Filed Pursuant to Rule 424(b)(2)
Registration No. 333-71392
PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 15, 2001)
$614,250,000
[SOUTHWEST AIRLINES LOGO]
2001-1 PASS THROUGH TRUSTS
PASS THROUGH CERTIFICATES, SERIES 2001-1
------------------
Three classes of the Southwest Airlines Co. Pass Through Certificates,
Series 2001-1, are being offered under this prospectus supplement: Class A-1,
Class A-2 and Class B. A separate trust will be established for each class of
certificates. The trusts will use the proceeds from the sale of the certificates
to acquire equipment notes. The equipment notes will be issued by Southwest on a
full recourse basis. Payments on the equipment notes held in each trust will be
passed through to the holders of certificates of such trust.
The equipment notes will be issued for each of 29 Boeing 737-700 aircraft
owned by Southwest. The equipment notes issued for each aircraft will be secured
by a mortgage on such aircraft. Interest on the equipment notes held for the
Class A-1, Class A-2 and Class B certificates will be payable semiannually on
each May 1 and November 1 after issuance, beginning on May 1, 2002. Principal
payments on the equipment notes held for the Class A-1 certificates will be
scheduled on May 1 and November 1 in certain years, beginning on May 1, 2002.
The entire principal of the equipment notes held for the Class A-2 and Class B
certificates will be scheduled for payment on November 1, 2006.
The Class A-1 and Class A-2 certificates will rank equally in right of
distributions and will rank senior to the Class B Certificates. The Class B
certificates will rank junior to the Class A-1 and Class A-2 certificates.
Westdeutsche Landesbank Girozentrale, New York branch, will provide a
liquidity facility for each of the Class A-1 and Class A-2 certificates, in each
case in an amount sufficient to make three semiannual interest payments. There
is no liquidity facility for the Class B certificates.
INVESTING IN THE CERTIFICATES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE S-11.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus to which it relates is
truthful or complete. Any representation to the contrary is a criminal offense.
PRINCIPAL INTEREST FINAL EXPECTED PRICE TO
PASS THROUGH CERTIFICATES AMOUNT RATE DISTRIBUTION DATE PUBLIC(1)
------------------------- ------------ -------- ----------------- ---------
Class A-1 $150,000,000 5.100% May 1, 2006 100%
Class A-2 $375,000,000 5.496% November 1, 2006 100%
Class B $ 89,250,000 6.126% November 1, 2006 100%
---------------
(1) Plus accrued interest, if any, from the date of issuance.
The underwriters will purchase all of the Class A-1, Class A-2 and Class B
certificates if any are purchased, subject to the satisfaction of certain
conditions. The aggregate proceeds from the sale of the Class A-1, Class A-2 and
Class B certificates will be $614,250,000. Southwest will pay the underwriters a
commission of $3,992,625. The underwriters expect to deliver the Class A-1,
Class A-2 and Class B certificates to purchasers on October 30, 2001. Interest
on the Class A-1, Class A-2 and Class B certificates will accrue from the date
of delivery. None of the Class A-1, Class A-2 or Class B certificates will be
listed on a national securities exchange.
Joint Bookrunners
SALOMON SMITH BARNEY JPMORGAN
------------------
MERRILL LYNCH & CO.
October 18, 2001
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY OTHER
DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
------------------
PRESENTATION OF INFORMATION
These offering materials consist of two documents: (a) this Prospectus
Supplement, which describes the terms of the certificates that we are currently
offering, and (b) the accompanying Prospectus, which provides general
information about our pass through certificates, some of which may not apply to
the certificates that we are currently offering. The information in this
Prospectus Supplement replaces any inconsistent information included in the
accompanying Prospectus.
We have given certain capitalized terms specific meanings for purposes of
this Prospectus Supplement. The "Index of Terms" attached as Appendix I to this
Prospectus Supplement lists the page in this Prospectus Supplement on which we
have defined each such term.
At various places in this Prospectus Supplement and the Prospectus, we
refer you to other sections of such documents for additional information by
indicating the caption heading of such other sections. The page on which each
principal caption included in this Prospectus Supplement can be found is listed
in the Table of Contents below. All such cross references in this Prospectus
Supplement are to captions contained in this Prospectus Supplement and not in
the Prospectus, unless otherwise stated. The page on which each principal
caption included in the Prospectus can be found is listed in the Table of
Contents included in the Prospectus.
This Prospectus Supplement and the accompanying Prospectus and the
documents incorporated by reference include "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
Southwest's expectations or beliefs concerning future events. When used in this
Prospectus Supplement and the accompanying Prospectus and the documents
incorporated by reference, the words "expects," "plans," "anticipates," and
similar expressions are intended to identify forward-looking statements. All
forward-looking statements are based upon information available to us on the
date such statements are made. We undertake no obligation to publicly update or
revise any forward-looking statement after the date of this Prospectus
Supplement, whether as a result of new information, future events or otherwise.
Forward-looking statements are subject to a number of factors that could cause
actual results to differ materially from our expectations. Information
concerning these factors is contained in our SEC filings, including our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, our Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 31, 2001 and June 30,
2001 and our Current Report on Form 8-K filed on October 3, 2001.
i
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
SUMMARY................................. S-1
Summary of Terms of Certificates...... S-1
Equipment Notes and the Aircraft...... S-2
Loan to Aircraft Value Ratios......... S-3
Cash Flow Structure................... S-4
The Offering.......................... S-5
Summary Financial and Operating
Data................................ S-10
RISK FACTORS............................ S-11
Appraisals and Realizable Value of
Aircraft............................ S-11
Repossession.......................... S-11
Priority of Distributions;
Subordination....................... S-11
No Liquidity Facility for the Class B
Certificates........................ S-12
Control Over Collateral; Sale of
Collateral.......................... S-12
No Financial Covenants................ S-13
Ratings of the Certificates........... S-13
Limited Ability to Resell the
Certificates........................ S-13
USE OF PROCEEDS......................... S-14
THE COMPANY............................. S-15
Recent Developments................... S-15
DESCRIPTION OF THE CERTIFICATES......... S-17
General............................... S-17
Subordination......................... S-18
Payments and Distributions............ S-18
Pool Factors.......................... S-19
Reports to Certificateholders......... S-20
Indenture Defaults and Certain Rights
Upon an Indenture Default........... S-21
Purchase Rights of
Certificateholders.................. S-23
PTC Event of Default.................. S-23
Merger, Consolidation and Transfer of
Assets.............................. S-24
Modifications of the Pass Through
Trust Agreements and Certain Other
Agreements.......................... S-24
Possible Issuance of Class C
Certificates........................ S-26
Termination of the Trusts............. S-27
The Trustees.......................... S-27
Book-Entry; Delivery and Form......... S-27
DESCRIPTION OF THE LIQUIDITY
FACILITIES............................ S-27
General............................... S-28
Drawings.............................. S-28
Reimbursement of Drawings............. S-31
Interest Drawings and Final
Drawings......................... S-31
Downgrade Drawings and Non-Extension
Drawings......................... S-31
Liquidity Events of Default........... S-32
PAGE
----
Liquidity Provider.................... S-32
DESCRIPTION OF THE INTERCREDITOR
AGREEMENT............................. S-33
Intercreditor Rights.................. S-33
Priority of Distributions............. S-34
Voting of Equipment Notes............. S-37
The Subordination Agent............... S-38
DESCRIPTION OF THE AIRCRAFT AND THE
APPRAISALS............................ S-38
The Aircraft.......................... S-38
The Appraisals........................ S-39
DESCRIPTION OF THE EQUIPMENT NOTES...... S-40
Purchase of Equipment Notes........... S-40
Subordination......................... S-41
Principal and Interest Payments....... S-41
Redemption............................ S-41
Security.............................. S-42
Loan to Value Ratios of Equipment
Notes............................... S-43
Defeasance............................ S-43
Limitation of Liability............... S-43
Indenture Defaults, Notice and
Waiver.............................. S-44
Remedies.............................. S-44
Modification of Indentures............ S-45
Indemnification....................... S-46
Certain Provisions of the
Indentures.......................... S-46
CERTAIN U.S. FEDERAL INCOME TAX
CONSEQUENCES.......................... S-50
General............................... S-50
Tax Status of the Trusts.............. S-50
Taxation of Certificateholders
Generally........................... S-51
Effect of Reallocation of Payments
under the Intercreditor Agreement... S-51
Sale or Other Disposition of the
Certificates........................ S-52
Foreign Certificateholders............ S-52
Backup Withholding.................... S-52
CERTAIN DELAWARE TAXES.................. S-52
CERTAIN ERISA CONSIDERATIONS............ S-53
UNDERWRITING............................ S-56
LEGAL MATTERS........................... S-57
EXPERTS................................. S-57
APPENDIX I -- INDEX OF TERMS............ I-1
APPENDIX II -- APPRAISAL LETTERS........ II-1
APPENDIX III -- EQUIPMENT NOTE PRINCIPAL
PAYMENTS.............................. III-1
APPENDIX IV -- LOAN TO VALUE RATIOS OF
EQUIPMENT NOTES....................... IV-1
ii
SUMMARY
This summary highlights selected information from this Prospectus
Supplement and the accompanying Prospectus and may not contain all of the
information that is important to you. For more complete information about the
Certificates and Southwest, you should read this entire Prospectus Supplement
and the accompanying Prospectus, as well as the materials filed with the
Securities and Exchange Commission that are considered to be part of this
Prospectus Supplement and the Prospectus. See "Where You Can Find More
Information" in the Prospectus.
