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Exhibit 10.8
EMPLOYMENT CONTRACT
THIS EMPLOYMENT CONTRACT (hereinafter referred to as this
"Agreement"), dated as of January 1, 1996, 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, and January 1, 1988, and
most recently pursuant to an Employment Contract dated as of January 1, 1992
(collectively, the "Old Contracts"); and
WHEREAS the Employee and Southwest desire to enter into a successor
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. POSITIONS, DUTIES AND AUTHORITY
A. POSITIONS. The Employee shall serve as President and Chief Executive
Officer of Southwest, and the Employee shall serve in such senior
executive positions with MW SW Corp., Southwest Jet Fuel Co., TranStar
Airlines Corporation, Morris Air Corporation and Southwest Airlines
Eurofinance N.V. as the Board of Directors of Southwest may from time
to time request. For so long as he shall be elected to the Board of
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of Southwest, the Employee shall serve thereon as Chairman without
additional compensation hereunder.
B. DUTIES. The Employee's duties shall include, in addition to those
enumerated in the bylaws of Southwest, management of the day-to-day
operations of Southwest, planning of the future course of such
operations and implementation of Southwest's current and long-range
business policies and programs. The Employee's duties may also
include managing or handling other functions or segments of
Southwest's business as may be directed from time to time by the Board
of Directors of Southwest.
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. FULL TIME AND EFFORTS. During the term of his employment hereunder,
the Employee shall devote his full time and efforts to the business
affairs of Southwest. The Employee shall generally conform with all
policies of Southwest as they apply to a person of his level of
responsibilities. The Employee will not, without the prior approval
of the Board of Directors of Southwest, accept any other employment,
or serve as an officer, consultant or partner of any business or other
entity organized for profit (other than Southwest and any family
enterprise), except in the capacity of an investor of money
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and so long as such monetary investment does not require any
significant active involvement or otherwise adversely affect the
conduct of the Employee's duties as set forth in this Agreement. It
is understood, however, that the Employee may act as executor of the
estates of family members and he may serve as a director or trustee of
any business or other entity not engaged in significant competition
with Southwest, provided that such service does not adversely affect
the conduct of the Employee's duties as set forth in this Agreement.
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
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operations anywhere in the United States. 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. This Agreement and the Employee's employment hereunder shall commence
and become effective on and as of January 1, 1996. The term of such
employment shall expire on December 31, 2000, 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
December 31, 1996, 1997, 1998 and 1999 shall be $395,000 and for the
year ended December 31, 2000 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, not exceeding
$172,000 per year for years prior to December 31, 1999 and not
exceeding $196,000 for the year ended December 31, 2000.
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C. DEFERRED COMPENSATION. In addition to the Base Salary provided for in
Paragraph IV-A above, and consistent with the Old Contracts,
Southwest shall continue to 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 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. Profit Sharing 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 year, then Deferred Compensation shall accumulate and be
calculated through the close of the next preceding December 31. The
Deferred Compensation credited to the Account (including the Interest
hereinafter provided as well as all amounts credited to the Account
pursuant to the Old Contracts) shall be paid in cash to the Employee
(or to the executors or administrators of his estate) at the rate of
$60,000 per calendar year (subject to such
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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 (70) 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 earlier, 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, 1996 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
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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 $6,000 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,
Southwest shall reimburse the Employee (i) for all medical and dental
expenses incurred by the Employee and his spouse and (ii) 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. Expenses for medical care shall be deemed
to include all amounts paid with respect to hospital bills, doctor and
dental bills and drugs which are not compensated by insurance or
otherwise.
F. STOCK OPTION GRANT AND AMENDMENTS. Southwest shall grant to the
Employee, effective as of the date hereof but subject to shareholder
approval, ten-year options to purchase 500,000 shares of its common
stock at a price per share which represents the New York Stock
Exchange - Composite Tape closing sales price on January 2, 1996, the
first trading day after the effective date of this Agreement in
accordance with the Stock Option Plan and Agreement of even date
herewith, a form of which is attached as Exhibit A hereto, and
ten-year options to purchase 144,395 such shares at $1 per share in
accordance with the Stock Option Plan and Agreement of even
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date herewith, a form of which is attached as Exhibit B hereto.
