<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [ X ]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.1a-11(c) or
Section 240.1a-12
SOUTHWEST AIRLINES CO.
(Name of Registrant as Specified in its Charter
SOUTHWEST AIRLINES CO.
(Name of Person(s) Filing Proxy Statement
Payment of Filing Fee (check the appropriate box):
[ X ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange
Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which
transaction applies:
2) Aggregate number of securities to which transaction
applies:
3) Per unit price or other underlying value of
transaction computer pursuant to Exchange Act Rule
0-11:*
4) Proposed maximum aggregate value of transaction:
* Set forth the amount on which the filing fee is calculated and
state how it was determined.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 2
[LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, MAY 16, 1996
To the Shareholders:
The Annual Meeting of Shareholders of Southwest Airlines Co. (the "Company"
or "Southwest") will be held at its corporate headquarters, 2702 Love Field
Drive, Dallas, Texas, on Thursday, May 16, 1996, at 10:00 A.M., local time, for
the following purposes:
(1) the election of three directors;
(2) approval of the Company's 1996 stock option plans as adopted by the
Board of Directors of the Company;
(3) approval of an officer's stock option agreements;
(4) amending the Company's Articles of Incorporation to increase the
authorized number of shares of common stock;
(5) to take action on a shareholder's proposal; and
(6) transacting such other business as may properly come before such
meeting.
March 20, 1996 has been fixed as the date of record for determining
shareholders entitled to receive notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,
Colleen C. Barrett
Secretary
April 6, 1996
YOUR VOTE IS IMPORTANT, PLEASE DATE, VOTE, SIGN AND MAIL BACK THE ENCLOSED
PROXY AT YOUR EARLIEST CONVENIENCE. THE ENCLOSED RETURN ENVELOPE MAY BE USED
FOR THAT PURPOSE.
<PAGE> 3
SOUTHWEST AIRLINES CO.
P. O. BOX 36611
DALLAS, TEXAS 75235-1611
(214/904-4000)
-------------
PROXY STATEMENT
-------------
SOLICITATION AND REVOCABILITY OF PROXIES; VOTING
The enclosed proxy is solicited by and on behalf of the Board of Directors
of the Company for use at the Annual Meeting of Shareholders to be held on May
16, 1996, at the Company's corporate headquarters, 2702 Love Field Drive,
Dallas, Texas, or any adjournment thereof. The cost of solicitation will be
paid by the Company. In addition to solicitation by mail, solicitation of
proxies may be made personally or by telephone by the Company's regular
employees, and arrangements will be made with brokerage houses or other
custodians, nominees and fiduciaries to send proxies and proxy material to
their principals. In addition, D. F. King & Co., Inc. has been engaged to
solicit proxies for the Company. The anticipated fee of such proxy solicitor
is $7,500 plus out-of-pocket costs and expenses. The proxy statement and form
of proxy were first mailed to shareholders of the Company on or about April 6,
1996.
The enclosed proxy, even though executed and returned, may be revoked at
any time prior to the voting of the proxy by the subsequent execution and
submission of a revised proxy, by written notice to the Secretary of the
Company, or by voting in person at the meeting. Shares represented by proxy
will be voted at the meeting. Cumulative voting is not permitted. An
automated system administered by the Company's transfer agent tabulates the
votes. Abstentions and broker non-votes are each included in the determination
of the number of shares present and voting, for purposes of determining the
presence or absence of a quorum for the transaction of business. Neither
abstentions nor broker non- votes are counted as voted either for or against a
proposal. Except as otherwise stated herein, provided a quorum is present, the
affirmative vote of the holders of a majority of the shares entitled to vote
on, and voted for or against, the matter is required to approve any matter.
ELECTION OF DIRECTORS
(ITEM 1)
At the Annual Meeting of Shareholders, three directors are to be elected
for a three-year term expiring in 1999 or until their respective successors are
duly elected and qualified, to serve with the six directors whose terms do not
expire until later years. Provided a quorum is present at the Annual Meeting,
a plurality of the votes cast in person or by proxy by the holders of shares
entitled to vote is required to elect directors.
The persons named in the enclosed proxy have been selected as a proxy
committee by the directors of the Company, and it is the intention of the proxy
committee that, unless otherwise directed therein, proxies will be voted for
the election of the nominees listed below. Although the directors of the
Company do not contemplate that any of the nominees will be unable to serve, if
such a situation arises prior to the meeting, the proxy committee will act in
accordance with its best judgment.
The following table sets forth certain information for each nominee and
present director of the Company. Each of the nominees for director named in
the following table is now serving as a director of the Company. There is no
family relationship between any of the directors or between any director and
any executive officer of the Company.
<PAGE> 4
<TABLE>
<CAPTION>
DIRECTOR
NAME SINCE AGE
- ---- -------------- ---
<S> <C> <C>
Samuel E. Barshop(1) . . . . . . . . . . . . . . . . . . 1975 66
Gene H. Bishop(1) . . . . . . . . . . . . . . . . . . . . 1977 65
C. Webb Crockett . . . . . . . . . . . . . . . . . . . . 1994 62
William P. Hobby, Jr. . . . . . . . . . . . . . . . . . . 1990 64
Travis C. Johnson . . . . . . . . . . . . . . . . . . . 1978 59
Herbert D. Kelleher . . . . . . . . . . . . . . . . . . . 1967 (2) 64
Rollin W. King(1) . . . . . . . . . . . . . . . . . . . . 1967 64
Walter M. Mischer, Sr. . . . . . . . . . . . . . . . . . 1983 73
June M. Morris . . . . . . . . . . . . . . . . . . . . . 1994 65
- ---------------------
</TABLE>
(1) Current Nominee.
(2) Mr. Kelleher resigned as a director effective August 5, 1975, and he
was reelected to the Board on April 27, 1976.
CURRENT NOMINEES
Current nominees are to be elected for a term expiring in 1999.
Samuel E. Barshop was Chairman of the Board of Directors, President and
Chief Executive Officer of La Quinta Inns, Inc., for more than five years prior
to 1992. During 1992, Mr. Barshop resigned his positions as President and
Chief Executive Officer, maintaining the position of Chairman of La Quinta
Inns, Inc. until March 1994. La Quinta Inns, Inc. develops, owns, operates
and licenses motor inns. Since March 1994, Mr. Barshop has been managing
partner of Barshop & Oles, Co., Inc., a real estate company located in San
Antonio, Texas.
Gene H. Bishop was Chairman and Chief Executive Officer of Life Partners
Group, Inc., a closely held life insurance holding company, from November 1991
until October 1994, when he retired. Prior to that time he was Vice Chairman
and Chief Financial Officer of Lomas Financial Corporation and Chief Operating
Officer of Lomas Mortgage USA since October 1990, becoming President and Chief
Operating Officer of Lomas Mortgage USA in January 1991. Mr. Bishop is also a
director of Southwestern Public Service Company, First USA, Inc. (a credit card
company), First USA Paymentech, Inc. (a processor of credit card transactions),
Liberte` Investors (a real estate investment trust), Life Partners Group, Inc.,
Republic Financial Services, Inc., and Drew Industries, Inc.
Rollin W. King engaged in executive education and consulting as the
principal of Rollin King Associates from January 1, 1989 until his retirement
on December 31, 1995.
DIRECTORS WHOSE TERM EXPIRES IN 1997
Herbert D. Kelleher has been Chairman of the Board of the Company since
March 29, 1978. Mr. Kelleher became interim President and Chief Executive
Officer of the Company in September 1981, and assumed those offices on a
permanent basis in February 1982.
Walter M. Mischer, Sr. has been Chairman of the Board and Chief Executive
Officer of Southern Investors Service Company, Inc. (formerly The Mischer
Corporation), a real estate and financial investment company, for more than the
past five years. Mr. Mischer is also a director of Howell Corporation.
2
<PAGE> 5
June M. Morris was a founder of Morris Air Corporation ("Morris"), a
wholly-owned subsidiary of Southwest. Mrs. Morris was Chief Executive Officer
of Morris until its operations were absorbed by Southwest in October, 1994, and
subsequently she has been principally engaged in private investments. Morris
was a domestic airline operating 21 Boeing 737 Aircraft until its acquisition
by Southwest in December, 1993.
DIRECTORS WHOSE TERM EXPIRES IN 1998
C. Webb Crockett has been a shareholder in the Phoenix, Arizona, law firm
of Fennemore Craig for more than the past five years. Fennemore Craig has
performed services for the Company in the past and may do so in 1996.
William P. Hobby, Jr. was lieutenant governor of the State of Texas for 18
years until January 1991. He has been Chancellor of the University of Houston
System since September 1995 and Chairman of H&C Communications, Inc., Houston,
Texas, a privately owned broadcasting company, for more than the past five
years. He also served as Executive Editor of the Houston Post for more than 20
years.