SUMMARY OF TERMS OF CERTIFICATES
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES CLASS B CERTIFICATES
---------------------- ---------------------- --------------------
Aggregate Face Amount........... $150,000,000 $375,000,000 $89,250,000
Ratings:
Moody's....................... Aa2 Aa2 A2
Standard & Poor's(1).......... AAA AAA A+
Initial Loan to Aircraft Value
(cumulative).................. 53.1% 53.1% 62.1%
Expected Highest Loan to
Aircraft Value (cumulative)... 53.1% 53.1% 62.1%
Expected Principal Distribution
Window (in years)............. 4.5 5.0 5.0
Initial Average Life (in years
from Issuance Date)........... 3.1 5.0 5.0
Regular Distribution Dates...... May 1 and May 1 and May 1 and
November 1 November 1 November 1
Final Expected Regular
Distribution Date............. May 1, 2006 November 1, 2006 November 1, 2006
Final Maturity Date............. November 1, 2007 May 1, 2008 November 1, 2006
Minimum Denomination............ $1,000 $1,000 $1,000
Section 1110 Protection......... Yes Yes Yes
Liquidity Facility Coverage..... 3 semiannual interest 3 semiannual interest No
payments payments
---------------
(1) Southwest expects that when the Certificates are issued, the ratings
assigned to them by Standard & Poor's will be placed on CreditWatch with
negative implications.
In calculating the initial loan to aircraft value ratios, we assumed an
aggregate appraised aircraft value of $988,543,333. The aggregate appraised
value is only an estimate and reflects assumptions that are described in
"Description of the Aircraft and the Appraisals -- The Appraisals". The
protections of Section 1110 of the U.S. Bankruptcy Code indicated above are
available to each Indenture Trustee as secured party under the related
Indenture.
S-1
EQUIPMENT NOTES AND THE AIRCRAFT
The Class A-1, Class A-2 and Class B Trusts will hold Series A-1, Series
A-2 and Series B Equipment Notes, respectively, in each case issued by Southwest
for each of 29 Aircraft owned by Southwest. The Equipment Notes issued with
respect to each Aircraft will be secured by a mortgage on such Aircraft. All the
Trusts will have the benefits of the cross-subordination provisions of the
Intercreditor Agreement with respect to the Equipment Notes issued against all
29 Aircraft. See "Description of the Intercreditor Agreement".
The Aircraft to which this offering relates will consist of 29 Boeing
737-700 aircraft. Set forth below is certain information about the Equipment
Notes to be held in the Trusts and the Aircraft owned by Southwest expected to
secure such Equipment Notes:
PRINCIPAL AMOUNT OF
SERIES A-1, SERIES A-2
AIRCRAFT MANUFACTURER'S AIRCRAFT AND SERIES B
REGISTRATION NUMBER SERIAL NUMBER DELIVERY DATE EQUIPMENT NOTES APPRAISED VALUE(1)
------------------- -------------- ------------- ---------------------- ------------------
N700GS....................... 27835 12/17/1997 $19,821,848 $31,893,333
N701GS....................... 27836 12/19/1997 19,821,848 31,893,333
N703SW....................... 27837 12/31/1997 19,821,848 31,893,333
N706SW....................... 27840 5/31/1998 20,089,259 32,453,333
N712SW....................... 27846 5/31/1998 20,089,259 32,453,333
N798SW....................... 28436 5/13/1998(2) 20,089,259 32,453,333
N713SW....................... 27847 6/8/1998 20,122,686 32,560,000
N714CB....................... 27848 6/19/1998 20,122,686 32,560,000
N715SW....................... 27849 6/30/1998 20,122,686 32,560,000
N716SW....................... 27850 6/30/1998 20,122,686 32,560,000
N719SW....................... 27853 8/5/1998 20,222,965 32,826,667
N720WN....................... 27854 9/30/1998 20,256,391 32,950,000
N707SA....................... 27841 10/30/1998 20,289,818 33,073,333
N742SW....................... 29278 12/28/1998 20,356,671 33,340,000
N726SW....................... 27858 2/25/1999 20,543,858 33,606,667
N745SW....................... 29491 3/31/1999 20,664,193 33,733,333
N727SA....................... 27859 5/20/1999 20,898,178 34,003,333
N728SW....................... 27860 5/19/1999 20,898,178 34,003,333
N729SW....................... 27861 5/24/1999 20,898,178 34,003,333
N770SA....................... 30589 6/28/2000 22,128,269 35,783,333
N772SW....................... 27880 7/6/2000 22,248,604 35,920,000
N782SA....................... 29808 9/29/2000 22,482,589 36,150,000
N789SW....................... 29816 11/19/2000 22,716,574 36,300,000
N791SW....................... 27886 12/26/2000 22,830,223 36,350,000
N400WN....................... 27891 3/28/2001 23,238,025 36,500,000
N797MX....................... 27890 3/23/2001 23,238,025 36,500,000
N403WN....................... 29815 4/16/2001 23,322,705 36,620,000
N405WN....................... 27893 6/28/2001 23,396,244 36,800,000
N406WN....................... 27894 6/28/2001 23,396,244 36,800,000
---------------
(1) The appraised value of each Aircraft set forth above is the lesser of the
average and median appraised base values of such Aircraft as appraised by
three independent appraisal and consulting firms. These Appraisals are based
upon varying assumptions and methodologies. An appraisal is only an estimate
of value and should not be relied upon as a measure of realizable value. See
"Risk Factors -- Appraisals and Realizable Value of Aircraft".
(2) Southwest purchased this Aircraft used in 2000.
S-2
LOAN TO AIRCRAFT VALUE RATIOS
The following table sets forth loan to Aircraft value ratios ("LTVs") for
each Class of Certificates as of the Issuance Date and as of each Regular
Distribution Date thereafter. The table should not be considered a forecast or
prediction of expected or likely LTVs but simply a mathematical calculation
based on one set of assumptions. See "Risk Factors -- Appraisals and Realizable
Value of Aircraft".
ASSUMED POOL BALANCE(2) LTV(3)
AGGREGATE ------------------------------------------ ------------------------------------------
AIRCRAFT CLASS A-1 CLASS A-2 CLASS B CLASS A-1 CLASS A-2 CLASS B
DATE VALUE(1) CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
---- ------------ ------------ ------------ ------------ ------------ ------------ ------------
October 30, 2001............ $988,543,333 $150,000,000 $375,000,000 $89,250,000 53.1% 53.1% 62.1%
May 1, 2002................. 967,921,021 127,578,505 375,000,000 89,250,000 51.9 51.9 61.1
November 1, 2002............ 956,936,342 121,410,888 375,000,000 89,250,000 51.9 51.9 61.2
May 1, 2003................. 936,314,029 109,455,794 375,000,000 89,250,000 51.7 51.7 61.3
November 1, 2003............ 925,329,350 103,288,177 375,000,000 89,250,000 51.7 51.7 61.3
May 1, 2004................. 904,707,037 91,333,083 375,000,000 89,250,000 51.5 51.5 61.4
November 1, 2004............ 893,722,359 85,165,466 375,000,000 89,250,000 51.5 51.5 61.5
May 1, 2005................. 873,100,046 71,622,004 375,000,000 89,250,000 51.2 51.2 61.4
November 1, 2005............ 862,115,367 64,622,582 375,000,000 89,250,000 51.0 51.0 61.3
May 1, 2006................. 841,493,054 -- 375,000,000 89,250,000 NA 44.6 55.2
November 1, 2006............ 830,508,376 -- -- -- NA NA NA
---------------
(1) In calculating the assumed aggregate aircraft values above, we assumed that
the initial appraised base value of each Aircraft declines by approximately
3% each year. Other rates or methods of depreciation may result in
materially different LTVs. We cannot assure you that the depreciation rate
and method assumed for purposes of the table are the ones most likely to
occur nor can we predict the actual future value of any Aircraft. The
assumed aggregate Aircraft value as of any date does not include the value
of Aircraft as to which the Equipment Notes secured by such Aircraft are
expected to have been paid in full on or prior to such date. See footnote
(1) in the chart under "Equipment Notes and the Aircraft".
(2) The Pool Balance for each Class of Certificates indicates, as of any date,
the portion of the original face amount of that Class of Certificates that
has not been distributed to the Certificateholders.
(3) The LTVs for each Class of Certificates were obtained for each Regular
Distribution Date by dividing (1) the expected Pool Balance of that Class
together with the expected Pool Balance of all other Classes equal or senior
in right of payment to that Class after giving effect to the distributions
expected to be made on that date, by (2) the assumed value of all of the
Aircraft on that Regular Distribution Date based on the assumptions
described above.
The above table was compiled on an aggregate basis. However, the Equipment
Notes for an Aircraft will not have a security interest in any other Aircraft.
This means that any excess proceeds realized from the sale of an Aircraft or
other exercise of remedies will not be available to cover any shortfalls on the
Equipment Notes relating to any other Aircraft. The proceeds from the sale of an
Aircraft, to the extent paid to the Subordination Agent in respect of any Series
of Equipment Notes secured by that Aircraft, may be available for distribution,
pursuant to the Intercreditor Agreement, to the Class A-1 and Class A-2
Certificateholders in a default situation. Appendix IV to this Prospectus
Supplement sets forth the LTVs for the Equipment Notes issued for each
individual Aircraft. See "Description of the Equipment Notes -- Loan to Value
Ratios of Equipment Notes" for examples of LTVs for the Equipment Notes issued
in respect of individual Aircraft, which may be more relevant in a default
situation than the aggregate values shown above.
S-3
CASH FLOW STRUCTURE
Set forth below is a diagram illustrating the structure for the Offering
and certain cash flows.
[SOUTHWEST AIRLINES CHART]
---------------
(1) Southwest will issue Series A-1, Series A-2 and Series B Equipment Notes in
respect of each Aircraft. The Equipment Notes with respect to each Aircraft
will be subject to a separate Indenture. The Equipment Notes will not be
cross-collateralized. There will be no cross-default provisions in the
Indentures.