Failing shareholder approval of each such Stock Option Plan and
Agreement at the 1996 Annual Meeting of Shareholders (including any
adjournment thereof), such grant shall be null and void ab initio, and
thereupon Southwest and the Employee shall negotiate alternative
compensation of equivalent value to the Employee.
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 December 31, 2000 (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.
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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 such
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 work 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 return to full-time duty
(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
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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. Notwithstanding the forgoing, Southwest shall
have no obligation to pay the Employee hereunder, and the Employee
shall have no right to receive from Southwest hereunder, any payment
to the extent that such payment would constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended, and, in the event Southwest makes any such
payment hereunder, the Employee shall refund the amount of such
payment to Southwest promptly upon request. 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
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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.
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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.
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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/ John G. Denison
-----------------------------------
John G. Denison
Executive Vice President -
Corporate Services
Address: P.O. Box 36611
Dallas, Texas 75235-1611
ATTEST:
/s/ Colleen C. Barrett
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Colleen C. Barrett
Secretary
THE EMPLOYEE
/s/ Herbert D. Kelleher
---------------------------------------
Herbert D. Kelleher
Address: P.O. Box 36611
Dallas, Texas 75235-1611
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STOCK OPTION PLAN AND AGREEMENT
THIS STOCK OPTION PLAN AND AGREEMENT ("Agreement"), made as of the 2nd
day of January 1996, between SOUTHWEST AIRLINES CO., a Texas corporation (the
"Company"), and HERBERT D. KELLEHER ("Employee"),
W I T N E S S E T H:
To carry out the purpose of Paragraph IV-F of the Employment Contract
(herein so called) of even date herewith between the Company and Employee by
affording Employee the opportunity to purchase shares of the $1.00 par value
common stock of the Company ("Stock"), the Company and Employee hereby agree as
follows:
1. GRANT OF OPTION. Subject to shareholder approval as provided
in Paragraph IV-F of the Employment Contract, the Company hereby irrevocably
grants to Employee the right and option ("Option") to purchase all or part of
an aggregate of 500,000 shares of Stock, on the terms and conditions set forth
herein. This Option is not intended to constitute an incentive stock option
within the meaning of Section 422A(b) of the Internal Revenue Code of 1986, as
amended (the "Code").
2. PURCHASE PRICE. The purchase price of Stock purchased
pursuant to the exercise of this Option shall be $23.50 per share, which
represents the New York Stock Exchange-Composite Tape closing sales price of
the Stock on the date thereof.
3. EXERCISE OF OPTION. Subject to the earlier expiration of this
Option as herein provided, this Option may be exercised, by written notice to
the Company (addressed to its
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principal executive offices), at any time and from time to time after the date
of grant hereof, 100,000 shares on the date hereof and thereafter in equal
annual increments of 100,000 shares each on January 1 of each year, beginning
January 1, 1997, with all of such options being exercisable on and after
January 1, 2000. Notwithstanding the foregoing, in the event of any change of
control of the Company (as defined in Paragraph V-D of the Employment
Contract), then this Option shall become exercisable in full. This Option is
not transferable by Employee otherwise than by will or the laws of descent and
distribution, and may be exercised only by Employee during his lifetime and
while he remains a full-time employee of the Company, except that:
(a) If Employee's full-time employment with the Company terminates
other than by death (whether by resignation, retirement, dismissal or
otherwise), Employee may exercise this Option at any time during the period of
three years following the date of such termination, but only as to the number
of shares Employee was entitled to purchase hereunder as of the date his
employment so terminates.
(b) If Employee dies while in the employ of the Company or within
the three-year period specified in (a) above, his estate, or the person who
acquires this Option by bequest or inheritance or by reason of the death of
Employee, may exercise this Option at any time during the period of one year
following the date of Employee's death, but only as to the number of shares
Employee was entitled to purchase hereunder as of the date of his death.