Travis C. Johnson has been a partner in the El Paso, Texas law firm of
Johnson & Bowen for more than the past five years. Mr. Johnson is a director
of Texas Commerce Bank - El Paso. Johnson & Bowen has performed services for
the Company during the past and may do so in 1996.
BOARD COMMITTEES
The Board of Directors has appointed an Audit Committee consisting of
Messrs. Barshop, Bishop, Crockett, Hobby, Johnson (Chairman), King, and Mischer
and Mrs. Morris. The Audit Committee held four meetings during 1995. Its
principal functions are to give additional assurance that financial information
is accurate and timely and that it includes all appropriate disclosures; to
ascertain the existence of an effective accounting and internal control system;
and to oversee the entire audit function, both independent and internal. The
Board of Directors has appointed a Compensation Committee consisting of Messrs.
Barshop (Chairman), Bishop, Hobby and Mischer. The Compensation Committee held
one meeting during 1995. The Compensation Committee studies, advises and
consults with management respecting the compensation of officers of the
Company, and administers the Company's stock-based compensation plans. It
recommends for the Board's consideration any plan for additional compensation
that it deems appropriate. The Board of Directors has appointed an Executive
Committee consisting of Messrs. Bishop, Kelleher and King to assist the Board
in carrying out its duties. The Executive Committee has authority to act for
the Board on most matters during the intervals between Board meetings. The
Executive Committee held seven telephone meetings during 1995, and otherwise
acted by unanimous consent. The Company has no standing nominating committee
of its Board nor any committee performing similar functions. During 1995, each
director attended at least 75% of the total of the Board and committee meetings
which he or she was obligated to attend.
DIRECTORS' FEES
Directors' fees are paid on an annual basis from May to May in each year.
Each director of the Company who is not an officer of the Company was paid
$9,000 for the year ending May 1995, and $9,500 for the year ending May 1996,
for services as a director. During 1995, the Board of Directors held six
meetings and otherwise acted by unanimous consent. In addition, $1,800
(increasing to $2,000 for the year ending May 1996) was paid for attendance at
each meeting of the Board of Directors, and $800 (increasing to $850 for the
year ending May 1996) for attendance at each meeting of a committee held on the
same date as the Board meetings. Members of the Executive Committee receive an
additional $4,300 (increasing to $4,500 for the year ending May 1996) per year
for their services on such committee. The Chairmen of the Audit and
Compensation Committees received annual fees of $3,300
3
<PAGE> 6
and $1,700, respectively (increasing to $3,500 and $2,000, respectively for the
year ending May 1996). Officers of the Company receive no additional
remuneration for serving as directors or on committees of the Board.
VOTING SECURITIES AND MANAGEMENT SHAREHOLDING
At the close of business on March 20, 1996, the record date of those
entitled to notice of and to vote at the meeting, there were outstanding
144,547,692 shares of Common Stock, $1.00 par value, each share of which is
entitled to one vote.
The following table sets forth as of February 29, 1996, certain information
regarding the beneficial ownership of Common Stock by the directors, each of
the executive officers of the Company named in the Summary Compensation Table
and by all executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
NAME OF DIRECTOR, OFFICER OR BENEFICIALLY OF
IDENTITY OF GROUP OWNED (1)(2) CLASS (2)
--------------------------------- ------------ ---------
<S> <C> <C>
Samuel E. Barshop . . . . . . . . . . . . . . . . . . . . . . 50,832 *
Gene H. Bishop . . . . . . . . . . . . . . . . . . . . . . . 46,800 *
C. Webb Crockett . . . . . . . . . . . . . . . . . . . . . . 3,500 *
William P. Hobby, Jr (3) . . . . . . . . . . . . . . . . . . 44,025 *
Travis C. Johnson . . . . . . . . . . . . . . . . . . . . . . 90,600 *
Herbert D. Kelleher (4) . . . . . . . . . . . . . . . . . . . 2,849,161 2.0%
Rollin W. King (5) . . . . . . . . . . . . . . . . . . . . . 156,838 *
Walter M. Mischer, Sr . . . . . . . . . . . . . . . . . . . . 55,275 *
June M. Morris (6) . . . . . . . . . . . . . . . . . . . . . 1,192,047 *
Gary A. Barron (7) . . . . . . . . . . . . . . . . . . . . . 59,207 *
John G. Denison (8) . . . . . . . . . . . . . . . . . . . . . 71,509 *
Colleen C. Barrett (9) . . . . . . . . . . . . . . . . . . . 55,150 *
James F. Parker (10) . . . . . . . . . . . . . . . . . . . . 62,260 *
Executive Officers and Directors as a Group
(16 persons) (11) . . . . . . . . . . . . . . . . . . . . . . 4,839,384 3.4%
- ----------------------------
</TABLE>
* Less than 1%
(1) Unless otherwise indicated, beneficial owners have sole rather than
shared voting and investment power respecting their shares, other than
shared rights created under joint tenancy or marital property laws as
between the Company's directors and officers and their respective
spouses, if any. Such persons also beneficially owned an equal number
and percentage of nonexercisable Common Share Purchase Rights of the
Company that trade in tandem with its Common Stock.
(2) The number of shares beneficially owned includes shares which each
beneficial owner and the group had the right to acquire within 60 days
pursuant to stock options. The percentage for each beneficial owner
and for the group is calculated based on the sum of the 144,399,522
shares of Common Stock outstanding on February 29, 1996 and any shares
shown for such beneficial owner or group as subject to stock options
and currently exercisable, as if any such stock options had been
exercised.
(footnotes continue on next page)
4
<PAGE> 7
(3) Includes 3,525 shares held by a testamentary trust of which Governor
Hobby is a co-trustee.
(4) Includes 1,515,372 shares which Mr. Kelleher had the right to acquire
within 60 days pursuant to stock options (including those subject to
shareholder approval at the 1996 Annual Meeting); and 83,001 shares
held in trust for unrelated individuals. See "Approval of an
Officer's Stock Option Agreements", below.
(5) Includes 12,000 shares held by a charitable remainder trust in which
Mr. King has a beneficial interest. Mr. King disclaims any
beneficial interest in these shares.
(6) Held by a family trust of which Mrs. Morris is co-trustee.
(7) Includes 58,364 shares which Mr. Barron had the right to acquire
within 60 days pursuant to stock options.
(8) Includes 3,896 shares held for his account under the Profit Sharing
Plan with respect to which he has the right to direct the voting and
59,264 shares which Mr. Denison had the right to acquire within 60
days pursuant to stock options.
(9) Includes 54,964 shares which Ms. Barrett had the right to acquire
within 60 days pursuant to stock options.
(10) Includes 5,247 shares held for his account under the Profit Sharing
Plan with respect to which he has the right to direct the voting and
52,098 shares which Mr. Parker had the right to acquire within 60 days
pursuant to stock options.
(11) Includes 16,533 shares held for the accounts of certain officers under
the Profit Sharing Plan with respect to which such persons have the
right to direct voting.
5
<PAGE> 8
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses compensation for services rendered by the
Company's Chief Executive Officer and the four remaining most highly paid
executive officers during the three fiscal years ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------------------------ UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS(#) ($) (1)
- ---------------------------- ------ ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Herbert D. Kelleher, Chairman 1995 $395,000 $172,000 --- $ ---
of the Board, President and 1994 395,000 172,000 --- 68,458
Chief Executive Officer 1993 395,000 150,000 --- 64,913
Gary A. Barron, 1995 $205,653 $125,000 10,500
Executive Vice 1994 197,209 125,000 7,500 25,927
President - Operations 1993 187,815 83,000 6,300 26,567
John G. Denison, 1995 $193,707 $100,000 11,085
Executive Vice President - 1994 185,754 115,000 8,085 25,927
Corporate Services 1993 176,902 83,000 6,885 26,617
Colleen C. Barrett, Executive 1995 $188,084 $100,000 10,500
Vice President - Customers; 1994 180,361 125,000 7,500 25,927
Corporate Secretary 1993 171,769 83,000 6,300 26,603
James F. Parker, 1995 $167,560 $85,000 7,050
Vice President - 1994 160,680 80,000 5,000 23,825
General Counsel 1993 153,024 54,000 4,200 22,591
</TABLE>
(1) Consists of amounts contributed by the Company pursuant to the
Southwest Airlines Co. Profit Sharing Plan and 401(k) Plan in which
all employees of the Company are eligible to participate. In addition
to those amounts, "All Other Compensation" for Mr. Kelleher includes
deferred compensation, bearing interest at an annual rate of 10%, in
an amount equal to Company contributions which would otherwise have
been made on behalf of Mr. Kelleher to the Profit Sharing Plan but
which exceed the contributions permitted by Federal tax laws,
totalling $36,019, $42,531, and $35,971 for 1995, 1994 and 1993,
respectively. See "Employment and Other Contracts."