(2) Separate Liquidity Facilities will be available with respect to the Class
A-1 and Class A-2 Certificates for up to three semiannual interest
distributions on the Certificates for such Classes. There will be no
liquidity facility available with respect to the Class B Certificates.
S-4
THE OFFERING
Trusts..................... The Class A-1 Trust, the Class A-2 Trust and the
Class B Trust each will be formed pursuant to a
separate trust supplement to a basic pass through
trust agreement between Southwest and Wilmington
Trust Company, as Trustee under each Trust.
Certificates Offered....... - Class A-1 Certificates
- Class A-2 Certificates
- Class B Certificates
Each Class of Certificates will represent a
fractional undivided interest in a related Trust.
Use of Proceeds............ The proceeds from the sale of the Certificates of
each Trust will be used by the respective Trustee
to acquire Equipment Notes to be held by such
Trust. The Equipment Notes will be full recourse
obligations of Southwest.
Southwest will issue Equipment Notes under 29
separate Indentures. Southwest will use the
proceeds from the issuance of the Equipment Notes
for general corporate purposes, including, among
other possible uses, the repayment of the $475
million of borrowings outstanding under Southwest's
bank credit facility and accrued interest thereon.
Pass Through Trustee,
Subordination Agent and
Indenture Trustee.......... Wilmington Trust Company
Liquidity Provider for
Class A-1 and Class A-2
Certificates............... Westdeutsche Landesbank Girozentrale, New York
branch. There will be no liquidity facility
available with respect to the Class B Certificates.
Trust Property............. The property of each Trust will include:
- Subject to the Intercreditor Agreement, Equipment
Notes acquired by such Trust.
- All rights of the Trust under the Intercreditor
Agreement, the Indentures and the Participation
Agreements.
- For each of the Class A-1 and A-2 Trusts only,
all monies receivable under the Liquidity
Facility for such Trust.
- Funds from time to time deposited with the
Trustee in accounts relating to such Trust.
Regular Distribution
Dates...................... May 1 and November 1 commencing on May 1, 2002.
Record Dates............... The fifteenth day preceding the related
Distribution Date.
Distributions.............. The Trustee will distribute all payments of
principal, Make-Whole Premium (if any) and interest
received on the Equipment Notes held in each Trust
to the holders of the Certificates of such Trust,
subject to the subordination provisions of the
Intercreditor Agreement applicable to the
Certificates. Scheduled payments of principal and
interest made on the Equipment Notes will be
distributed on the applicable Regular Distribution
Dates. Special payments, if due, will
S-5
be made from the proceeds resulting from any early
redemption or purchase of the Equipment Notes on a
Special Distribution Date after not less than 15
days' notice to Certificateholders. These special
payments will be made up of the principal, interest
and, in some instances, a Make-Whole Premium,
payable by Southwest.
Intercreditor Agreement.... The Trustees, the Liquidity Provider and the
Subordination Agent will enter into the
Intercreditor Agreement. The Intercreditor
Agreement states how the Subordination Agent will
distribute payments made on the Equipment Notes
and, in the case of the Class A-1 and Class A-2
Trusts, under the Liquidity Facilities, among such
Trusts and the Liquidity Provider. The
Intercreditor Agreement also sets forth agreements
among the Trustees and the Liquidity Provider
relating to who will control the exercise of
remedies under the Equipment Notes and the related
Indentures.
Subordination.............. Under the Intercreditor Agreement, after the
Liquidity Provider is reimbursed, if necessary, and
other specified fees and expenses are paid, the
Subordination Agent will generally make
distributions on the Certificates in the following
order:
- First, to the holders of the Class A-1 and Class
A-2 Certificates on a pro rata basis.
- Second, to the holders of the Class B
Certificates.
However, if Southwest is in bankruptcy or certain
other specified events have occurred but Southwest
is continuing to meet certain of its obligations,
the subordination provisions applicable to the
Certificates permit distributions to be made on
Class B Certificates prior to making distributions
in full on the Class A-1 and Class A-2
Certificates.
Control of Indenture
Trustee.................... The holders of at least a majority of the
outstanding principal amount of Equipment Notes
issued under each Indenture will be entitled to
direct the Indenture Trustee under such Indenture
in taking action as long as no Indenture Default is
continuing thereunder. If an Indenture Default is
continuing, subject to certain conditions, the
Controlling Party will direct the Indenture Trustee
in exercising remedies, including accelerating such
Equipment Notes or foreclosing the lien on the
Aircraft securing such Equipment Notes.
The Controlling Party will be:
- The Class A-1 Trustee or Class A-2 Trustee,
whichever represents the Class with the larger
principal amount of Certificates outstanding at
the time that an Indenture Default occurs.
- Upon payment of final distributions to the
holders of such larger Class, the other of the
Class A-1 Trustee or Class A-2 Trustee.
- Upon payment of final distributions to the
holders of Class A-1 and A-2 Certificates, the
Class B Trustee.
- Under certain circumstances, and notwithstanding
the foregoing, the Liquidity Provider with the
largest amount owed to it.
In exercising remedies during the nine months after
the earlier of (a) the acceleration of the
Equipment Notes issued pursuant to any
S-6
Indenture or (b) the bankruptcy of Southwest, the
Controlling Party may not, without the consent of
each Trustee, direct the sale of such Equipment
Notes or the Aircraft subject to the lien of such
Indenture for less than certain specified minimum
amounts.
Right to Buy Other Classes
of Certificates............ If Southwest is in bankruptcy or certain other
specified events have occurred, the
Certificateholders will have the right to buy
certain other Classes of Certificates on the
following basis:
- If the Class A-1 or Class A-2 Certificateholders
are then represented by the Controlling Party,
the Certificateholders of such other Class will
have the right to purchase all of such Class of
Certificates represented by the Controlling
Party.
- The Class B Certificateholders will have the
right to purchase all of the Class A-1 and Class
A-2 Certificates.
The purchase price in each case described above
will be the outstanding balance of the applicable
Class of Certificates plus accrued and unpaid
interest.
Liquidity Facilities....... Under the Liquidity Facility for each of the Class
A-1 and Class A-2 Trusts, the Liquidity Provider
will, if necessary, make advances in an aggregate
amount sufficient to pay interest on the applicable
Certificates on up to three successive semiannual
Regular Distribution Dates at the applicable
interest rate for such Certificates. There is no
Liquidity Facility for the Class B Certificates.
Notwithstanding the subordination provisions
applicable to the Certificates, the holders of the
Certificates to be issued by each of the Class A-1
and Class A-2 Trusts will be entitled to receive
and retain the proceeds of drawings under the
Liquidity Facility for such Trust.
Upon each drawing under any Liquidity Facility to
pay interest on the Class A-1 and Class A-2
Certificates, the Subordination Agent will
reimburse the applicable Liquidity Provider for the
amount of such drawing, together with interest on
such drawing. Such reimbursement obligation and all
interest, fees and other amounts owing to the
Liquidity Provider under each Liquidity Facility
will rank equally with comparable obligations
relating to the other Liquidity Facility and will
rank senior to all Classes of the Certificates in
right of payment.
Equipment Notes
(a) Issue and Purchase..... On the Issuance Date, pursuant to the Participation
Agreement and Indenture for each Aircraft and
subject to certain customary conditions precedent
contained therein, Southwest will issue Series A-1,
Series A-2 and Series B Equipment Notes, which will
be purchased, respectively, by the Class A-1, Class
A-2 and Class B Trusts using the proceeds from the
issuance of the Certificates.
(b) Interest............... The Equipment Notes held in each Trust will accrue
interest at the rate per annum for the Certificates
issued by such Trust set forth on the cover page of
this Prospectus Supplement. Interest will be
payable on May 1 and November 1 of each year,
commencing on May 1, 2002. Interest will be
calculated on the basis of a 360-day year
consisting of twelve 30-day months.
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(c) Principal.............. Amortizing Notes. Principal payments on the Series
A-1 Equipment Notes are scheduled on May 1 and
November 1 in certain years, commencing on May 1,
2002.
Bullet Maturity Notes. The entire principal amount
of the Series A-2 and Series B Equipment Notes is
scheduled to be paid on November 1, 2006.
(d) Redemption and
Purchase................... Aircraft Event of Loss. If an Event of Loss occurs
with respect to an Aircraft, all of the Equipment
Notes issued with respect to such Aircraft will be
redeemed, unless Southwest replaces such Aircraft
under the related financing agreements. The
redemption price in such case will be the unpaid
principal amount of such Equipment Notes, together
with accrued interest, but without any Make-Whole
Premium.
Optional Redemption. Southwest may elect to redeem
all of the Equipment Notes with respect to any
Aircraft or, with Ratings Confirmation, all of any
Series of Equipment Notes, prior to maturity. The
redemption price in any such case will be the
unpaid principal amount of such Equipment Notes,
together with accrued interest plus a Make-Whole
Premium. See "Description of the Equipment
Notes -- Redemption".
(e) Security............... The Equipment Notes issued with respect to each
Aircraft will be secured by a mortgage on such
Aircraft. Southwest will not cross-collateralize
the Equipment Notes. This means that the Equipment
Notes issued in respect of an Aircraft will not be
secured by any other Aircraft. Accordingly, any
excess proceeds from the sale of an Aircraft or
other exercise of remedies with respect to such
Aircraft will not be available to cover any
shortfall with respect to any other Aircraft.
There will not be cross-default provisions in the
Indentures. This means that if the Equipment Notes
secured by one or more Aircraft are in default and
the Equipment Notes issued with respect to the
remaining Aircraft are not in default, no remedies
will be exercisable with respect to the Equipment
Notes secured by the remaining Aircraft.
By virtue of the Intercreditor Agreement, all of
the Equipment Notes will be effectively
cross-subordinated. Accordingly, any payments
received on the Series B Equipment Notes may be
applied in accordance with the priority of payment
provisions set forth in the Intercreditor Agreement
to make distributions on the Class A-1 and Class
A-2 Certificates.
