EXHIBIT 4.2
SOUTHWEST AIRLINES CO.
2002 MECHANICS NON-QUALIFIED
STOCK OPTION PLAN
(As Amended through October 22, 2002)
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 2002 Mechanics Non-Qualified Stock Option
Plan (the "Plan).
1. PURPOSE. This Plan is adopted pursuant to the Collective Bargaining
Agreement (the "Agreement") between the Company and the International
Brotherhood of Teamsters - Airline Division for Mechanics and related Employees
of Southwest Airlines Co. (the "IBT") for the period August 16, 2001 to August
16, 2005.
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 a representative of the IBT. Members of the
Committee 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.
(a) 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 by the Company
and covered by the Agreement and as set forth in the schedule attached as
Exhibit A and made a part hereof. Only persons who are employed as fulltime
Mechanics of the Company on the date of the grant may be granted options under
this Plan; under no circumstances shall executive officers of the Company be
eligible to receive options hereunder.
(b) Grant Price. Initial Grants (as defined in Exhibit A)
shall be granted at an exercise price equal to the fair market value of the
Common Stock on the date of ratification of the Agreement; thereafter, 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.
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MECHANICS NON-QUALIFIED STOCK OPTION PLAN Page 1
(c) Southwest Airlines Employees Becoming Mechanics. Except as
provided in subparagraph (e) below, Southwest Airlines Employees who enter the
Mechanics work force without a break in company service and who are participants
in another stock option plan (an "existing plan") will retain any vested and
unexercised options granted with such existing plan. Such Employee must choose
to either retain unvested stock option grants established in accordance with
such existing plan (if permitted by such other plan), or will receive grants in
accordance with this Plan, whichever is chosen by the Employee involved, but the
Employee shall not hold grants under both plans simultaneously (other than
vested and unexercised options in such existing plans). The Employee must make
the election prior to the scheduled grant date for options under this Plan. If
the Employee does not make a timely election, options previously granted will
remain in effect, and no grant will be made under this Plan. Exercise of options
will be done in accordance with the Plan under which they were awarded. At such
time as the Employee no longer holds any vested or unvested options under the
other existing plan, the Employee will receive an initial grant under this Plan
on the next scheduled grant date. Employees who entered the Mechanics work force
prior to the initial grant date of options under this Plan must make the
election within 60 days of the date of ratification of the Agreement.
(d) Mechanics Transferring to Another Work Group. Except as
provided in subparagraph (e) below, if a Southwest Airlines Mechanic transfers
to another work group, any unvested portion of any option granted in accordance
with this Plan, shall automatically and without notice terminate and become null
and void as of the first day such Optionee is on the payroll for such position.
Any vested and unexercised portion of any such option shall remain exercisable
under this Plan.
(e) Employees Transferring between Groups Represented by the
International Brotherhood of Teamsters. Southwest Airlines Mechanics who
transfer between work groups represented by the International Brotherhood of
Teamsters and which are each covered by an existing stock option plan will
retain vested stock option grants established in accordance with their original
plan and must choose to either retain unvested stock option grants established
in accordance with such original plan or will receive grants in accordance with
the plan for their new group. The Employee shall not hold grants under both
plans simultaneously (other than previously vested and unexercised options in
the original plan). If the Employee chooses to retain grants under the original
plan, and the stock option plan for the group into which he is moving would
provide additional options (in the Total Grant) at his entry, he may choose to
retain grants under the original plan, and, in addition, receive a supplemental
grant under the other plan in an amount equal to the difference between those
available under the other plan, and the amount already received under the
original plan. Employees who entered the Mechanics work force prior to the
initial grant date of options under this Plan must make the election within 60
days of the date of ratification of the Agreement.
The Employee must make the election under this paragraph prior
to the next scheduled grant date for options under the stock option plan for the
group into which the Employee is moving. If the Employee does not make a timely
election, options previously granted under the Employee's original plan will
remain in effect and, if appropriate, an incremental grant will be made under
the other stock option plan.
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MECHANICS NON-QUALIFIED STOCK OPTION PLAN Page 2
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
on the most recent business day on which the stock was traded, unless otherwise
determined by the Committee.