6
<PAGE> 9
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants in 1995
to the named executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ----------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Herbert D. Kelleher -0- --- --- --- --- ---
Gary A. Barron (2) 10,500 0.07% $18.8125 1/26/05 $124,226 $314,814
John G. Denison (2) 10,500 0.07% $18.8125 1/26/05 124,226 314,814
585 - $16.8750 1/01/05 6,208 15,733
Colleen C. Barrett(2) 10,500 0.07% $18.8125 1/26/05 124,226 314,814
James F. Parker (2) 7,000 0.04% $18.8125 1/26/05 82,818 209,876
50 - $16.8750 1/01/05 531 1,345
</TABLE>
(1) These amounts represent assumed rates of appreciation in market value
from the date of grant until the end of the option term, at the rates
set by the Securities and Exchange Commission, and therefore are not
intended to forecast possible future appreciation, if any, in
Southwest's stock price. Southwest did not use an alternative formula
for a grant date valuation, as it is not aware of any formula which
will determine with reasonable accuracy a present value based on
future unknown or volatile factors.
(2) Options to the named individuals were granted under the Company's 1991
Non-Qualified Stock Option Plan at fair market value on the date of
the grant. Such options are exercisable as follows: One-third on the
grant date, one-third on the first anniversary of the grant date, and
one-third on the second anniversary of the grant date, subject to
continued employment; except that options to purchase 585 shares
granted to Mr. Denison and 50 shares granted to Mr. Parker vest
immediately.
At January 26, 2005, the expiration date of the $18.8125 options
described above, the stock price for Southwest Common Stock would be $30.6436
or $48.7948 per share, assuming annual appreciation rates from January 26, 1995
at 5% or 10%, respectively. However, if the price of the Common Stock does not
appreciate, the value of these options to the named executives, and the
corresponding benefit to all shareholders of the Company, would be zero. All
of the preceding appreciation calculations are compounded annually.
7
<PAGE> 10
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAREND OPTION VALUES
The following table shows stock option exercises by the named executive
officers during 1995. In addition, this table includes the number of shares
covered by both exercisable and non-exercisable stock options as of December
31, 1995. Also reported are the values for "in-the-money" options which
represent the positive spread between the exercise price of any such existing
stock options and the yearend price of the Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY
SHARES AT FISCAL YEAREND (#) OPTIONS AT FISCAL YEAREND ($)(2)
ACQUIRED ON VALUE REALIZED ---------------------------- ----------------------------
NAME EXERCISE (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----- ------------ ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Herbert D. Kelleher 67,500 $1,391,172 1,424,543 75,050 $28,421,322 $1,268,464
Gary A. Barron - 0 - N/A 39,940 63,500 433,336 946,183
John G. Denison - 0 - N/A 40,255 63,500 414,395 946,183
Colleen C. Barrett 10,000 167,291 36,540 63,500 375,607 946,183
James F. Parker - 0 - N/A 38,016 53,584 481,738 821,805
</TABLE>
(1) Aggregate market value of the shares covered by the option less the
aggregate price paid by the executive.
(2) The closing price of the Common Stock on December 29, 1995, the last
trading day of Southwest's fiscal year, was $23 per share.
EMPLOYMENT AND OTHER CONTRACTS
The Company re-employed Herbert D. Kelleher, effective as of January 1,
1996, as President and Chief Executive Officer under a five-year Employment
Contract. The contract provides for an annual base salary of $395,000, in the
first four years, increasing to $450,000 in the year 2000. The Employment
Contract also provides for additional benefits including: (i) a discretionary
annual cash bonus, not exceeding $172,000 in the first four years and $196,000
in the year 2000; (ii) long-term disability insurance providing for disability
payments of $6,000 per month to age 70; (iii) reimbursement for medical and
dental expenses incurred by Mr. Kelleher and his spouse, and for such expenses
for other members of his family to the extent Mr. Kelleher pays in excess of
$10,000 per year in such expenses; and (iv) deferred compensation bearing
interest at 10% in an amount equal to any Company contributions which would
otherwise have been made on behalf of Mr. Kelleher to the Company Profit
Sharing Plan but which exceed maximum annual additions under the Plan on his
behalf under federal tax laws. The Employment Contract is terminable by Mr.
Kelleher within 60 days after the occurrence of a change of control of the
Company in which a third party acquires 20% or more of the Company's voting
securities or a majority of the directors of the Company are replaced as a
result of a tender offer or merger, sale of assets or contested election. In
the event Mr. Kelleher so terminates his employment, the Employment Contract
provides for a lump sum severance payment equal to Mr. Kelleher's unpaid base
salary for the remaining term of his Employment Contract plus $750,000 subject
to reduction to avoid any "excess parachute payment" for federal income tax
purposes.
8
<PAGE> 11
The Board of Directors of the Company established in 1987 an Executive
Service Recognition Plan to permit the Company to continue to attract and
retain well qualified executive personnel and to assure both the Company of
continuity of management and its executives of continued employment in the
event of any actual or threatened change of control of the Company (defined
substantially as described in the following paragraph). As contemplated by the
Executive Service Recognition Plan, the Company has entered into employment
agreements with each of its current executive officers named in the Summary
Compensation Table and certain other executive personnel. The terms of these
employment agreements would be invoked only in the event of a change of
control. The executives must remain in the employment of the Company for one
year after a change of control has occurred. If the executive's employment is
terminated other than for cause (as defined), or if the executive terminates
employment for good reason (as defined), during the one-year term of
employment, then the executive would receive a severance payment equal to a
full year's base salary and annual bonus plus a prorated annual bonus for the
year of termination. In addition, the executive's welfare benefits would
continue for the unexpired portion of his one-year term of employment.
The Board of Directors of the Company established in 1988 a Change in
Control Severance Pay Plan (the "Severance Pay Plan") to provide for severance
payments to qualified employees whose employment with the Company terminates
due to certain conditions created by a change in control of the Company (as
defined in the plan). All employees of the Company are participants in the
Severance Pay Plan except the President, any Vice President participating in
the Executive Service Recognition Plan and all other employees, who are
beneficiaries of an enforceable contract with the Company providing for
severance payments in the event of a reduction in force or furlough (collective
bargaining agreements). Generally, the Severance Pay Plan provides for
severance payments, based upon the employee's salary and years of service with
the Company, in the event the employee is terminated, other than for cause (as
defined in the Plan), death, voluntary retirement or total and permanent
disability, within one year of a "change in control". The employee would also
remain eligible for a 12 month extension of coverage under each "welfare
benefit" plan of the Company, including medical, dental, etc., as in effect
immediately prior to any change in control. For purposes of the Severance Pay
Plan, a "change in control" shall be deemed to have occurred if 20% or more of
the combined voting power of the Company's outstanding voting securities
ordinarily having the right to vote for directors shall have been acquired by a
third person or a change in the makeup of the Board of Directors shall have
occurred under certain circumstances described in the plan.
APPROVAL OF PLANS
(ITEM 2)
GENERAL
In order to assist the Company in attracting, motivating and retaining
employees and non-employee directors who are critical to the Company's future
growth and success, the Board of Directors has recently adopted, subject to
shareholder approval at the Annual Meeting, the Company's 1996 Incentive Stock
Option Plan and 1996 Non-Qualified Stock Option Plan (collectively, the "1996
Plans"). Each plan is designed to give the participants an opportunity, and
incentive, to acquire Common Stock on a favorable basis. The closing sales
price for the Company's Common Stock, as quoted by the New York Stock Exchange
on February 29, 1996, was $30.75 per share.
In 1991, the Company adopted its 1991 Incentive Stock Option Plan and 1991
Non-Qualified Stock Option Plan. Options for a total of 8,703,428 shares have
been granted to date under the 1991 Incentive Stock Option Plan to over 450
employees, reaching from executive officer level to some manager level
employees. Individual grants for 1995 ranged from 29,900 shares for the
highest level employee to 9,100 shares at manager level. In 1995, a total of
983,214 options were granted, none of which were to executive officers. The
purpose of the 1996 Incentive Stock Option Plan is to replace the 1991 Plan, as
the remaining 1,129,142 shares available under the 1991 Plan will be exhausted
by January 1997 at recent rates of option grants.
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The Company adopted the 1991 Non-Qualified Stock Option Plan in order to
grant stock options to non-employee directors and to grant options to employees
in excess of limits imposed by federal tax regulations on option grants under
the 1991 Incentive Stock Option Plan. Options for a total of 307,122 shares
have been granted to date under the 1991 Non-Qualified Stock Option Plan to a
total of nine executive officers and 20 other members of senior management, and
options on an additional 290,000 shares have been granted under this plan to
non-employee directors. In 1995, options on a total of 93,315 shares were
granted under the 1991 Non-Qualified Stock Option Plan, of which 60,729 were to
executive officers and none were to directors. The purpose of the 1996
Non-Qualified Stock Option Plan is to replace the 1991 plan, as the remaining
129,269 shares available under the 1991 plan will be exhausted by January 1997
at recent rates of grant.