(f) Section 1110
Protection................. Vinson & Elkins L.L.P. will provide an opinion to
the Trustees that the benefits of Section 1110 of
the U.S. Bankruptcy Code will be available with
respect to the Equipment Notes.
Certain Federal Income Tax
Consequences............... Each Certificate Owner generally should report on
its federal income tax return its pro rata share of
income from the Equipment Notes and other property
held by the relevant Trust. See "Certain U.S.
Federal Income Tax Consequences".
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Certain ERISA
Considerations............. Each person who acquires a Certificate will be
deemed to have represented that either: (a) no
employee benefit plan assets have been used to
purchase or hold such Certificate or (b) the
purchase and holding of such Certificate are exempt
from the prohibited transaction restrictions of the
Employee Retirement Income Security Act of 1974 and
the Internal Revenue Code of 1986 pursuant to one
or more prohibited transaction statutory or
administrative exemptions. See "Certain ERISA
Considerations".
Rating of the
Certificates............... It is a condition to the issuance of the
Certificates that they be rated by Moody's and
Standard & Poor's not less than the ratings set
forth below:
STANDARD &
CERTIFICATES MOODY'S POOR'S
------------ ------- ----------
Class A-1................................. Aa2 AAA
Class A-2................................. Aa2 AAA
Class B................................... A2 A+
Southwest expects that when the Certificates are
issued, the ratings assigned to them by Standard &
Poor's will be placed on CreditWatch with negative
implications. A rating is not a recommendation to
purchase, hold or sell Certificates, and such
rating does not address market price or suitability
for a particular investor. We cannot assure you
that such ratings will not be lowered or withdrawn
by a Rating Agency.
STANDARD &
MOODY'S POOR'S
------- ----------
Threshold Rating for the Liquidity
Provider............................. Short term............................... P-1 A-1+
Liquidity Provider
Rating..................... The Liquidity Provider for the Class A-1 and Class
A-2 Certificates currently meets the Threshold
Rating requirement.
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SUMMARY FINANCIAL AND OPERATING DATA
The following tables summarize certain consolidated financial data and
certain operating data of Southwest. The following selected consolidated
financial data for the years ended December 31, 2000, 1999 and 1998 are derived
from the audited consolidated financial statements of Southwest and should be
read in conjunction with those financial statements. The following selected
consolidated financial data for the nine months ended September 30, 2001 and
2000 are derived from our unaudited consolidated financial statements, which
will be included in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001, and which include all adjustments, consisting solely of
normal recurring accruals, that we consider necessary for the fair presentation
of the financial position and results of our operations for these periods.
Operating results for the nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. See "The Company -- Recent Developments". Our selected
consolidated financial data should be read in conjunction with, and are
qualified in their entirety by reference to, the consolidated financial
statements, including the notes thereto, incorporated by reference into this
Prospectus Supplement.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
FINANCIAL DATA:
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Operating revenues.......................... $ 4,317,527 $ 4,182,156 $ 5,649,560 $ 4,735,587 $ 4,163,980
Operating expenses.......................... 3,723,522 3,412,081 4,628,415 3,954,011 3,480,369
----------- ----------- ----------- ----------- -----------
Operating income............................ 594,005 770,075 1,021,145 781,576 683,611
Other expenses(income), net................. (135,818) 2,164 3,781 7,965 (21,501)
----------- ----------- ----------- ----------- -----------
Income before income taxes.................. 729,823 767,911 1,017,364 773,611 705,112
Provision for income taxes.................. 282,181 297,348 392,140 299,233 271,681
----------- ----------- ----------- ----------- -----------
Net income.................................. $ 447,642 $ 470,563(3) $ 625,224(3) $ 474,378 $ 433,431
=========== =========== =========== =========== ===========
Net income per share, basic(4).............. $ .59 $ .63(3) $ .84(3) $ .63 $ .58
Net income per share, diluted(4)............ $ .55 $ .60(3) $ .79(3) $ .59 $ .55
Cash and cash equivalents................... $ 1,489,391 $ 580,608 $ 522,995 $ 418,819 $ 378,511
Total current assets........................ $ 1,752,466 $ 859,872 $ 831,536 $ 632,595 $ 574,155
Total property and equipment, net........... $ 6,207,858 $ 5,568,491 $ 5,819,725 $ 5,008,166 $ 4,137,610
Other assets, net........................... $ 34,602 $ 19,294 $ 18,311 $ 12,942 $ 4,231
Total assets at period-end.................. $ 7,994,926 $ 6,447,657 $ 6,669,572 $ 5,653,703 $ 4,715,996
Long-term obligations at period-end......... $ 751,616 $ 762,612 $ 760,992 $ 871,717 $ 623,309
Stockholders' equity at period-end.......... $ 3,949,660 $ 3,210,520 $ 3,451,320 $ 2,835,788 $ 2,397,918
OTHER DATA:
Ratio of earnings to fixed charges.......... 5.78 5.98 5.97 5.01 4.58
OPERATING DATA:
Revenue passengers carried.................. 49,450,492 47,391,379 63,678,261 57,500,213 52,586,400
Revenue passenger miles (RPMs) (000s)....... 33,710,859 31,376,044 42,215,162 36,479,322 31,419,110
Available seat miles (ASMs) (000s).......... 48,587,630 44,209,075 59,909,965 52,855,467 47,543,515
Load factor(1).............................. 69.4% 71.0% 70.5% 69.0% 66.1%
Average length of passenger haul (miles).... 682 662 663 634 597
Trips flown................................. 705,273 671,968 903,754 846,823 806,822
Average passenger fare...................... $ 84.51 $ 85.37 $ 85.87 $ 79.35 $ 76.26
Passenger revenue yield per RPM............. 12.40c 12.89c 12.95c 12.51c 12.76c
Operating revenue yield per ASM............. 8.89c 9.46c 9.43c 8.96c 8.76c
Operating expenses per ASM.................. 7.66c 7.72c 7.73c 7.48c 7.32c
Fuel cost per gallon, excluding fuel tax
(average)................................. 74.40c 77.93c 78.69c 52.71c 45.67c
Number of employees at period-end........... 30,946 28,321 29,274 27,653 25,844
Size of fleet at period-end(2).............. 358 334 344 312 280
---------------
(1) Revenue passenger miles divided by available seat miles.
(2) Includes leased aircraft.
(3) Excludes cumulative effect of accounting change of $22.1 million ($.03 per
share).
(4) All per share data have been restated due to the Company's February 2001
three-for-two stock split.
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RISK FACTORS
You should carefully consider the following risk factors as well as other
information contained in this Prospectus Supplement and the accompanying
Prospectus as well as the other information incorporated by reference into this
Prospectus Supplement and the Prospectus before deciding to invest in the
Certificates.
APPRAISALS AND REALIZABLE VALUE OF AIRCRAFT
Three independent appraisal and consulting firms have prepared Appraisals
of the Aircraft. Letters summarizing the Appraisals are annexed to this
Prospectus Supplement as Appendix II. The Appraisals are based on varying
assumptions and methodologies, which differ among the appraisers, and may not
reflect current market conditions that could affect the current market value of
the Aircraft. Base value is the theoretical value for an aircraft that assumes a
balanced market, while current market value is the value for an aircraft in the
actual market. The Appraisals were prepared without physical inspection of the
Aircraft. Any appraisals that are based on other assumptions and methodologies
may result in valuations that are materially different from those contained in
the Appraisals. See "Description of the Aircraft and the Appraisals -- The
Appraisals".
An Appraisal is only an estimate of value. It does not indicate the price
at which an Aircraft was, or may be, purchased from the Aircraft manufacturer,
nor should you rely upon an Appraisal as a measure of realizable value. The
proceeds realized upon a sale of any Aircraft may be less than its appraised
value. In particular, each Appraisal is an estimate of value as of the date of
such Appraisal. The value of an Aircraft if remedies are exercised under the
applicable Indenture will depend on market and economic conditions, the supply
of similar aircraft, the availability of buyers, the condition of the Aircraft,
whether the Aircraft is sold separately or as part of a block or other factors.
In addition, the value of the Aircraft will likely be negatively affected,
at least initially, as a consequence of the events of September 11, 2001
referred to under "The Company -- Recent Developments". Although each of the
Appraisals is dated after September 11, 2001, the Appraisals contain a
disclaimer as to the effect of the events of that day on the appraised values.
Nevertheless, one of the Appraisals contains a statement that consideration has
been given to such events and two of them contain a statement that values have
not been adjusted to reflect the effects of such events.
Southwest cannot assure you that the proceeds realized upon any such
exercise of remedies would be sufficient to satisfy in full payments due on the
Equipment Notes relating to such Aircraft of the full amount of distributions
expected on the Certificates.
REPOSSESSION
While we operate only domestically, there will be no geographic
restrictions on our ability to operate the Aircraft. Although we do not
currently intend to do so, we may register the Aircraft in specified foreign
jurisdictions and/or lease the Aircraft to certain permitted lessees. If an
Indenture Default occurs and any related Aircraft is located outside the United
States, is registered in a foreign jurisdiction or is leased to a foreign or
domestic operator, it may be difficult, time consuming and expensive for an
Indenture Trustee to exercise repossession rights. Additional difficulties may
exist if a lessee is the subject of a bankruptcy, insolvency or similar event.
In addition, some jurisdictions may allow for other liens or other third
party rights to have priority over an Indenture Trustee's mortgage on an
Aircraft. As a result, the benefits of an Indenture Trustee's mortgage on an
Aircraft may be less than they would be if the Aircraft were located or
registered in the United States.
