,286 Mar-02 4,242 Nov-04 2,474
Apr-94 7,707 Dec-96 7,500 Aug-99 7,279 Apr-02 4,207 Dec-04 2,331
May-94 7,704 Jan-97 7,492 Sep-99 7,272 May-02 4,172 Jan-05 2,188
Jun-94 7,701 Feb-97 7,484 Oct-99 7,163 Jun-02 4,137 Feb-05 2,045
Jul-94 7,698 Mar-97 7,476 Nov-99 7,054 Jul-02 4,102 Mar-05 1,902
Aug-94 7,695 Apr-97 7,468 Dec-99 6,945 Aug-02 4,067 Apr-05 1,759
Sep-94 7,692 May-97 7,460 Jan-00 6,836 Sep-02 4,032 May-05 1,616
Oct-94 7,684 Jun-97 7,452 Feb-00 6,727 Oct-02 3,999 Jun-05 1,473
Nov-94 7,676 Jul-97 7,444 Mar-00 6,618 Nov-02 3,966 Jul-05 1,330
Dec-94 7,668 Aug-97 7,436 Apr-00 6,509 Dec-02 3,933 Aug-05 1,187
Jan-95 7,660 Sep-97 7,428 May-00 6,400 Jan-03 3,900 Sep-05 1,044
Feb-95 7,652 Oct-97 7,422 Jun-00 6,291 Feb-03 3,867 Oct-05 957
Mar-95 7,644 Nov-97 7,416 Jul-00 6,182 Mar-03 3,834 Nov-05 870
Apr-95 7,636 Dec-97 7,410 Aug-00 6,073 Apr-03 3,801 Dec-05 783
May-95 7,628 Jan-98 7,404 Sep-00 5,964 May-03 3,768 Jan-06 696
Jun-95 7,620 Feb-98 7,398 Oct-00 5,838 Jun-03 3,735 Feb-06 609
Jul-95 7,612 Mar-98 7,392 Nov-00 5,712 Jul-03 3,702 Mar-06 522
Aug-95 7,604 Apr-98 7,386 Dec-00 5,586 Aug-03 3,669 Apr-06 435
Sep-95 7,596 May-98 7,380 Jan-01 5,460 Sep-03 3,636 May-06 348
Oct-95 7,590 Jun-98 7,374 Feb-01 5,334 Oct-03 3,563 Jun-06 261
Nov-95 7,584 Jul-98 7,368 Mar-01 5,208 Nov-03 3,490 Jul-06 174
Dec-95 7,578 Aug-98 7,362 Apr-01 5,082 Dec-03 3,417 Aug-06 87
Jan-96 7,572 Sep-98 7,356 May-01 4,956 Jan-04 3,344 Sep-06 --
Feb-96 7,566 Oct-98 7,349 Jun-01 4,830 Feb-04 3,271
Mar-96 7,560 Nov-98 7,342 Jul-01 4,704 Mar-04 3,198
Apr-96 7,554 Dec-98 7,335 Aug-01 4,578 Apr-04 3,125
</Table>
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2002 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 1
Vesting Requirements
Options will vest on the last day of the month of each month beginning
September 2004 through August 2006 for Optionees who are on paid status on the
first day of that month and none other. The number of options vesting each month
will be determined in accordance with the following schedule:
Monthly Vesting Schedule
<Table>
<Caption>
Twelve months beginning Twelve months beginning
Step* 9/30/04 9/30/05
- ------- ----------------------- -----------------------
12 315 329
11 312 325
10 308 322
9 305 318
8 301 315
7 298 311
6 295 308
5 189 198
4 173 180
3 156 163
2 140 147
1 83 87
</Table>
* Years of Service as of date of monthly vesting
For example, in September 2004, a 12- year Captain would vest in 315 options on
September 2004.
For further example, a Pilot hired on February 1, 2002 would be granted a total
of 4,277 options. On September 30, 2004, that Pilot will be a third-year First
Officer. He will vest in 156 options per month from September 30, 2004 through
January 31, 2005. Beginning February 28, 2005, and on the last day of each month
through August 31, 2005, that Pilot will vest in 173 options per month,
increasing on September 30, 2005 to 180 options per month through January 31,
2006. In
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2002 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 2
February 2006, the Pilot becomes a 5th-year First Officer. Accordingly, he will
now vest in 198 options per month from February 28, 2006 through August 31,
2006. The example assumes the Pilot was on paid status on the first day of the
month.
New Hire Vesting
Pilots hired in or before August 2003 will vest in options starting in
September 2004, since these Pilots will have successfully completed probation by
that time. Pilots hired after August 2003 will receive an option on their date
of hire, and will begin vesting on the first vesting date after successful
completion of probation (one year after date of hire). The first month of
vesting will include the number of shares as calculated in the above vesting
schedule, plus all options eligible to be accumulated during probation. In
subsequent months, options will vest according to the above vesting schedule.
For example, a Pilot hired in October 2004 will be granted 2,617
options in October 2004. From October 2004 to August 2005, the Pilot will
accumulate 83 options per month (the step 1 First Officer rate), totaling 913
options. In September 2005, the monthly amount increases to 87 options, so that
by the Pilots' anniversary date in October 2005, he will have accumulated 1,000
options while on probation. In October 2005, the Pilot will be off probation and
will vest in his 1,000 options earned during probation, plus the 147 options
earned at the step 2 First Officer rate in the month of October 2005. The Pilot
will then vest in 147 options per month from November 2005 through August 2006.
For further example, a Pilot hired in July 2004 will be granted 2,906
options in July 2004. From September 30, 2004, through June 30, 2005, the Pilot
will accumulate 83 options per month (the step 1 First Officer rate), totaling
830 options. On July 31, 2005, the Pilot will vest in 830 options accumulated
during probation, plus 140 options for one month (July 2005) at step 2 First
Officer rates, totaling 970. The Pilot will then vest in 140 options for the
month of August on August 31, 2005. Beginning in September 2005, the Pilot will
vest in 147 step 2 First Officer options through June 30, 2006. On July 1, 2006,
the Pilot becomes a step 3 First Officer, and begins vesting in 163 options per
month from July 2006 through August 31, 2006. The examples shown above assume
the Pilots were on paid status on the first day of the month.
Retiring Pilots
Pilots who retire due to the FAA's mandatory retirement rule will vest
in the options attributable to the month they retire, assuming they are on paid
status on the first day of the month. Pilots retiring early will not vest in
their final month of employment unless they are an Employee on the last day of
that month (the vesting date) and were on paid status on the first day of the
month.
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Military Leave
Notwithstanding the foregoing, Pilots on active duty military leave,
upon returning to paid status, will, on the last day of the first month during
which they were on paid status on the first day of the month, vest in all
options for which they would have vested had they not been on military leave.
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