No options have yet been granted under the 1996 Plans and it is not
anticipated that any will be granted until the latter part of 1996. Both 1996
Plans will be administered so as to comply with Rule 16b-3 under the Securities
Exchange Act of 1934.
A more complete description of each 1996 Plan follows:
APPROVAL OF 1996 INCENTIVE STOCK OPTION PLAN
AND 1996 NON-QUALIFIED STOCK OPTION PLAN
On March 21, 1996, the Company's Board of Directors adopted the Company's
1996 Incentive Stock Option Plan ("1996 Incentive Plan") and 1996 Non-Qualified
Stock Option Plan ("1996 Non-Qualified Plan"), which are subject to approval by
the shareholders at the Annual Meeting. All options under both 1996 Plans are
to be granted at the fair market value of the stock on the date the option is
granted, except that under the 1996 Incentive Plan, holders of more than 10% of
the Common Stock will be required to pay a purchase price equal to 110% of the
fair market value of such stock on the date of the grant. At the current time
no person owns more than 10% of the Common Stock. Payment due the Company upon
the exercise of an option may be made in cash or in shares of the Common Stock,
or a combination thereof. If the payment is made using the Common Stock, it is
valued at the fair market value on the date of exercise. Both 1996 Plans will
be administered by the Stock Option Committee of the Board of Directors.
The following discussion summarizes the material differences between the
two 1996 Plans.
THE 1996 INCENTIVE PLAN
The Company has reserved 6,000,000 shares of its Common Stock for issuance
under the 1996 Incentive Plan. Only key employees, as determined by the Stock
Option Committee, are eligible for participation in the 1996 Incentive Plan.
No employee may receive options under the plan in excess of 50,000 shares
during any year.
Options are exercisable over the period set forth in each grant, with all
options expiring on the tenth anniversary of the grant date, except that
options granted to holders of more than 10% of the Common Stock will expire on
the fifth anniversary of such date.
The 1996 Incentive Plan has been designed to qualify as an Incentive Stock
Option Plan under Section 422 of the Internal Revenue Code of 1986, as amended.
Accordingly, taxable income will not be recognized by an optionee upon the
grant or exercise of an option under the 1996 Incentive Plan, and the Company
will not be allowed the corresponding tax deduction. Generally, any gain which
is realized as a result of disposing of shares acquired upon the exercise of an
incentive stock option will be taxed as a long-term capital gain if (i) the
employee does not dispose of the stock within two years after the option is
granted and (ii) the stock itself is held for at least one year. If all the
requirements other than these holding period rules are met, the tax is deferred
until disposition of the stock, but gain is treated as ordinary income in an
amount equal to the lesser of (i) the fair market value of the stock on the
date of exercise, minus the option price or (ii) the amount realized on
disposition, minus the option price. The Company
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<PAGE> 13
is allowed a corresponding deduction at that time. If an individual who has
acquired a share of stock by the exercise of an incentive stock option makes a
disposition of such share within the two-year period described above and such
disposition is a sale or exchange with respect to which a loss is recognized by
such individual, then the amount which is deductible by the Company will not
exceed the excess, if any, of the amount realized on such sale or exchange over
the adjusted basis of such share. Any additional gain will be taxed as a
long-term capital gain if the stock is held for more than six months.
THE 1996 NON-QUALIFIED PLAN
The Company has reserved 575,000 shares of its Common Stock for issuance
under the 1996 Non-Qualified Plan. Key employees and non-employee directors
("Outside Directors") are eligible for participation in this plan. Since
Section 422 of the Internal Revenue Code of 1986, as amended, does not permit
the granting of incentive stock options to non- employees, or the granting of
options for stock in any calendar year to an employee for the purchase of stock
having an aggregate fair market value in excess of $100,000, the Company
elected to adopt this additional plan to enable it to grant options under those
circumstances, as well as other circumstances as determined by the Stock Option
Committee. Options granted to employees are exercisable over the period set
forth in each grant, and expire on the tenth anniversary of the date of grant.
Options will not be granted to any employee in excess of 50,000 shares during
any year.
Under the terms of the 1996 Non-Qualified Plan, to the extent shares are
not available for issuance under the 1991 Non-Qualified Stock Option Plan,
individuals who become Outside Directors for the first time in the future will
receive options for 10,000 shares at the fair market value of the Common Stock
on the date of their election to the Board, vesting over a period of five years
beginning one year from the date of the grant. (Thus, none of the current non-
employee directors of the Company is eligible to receive an option grant under
the 1996 Non-Qualified Plan.) The remaining terms of those options are to be
identical to those granted to employees under the 1996 Incentive Plan, except
that in the event an Outside Director ceases to serve on the Board of Directors
for any reason other than his or her death, any unexercised options expire 30
days after cessation of service. In the event of an Outside Director's death
while serving as a director, or within 30 days after cessation of service, then
the deceased director's executor or administrator may exercise any unexercised
options for a period of six months before they will automatically terminate.
The unexercised portion of any options granted to Outside Directors expire, in
any event, on the tenth anniversary of the date of the grant.
Generally, no tax is imposed on the optionee upon the grant of an option
which does not qualify for incentive stock option treatment (a "non-qualified"
stock option). Upon the exercise of a non-qualified stock option, the optionee
will be treated as receiving ordinary income in the year of exercise in an
amount equal to the excess of the fair market value of the shares at the time
of exercise over the option exercise price. Upon a subsequent disposition of
the shares, any difference between the fair market value of the shares at the
time of exercise and the amount realized on the disposition will be eligible
for treatment as long-term capital gain or loss, if the shares have been held
for more than six months. The Company ordinarily will be entitled to a
deduction equal to the amount of ordinary income realized by the optionee.
This deduction is allowed for the Company's taxable year which ends with or
next following the optionee's taxable year for which such amount is included in
the optionee's gross income.
The complete texts of the 1996 Incentive Plan and the 1996 Non-Qualified
Plan are set forth in Exhibits A and B to this Proxy Statement, respectively.
The foregoing summary of the 1996 Plans is qualified in its entirety by
reference to such Exhibits.
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REQUIRED VOTE
Provided a quorum is present, the affirmative vote of the holders of a
majority of the shares represented or present and entitled to vote at the
Annual Meeting will be required to approve the 1996 Incentive Plan and the 1996
Non- Qualified Plan. The Board of Directors recommends that the shareholders
vote FOR this proposal.
APPROVAL OF AN OFFICER'S STOCK OPTION AGREEMENTS
(ITEM 3)
DESCRIPTION OF OPTION AGREEMENTS
The Company has granted to Mr. Kelleher, in connection with his
re-employment as of January 1, 1996 as President and Chief Executive Officer of
the Company and subject to shareholder approval as described below,
nonstatutory options (the "1996 Options") to purchase, subject to his continued
employment for four years, 144,395 shares of Common Stock at a purchase price
of $1 per share and 500,000 shares at a purchase price of $23.50 per share,
representing the composite tape closing sales price of the Common Stock on the
New York Stock Exchange on January 2, 1996. The 1996 Options are evidenced by
two written Stock Option Plans and Agreements (the "Option Agreements"), one of
which relates to the options exercisable at $1 per share and the other of which
relates to the options exercisable at $23.50 per share. Except for the
different option exercise prices, these two Option Agreements are basically
identical.
One-fifth of the 1996 Options are not subject to vesting and may be
exercised at any time as to any of the underlying shares. Provided Mr.
Kelleher remains in the continuous, full-time employ of the Company, the
balance of the 1996 Options will become exercisable in cumulative increments of
one-fifth of the underlying shares each January 1 beginning January 1, 1997;
provided further, however, that in the event of a change of control of the
Company as described under "Compensation of Executive Officers and Directors -
Employment and Other Contracts" above, all of the 1996 Options will become
immediately exercisable. Each of the 1996 Options will expire ten years after
it becomes exercisable.
The 1996 Options are not transferable by Mr. Kelleher other than by will
or the laws of descent and distribution, and are exercisable during Mr.
Kelleher's lifetime only by him. The maximum aggregate number of shares of
Common Stock which may be issued pursuant to the 1996 Options is 644,395,
subject to adjustment to prevent dilution or enlargement of rights. Such
shares may consist of authorized but unissued shares of Common Stock or
previously issued shares reacquired by the Company.
The 1996 Options are not intended to constitute qualified or incentive
stock options for federal income tax purposes. No federal income tax should be
imposed on Mr. Kelleher as the result of the grant of any of the 1996 Options.