PRIORITY OF DISTRIBUTIONS; SUBORDINATION
Under the Intercreditor Agreement, the Liquidity Provider will receive
payment of all amounts owed to it before the Certificateholders of any Class
receive any funds. In addition, in specified default situations, the Indenture
Trustees, the Subordination Agent and the Trustees will receive some payments
S-11
for any amounts due to them before the Certificateholders of any Class receive
any funds. See "Description of the Intercreditor Agreement -- Priority of
Distributions".
The Class B Certificates are subordinated to the Class A-1 and Class A-2
Certificates in rights to distributions. See "Description of the
Certificates -- Subordination". Consequently, a payment default under any
Equipment Note or a Triggering Event may cause the distribution to the Class A-1
and Class A-2 Certificates of payments received on the Series B Equipment Notes.
If this should occur, the interest accruing on the remaining Equipment Notes
would be less than the interest accruing on the remaining Class B Certificates
because the Class B Certificates are entitled to distributions of interest that
accrues at a higher rate than the rate at which interest accrues on the
remaining Equipment Notes (which include Equipment Notes of series that apply to
Class A-1 and Class A-2 Certificates and bear interest at a lower rate). As a
result of this possible interest shortfall, the holders of the Class B
Certificates may not receive the full amount due to them after a payment default
under any Equipment Note even if all Equipment Notes are eventually paid in
full.
NO LIQUIDITY FACILITY FOR THE CLASS B CERTIFICATES
While the Class A-1 and Class A-2 Certificates will have the benefit of
separate Liquidity Facilities which cover certain interest payments, the Class B
Certificates will not have the benefit of any liquidity facility.
CONTROL OVER COLLATERAL; SALE OF COLLATERAL
If an Indenture Default is continuing, subject to certain conditions, the
Indenture Trustee under such Indenture will be directed by the Controlling Party
in exercising remedies under such Indenture, including accelerating the
applicable Equipment Notes or foreclosing the lien on the Aircraft securing such
Equipment Notes. See "Description of the Certificates -- Indenture Defaults and
Certain Rights Upon an Indenture Default".
The Controlling Party will be:
- The Class A-1 Trustee or Class A-2 Trustee, whichever represents the
Class with the larger principal amount of Certificates outstanding at the
time that the Indenture Default occurs.
- Upon payment of final distributions to the holders of such larger Class,
the other of the Class A-1 Trustee or Class A-2 Trustee.
- Upon payment of final distributions to the holders of Class A-1 and A-2
Certificates, the Class B Trustee.
- Under certain circumstances, and notwithstanding the foregoing, the
Liquidity Provider with the largest amount owed to it.
The market for any Aircraft or Equipment Notes, as the case may be, during
any Indenture Default may be very limited, and we cannot assure you as to the
price at which they could be sold. Some Certificateholders will receive a
smaller amount of principal distributions than anticipated and will not have any
claim for the shortfall against any Indenture Trustee, any Pass Through Trustee
or, if the Equipment Notes are sold, Southwest, if the Controlling Party sells:
- any Equipment Notes for less than their outstanding principal amount; or
- any Aircraft for less than the outstanding principal amount of the
related Equipment Notes.
The Equipment Notes will not be cross-collateralized. This means that the
Equipment Notes secured by an Aircraft will not be secured by any other
Aircraft. Accordingly, any proceeds realized from the sale of an Aircraft or
other exercise of default remedies with respect to that Aircraft in excess of
the principal amount of the Equipment Notes related to the Aircraft will not be
available to cover shortfalls, if any, on the Equipment Notes relating to any
other Aircraft.
S-12
NO FINANCIAL COVENANTS
The Certificates, the Equipment Notes and the underlying agreements will
not contain any financial or similar covenants or "event risk" provisions
protecting the Certificateholders.
RATINGS OF THE CERTIFICATES
It is a condition to the issuance of the Certificates that the Class A-1
and Class A-2 Certificates be rated not lower than Aa2 by Moody's and AAA by
Standard & Poor's and the Class B Certificates be rated not lower than A2 by
Moody's and A+ by Standard & Poor's. Southwest expects that when the
Certificates are issued, the ratings assigned to them by Standard & Poor's will
be placed on CreditWatch with negative implications. A rating is not a
recommendation to purchase, hold or sell Certificates, since such rating does
not address market price or suitability for a particular investor. A rating may
not remain for any given period of time and may be lowered or withdrawn entirely
by a Rating Agency if in its judgment circumstances in the future (including the
downgrading of Southwest or a Liquidity Provider) so warrant. The ratings of the
Certificates are based primarily on the default risk of the Equipment Notes, the
availability of the Liquidity Facilities for the benefit of holders of the Class
A-1 and Class A-2 Certificates, the collateral value provided by the Aircraft
securing the Equipment Notes and the subordination provisions applicable to the
Certificates.
The reduction, suspension or withdrawal of any of the ratings of the
Certificates will not, by itself, constitute an Indenture Default.
LIMITED ABILITY TO RESELL THE CERTIFICATES
Prior to this Offering, there has been no public market for the
Certificates. Neither Southwest nor any Trustee intends to apply for listing of
the Certificates on any securities exchange or otherwise. The Underwriters may
assist in resales of the Certificates, but they are not required to do so, and
any market-making activity may be discontinued at any time without notice at the
sole discretion of each underwriter. A secondary market for the Certificates may
not develop. If a secondary market does develop, it might not continue or it
might not be sufficiently liquid to allow you to resell any of your
Certificates. If an active public market does not develop, the market price and
liquidity of the Certificates may be adversely affected.
S-13
USE OF PROCEEDS
The proceeds from the sale of the Certificates of each Trust will be used
by the applicable Trustee to acquire the Equipment Notes to be held by that
Trust. Southwest will issue the Equipment Notes under 29 separate Indentures,
one for each Aircraft. Southwest will use the proceeds from the issuance of the
Equipment Notes for general corporate purposes, including, among other possible
uses, repayment of the $475 million of borrowings outstanding under Southwest's
bank credit facility and accrued interest thereon. The bank credit facility was
drawn down in mid-September 2001 for general corporate purposes and bears
interest at six-month LIBOR (as defined in the bank credit facility) plus a
margin of 0.155%. The bank credit facility matures in May 2002, and any
borrowings under the facility may be repaid at any time.
S-14
THE COMPANY
Southwest Airlines Co. ("Southwest" or the "Company") is a major U.S.
airline that provides primarily short-haul, high frequency, point-to-point, low
fare service across the United States. Southwest was incorporated in Texas and
commenced customer service in 1971. We are the only major U.S. airline that has
been profitable each year since 1972. Based on data for second quarter 2001 (the
latest available data), we are the fourth largest carrier in the United States
based on domestic passengers boarded and the second largest based on scheduled
domestic departures. As of September 30, 2001, Southwest operated 358 Boeing 737
aircraft and provided service to 58 airports in 57 cities in 29 states
throughout the United States. In early October 2001, Southwest commenced service
to Norfolk, Virginia.
Additional information concerning Southwest is included in its reports and
other documents incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus. See "Where You Can Find More Information" in the
Prospectus.
RECENT DEVELOPMENTS
On October 18, 2001, Southwest announced the following unaudited results
for the quarter and nine-month period ended September 30, 2001. Operating
revenues for third quarter 2001 decreased 9.7 percent to $1.34 billion, compared
to $1.48 billion for third quarter 2000. Net income for third quarter 2001
decreased 18.1 percent to $151.0 million, compared to net income of $184.3
million for third quarter 2000. Third quarter 2001 net income includes a special
pre-tax gain of $169.0 million from a federal grant and special pre-tax charges
of approximately $58.0 million arising from the terrorist attacks on September
11, 2001, including refunds of nonrefundable fares, provisions for uncollectible
accounts, write-downs of various assets due to impairment and estimated charges
for the deferral of Boeing 737 aircraft firm orders and options. Excluding the
special gain and charges, third quarter 2001 net income was $82.8 million, which
reflects the adverse impact of operating and other losses caused by and
following the terrorist attacks.
Operating revenues for the nine months ended September 30, 2001 increased
3.2 percent to $4.32 billion while operating expenses increased 9.1 percent to
$3.72 billion, resulting in operating income in 2001 of $594.0 million. Net
income for the nine-month period was $447.6 million in 2001 versus $470.6
million in 2000, before the cumulative effect of a change in accounting
principle. Excluding the gain resulting from the federal grant and special
charges related to the September 11 attacks, net income for the nine-month
period was $344.2 million.
On September 11, 2001, the FAA suspended all commercial airline flights as
a result of the terrorist attacks. From September 11, 2001 until it resumed
operations on September 14, Southwest cancelled approximately 9,000 scheduled
flights. Although flight operations were suspended, Southwest continued to incur
substantially all of its normal operating expenses during this period. Total
operating losses incurred during the time operations were suspended approximated
$25 million. Once operations were resumed, Southwest continued to incur
additional operating losses through the end of the quarter of approximately $95
million due to depressed passenger traffic and revenues.
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (the "Act"). The Act provides
for direct cash grants to U.S. airlines to compensate them for "direct and
incremental losses" (as defined in the Act and Department of Transportation
instructions) incurred during third and fourth quarters 2001 and resulting from
the terrorist attacks. If "direct and incremental losses" resulting from the
attacks continue, as expected currently, Southwest will recognize gains from
additional grants of up to approximately $120 million during fourth quarter
2001.
As a result of the attacks, Southwest has not placed into its schedule the
eleven Boeing 737-700 aircraft originally scheduled for delivery from September
11 through December 31, 2001. Southwest is currently operating 100 percent of
its fleet and, at this point, has no plans to ground any aircraft early. Because
Southwest did not place the remaining 2001 aircraft deliveries into its fall
schedule, minor
S-15
adjustments were made to accommodate its new Norfolk service, which began on
October 7, 2001, and other scheduled service previously announced.
