EXHIBIT 10.27
SOUTHWEST AIRLINES CO.
2002 RAMP, OPERATIONS, PROVISIONING AND
FREIGHT NON-QUALIFIED STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 2002 Ramp, Operations, Provisioning and
Freight Non-Qualified Stock Option Plan.
1. PURPOSE. This Plan is adopted pursuant to proposed Side Letter of
Agreement No. Ten ("Side Letter Ten") to the Collective Bargaining Agreement
(the "Agreement") between the Company and the Transport Workers Union of
America, AFL - CIO Local 555 representing Ramp, Operations, Provisioning and
Freight Agents ("TWU") ratified on June 14, 2001.
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.
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 as Ramp,
Operations, Provisioning or Freight Agents by the Company pursuant to the
Agreement, or to Supervisory Employees in the Ground Operations or Provisioning
Depts., all as set forth in the schedule attached as Exhibit A and made a part
hereof. Only persons who are employed as Ramp, Operations, Provisioning or
Freight Agents of the Company on the date of the grant may be granted options
under this Plan, or at the option of the Company, Supervisory Employees in the
Company's Ground Operations and Provisioning
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2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 1
Depts.; under no circumstances shall officers of the Company be eligible to
receive options hereunder.
(b) Grant Price. 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. Ten.
(c) Southwest Airlines Employees Joining the TWU. Southwest Airlines
Employees who enter the work force subject to the Agreement 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. The 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 plan). 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 TWU workforce 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) Transferring to Another Work Group. If an Optionee transfers to
another work group (other than a supervisory, management, or union position
related to the functions covered by this Agreement), 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.
4. DEFINITIONS. An Employee receiving any option under this Plan is
referred to herein 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 11,500,000 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
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2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 2
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 30, 2008, except as to any options then outstanding under this Plan,
which shall remain in effect until they have been exercised or expired; except
that this Plan will be terminated on December 30, 2007, upon delivery of notice
by TWU 555 of its desire to make the Agreement amendable as of June 30, 2007,
pursuant to Section 4 of Side Letter Ten.
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.
(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) November 1, 2012;
(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 the
Optionee's death occurs either during his employment with the Company or during
the three-month period following the date of termination of such employment.
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2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 3
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 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.
(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.
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2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 4
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 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.
(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
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2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 5
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 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; AMENDMENTS. 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 TWU on or before December 30, 2002,
this Plan shall be null and void.
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2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 6
Exhibit A
INITIAL STOCK OPTION GRANTS AND VESTING
On the date of ratification of Letter Agreement No. Ten to the
Agreement, options will be granted to persons employed as Ramp, Operations,
Provisioning or Freight Agents by the Company according to the following
schedule, and vesting as shown below.
<Table>
<Caption>
PROJECTED
SENIORITY SENIORITY SHARES VESTING SHARES VESTING
AS OF 7/1/02 AS OF 7/1/06 7/1/06 7/1/07 TOTAL GRANT
------------ ------------ -------------- -------------- -----------
1st Year Step 4 350 400 750
Step 1 Step 5 400 450 850
Step 2 Step 6 450 500 950
Step 3 Step 7 500 550 1,050
Step 4 Step 8 550 600 1,150
Step 5 Step 9 600 650 1,250
Step 6 Step 10 650 700 1,350
Step 7 Step 11 700 700 1,400
Step 8 Step 11 700 700 1,400
Step 9 Step 11 700 700 1,400
Step 10 Step 11 700 700 1,400
Step 11 Step 11 700+ 700+ 1,400+
</Table>
+ Add ten shares for every full year of service completed above 11 years
as of the vesting date. Example: An Employee who has completed 20 years
of service as of 7/1/06 would receive a total grant of 1,590 shares,
with 790 shares vesting on 7/1/06 and 800 shares vesting 7/1/07.
EMPLOYEES HIRED BETWEEN 7/1/02 AND DATE OF RATIFICATION
Eligible Employees hired between 7/1/02 and Date of Ratification shall be
granted options for a total of 700 shares, with 325 shares vesting 7/1/06 and
375 shares vesting 7/1/07, to be granted upon completion of probation.
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2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 1
SUBSEQUENT GRANTS
Options will be granted to persons subsequently employed by the Company
who are covered by the Agreement who have completed probation. Grants will be
made upon completion of probation, at the then applicable Fair Market Value.
Options will vest annually as follows:
<Table>
<Caption>
PROJECTED
SENIORITY SHARES VESTING SHARES VESTING
HIRE DATE AS OF 7/1/06 7/1/06 7/1/07 TOTAL GRANT
- ------------------ ------------ -------------- -------------- -----------
DOR-6/30/03 Step 3 300 350 650
7/1/03-6/30/04 Step 2 250 300 550
7/1/04-6/30/05 Step 1 200 250 450
7/1/05-6/30/06 1st Year 200 200 400
7/1/06-6/30/07 -- -- 200* 200
7/1/07-6/30/08 -- -- 175* 175
</Table>
* Grants will be made upon completion of probation, not necessarily by 7/1/07.
Any options granted after 7/1/07 will vest immediately upon grant.
VESTING REQUIREMENTS
Options will vest on the applicable vesting date under the following
circumstances, and no other:
For Optionees who are Employees of the Company and on the TWU 555 seniority list
as of the applicable vesting date, and who have been on paid status for at least
1000 hours during the 12 months immediately preceding the vesting date, options
shall vest on the applicable vesting date. Options for Employees of the Company
who are on the TWU 555 seniority list as of the applicable vesting date, but who
were not on paid status for at least 1,000 hours during the 12 months
immediately preceding the vesting date, will vest upon the Employee's completion
of 1,000 hours on paid status during the 12 month period immediately following
the vesting date. If such Optionee is not on paid status for 1,000 hours during
such 12 month period, the options will be canceled.
SUPERVISORY EMPLOYEES
At the Company's option from time to time, Supervisory Employees in the
Company's Ground Operations or Provisioning Depts. may be granted options in
amounts and with vesting and other requirements as may be determined from time
to time by the Compensation Committee of the Board of Directors.
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2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 2
EARLY TERMINATION OF THE AGREEMENT
Notwithstanding any other term of this Plan, in the event TWU exercises its
option to make the Agreement amendable as of June 30, 2007, no options shall
vest on or after July 1, 2007 and such options shall immediately terminate.
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2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 3