Upon the exercise of a 1996 Option, Mr. Kelleher will be treated as receiving
compensation taxable as ordinary income in the year of exercise, in an amount
equal to the excess of the fair market value on the date of exercise of the
shares of Common Stock purchased under the 1996 Option over the purchase price
paid therefor. Upon a subsequent disposition of the shares, any difference
between the fair market value of the shares on the date of exercise and the
amount realized upon disposition will be eligible for treatment as long-term
capital gain or loss, if the shares have been held for more than six months.
The Company will be allowed a deduction for federal income tax purposes for
compensation paid at the same time and in the same amount as ordinary income
from compensation is recognized by Mr. Kelleher, subject to certain limits on
deductibility imposed by Internal Revenue Service regulations under some
circumstances. See the discussion of Mr. Kelleher's contract under "Board
Compensation Committee Report on Executive Compensation", below.
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<PAGE> 15
Each of the Option Agreements provides that the purchase price of shares
subject thereto must be paid in full at the time of exercise in cash, by
delivery to the Company of shares of Common Stock having a fair market value
equal to the purchase price, or by a combination of cash and shares. If Mr.
Kelleher elected to pay the purchase price of option shares by delivering
shares he already owned having a fair market value equal to the purchase price,
he would recognize neither gain nor loss on the exchange of the shares he
already owned for a like number of option shares, and his basis in the number
of option shares he received equal to the exchanged shares he already owned
would be the same as his basis in such exchanged shares. In addition, Mr.
Kelleher would be treated as receiving compensation taxable as ordinary income
equal to the fair market value at the time of exercise of the shares received
under the 1996 Options in excess of the number of the exchanged shares.
The Option Agreements permit Mr. Kelleher to elect to pay withholding
taxes in connection with the exercise of an option granted thereunder by
delivering to the Company previously owned shares of Common Stock or by having
shares of Common Stock otherwise issuable to Mr. Kelleher thereunder withheld
by the Company, in each case valued at fair market value on the date of
delivery or withholding of the shares.
Shareholder approval of the Option Agreements is not required under Texas
law or for federal income tax purposes, but it is a prerequisite to the listing
of the shares covered thereby on the New York Stock Exchange. The Board of
Directors also seeks approval of the Option Agreements by the shareholders of
the Company in order to extend to Mr. Kelleher the benefits of Rule 16b-3,
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
VOTE REQUIRED; EFFECT OF A NEGATIVE VOTE
Approval of the Option Agreements requires the affirmative vote of a
majority of the shares of Common Stock voting in person or represented by proxy
at the Annual Meeting, provided a quorum is present. Mr. Kelleher's current
Employment Contract provides that, failing shareholder approval of the Option
Agreements at this Annual Meeting, the grant of the 1996 Options will be
voided, and thereupon the Company and Mr. Kelleher will negotiate alternative
compensation of equivalent value to him. Your Board recommends that you vote
FOR approval of the Option Agreements.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Salary Administration Program for Southwest's noncontract people will
be administered in a manner that promotes the attainment by Southwest of
reasonable profits on a consistent basis in order to preserve job protection
and security for such noncontract people; that promotes and rewards
productivity and dedication to the success of Southwest as the collective
embodiment of all of its people; that accomplishes internal equity among its
people; and that responds pragmatically to the actual influence of external
market forces.
Southwest Airlines Co.
Salary Administration Manual
January 1991
The above principles are applied to all Southwest noncontract employees,
including executive officers. The compensation of Southwest's executive
officers is reviewed by the Compensation Committee of the Board of Directors on
an annual basis. The Committee considers the total compensation (both salary
and incentives), as well as the recommendation of the Company's President, in
establishing each element of compensation.
At current cash compensation levels, the Committee does not expect
Internal Revenue Service regulations regarding maximum deductibility of
executive compensation to have any application to the
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<PAGE> 16
Company, except with respect to Mr. Kelleher's 1996 Employment Contract,
addressed below. The Company's 1996 Plans have been designed to exclude
compensation thereunder from IRS limits.
The principal elements of compensation for Southwest's executive officers
are the following:
Base salary. As a general rule, base salary for the executive officers of
Southwest falls below the salaries for comparable positions in comparably sized
companies. The Committee bases this determination on comparative compensation
studies for similarly situated businesses; its impression of the prevailing
business climate; and the advice of the Company's President.
Annual salary increases, if any, for executive officers as a group are not
more, on a percentage basis, than those received by other noncontract
employees.
Annual incentive bonus. Only officers of the Company are eligible for
annual incentive bonuses. The amount of each bonus is determined by the
Compensation Committee at the end of each year, including Mr. Kelleher's
discretionary bonus under his Employment Contract.
In fixing the salary and bonus amounts for 1995, the Committee considered
the performance of each individual, his or her level of responsibility within
the Company, the Company's profitability, the longevity in office of each
officer, and each officer's performance as a team member. However, no
mathematical weighing formulae were applied with respect to any of these
factors. In evaluating an individual's performance, the Committee relied on
the recommendation of the President, whose recommendation is based on his own
perception of such officer's performance.
The Company does not utilize defined performance targets in establishing
compensation, nor does it employ minimum, targeted or maximum amounts of
bonuses or total compensation levels for the executive officers and the final
determination of compensation is subjective.
Stock Options. In an effort to bridge the perceived gap between the lower
level of cash compensation for Company officers as compared to their peers and
to provide a long-term incentive for future performance that aligns officers'
interests with shareholders in general, the Company adopted its 1991 Incentive
Stock Option Plan and 1991 Non-Qualified Stock Option Plan, and proposes the
adoption of its 1996 Plans. See "Approval of Plans." The number of options
initially granted to an individual, as compared to other Southwest employees,
is dependent on the length of service with the Company and individual levels of
performance and responsibility. Subsequent grants, including those made in
1995, have been based on levels of individual performance. With respect to all
options granted, the precise number of shares is determined on a subjective
basis. All grants under the Stock Option Plans are at current market value and
vest over a number of years, dependent on continued employment. Each grant is
made based upon the individual's compensation package for that year, without
reference to previous grants. There is no limit on the number of options that
may be granted to any one individual under the 1991 Plans. Each of the 1996
Plans limits the number of options that may be granted to any one individual in
any calendar year to 50,000 shares.
Although it is not contractually obligated to do so, it has been the
practice of the Committee to grant additional options to employees (including
the named executive officers), other than Mr. Kelleher, who exercise options
and hold the acquired stock. Such grants have been made on January 1 of each
year in an amount equal to five percent of the number of shares held by the
employee on the previous December 31 as a result of option exercises. On
January 1, 1996, the total such options granted was 6,685, of which 635 were to
named executive officers.
Kelleher 1996 Employment Contract. Effective as of January 1, 1996,
Southwest entered into a new five-year employment agreement with its President
and Chief Executive Officer, Herbert D. Kelleher. See "Compensation of
Executive Officers - Employment and Other Contracts" and "Approval of an
Officer's Stock Option Agreements." Pursuant to his 1996 Employment Contract,
Mr. Kelleher is to receive a base salary of $395,000 for the first four years,
increasing to $450,000 in year five, with
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<PAGE> 17
maximum annual bonuses capped at $172,000 for the first four years and $196,000
in year five. In addition, subject to shareholder approval at the 1996 Annual
Meeting, Mr. Kelleher was granted fair market value options to purchase 500,000
shares of Southwest Common Stock and $1.00 options to purchase 144,395 shares
of Southwest Common Stock, with 20% of each grant vested immediately and the
balance vesting ratably over the next four years.
Mr. Kelleher's cash compensation for the first four years under the 1996
Employment Contract is unchanged from his 1992 Employment Contract. This is
pursuant to a voluntary commitment made by Mr. Kelleher to the Southwest
Airlines Pilots' Association (SWAPA) at the time members of SWAPA agreed to a
five year base pay freeze, receiving in lieu thereof, options to purchase
Southwest Common Stock, all pursuant to a collective bargaining agreement
entered into as of 1994. The Committee relied on a study performed by an
independent consultant in determining that Mr. Kelleher's cash compensation for
the five-year period covered by his 1996 Employment Contract was significantly
below the midpoint for comparable positions. The options granted to Mr.
Kelleher, in accordance with past practice, were designed to make up the
difference between his cash compensation and that received by others in
comparable positions, dependent on successful performance by the Company as
reflected in the price of its stock.
The number of options granted to Mr. Kelleher was based on the Committee's
review of compensation for similarly situated individuals in the transportation
industry, and the Committee's perception of his past and expected future
contributions to Southwest's performance over the five-year term of the new
contract. At Mr. Kelleher's recommendation, the number of options granted to
Mr. Kelleher was significantly below the number recommended by the consultant
as necessary to make Mr. Kelleher's contract competitive. The Committee did
not consider the amount and value of other options held by Mr. Kelleher, as
those options were granted in connection with employment agreements going back
15 years, and were part of earlier compensation packages. The Company has no
target ownership levels for Company equity holdings by executives. Although as
a result of the $1 stock options, some portion of Mr. Kelleher's compensation
may not be deductible pursuant to current Internal Revenue Service regulations,
the Committee believed that it is in the best interests of all shareholders to
structure Mr. Kelleher's compensation in a manner consistent with past
practices, in a way designed to ensure his continuing service to Southwest
Airlines Co.