Southwest recently completed discussions with Boeing regarding future
aircraft delivery dates. Boeing has agreed to defer delivery of seven aircraft,
originally scheduled for delivery in September/October 2001 to November 2001.
Twelve more aircraft are in production and will be delivered by Boeing from
December 2001 through April 2002. Southwest currently has no plans to increase
its fleet until sometime after April 2002 and is pursuing an interim arrangement
for these 19 aircraft.
S-16
DESCRIPTION OF THE CERTIFICATES
The following summary describes all material terms of the Certificates and
the Pass Through Trust Agreements and supplements (or, to the extent
inconsistent therewith, replaces) the description of the general terms and
provisions of the Certificates set forth in the prospectus (the "Prospectus")
accompanying this Prospectus Supplement. The summary does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Basic Agreement, which was filed on October 11, 2001 with the Securities
and Exchange Commission (the "SEC") as an exhibit to Southwest's Registration
Statement on Form S-3, and to all of the provisions of the Certificates, the
Trust Supplements for the Trusts and the Intercreditor Agreement, each of which
will be filed as an exhibit to a Current Report on Form 8-K to be filed by
Southwest.
We are offering the Class A-1, Class A-2 and Class B Certificates pursuant
to this Prospectus Supplement.
Except as otherwise indicated, the following summary relates to each of the
Trusts and the Certificates issued by each Trust. The terms and conditions
governing each of the Trusts will be substantially the same, except as described
under "-- Subordination" and "-- Purchase Rights of Certificateholders" below
and except that the principal amount and scheduled principal repayments of the
Equipment Notes held by each Trust and the interest rate and maturity date of
the Equipment Notes held by each Trust will differ. The references to Sections
in parentheses in the following summary are to the relevant Sections of the
Basic Agreement unless otherwise indicated.
GENERAL
Each Certificate will represent a fractional undivided interest in one of
the three Southwest Airlines 2001-1 Pass Through Trusts (the "Class A-1 Trust",
the "Class A-2 Trust" and the "Class B Trust", and collectively, the "Trusts").
The Trusts will be formed pursuant to a pass through trust agreement between
Southwest and Wilmington Trust Company, as trustee (the "Trustee"), dated as of
October 10, 2001 (the "Basic Agreement"), and three separate supplements thereto
(each, a "Trust Supplement" and, together with the Basic Agreement,
collectively, the "Pass Through Trust Agreements") relating to such Trusts
between Southwest and the Trustee, as trustee under each Trust. The Certificates
to be issued by the Class A-1 Trust, the Class A-2 Trust and the Class B Trust
are referred to herein as the "Class A-1 Certificates", the "Class A-2
Certificates" and the "Class B Certificates", respectively, and collectively as
the "Certificates".
Each Certificate will represent a fractional undivided interest in the
Trust created by the Basic Agreement and the applicable Trust Supplement
pursuant to which such Certificate is issued. (Section 2.01) The property of
each Trust (the "Trust Property") will consist of:
- Subject to the Intercreditor Agreement, Equipment Notes acquired under
the Participation Agreements and issued by Southwest on a recourse basis
in connection with each separate secured loan transaction with respect to
each Aircraft and all monies paid or due to be paid on such Equipment
Notes.
- The rights of such Trust under the Participation Agreements, the
Indentures, and the Intercreditor Agreement (including all monies
receivable in respect of such rights).
- With respect to the Class A-1 and Class A-2 Trusts, all monies receivable
under the Liquidity Facility for such Trust.
- Funds from time to time deposited with the Trustee in accounts relating
to such Trust, including all proceeds from the sale of any Equipment
Notes by the Trustee.
The Certificates will be issued in fully registered form only and will be
subject to the provisions described below under "-- Book-Entry; Delivery and
Form". Certificates will be issued only in minimum denominations of $1,000 or
integral multiples thereof, except that one Certificate of each Trust may be
issued in a different denomination. (Section 3.01)
S-17
The Certificates represent interests in the respective Trusts, and all
payments and distributions thereon will be made only from the Trust Property of
the related Trust. (Section 3.09) The Certificates do not represent an interest
in or obligation of Southwest, the Trustees, any of the Indenture Trustees in
their individual capacities, or any affiliate of any thereof.
SUBORDINATION
The Certificates are subject to subordination terms set forth in the
Intercreditor Agreement which vary depending upon whether a Triggering Event has
occurred. See "Description of the Intercreditor Agreement -- Priority of
Distributions".
PAYMENTS AND DISTRIBUTIONS
The Equipment Notes held in each Trust will accrue interest at the
applicable rate per annum for the Certificates to be issued by such Trust set
forth on the cover page of this Prospectus Supplement, payable on May 1 and
November 1 of each year, commencing on May 1, 2002. Such interest payments will
be distributed to holders of the Certificates ("Certificateholders") of such
Trust on each such date until the final Distribution Date for such Trust,
subject to the Intercreditor Agreement. Interest on the Certificates is
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Payments of interest applicable to the Certificates to be issued by each of
the Class A-1 and Class A-2 Trusts will be supported by a separate Liquidity
Facility to be provided by the Liquidity Provider for the benefit of the holders
of such Certificates in an aggregate amount sufficient to pay interest on the
Pool Balance thereof at the Stated Interest Rate for such Certificates on up to
three successive Regular Distribution Dates (without regard to any future
payments of principal on such Certificates). The Liquidity Facilities for the
Class A-1 and Class A-2 Certificates do not provide for drawings thereunder to
pay for principal of or Make-Whole Premium on the Certificates of such Classes,
any interest on the Certificates of such Class in excess of the Stated Interest
Rate, or, notwithstanding the subordination provisions of the Intercreditor
Agreement, principal of or interest or Make-Whole Premium on the Certificates of
any other Class. Therefore, only the holders of the Certificates to be issued by
a particular Trust will be entitled to receive and retain the proceeds of
drawings under the Liquidity Facility for such Certificates. Payments of
interest applicable to the Class B Certificates will not be supported by a
Liquidity Facility. See "Description of the Liquidity Facilities".
Payments of principal of the Series A-1 Equipment Notes are scheduled to be
received by the Class A-1 Trustee on May 1 and November 1 in certain years,
depending upon the terms of the Equipment Notes held in such Trust. The entire
principal amount of the Series A-2 and Series B Equipment Notes is scheduled for
payment on November 1, 2006.
Scheduled payments of interest or principal on the Equipment Notes are
herein referred to as "Scheduled Payments", and May 1 and November 1 of each
year are herein referred to as "Regular Distribution Dates". See "Description of
the Equipment Notes -- Principal and Interest Payments". The "Final Maturity
Date" for the Class A-1 Certificates is November 1, 2007, for the Class A-2
Certificates is May 1, 2008, and for the Class B Certificates is November 1,
2006.
The Trustee of each Trust will distribute, subject to the Intercreditor
Agreement, on each Regular Distribution Date to the Certificateholders of such
Trust all Scheduled Payments received in respect of Equipment Notes held on
behalf of such Trust, the receipt of which is confirmed by the Trustee on such
Regular Distribution Date. Each Certificateholder of each Trust will be entitled
to receive its proportionate share, based upon its fractional interest in such
Trust, of any distribution in respect of Scheduled Payments, subject to the
Intercreditor Agreement, of principal or interest on Equipment Notes held on
behalf of such Trust. Each such distribution of Scheduled Payments will be made
by the applicable Trustee to the Certificateholders of record of the relevant
Trust on the record date applicable to such Scheduled Payment subject to certain
exceptions. (Sections 4.01 and 4.02) If a Scheduled Payment is not received by
the applicable Trustee on a Regular Distribution Date but is received within
five days
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thereafter, it will be distributed on the date received to such holders of
record. If it is received after such five-day period, it will be treated as a
Special Payment and distributed as described below.
Any payment in respect of, or any proceeds of, any Equipment Note or
Collateral under (and as defined in) any Indenture, other than a Scheduled
Payment (each, a "Special Payment"), will be distributed on, in the case of an
early redemption or a purchase of any Equipment Note, the date of such early
redemption or purchase (which shall be a Business Day), and otherwise on the
Business Day specified for distribution of such Special Payment pursuant to a
notice delivered by each Trustee as soon as practicable after the Trustee has
received funds for such Special Payment (each, a "Special Distribution Date").
Any such distribution will be subject to the Intercreditor Agreement.
Each Trustee will mail a notice to the Certificateholders of the applicable
Trust stating the scheduled Special Distribution Date, the related record date,
the amount of the Special Payment and the reason for the Special Payment. In the
case of a redemption or purchase of the Equipment Notes held in the related
Trust, such notice will be mailed not less than 15 days prior to the date such
Special Payment is scheduled to be distributed, and in the case of any other
Special Payment, such notice will be mailed as soon as practicable after the
Trustee has confirmed that it has received funds for such Special Payment.
(Section 4.02(c); Trust Supplements, Section 3.01) Each distribution of a
Special Payment, other than a final distribution, on a Special Distribution Date
for any Trust will be made by the Trustee to the Certificateholders of record of
such Trust on the record date applicable to such Special Payment. (Section
4.02(b)) See "-- Indenture Defaults and Certain Rights Upon an Indenture
Default" and "Description of the Equipment Notes -- Redemption".
Each Pass Through Trust Agreement requires that the Trustee establish and
maintain, for the related Trust and for the benefit of the Certificateholders of
such Trust, one or more non-interest bearing accounts (the "Certificate
Account") for the deposit of payments representing Scheduled Payments received
by such Trustee. Each Pass Through Trust Agreement also requires that the
Trustee establish and maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more accounts (the "Special Payments
Account") for the deposit of payments representing Special Payments received by
such Trustee, which shall be non-interest bearing except in certain
circumstances where the Trustee may invest amounts in such account in certain
permitted investments. Pursuant to the terms of each Pass Through Trust
Agreement, the Trustee is required to deposit any Scheduled Payments relating to
the applicable Trust received by it in the Certificate Account of such Trust and
to deposit any Special Payments so received by it in the Special Payments
Account of such Trust. (Section 4.01; Trust Supplements, Section 3.01) All
amounts so deposited will be distributed by the Trustee on a Regular
Distribution Date or a Special Distribution Date, as appropriate. (Section 4.02;
Trust Supplements, Section 3.01)
The final distribution for each Trust will be made only upon presentation
and surrender of the Certificates for such Trust at the office or agency of the
Trustee specified in the notice given by the Trustee of such final distribution.