In any event, this Option shall not be exercisable as to any shares of
Stock offered hereby after the expiration of ten years from the date this
Option shall first become exercisable with respect to such shares. The
purchase price of shares of Stock as to which this Option is
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exercised shall be paid in full at the time of exercise (a) in cash (including
check, bank draft or money order payable to the order of the Company), or (b)
by delivery to the Company of shares of Stock having a fair market value equal
to the purchase price, or (c) by a combination of cash and Stock; provided that
the fair market value of Stock so delivered shall be the mean of the reported
high and low sales price of Stock on the New York Stock Exchange - Composite
Tape on the date on which the Option is exercised or, if no prices are so
reported on such day, on the next preceding day on which such prices of Stock
are so reported. Unless and until a certificate for such shares shall have
been issued by the Company to him, Employee (or the person permitted to
exercise this Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with respect to
shares acquirable upon an exercise of this Option.
4. SHARES SUBJECT TO THE OPTION. The aggregate number of shares
of Stock which may be issued under this Option is 500,000. Such shares may
consist of authorized but unissued shares of Stock or previously issued shares
reacquired by the Company. Any of such shares which remains unissued at the
termination of this Option shall cease to be subject thereto, but until
termination of this Option the Company shall at all times make available a
sufficient number of shares to meet the requirements of this Option. The
aggregate number of shares issuable under this Option shall be adjusted to
reflect a change in capitalization of the Company, such as a stock dividend or
stock split, as provided in Paragraph 5 of this Agreement.
5. RECAPITALIZATION OR REORGANIZATION. (a) The existence of
this Option 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
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in the Company's capital structure or its business, any merger or consolidation
of the Company, any issue of bonds, debentures, warrants, preferred or prior
preference stocks ahead of or affecting Stock or the rights thereof, the
dissolution or liquidation of the Company or any sale or transfer of all or any
part of its assets or business, or any other corporate act or proceeding.
(b) The shares offered by this Option are shares of Stock as
presently constituted, but if, and whenever, prior to the expiration of this
Option, the Company shall effect a subdivision or consolidation of shares of
Stock or the payment of a stock dividend on Stock without receipt of
consideration by the Company, the number of shares of Stock with respect to
which this 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 (but in no event to
less than the par value of the Stock), 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.
(c) If the Company recapitalizes or merges or engages in a
compulsory share exchange with one or more other entities and the Company shall
be the surviving or acquiring corporation, thereafter upon any exercise of this
Option, Employee shall be entitled to purchase under this Option, in lieu of
the number of shares of Stock as to which this Option shall then be
exercisable, the number and class of shares of stock and other securities or
other property to which Employee would have been entitled pursuant to the terms
of the recapitalization or plan of merger or exchange if, immediately prior to
the effective time of such recapitalization or merger or share exchange,
Employee had been the holder of record of the number of shares of Stock as to
which such Option is then exercisable. If the Company shall not be the
surviving
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or acquiring corporation in any merger or share exchange, or if the Company is
to be dissolved or liquidated, then unless a surviving or acquiring entity
assumes or substitutes new Options for this Option, (i) the time at which this
Option may be exercised shall be accelerated and this Option shall become
exercisable in full on or before a date fixed by the Company prior to the
effective date of such merger or share exchange or such dissolution or
liquidation, and (ii) upon such effective date this Option 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, for cash, 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, 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 Stock subject to this Option or the purchase price per
share.
6. ADMINISTRATION. To the extent necessary for the
administration of elections made pursuant to Paragraph 7 hereof, this Option
shall be administered by the Stock Option Committee which administers the 1991
Incentive Stock Option Plan of the Company; or, at the direction of the Board
of Directors of the Company, such other committee (together with such Stock
Option Committee, the "Committee") of three or more directors of the Company,
each of whom is a disinterested person, appointed by the Board of Directors of
the Company. The Committee is further authorized to interpret this Option and
may from time to time adopt such rules and regulations, consistent with the
provisions of this Option, as it may deem advisable to carry out this Option.
For purposes of this Option, "disinterested person" shall have the
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meaning provided for by Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended and the regulations promulgated under Section 162(m) of
the Internal Revenue Code.