Executive officers, including the President, participate in the Southwest
Airlines Profit Sharing Plan and 401(k) Plan, which are available to all
Southwest employees on the same basis. See "Compensation of Executive Officers
- - Summary Compensation Table." Southwest makes little use of perquisites for
executive officers.
COMPENSATION COMMITTEE
Samuel E. Barshop, Chair
Gene H. Bishop
William P. Hobby, Jr.
Walter M. Mischer, Sr.
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PERFORMANCE GRAPH
The following table compares total shareholder returns for the Company
over the last five years to the Standard & Poor's 500 Stock Index and the
Standard & Poor's Transportation Index assuming a $100 investment made on
December 31, 1990. Each of the three measures of cumulative total return
assumes reinvestment of dividends. The stock performance shown on the graph
below is not necessarily indicative of future price performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG SOUTHWEST AIRLINES CO., S&P 500 INDEX
AND S&P TRANSPORTATION INDEX
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Southwest 100.00 195.74 339.23 645.53 289.73 398.58
Airlines
S&P 500 100.00 130.47 140.41 154.56 156.60 215.45
S&P 100.00 148.79 161.68 195.46 161.35 224.83
Transportation
</TABLE>
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<PAGE> 19
AMENDMENT TO ARTICLES OF INCORPORATION TO
INCREASE AUTHORIZED SHARES OF COMMON STOCK
(ITEM 4)
Recently, the Board of Directors of the Company has approved, and is
recommending to the shareholders for approval at the Annual Meeting, an
amendment to Article Four of the Articles of Incorporation to increase the
number of authorized shares of Common Stock from 500,000,000 to 680,000,000.
The Company presently has authorized 500,000,000 shares of Common Stock, $1.00
par value. As of March 20, 1996, 144,547,692 shares were issued and
outstanding, and the Company had approximately 72,000,000 additional shares
reserved for issuance pursuant to employee stock benefit plans and an
additional 144,000,000 shares reserved for issuance upon exercise of rights
outstanding under the Common Share Purchase Rights Plan established in July
1986. Except as indicated with respect to currently reserved shares of Common
Stock, the Company has no present intention, plan, understanding or agreement
to issue additional shares of Common Stock. The Board of Directors, however,
believes that the proposed increase in authorized shares of Common Stock, at
the same par value, is desirable at this time to enhance the Company's
flexibility in connection with other possible future actions such as stock
dividends or splits or funding employee benefit plans.
Holders of Common Stock have no pre-emptive or other rights to subscribe
for additional shares. Depending upon the purpose for which any additional
shares are issued, shareholder approval might not be necessary. Further
issuance of additional shares of Common Stock might dilute, under certain
circumstances, either shareholders' equity or voting rights.
REQUIRED VOTE
The affirmative vote by the holders of at least two-thirds of the
outstanding shares of Common Stock of the Company is required for approval of
the proposed amendment. The Board of Directors recommends a vote FOR the
proposed amendment.
SHAREHOLDER PROPOSAL
(ITEM 5)
Michael Schaefer, P.O. Box 14398, Las Vegas, Nevada 89114, owner of 500
shares of Common Stock, has given notice that he intends to present for action
at the Annual Meeting the following resolution:
"RESOLVED: That the shareholders of Southwest Airlines Company (the
"Company" or "Southwest Airlines") assembled in annual meeting in person and by
proxy request the Board of Directors take such action as is necessary to assure
to all shareholders the availability of airfare from the Company-served city
closest to their home, to the situs of the annual shareholders meeting, at the
lowest-cost rate available to the public without advance reservation, on a
space available basis. Currently this is the seniors fare for travellers age
65 or older. Travel within 2 days of meeting."
The following statement was submitted in support of such resolution:
"Our annual meeting is popular. Because of our charismatic President, or
fact that we are in a fun business owned and operated by enthusiastic people.
General Motors had but 50 shareholders at their Wilmington, Delaware meeting,
we enjoyed some 500 at our Dallas 1995 meeting.
"Shareholders come to their annual meeting 'on company business'. It may
be too costly to provide gratis travel, but lowest-public-fare would encourage
attendance, lessen the burden of being a good corporate citizen, and would
result in more of a cross-section of investors in attendance, instead of mostly
65+ investors, and company employees attending in 1995.
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<PAGE> 20
"The seniors fare is almost 20% less than 21-day advance, for many cities,
and non-retired shareholders often cannot plan 21 days in advance to travel
out-of-town. The company would make money out of such travel, on a space
available basis, and requirement that investors of such travel, on a space
available basis, and requirement that investors produce photocopy of their
proxy from the Company or their broker would minimize abuse. Let's win this
for the stockholders! Please vote yes."
BOARD OF DIRECTORS POSITION
YOUR DIRECTORS RECOMMEND A VOTE AGAINST THE ADOPTION OF THIS PROPOSAL, FOR
THE FOLLOWING REASONS:
Southwest has always welcomed its shareholders to its annual meeting, held
in its "hometown". However, this plan is impractical. A significant majority
of shares of Southwest stock is held in "street name" and the Company would be
unable to verify beneficial ownership for purpose of implementing this
proposal. Further, the subject proposal reflects a personal interest of the
proponent and is not in the best interests of all shareholders. While it is
impossible to ascertain the numbers of persons who would benefit from such a
policy, clearly the policy would interfere with the Company's ability to manage
its inventory - available seats - on a business-like basis. The Company must
be free to manage revenue in a manner designed to maximize profits for all of
its shareholders, unconstrained by the special interests of a few.
THEREFORE, THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS
SHAREHOLDER PROPOSAL. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO
VOTED UNLESS SHAREHOLDERS SPECIFY A DIFFERENT CHOICE.
RELATIONSHIP WITH INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, independent auditors, has been selected by
the Board of Directors to serve as the Company's auditors for the fiscal year
ending December 31, 1996. Ernst & Young LLP has served as the Company's
auditors since the inception of the Company. A representative of Ernst & Young
LLP is expected to be present at the Annual Meeting in order to make a
statement if he so desires and to respond to appropriate questions.
OTHER MATTERS
NOTICE REQUIREMENTS
To permit the Company and its shareholders to deal with shareholder
proposals in an informed and orderly manner, the Bylaws establish an advance
notice procedure with regard to the nomination (other than by or at the
direction of the Board of Directors) of candidates for election to the Board of
Directors and with regard to certain matters to be brought before an Annual
Meeting of Shareholders. In general, written notice must be received by the
Secretary of the Company not less than 20 days nor more than 60 days prior to
the meeting and must contain certain specified information concerning the
person to be nominated or the matters to be brought before the meeting as well
as the shareholder submitting the proposal. A copy of the applicable Bylaw
provisions may be obtained, without charge, upon written request to the
Secretary of the Company at the address set forth on page 1 of this Proxy
Statement.
In addition, any shareholder who wishes to submit a proposal for inclusion
in the proxy material and presentation at the 1997 Annual Meeting of
Shareholders must forward such proposal to the Secretary of the Company, at the
address indicated on page 1 of this Proxy Statement, so that the Secretary
receives it no later than December 1, 1996.
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<PAGE> 21
COMPLIANCE WITH Section 16(A) OF THE SECURITIES EXCHANGE ACT
On April 27, 1994, The Morris Family Trust (the "Morris Trust") made gifts
of Southwest Common Stock aggregating 54,655 shares to unrelated individuals.
June Morris, a director of the Company since January, 1994, is a Co-Trustee of
the Morris Trust and is therefore classified as the beneficial owner of Common
Stock owned of record by the Morris Trust. Due to an oversight at the time,
during which Mrs. Morris was battling a very serious illness, these gifts were
not timely reported to the Securities and Exchange Commission as required by
Section 16(a) under the Securities Exchange Act of 1934. A total of five gifts
were reported late.
DISCRETIONARY AUTHORITY
In the event a quorum is present at the meeting but sufficient votes to
approve any of the items proposed by the Board of Directors have not been
received, the persons named as proxies may propose one or more adjournments of
the meeting to permit further solicitation of proxies. A shareholder vote may
be taken on one or more of the proposals in this Proxy Statement prior to such
adjournment if sufficient proxies have been received and it is otherwise
appropriate. Any adjournment will require the affirmative vote of the holders
of a majority of those shares of Common Stock represented at the meeting in
person or by proxy. If a quorum is present, the persons named as proxies will
vote those proxies which they have been authorized to vote on any other
business properly before the meeting in favor of such an adjournment.