The Trustee will mail such notice of the final distribution to the
Certificateholders of such Trust, specifying the date set for such final
distribution and the amount of such distribution. (Trust Supplements, Section
7.01) See "-- Termination of the Trusts" below. Distributions in respect of
Certificates issued in global form will be made as described in "-- Book Entry;
Delivery and Form" below.
If any Distribution Date is a Saturday, Sunday or other day on which
commercial banks are authorized or required to close in New York, New York,
Dallas, Texas or the city and state in which the Trustee, the Subordination
Agent or any Indenture Trustee maintains its corporate trust office (any other
day being a "Business Day"), distributions scheduled to be made on such Regular
Distribution Date or Special Distribution Date will be made on the next
succeeding Business Day without additional interest.
POOL FACTORS
The "Pool Balance" for each Trust or for the Certificates issued by any
Trust indicates, as of any date, the original aggregate face amount of the
Certificates of such Trust less the aggregate amount of all payments made in
respect of the Certificates of such Trust other than payments made in respect of
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interest or premium or reimbursement of any costs or expenses incurred in
connection therewith. The Pool Balance for each Trust or for the Certificates
issued by any Trust as of any Distribution Date shall be computed after giving
effect to any payment of principal of the Equipment Notes or payment with
respect to other Trust Property held in such Trust and the distribution thereof
to be made on that date. (Trust Supplements, Section 2.01)
The "Pool Factor" for each Trust as of any Distribution Date is the
quotient (rounded to the seventh decimal place) computed by dividing (i) the
Pool Balance by (ii) the original aggregate face amount of the Certificates of
such Trust. (Trust Supplements, Section 2.01) The Pool Factor for each Trust
will be 1.0000000 on the date of issuance of the Certificates; thereafter, the
Pool Factor for each Trust will decline as described herein to reflect
reductions in the Pool Balance of such Trust. The amount of a
Certificateholder's pro rata share of the Pool Balance of a Trust can be
determined by multiplying the par value of the Certificateholder's Certificate
of such Trust by the Pool Factor for such Trust as of the applicable
Distribution Date. Notice of the Pool Factor and the Pool Balance for each Trust
will be mailed to Certificateholders of such Trust on each Distribution Date.
(Trust Supplements, Section 3.02)
The following table sets forth the aggregate principal amortization
schedule for the Equipment Notes held in each Trust and the resulting Pool
Factors with respect to such Trust. The actual aggregate principal amortization
schedule applicable to each Trust and the resulting Pool Factors with respect to
such Trust may differ from those set forth below, since the scheduled
distribution of principal payments for any Trust would be affected if any
Equipment Notes held in such Trust are redeemed or purchased or if a default in
payment on such Equipment Notes occurred.
CLASS A-1 CLASS A-2 CLASS B
--------------------------- ---------------------------- ---------------------------
SCHEDULED EXPECTED SCHEDULED EXPECTED SCHEDULED EXPECTED
PRINCIPAL POOL PRINCIPAL POOL PRINCIPAL POOL
DATE PAYMENTS FACTOR PAYMENTS FACTOR PAYMENTS FACTOR
---- -------------- ---------- --------------- ---------- -------------- ----------
May 1, 2002................... $22,421,494.73 0.8505234 $ 0.00 1.0000000 $ 0.00 1.0000000
November 1, 2002.............. 6,167,616.79 0.8094059 0.00 1.0000000 0.00 1.0000000
May 1, 2003................... 11,955,094.30 0.7297053 0.00 1.0000000 0.00 1.0000000
November 1, 2003.............. 6,167,616.82 0.6885878 0.00 1.0000000 0.00 1.0000000
May 1, 2004................... 11,955,094.31 0.6088872 0.00 1.0000000 0.00 1.0000000
November 1, 2004.............. 6,167,616.78 0.5677698 0.00 1.0000000 0.00 1.0000000
May 1, 2005................... 13,543,462.36 0.4774800 0.00 1.0000000 0.00 1.0000000
November 1, 2005.............. 6,999,421.94 0.4308172 0.00 1.0000000 0.00 1.0000000
May 1, 2006................... 64,622,581.97 0.0000000 0.00 1.0000000 0.00 1.0000000
November 1, 2006.............. 0.00 0.0000000 375,000,000.00 0.0000000 89,250,000.00 0.0000000
The Pool Factor and Pool Balance of each Trust will be recomputed if there
has been an early redemption, purchase, or default in the payment of principal
or interest in respect of one or more of the Equipment Notes held in a Trust, as
described in "-- Indenture Defaults and Certain Rights Upon an Indenture
Default" and "Description of the Equipment Notes -- Redemption". In the event of
any such redemption, purchase or default in respect of one or more Equipment
Notes, the Pool Factors and the Pool Balances of each Trust so affected will be
recomputed after giving effect to any Special Payment to Certificateholders
resulting from such an early redemption or default and notice thereof will be
mailed to the Certificateholders of such Trust promptly after the occurrence of
any such event.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee of each Trust will include with each
distribution by it of a Scheduled Payment or Special Payment to
Certificateholders of the related Trust a statement setting forth
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the following information (per $1,000 aggregate principal amount of Certificate
for such Trust, except as to the amounts described in items (1) and (4) below):
(1) the aggregate amount of funds distributed on such Distribution
Date under the Pass Through Trust Agreement including, in the case of the
Class A-1 and A-2 Trusts, any portion thereof paid by the Liquidity
Provider;
(2) the amount of such distribution under the Pass Through Trust
Agreement allocable to principal and the amount allocable to Make-Whole
Premium, if any;
(3) the amount of such distribution under the Pass Through Trust
Agreement allocable to interest; and
(4) the Pool Balance and the Pool Factor for such Trust. (Trust
Supplements, Section 3.01(a))
So long as the Certificates are registered in the name of DTC or its
nominee, on the record date prior to each Distribution Date, the applicable
Trustee will request from DTC a securities position listing setting forth the
names of all DTC Participants reflected on DTC's books as holding interests in
the Certificates on such record date. On each Distribution Date, the applicable
Trustee will mail to each such DTC Participant the statement described above and
will make available additional copies as requested by such DTC Participant for
forwarding to Certificate Owners. (Trust Supplements, Section 3.02(a))
In addition, after the end of each calendar year, the applicable Trustee
will furnish to each Certificateholder of each Trust a report containing the sum
of the amounts determined pursuant to items (1), (2) and (3) above with respect
to the Trust for such calendar year or, in the event such person was a
Certificateholder during only a portion of such calendar year, for the
applicable portion of such calendar year, and such other items as are readily
available to such Trustee and which a Certificateholder shall reasonably request
as necessary for the purpose of such Certificateholder's preparation of its U.S.
federal income tax returns. (Trust Supplements, Section 3.01(b)) Such report and
such other items shall be prepared on the basis of information supplied to the
applicable Trustee by the DTC Participants and shall be delivered by such
Trustee to such DTC Participants to be available for forwarding by such DTC
Participants to Certificate Owners in the manner described above. (Trust
Supplements, Section 3.01(b)) At such time, if any, as the Certificates are
issued in the form of definitive certificates, the applicable Trustee will
prepare and deliver the information described above to each Certificateholder of
record of each Trust as the name and period of ownership of such
Certificateholder appears on the records of the registrar of the Certificates.
INDENTURE DEFAULTS AND CERTAIN RIGHTS UPON AN INDENTURE DEFAULT
Since the Equipment Notes issued under an Indenture will be held in more
than one Trust, a continuing event of default under an Indenture (an "Indenture
Default") would affect the Equipment Notes held by each such Trust. There are no
cross-default provisions in the Indentures for the Equipment Notes of any
Aircraft. Consequently, events resulting in an Indenture Default under any
particular Indenture may or may not result in an Indenture Default under any
other Indenture. If an Indenture Default occurs in fewer than all of the
Indentures, notwithstanding the treatment of Equipment Notes issued under any
Indenture under which an Indenture Default has occurred, payments of principal
and interest on all of the Equipment Notes will continue to be distributed to
the holders of the Certificates as originally scheduled, subject to the
Intercreditor Agreement. See "Description of the Intercreditor
Agreement -- Priority of Distributions".
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential conflict of interest upon an
Indenture Default. In such event, each Trustee has indicated that it would
resign as Trustee of one or all such Trusts, and a successor trustee would be
appointed in accordance with the terms of the applicable Pass Through Trust
Agreement. Wilmington Trust Company will be the initial Trustee under each
Trust.
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Upon the occurrence and continuation of an Indenture Default, the
Controlling Party will direct the Indenture Trustee under such Indenture in the
exercise of remedies thereunder and may accelerate and sell all (but not less
than all) of the Equipment Notes issued under such Indenture to any person,
subject to certain limitations. See "Description of the Intercreditor
Agreement -- Intercreditor Rights -- Sale of Equipment Notes or Aircraft". The
proceeds of such sale will be distributed pursuant to the provisions of the
Intercreditor Agreement. Any such proceeds so distributed to any Trustee upon
any such sale shall be deposited in the applicable Special Payments Account and
shall be distributed to the Certificateholders of the applicable Trust on a
Special Distribution Date. (Sections 4.01 and 4.02) The market for Equipment
Notes at the time of the existence of an Indenture Default may be very limited
and there can be no assurance as to the price at which they could be sold. If
any such Equipment Notes are sold for less than their outstanding principal
amount, certain Certificateholders will receive a smaller amount of principal
distributions than anticipated and will not have any claim for the shortfall
against Southwest, any Liquidity Provider or any Trustee. See "Risk
Factors -- Control Over Collateral; Sale of Collateral".