7. WITHHOLDING OF TAX. To the extent that the exercise of this
Option or the disposition of shares of Stock acquired by exercise of this
Option results in compensation income to Employee for federal or state income
tax purposes, except as hereinafter provided, Employee 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. Employee may elect with respect to this Option to surrender or
authorize the Company to withhold shares of Stock (valued at their fair market
value on the date of surrender or withholding of such shares) in satisfaction
of any such withholding obligation (a "Stock Surrender Withholding Election");
provided, however, that any Stock Surrender Withholding Election shall be made
in accordance with the rules and regulations adopted by the Committee for
implementation of the tax withholding provisions of this Paragraph 7. If
Employee fails to deliver such money or make a Stock Surrender Withholding
Election pursuant to this Paragraph 7, the Company is authorized to withhold
from any cash or Stock remuneration then or thereafter payable to Employee any
tax required to be withheld.
8. STATUS OF STOCK. The Company does not presently intend to
register for issue under the Securities Act of 1933, as amended (the "Act"),
the shares of Stock acquirable upon exercise of this Option, and instead
proposes to rely on the private offering exemption from the registration
requirements of the Act afforded by Section 4(2) thereof. In order to assure
that exemption from registration under the Act is available upon an exercise of
this Option, Employee (or the person permitted to exercise this Option in the
event of Employee's death),
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if requested by the Company to do so, will execute and deliver to the Company
in writing an agreement containing such provisions as the Company may
reasonably require to assure compliance with applicable securities laws. No
sale or disposition of shares of Stock acquired upon exercise of this Option
shall be made in the absence of a registration statement being on file with
respect to such shares under the Act unless an opinion of counsel satisfactory
to the Company that such sale or disposition will not constitute a violation of
the Act or any other applicable securities laws is first obtained. The
certificates representing shares of Stock acquired under this Option may bear
such legend as the Company deems appropriate, referring to the provisions of
this Paragraph 8.
9. REGISTRATION RIGHTS. With respect to any shares of Stock
which are issued and delivered upon exercise of this Option (the "Shares"):
(a) Upon written request made by Employee at any time before January
1, 2011, the Company shall take such steps as may be necessary promptly to
register (but not more than once), at the Company's sole expense (save for any
underwriting commissions or discounts applicable to any Shares and Employee's
counsel fees), such of the Shares under the Act (and under regulations of the
Securities and Exchange Commission under the Act or under any similar federal
act or acts then in effect and under the so-called "Blue Sky" laws of the
several states and regulations thereunder then in effect), as Employee may by
written request given to the Company within 15 days following such initial
request, desire to have so registered. The Company will cause such a
registration statement to be filed within 90 days after the initial request is
made. The Company will use its best efforts to cause any such registration
statement
-7-
STOCK OPTION AGREEMENT
21
to become and to remain effective and current for such period (not to exceed
120 days) as Employee may request.
(b) In connection with any registration under this Paragraph 9, the
parties agree to indemnify each other in the customary manner, and, in the case
of an organized secondary or primary underwritten offering, the Company agrees
to indemnify Employee and the underwriters and Employee agrees to indemnify the
Company (provided Employee is then a director, officer or employee of the
Company), in the manner and to the extent as is customary in secondary or
primary underwritten offerings.
(c) The Company shall have the sole right to designate the
underwriters to be employed in any organized secondary or primary underwritten
offering under this Section 9.
(d) In connection with any registration under this Section 9,
Employee shall furnish to the Company such information regarding the Shares and
such other information as the Company may reasonably request.
10. EMPLOYMENT RELATIONSHIP. Employee shall be considered to be
in the employment of the Company as long as he remains an employee of either
the Company, a parent or subsidiary corporation (as defined in Section 424 of
the Code), or a corporation or a parent or subsidiary of such corporation
assuming or substituting a new option for this Option. Any questions as to
whether or when there has been a termination of such employment, and the cause
of such termination, shall be determined by the Board of Directors of the
employing corporation, and its determination shall be final. No obligation as
to length of Employee's employment with any such corporation shall be implied
from the terms of this Agreement, and this Agreement in no way modifies,
alters, amends or impairs the provisions of the Employment Contract.