The Board of Directors does not know of any other matters which are to be
presented for action at the meeting. However, if other matters properly come
before the meeting, it is intended that the enclosed proxy will be voted in
accordance with the judgment of the persons voting the proxy.
By Order of the Board of Directors,
Herbert D. Kelleher
Chairman of the Board, President and
Chief Executive Officer
April 6, 1996
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EXHIBIT A
SOUTHWEST AIRLINES CO.
1996 INCENTIVE STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 1996 Incentive Stock Option Plan (the
"Plan") for employees of the Company and its subsidiaries.
1. Purpose. The purpose of this Plan is to secure for the
Company the benefits of the additional incentive inherent in the ownership of
its Common Stock by selected key employees of the Company and its subsidiaries
who are important to the success and the growth of the Company and its
subsidiaries, and to help the Company and its subsidiaries secure and retain
the services of such key employees. The Plan shall be administered so as to
qualify the options as "incentive stock options" under Section 422A of the
Internal Revenue Code.
2. Stock Option Committee. Subject to the provisions of
paragraph 4, this Plan shall be administered by a Stock Option Committee (the
"Committee") of the Board of Directors (the "Board") of the Company, to be
appointed by at least a majority of the whole Board of Directors. All members
of the Committee shall be "disinterested" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934, as such Rule is in effect on the
date of adoption of this Plan by the Board. The 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 and the transaction of
its business. 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 member of the
Committee may be removed at any time either with or without cause by resolution
adopted by the Board of Directors of the Company; and any vacancy on the
Committee may at any time be filled by resolution adopted by the Board of
Directors.
3. Grant of Options. The Committee shall have the authority and
responsibility, within the limitations of this Plan, to determine the key
employees to whom options are to be granted, the number of shares that may be
purchased under each option and the option price.
In determining the key employees to whom options shall be granted and
the number of shares to be covered by each such option, the Committee shall
take into consideration the employee's present and potential contribution to
the success of the Company and its subsidiaries and such other factors as the
Committee may deem proper and relevant. During any calendar year period during
the term of this Plan, options will not be granted to any individual in excess
of 50,000 shares, as adjusted from time to time pursuant to paragraph 13.
Options may not be granted under this Plan if shares are reasonably
available for granting under the 1991 Incentive Stock Option Plan.
4. Employees Eligible. Options may be granted under this Plan to
any key employee or prospective key employee (conditioned and effective upon
his becoming an employee) of the Company or its subsidiaries. Employees who
are also officers or directors of the Company or its subsidiaries shall not by
reason of such offices be ineligible to receive options under this Plan;
provided, however, that no
<PAGE> 23
director who is not also an employee of the Company or any of its subsidiaries
shall be eligible to receive options.
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 his employment with the Company or any
of its subsidiaries.
5. Stock Subject to Options. Subject to the provisions of
paragraph 13, 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 6,000,000.
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 or that may be granted under this Plan.
6. Option Price. The option price of each share of Common Stock
purchasable under any option granted under this Plan shall be not less than the
fair market value thereof at the time the option is granted and shall be set
forth in the option agreement; provided, however, that the option price for any
share of Common Stock purchasable under an option granted to an individual
owning, at the time the option is granted, more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or its
subsidiary corporations, shall be one hundred ten percent (110%) of the fair
market value thereof at the time the option is granted.
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.
7. Expiration and Termination of the Plan. Options may be
granted under this Plan at any time and from time to time, prior to ten years
from the date of adoption of this Plan, on which date this Plan will expire,
except as to options then outstanding under this Plan. Such options shall
remain in effect until they have been exercised or have expired. This Plan may
be terminated or modified at any time prior to December 31, 2005, by the Board
of Directors except to the extent prohibited by Section 422 of the Internal
Revenue Code.
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
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<PAGE> 24
8. Exercisability and Duration of Options. Options granted under
this Plan shall become exercisable after the lapse of such period or periods of
time or the occurrence of such event or events as the Committee, in its
discretion, may provide upon the granting thereof.
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:
(a) The expiration of 10 years from the date on which such option
was granted; provided, however, that in the case of an Optionee owning, at the
time such option was granted, more than 10% of the total combined voting power
of all classes of stock of the Company or its subsidiaries, such expiration
shall be as of 5 years from the date on which such option was granted;
(b) The expiration of three months from the date of termination of
the Optionee's employment with the Company or any subsidiary; provided that if
the Optionee shall die during such 3-month period the provisions of
subparagraph (c) below shall apply;
(c) The expiration of 6 months following the issuance of letters
testamentary or letters of administration to the executor or administrator of a
deceased Optionee, if the Optionee's death occurs either during his employment
with the Company or during the 3-month period following the date of termination
of such employment, but not later than 1 year after the Optionee's death;
(d) The termination of the Optionee's employment with the Company
for cause, including breach by the Optionee of an employment agreement with the
Company or any of its subsidiaries or the Optionee's commission of a felony or
misdemeanor (whether or not prosecuted) against the Company or any of its
subsidiaries;
(e) The expiration of such period of time or the occurrence of
such event as the Committee in its discretion may provide upon the granting
thereof.
9. Exercise of Options.
(a) Procedure. The options granted hereunder 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
written notice (the "Notice") of the exercise thereof to the Company. From
time to time the Committee may establish procedures relating and 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, it shall be valued at its fair market value on the date of such
notice, as determined pursuant to paragraph 6 hereof, and 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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<PAGE> 25
(d) Delivery of Shares. The Company shall cause certificates for
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.
10. 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 employment with the
Company, or during the 3-month period following the date of termination of such
employment, his options shall thereafter be exercisable, as provided in
paragraph 8(c), 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.
11. 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.
12. 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 any agreement of employment between the
Company or any of its subsidiaries and the Optionee.
13. 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 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 any 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. In the
event of any such change in the outstanding Common Stock, the aggregate number
of shares available under the Plan may be appropriately adjusted by the
Committee 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,
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<PAGE> 26
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 for 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 the
purchase price per share.
14. 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 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.
15. Limitation on Amount of Options. In no event shall the aggregate
fair market value (determined as of the time an option is granted) of the stock
for which options are exercisable for the first time by any Optionee during any
calendar year, under all incentive stock option plans of the Company and its
subsidiaries, exceed $100,000. As used in this Section, the term "incentive
stock option plan" shall mean any plan qualifying as such under Internal
Revenue Code Section 422.
16. Effective Date of Plan. This Plan shall become effective upon
its adoption by the Board of Directors of the Company, subject, however, to its
approval by the Company's shareholders after the date of such adoption.
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<PAGE> 27
EXHIBIT B
SOUTHWEST AIRLINES CO.
1996 NON-QUALIFIED STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 1996 Non-Qualified Stock Option Plan (the
"Plan") for employees and directors of the Company and its subsidiaries.
1. Purpose. The purpose of this Plan is to secure for the
Company the benefits of the additional incentive inherent in the ownership of
its Common Stock by selected key employees and directors of the Company and its
subsidiaries who are important to the success and the growth of the Company and
its subsidiaries, and to help the Company and its subsidiaries secure and
retain the services of such key employees and directors.
2. Stock Option Committee. Subject to the provisions of
paragraph 4, this Plan shall be administered by a Stock Option Committee (the
"Committee") of the Board of Directors (the "Board") of the Company, to be
appointed by at least a majority of the whole Board of Directors. All members
of the Committee shall be "disinterested" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934, as such Rule is in effect on the
date of adoption of this Plan by the Board. The 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 and the transaction of
its business. 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 member of the
Committee may be removed at any time either with or without cause by resolution
adopted by the Board of Directors of the Company; and any vacancy on the
Committee may at any time be filled by resolution adopted by the Board of
Directors.
3. Grant of Options. The Committee shall have the authority and
responsibility, within the limitations of this Plan, to determine the key
employees to whom options are to be granted, the number of shares that may be
purchased under each option and the option price.
In determining the key employees to whom options shall be granted and
the number of shares to be covered by each such option, the Committee shall
take into consideration the employee's present and potential contribution to
the success of the Company and its subsidiaries and such other factors as the
Committee may deem proper and relevant. During any calendar year period during
the term of this Plan, options will not be granted to any individual in excess
of 50,000 shares, as adjusted from time to time pursuant to paragraph 13.
Options may not be granted under this Plan if shares are available for
granting under the 1991 Non-Qualified Stock Option Plan.
4. Persons Eligible.
(a) Options may be granted under this Plan to any key employee or
prospective key employee (conditioned and effective upon his becoming an
employee) of the Company or its subsidiaries. Employees who are also officers
or directors of the Company or its subsidiaries shall not by reason of such
offices be ineligible to receive options under this Plan.