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 4,100,000 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
August 16, 2005, except as to Options outstanding on such date which shall
continue in full force and effect until they are exercised, terminate or expire
according to the terms of this Plan.
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.
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.
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MECHANICS NON-QUALIFIED STOCK OPTION PLAN Page 3
(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 (8) years from the date of grant
of such option;
(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
subparagraph (3) below); provided that if the Optionee shall die during
such 3-month period the provisions of subparagraph (3) below shall
apply; or
(3) The expiration of 12 months from the Optionee's death if
such death occurs during his employment with the Company.
In the case of subparagraphs (2) and (3) 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 options 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 (but in no event less than
100 shares, unless such exercise is for all remaining shares) by giving written
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.
(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 a cashier's check or electronic funds transfer 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 a certificate for at
least the number of shares of Common Stock to be used as payment.
(c) Irrevocable Election. The giving of such written 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.
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MECHANICS NON-QUALIFIED STOCK OPTION PLAN Page 4
(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 or during the three-month period following the date of termination
of such employment, the Optionee's options shall thereafter be exercisable, as
provided in paragraph 7(b), 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.
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.
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MECHANICS NON-QUALIFIED STOCK OPTION PLAN Page 5
(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
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
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MECHANICS NON-QUALIFIED STOCK OPTION PLAN Page 6
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 on the
latter of the following to occur: (a) its adoption by the Board of Directors of
the Company and (b) ratification of the Agreement by the IBT membership not
later than November 1, 2002.
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MECHANICS NON-QUALIFIED STOCK OPTION PLAN Page 7
EXHIBIT A
INITIAL GRANTS
On the Effective Date of the Agreement, options to purchase 2,400
shares of Common Stock of the Company will be granted to persons employed by the
Company and covered by the Agreement. Of those options, options to purchase
1,200 shares of Common Stock will vest on the later of (i) immediately, or (ii)
for Apprentices and Employees who have not completed probation, upon completion
of probation. Options to purchase 600 shares will vest on August 16, 2003 and
the balance of options to purchase 600 shares will vest on August 16, 2004, for
Employees who have completed probation as of such date; if the Employee has not
completed probation as of such date, the appropriate options will vest upon the
completion of probation.
SUBSEQUENT GRANTS
On August 16 of each year, commencing August 16, 2003, through August
16, 2005, options will be granted to persons employed by the Company who are
covered by the Agreement who have completed probation during the previous 12
months (except those receiving an Initial Grant on the Date of Ratification).
Options will vest annually on the anniversary of the Grant Date as follows:
<Table>
<Caption>
STOCK OPTION VESTING SCHEDULE
GRANT -------------------------------------------------------------------------------
DATE AUGUST 16,
------- -------------------------------------------------------------------------------
AUG. 16 TOTAL GRANT 2003 2004 2005
------- ----------- ---- ---- ----
2003 1,800 600 600 600
2004 1,200 -- 600 600
2005 600 -- -- 600
</Table>
VESTING REQUIREMENTS
Options will vest on the applicable vesting date under the following
circumstances, and no other:
(a) For Optionees who are Employees of the Company on paid status and on the
Mechanic seniority list as of the applicable vesting date; and
(b) For Optionees who are Employees of the Company on unpaid status and on the
Mechanic seniority list as of the applicable vesting date (e.g., medical leave,
military leave, union leave, maternity leave etc.) who accrue hours of service
during the calendar year prior to the year in which the vesting date occurs
sufficient to qualify for a profitsharing contribution under the Company's
Profitsharing Plan for such calendar year. By way of example, if an Optionee is
on unpaid medical leave on August 16, 2003, but during calendar year 2002
accrues sufficient hours of service to qualify
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MECHANICS NON-QUALIFIED STOCK OPTION PLAN Page 8
for a profitsharing contribution for 2003, such Optionee's options will vest on
August 16, 2003, as if that Optionee had been on paid status as of August 16,
2003.
Provided, however, that options may vest for Employees meeting the requirements
set forth above (except the requirement for being on the seniority list), and
for those Employees set forth in paragraph 3(e) of the Plan.
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