-8-
STOCK OPTION AGREEMENT
22
11. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of any successors to the Company and all persons lawfully
claiming under Employee.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Employee has executed
this Agreement, all as of the day and year first above written.
ATTEST: SOUTHWEST AIRLINES CO.
/s/ Colleen C. Barrett By:/s/ John G. Denison
- ----------------------------------- -----------------------------------
Colleen C. Barrett John G. Denison
Secretary Executive Vice President -
Corporate Services
EMPLOYEE
/s/ Herbert D. Kelleher
--------------------------------------
Herbert D. Kelleher
-9-
STOCK OPTION AGREEMENT
23
STOCK OPTION PLAN AND AGREEMENT
THIS STOCK OPTION PLAN AND AGREEMENT ("Agreement"), made as of the 1st
day of January 1996, between SOUTHWEST AIRLINES CO., a Texas corporation (the
"Company"), and HERBERT D. KELLEHER ("Employee"),
W I T N E S S E T H:
To carry out the purpose of Paragraph IV-F of the Employment Contract
(herein so called) of even date herewith between the Company and Employee by
affording Employee the opportunity to purchase shares of the $1.00 par value
common stock of the Company ("Stock"), the Company and Employee hereby agree as
follows:
1. GRANT OF OPTION. Subject to shareholder approval as provided
in Paragraph IV-F of the Employment Contract, the Company hereby irrevocably
grants to Employee the right and Option ("Option") to purchase all or part of
an aggregate of 144,395 shares of Stock, on the terms and conditions set forth
herein.
2. PURCHASE PRICE. The purchase price of Stock purchased
pursuant to the exercise of this Option shall be $1 per share.
3. EXERCISE OF OPTION. Subject to the earlier expiration of this
Option as herein provided, this Option may be exercised, by written notice to
the Company (addressed to its principal executive offices), at any time and
from time to time after the date of grant hereof; vesting in equal annual
increments of 28,879 shares each on January 1 of each year, beginning January
1, 1996, with all of such options being exercisable on and after January 1,
2000.
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STOCK OPTION AGREEMENT - $1
24
Notwithstanding the foregoing, in the event of any change of control of the
Company (as defined in Paragraph V-D of the Employment Contract), then this
Option shall become exercisable in full. This Option is not transferable by
Employee otherwise than by will or the laws of descent and distribution, and
may be exercised only by Employee during his lifetime and while he remains a
full-time employee of the Company, except that:
(a) If Employee's full-time employment with the Company terminates
other than by death (whether by resignation, retirement, dismissal or
otherwise), Employee may exercise this Option at any time during the period of
three years following the date of such termination, but only as to the number
of shares Employee was entitled to purchase hereunder as of the date his
employment so terminates.
(b) If Employee dies while in the employ of the Company or within
the three-year period specified in (a) above, his estate, or the person who
acquires this Option by bequest or inheritance or by reason of the death of
Employee, may exercise this Option at any time during the period of one year
following the date of Employee's death, but only as to the number of shares
Employee was entitled to purchase hereunder as of the date of his death.
In any event, this Option shall not be exercisable as to any shares of
Stock offered hereby after the expiration of ten years from the date this
Option shall first become exercisable with respect to such shares. The
purchase price of shares of Stock as to which this Option is exercised shall be
paid in full at the time of exercise (a) in cash (including check, bank draft
or money order payable to the order of the Company), or (b) by delivery to the
Company of shares of Stock having a fair market value equal to the purchase
price, or (c) by a combination of cash and Stock; provided that the fair market
value of Stock so delivered shall be the mean of the
-2-
STOCK OPTION AGREEMENT - $1
25
reported high and low sales price of Stock on the New York Stock Exchange -
Composite Tape on the date on which the Option is exercised or, if no prices
are so reported on such day, on the next preceding day on which such prices of
Stock are so reported. Unless and until a certificate for such shares shall
have been issued by the Company to him, Employee (or the person permitted to
exercise this Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with respect to
shares acquirable upon an exercise of this Option.