<PAGE> 28
(b) Each individual who is not an employee of the Company or its
subsidiaries, who becomes a director of the Company ("Outside Director") after
adoption of this Plan and who has not previously been granted options under
this, or any other stock option plan of the Company, shall, on the date of his
or her election to the Board of Directors of the Company, be granted an option
to purchase 10,000 shares of the Common Stock at a price equal to 100% of the
fair market value of the Common Stock on such date. No Outside Director to
whom an option has been granted shall be eligible to receive additional options
under this Plan.
An employee or director 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 employment with the
Company or any of its subsidiaries. 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.
5. Stock Subject to Options. Subject to the provisions of
paragraph 13, 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 575,000. 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 or that may be granted under this Plan.
6. Option Price. The option price of each share of Common Stock
purchasable under any option granted under this Plan shall be not less than the
fair market value thereof at the time the option is granted and shall be set
forth in the option agreement.
7. Expiration and Termination of the Plan. Options may be
granted under this Plan at any time and from time to time, prior to December
31, 2005, on which date this Plan will expire, except as to options then
outstanding under this Plan. Such options shall remain in effect until they
have been exercised or have expired. This Plan may be terminated or modified
at any time prior to December 31, 2005, by the Board of Directors except with
respect to any options then outstanding under this Plan; provided that any (a)
increase in the maximum number of shares subject to options, as specified in
paragraph 5, (b) decrease in the minimum option price specified in paragraph 6
or (c) change in the number of and terms of options to be awarded to Outside
Directors as specified in paragraphs 4(b), 8 and 13 shall be subject to
approval by the Company's shareholders, unless made pursuant to the provisions
of paragraph 13.
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<PAGE> 29
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.
8. Exercisability and Duration of Options.
(a) Exercisability. Options granted under this Plan to employees
shall become exercisable after the lapse of such period or periods of time or
the occurrence of such event or events as the Committee, in its discretion, may
provide upon the granting thereof. Any option granted under this Plan to an
Outside Director shall become exercisable as follows (or after the lapse of
such additional period or periods of time or the occurrence of such event or
events as the Committee, in its discretion, may provide upon the granting
thereof):
<TABLE>
<CAPTION>
Time Elapsed since Grant Options First Exercisable
------------------------ ---------------------------
<S> <C>
One Year 1,000
Two Years 1,500
Three Years 2,000
Four Years 2,500
Five Years 3,000
</TABLE>
After the expiration of five years following the date on which such
grant is made, such options may be exercised as to all of the shares covered
thereby.
(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 10 years from the date on which
such option was granted;
(2) The expiration of three months from the date of
termination of the Optionee's employment with the Company or any subsidiary (or
in the case of an Outside Director, three months from the date such Outside
Director ceases to serve as a member of the Board of Directors for any reason
other than death); provided that if the Optionee shall die during such 3-month
period the provisions of subparagraph (3) below shall apply;
(3) The expiration of 6 months following the issuance of
letters testamentary or letters of administration to the executor or
administrator of a deceased Optionee, if the Optionee's death occurs either
during his employment with the Company (or service as an Outside Director, as
the case may be) or during the 3-month period following the date of termination
of such employment (or service as an Outside Director, as the case may be), but
not later than 1 year after the Optionee's death;
(4) In the case of employee Optionees, the termination of
the Optionee's employment with the Company for cause, including breach by the
Optionee of an employment agreement with the Company or any of its subsidiaries
or the Optionee's commission of a felony or misdemeanor (whether or not
prosecuted) against the Company or any of its subsidiaries;
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<PAGE> 30
(5) In the case of employee Optionees, the expiration of
such period of time or the occurrence of such event as the Committee in its
discretion may provide upon the granting thereof.
9. Exercise of Options.
(a) Procedure. The options granted hereunder 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
written notice (the "Notice") of the exercise thereof to the Company. From
time to time the Committee may establish procedures relating and 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, it shall be valued at its fair market value on the date of such
notice, as determined pursuant to paragraph 6 hereof and 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.
(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 certificates for
shares to be delivered to the Optionee (or the person exercising the Optionee's
options in the event of the death as soon as practicable after the exercise
date.
10. 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 options.
In the event of the Optionee's death during his or her employment with
the Company, or during the 30-day period following the date of termination of
such employment, his options shall thereafter be exercisable, as provided in
paragraph 8(b), 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.
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<PAGE> 31
11. 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.
12. 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 any agreement of employment between the
Company or any of its subsidiaries and the Optionee.
13. 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 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. In the
event of any such change in the outstanding Common Stock, the aggregate number
of shares available under the Plan may be appropriately adjusted by the
Committee 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.
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<PAGE> 32
(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 the
purchase price per share.
14. Purchase for Investment and Legality. The Optionee, by the
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 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.
15. Effective Date of Plan. This Plan shall become effective upon
its adoption by the Board of Directors of the Company, subject, however, to its
approval by the Company's shareholders after the date of such adoption.
6
<PAGE> 33
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
Directors
<PAGE> 34
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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<PAGE> 35
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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<PAGE> 36
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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<PAGE> 37
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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<PAGE> 38
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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<PAGE> 39
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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<PAGE> 40
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.
-8-
<PAGE> 41
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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<PAGE> 42
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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<PAGE> 43
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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<PAGE> 44
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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<PAGE> 45
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
- -----------------------------------
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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<PAGE> 46
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 $_____ 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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<PAGE> 47
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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STOCK OPTION AGREEMENT
<PAGE> 48
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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STOCK OPTION AGREEMENT
<PAGE> 49
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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STOCK OPTION AGREEMENT
<PAGE> 50
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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STOCK OPTION AGREEMENT
<PAGE> 51
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),
-6-
STOCK OPTION AGREEMENT
<PAGE> 52
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
<PAGE> 53
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
<PAGE> 54
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
<PAGE> 55
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.
-1-
STOCK OPTION AGREEMENT - $1
<PAGE> 56
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
<PAGE> 57
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
<PAGE> 58
(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
<PAGE> 59
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
<PAGE> 60
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
<PAGE> 61
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
<PAGE> 62
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
<PAGE> 63
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
<PAGE> 64
- --------------------------------------------------------------------------------
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF SOUTHWEST AIRLINES CO. PROXY
The undersigned hereby appoints Colleen C. Barrett, Herbert D. Kelleher and
Gary C. Kelly proxies (to act by majority decision if more than one shall act),
and each of them with full power of substitution, to vote all shares of Common
Stock of Southwest Airlines Co. that the undersigned is entitled to vote at the
annual meeting of shareholders thereof to be held on May 16, 1996, or at any
adjournments thereof, as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR ALL NOMINEES."
<TABLE>
<S> <C> <C>
(1) ELECTION OF DIRECTORS / /FOR all nominees listed below / / WITHHOLD AUTHORITY to vote for all nominees listed
(except those indicated to the below
contrary below, see instructions)
</TABLE>
Samuel E. Barshop, Gene H. Bishop and Rollin W. King.
INSTRUCTION: to withhold authority to vote for any individual nominee, write
that nominee's name in the space provided here.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "APPROVE" THE FOLLOWING THREE ITEMS.
(2) / / APPROVE or / / DISAPPROVE or / / ABSTAIN
officer's stock options described in the proxy statement related to the
meeting.
(3) / / APPROVE or / / DISAPPROVE or / / ABSTAIN
1996 Stock Option Plans described in the proxy statement related to the
meeting.
(4) / / APPROVE or / / DISAPPROVE or / / ABSTAIN
amending the Company's Articles of Incorporation to increase the authorized
number of shares of Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "DISAPPROVE" THE FOLLOWING
SHAREHOLDER PROPOSAL.
(5) / / APPROVE or / / DISAPPROVE or / / ABSTAIN
shareholder proposal described in proxy statement related to the meeting.
(6) / / WITH or / / WITHOUT
authority to vote on any business that may properly come before the meeting.
(Please Date and Sign on Reverse Side)
- --------------------------------------------------------------------------------
<PAGE> 65
- --------------------------------------------------------------------------------
ALL SHARES WILL BE VOTED AS DIRECTED HEREIN AND, UNLESS OTHERWISE DIRECTED, WILL
BE VOTED "FOR ALL NOMINEES" IN ITEM 1, "APPROVE" ITEMS 2, 3 AND 4 AND
"DISAPPROVE" ITEM 5, AND IN ACCORDANCE WITH THE DISCRETION OF THE PERSON VOTING
THE PROXY WITH RESPECT TO ANY OTHER BUSINESS PROPERLY BEFORE THE MEETING.
YOU MAY REVOKE THIS PROXY AT ANY TIME PRIOR TO A VOTE THEREON.
Dated: , 1996
------------------------
------------------------------------
------------------------------------
PLEASE SIGN EXACTLY AS NAME APPEARS
ON THIS CARD. JOINT OWNERS SHOULD
EACH SIGN. EXECUTORS,
ADMINISTRATORS, TRUSTEES, ETC.,
SHOULD GIVE THEIR FULL TITLES.
PLEASE COMPLETE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