4. SHARES SUBJECT TO THE OPTION. The aggregate number of shares
of Stock which may be issued under this Option is 144,395. Such shares may
consist of authorized but unissued shares of Stock or previously issued shares
reacquired by the Company. Any of such shares which remains unissued at the
termination of this Option shall cease to be subject thereto, but until
termination of this Option the Company shall at all times make available a
sufficient number of shares to meet the requirements, of this Option. The
aggregate number of shares issuable under this Option shall be adjusted to
reflect a change in capitalization of the Company, such as a stock dividend or
stock split, as provided in Paragraph 5 of this Agreement.
5. RECAPITALIZATION OR REORGANIZATION. (a) The existence of this
Option 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 bonds, debentures, warrants, preferred or prior preference stocks
ahead of or affecting Stock or the rights thereof, the dissolution or
liquidation of the Company or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding.
-3-
STOCK OPTION AGREEMENT - $1
26
(b) The shares offered by this Option are shares of Stock as
presently constituted, but if, and whenever, prior to the expiration of this
Option, the Company shall effect a subdivision or consolidation of shares of
Stock or the payment of a stock dividend on Stock without receipt of
consideration by the Company, the number of shares of Stock with respect to
which this 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 (but in no event to
less than the par value of the Stock), 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.
(c) If the Company recapitalizes or merges or engages in a
compulsory share exchange with one or more other entities and the Company shall
be the surviving or acquiring corporation, thereafter upon any exercise of this
Option, Employee shall be entitled to purchase under this Option, in lieu of
the number of shares of Stock as to which this Option shall then be
exercisable, the number and class of shares of stock and other securities or
other property to which Employee would have been entitled pursuant to the terms
of the recapitalization or plan of merger or exchange if, immediately prior to
the effective time of such recapitalization or merger or share exchange,
Employee had been the holder of record of the number of shares of Stock as to
which such Option is then exercisable. If the Company shall not be the
surviving or acquiring corporation in any merger or share exchange, or if the
Company is to be dissolved or liquidated, then unless a surviving or acquiring
entity assumes or substitutes new Options for this Option, (i) the time at
which this Option may be exercised shall be accelerated and this Option shall
become exercisable in full on or before a date fixed by the Company prior to
the
-4-
STOCK OPTION AGREEMENT - $1
27
effective date of such merger or share exchange or such dissolution or
liquidation, and (ii) upon such effective date this Option 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, for cash, 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 Stock subject to this Option or the purchase price per
share.
6. ADMINISTRATION. To the extent necessary for the
administration of elections made pursuant to Paragraph 7 hereof, this Option
shall be administered by the Stock Option Committee which administers the 1991
Incentive Stock Option Plan of the Company; or, at the direction of the Board
of Directors of the Company, such other committee (together with such Stock
Option Committee, the "Committee") of three or more directors of the Company,
each of whom is a disinterested person, appointed by the Board of Directors of
the Company. The Committee is further authorized to interpret this Option and
may from time to time adopt such rules and regulations, consistent with the
provisions of this Option, as it may deem advisable to carry out this Option.
For purposes of this Option, "disinterested person" shall have the meaning
provided for by Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended.
7. WITHHOLDING OF TAX. To the extent that the exercise of this
Option or the disposition of shares of Stock acquired by exercise of this
Option results in compensation income
-5-
STOCK OPTION AGREEMENT - $1
28
to Employee for federal or state income tax purposes, except as hereinafter
provided, Employee 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. Employee may elect with
respect to this Option to surrender or authorize the Company to withhold shares
of Stock (valued at their fair market value on the date of surrender or
withholding of such shares) in satisfaction of any such withholding obligation
(a "Stock Surrender Withholding Election"); provided, however, that any Stock
Surrender Withholding Election shall be made in accordance with the rules and
regulations adopted by the Committee for implementation of the tax withholding
provisions of this Paragraph 7. If Employee fails to deliver such money or
make a Stock Surrender Withholding Election pursuant to this Paragraph 7, the
Company is authorized to withhold from any cash or Stock remuneration then or
thereafter payable to Employee any tax required to be withheld.
8. STATUS OF STOCK. The Company does not presently intend to
register for issue under the Securities Act of 1933, as amended (the "Act"),
the shares of Stock acquirable upon exercise of this Option, and instead
proposes to rely on the private offering exemption from the registration
requirements of the Act afforded by Section 4(2) thereof. In order to assure
that exemption from registration under the Act is available upon an exercise of
this Option, Employee (or the person permitted to exercise this Option in the
event of Employee's death), if requested by the Company to do so, will execute
and deliver to the Company in writing an agreement containing such provisions
as the Company may reasonably require to assure compliance with applicable
securities laws. No sale or disposition of shares of Stock acquired upon
exercise of this Option shall be made in the absence of a registration
statement being on
-6-
STOCK OPTION AGREEMENT - $1
29
file with respect to such shares under the Act unless an opinion of counsel
satisfactory to the Company that such sale or disposition will not constitute a
violation of the Act or any other applicable securities laws is first obtained.
The certificates representing shares of Stock acquired under this Option may
bear such legend as the Company deems appropriate, referring to the provisions
of this Paragraph 8.
9. REGISTRATION RIGHTS. With respect to any shares of Stock
which are issued and delivered upon exercise of this Option (the "Shares"):
(a) Upon written request made by Employee at any time before
January 1, 2011, the Company shall take such steps as may be necessary promptly
to register (but not more than once), at the Company's sole expense (save for
any underwriting commissions or discounts applicable to any Shares and
Employee's counsel fees), such of the Shares under the Act (and under
regulations of the Securities and Exchange Commission under the Act or under
any similar federal act or acts then in effect and under the so-called "Blue
Sky" laws of the several states and regulations thereunder then in effect), as
Employee may by written request given to the Company within 15 days following
such initial request, desire to have so registered. The Company will cause
such a registration statement to be filed within 90 days after the initial
request is made. The Company will use its best efforts to cause any such
registration statement to become and to remain effective and current for such
period (not to exceed 120 days) as Employee may request.
(b) In connection with any registration under this Paragraph 9,
the parties agree to indemnify each other in the customary manner, and, in the
case of an organized secondary or primary underwritten offering, the Company
agrees to indemnify Employee and the underwriters
-7-
STOCK OPTION AGREEMENT - $1
30
and Employee agrees to indemnify the Company (provided Employee is then a
director, officer or employee of the Company), in the manner and to the extent
as is customary in secondary or primary underwritten offerings.
(c) The Company shall have the sole right to designate the
underwriters to be employed in any organized secondary or primary underwritten
offering under this Section 9.
(d) In connection with any registration under this Section 9,
Employee shall furnish to the Company such information regarding the Shares and
such other information as the Company may reasonably request.
10. EMPLOYMENT RELATIONSHIP. Employee shall be considered to be
in the employment of the Company as long as he remains an employee of either
the Company, a parent or subsidiary corporation (as defined in Section 424 of
the Internal Revenue Code of 1986, as amended), or a corporation or a parent or
subsidiary of such corporation assuming or substituting a new option for this
Option. Any questions as to whether and when there has been a termination of
such employment, and the cause of such termination, shall be determined by the
Board of Directors of the employing corporation, and its determination shall be
final. No obligation as to the length of the Employee's employment with any
such corporation shall be implied from the terms of this Agreement, and this
Agreement in no way modifies, alters, amends or impairs the provisions of the
Employment Contract.
11. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of any successors to the Company and all persons lawfully
claiming under Employee.
-8-
STOCK OPTION AGREEMENT - $1
31
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Employee has executed
this Agreement, all as of the day and year first above written.
ATTEST: SOUTHWEST AIRLINES CO.
/s/ Colleen C. Barrett By /s/ John G. Denison
- ----------------------------------- -----------------------------------
Colleen C. Barrett John G. Denison
Secretary Executive Vice President -
Corporate Services
EMPLOYEE
/s/ Herbert D. Kelleher
-------------------------------------
Herbert D. Kelleher
-9-
STOCK OPTION AGREEMENT - $1