Any amount, other than Scheduled Payments received on a Regular
Distribution Date or within five days thereafter, distributed to the Trustee of
any Trust by the Subordination Agent on account of any Equipment Note or
Collateral under (and as defined in) any Indenture held in such Trust following
an Indenture Default will be deposited in the Special Payments Account for such
Trust and will be distributed to the Certificateholders of such Trust on a
Special Distribution Date. (Sections 4.01 and 4.02; Trust Supplements, Sections
3.02 and 3.03)
Any funds representing payments received with respect to any defaulted
Equipment Notes, or the proceeds from the sale of any Equipment Notes, held by
the Trustee in the Special Payments Account for such Trust will, to the extent
practicable, be invested and reinvested by such Trustee in certain permitted
investments pending the distribution of such funds on a Special Distribution
Date. (Section 4.04) Such permitted investments are defined as obligations of
the United States or agencies or instrumentalities thereof for the payment of
which the full faith and credit of the United States is pledged and which mature
in not more than 60 days or such lesser time as is required for the distribution
of any such funds on a Special Distribution Date. (Section 1.01)
Each Pass Through Trust Agreement provides that the applicable Trustee
will, within 90 days after the occurrence of any default known to the Trustee,
give to the Certificateholders of such Trust notice, transmitted by mail, of
such uncured or unwaived default with respect to such Trust known to it,
provided that, except in the case of default in a payment of principal, premium,
if any, or interest on any of the Equipment Notes held in such Trust, the
applicable Trustee will be protected in withholding such notice if it in good
faith determines that the withholding of such notice is in the interests of such
Certificateholders. (Section 7.02) The term "default" as used in this paragraph
only with respect to any Trust means the occurrence of an Indenture Default
under any Indenture pursuant to which Equipment Notes held by such Trust were
issued, as described above, except that in determining whether any such
Indenture Default has occurred, any grace period or notice in connection
therewith will be disregarded.
Each Pass Through Trust Agreement contains a provision entitling the
applicable Trustee, subject to the duty of such Trustee during a default to act
with the required standard of care, to be offered reasonable security or
indemnity by the holders of the Certificates of such Trust before proceeding to
exercise any right or power under such Pass Through Trust Agreement at the
request of such Certificateholders. (Section 7.03(e))
Subject to certain qualifications set forth in each Pass Through Trust
Agreement and to the Intercreditor Agreement, the Certificateholders of each
Trust holding Certificates evidencing fractional undivided interests aggregating
not less than a majority in interest in such Trust shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee with respect to such Trust or pursuant to the terms of
the Intercreditor Agreement, or exercising any trust or power conferred on such
Trustee under such Pass Through Trust Agreement or the Intercreditor Agreement,
including any right of such Trustee as Controlling Party under the Intercreditor
Agreement or as holder of the Equipment Notes. (Section 6.04)
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In certain cases, the holders of the Certificates of a Trust evidencing
fractional undivided interests aggregating not less than a majority in interest
of such Trust may on behalf of the holders of all the Certificates of such Trust
waive any past "event of default" under such Trust (i.e., any Indenture Default
under any Indenture pursuant to which Equipment Notes held by such Trust were
issued) and its consequences or, if the Trustee of such Trust is the Controlling
Party, may direct the Trustee to instruct the applicable Indenture Trustee to
waive any past Indenture Default and its consequences, except (i) a default in
the deposit of any Scheduled Payment or Special Payment or in the distribution
thereof, (ii) a default in payment of the principal, Make-Whole Premium, if any,
or interest with respect to any of the Equipment Notes and (iii) a default in
respect of any covenant or provision of the Pass Through Trust Agreement that
cannot be modified or amended without the consent of each Certificateholder of
such Trust affected thereby. (Section 6.05) Each Indenture will provide that,
with certain exceptions, the holders of the majority in aggregate unpaid
principal amount of the Equipment Notes issued thereunder may on behalf of all
such holders waive any past default or Indenture Default thereunder.
Notwithstanding such provisions of the Indentures, pursuant to the Intercreditor
Agreement only the Controlling Party will be entitled to waive any such past
default or Indenture Default.
PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event, with
ten days' written notice to the Trustee and each Certificateholder of the same
Class:
- If the Class A-1 or Class A-2 Certificateholders are then represented by
the Controlling Party, the Certificateholders of such other Class will
have the right to purchase all of such Class of Certificates represented
by the Controlling Party.
- The Class B Certificateholders will have the right to purchase all of the
Class A-1 and Class A-2 Certificates.
- If the Class C Certificates are issued, the Class C Certificateholders
will have the right to purchase all of the Class A-1, Class A-2 and Class
B Certificates.
In each case the purchase price will be equal to the Pool Balance of the
relevant Class or Classes of Certificates plus accrued and unpaid interest
thereon to the date of purchase, without any Make-Whole Premium, but including
any other amounts then due and payable to the Certificateholders of such Class
or Classes. Such purchase right may be exercised by any Certificateholder of the
Class or Classes entitled to such right. In each case, if prior to the end of
the ten-day notice period, any other Certificateholder of the same Class
notifies the purchasing Certificateholder that the other Certificateholder wants
to participate in such purchase, then such other Certificateholder may join with
the purchasing Certificateholder to purchase the Certificates pro rata based on
the interest in the Trust held by each Certificateholder. (Trust Supplements,
Section 4.01)
PTC EVENT OF DEFAULT
A Pass Through Certificate Event of Default (a "PTC Event of Default")
under each Pass Through Trust Agreement means the failure to pay:
- The outstanding Pool Balance of the applicable Class of Certificates
within ten Business Days of the Final Maturity Date for such Class.
- Interest due on such Class of Certificates within ten Business Days of
any Distribution Date (unless, in the case of the Class A-1 and Class A-2
Certificates, the Subordination Agent shall have made Interest Drawings,
or withdrawals from the Cash Collateral Account for such Class of
Certificates, with respect thereto in an aggregate amount sufficient to
pay such interest and shall have distributed such amount to the Trustee
entitled thereto). (Section 1.01)
Any failure to make expected principal distributions with respect to any
Class of Certificates on any Regular Distribution Date (other than the Final
Maturity Date) will not constitute a PTC Event of
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Default with respect to such Certificates. A PTC Event of Default with respect
to the most senior outstanding Class of Certificates resulting from an Indenture
Default under all Indentures will constitute a Triggering Event. See
"Description of the Intercreditor Agreement -- Priority of Distributions" for a
discussion of the consequences of the occurrence of a Triggering Event.
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Southwest will be prohibited from consolidating with or merging into any
other corporation or transferring substantially all of its assets as an entirety
to any other entity unless:
- The surviving successor or transferee shall be validly existing under the
laws of the United States or any state thereof or the District of
Columbia.
- The surviving successor or transferee shall be a "citizen of the United
States" (as defined in Title 49 of the United States Code relating to
aviation (the "Transportation Code")) holding an air carrier operating
certificate issued pursuant to Chapter 447 of Title 49, United States
Code, if, and so long as, such status is a condition of entitlement to
the benefits of Section 1110 of the Bankruptcy Code.
- The surviving successor or transferee shall expressly assume all of the
obligations of Southwest contained in the Basic Agreement and any Trust
Supplement, the Indentures and the Participation Agreements, and any
other operative documents.
- Southwest shall have delivered a certificate and an opinion or opinions
of counsel indicating that such transaction, in effect, complies with
such conditions.
In addition, after giving effect to such transaction, no Indenture Default
shall have occurred and be continuing. (Section 5.02; Indentures, Section 4.07)
The Basic Agreement, the Trust Supplements, the Indentures and the
Participation Agreements will not contain any financial covenants or similar
provisions which may afford the applicable Trustee or Certificateholders
protection in the event of a highly leveraged transaction, including
transactions effected by management or affiliates, which may or may not result
in a change in control of Southwest.
MODIFICATIONS OF THE PASS THROUGH TRUST AGREEMENTS AND CERTAIN OTHER AGREEMENTS
Each Pass Through Trust Agreement contains provisions permitting, at the
request of Southwest, the execution of amendments or supplements to such Pass
Through Trust Agreement or, if applicable, the Intercreditor Agreement, or with
respect to the Pass Through Trust Agreements for the Class A-1 and Class A-2
Trusts, the relevant Liquidity Facilities, without the consent of the holders of
any of the Certificates of such Trust:
- To evidence the succession of another entity to Southwest and the
assumption by such entity of Southwest's obligations under such Pass
Through Trust Agreement.
- To add to the covenants of Southwest for the benefit of holders of such
Certificates or to surrender any right or power conferred upon Southwest
in such Pass Through Trust Agreement, the Intercreditor Agreement or any
Liquidity Facility.
- To correct or supplement any provision of such Pass Through Trust
Agreement, the Intercreditor Agreement or any Liquidity Facility which
may be defective or inconsistent with any other provision in such Pass
Through Trust Agreement, the Intercreditor Agreement, or any Liquidity
Facility, as applicable, or to cure any ambiguity or to modify any other
provision with respect to matters or questions arising under such Pass
Through Trust Agreement, the Intercreditor Agreement or any Liquidity
Facility, provided that such action shall not materially adversely affect
the interests of the holders of such Certificates; to correct any mistake
in such Pass Through Trust Agreement, the Intercreditor Agreement or any
Liquidity Facility; or, as provided in the Intercreditor Agreement, to
give effect to or provide for a Replacement Facility.
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- To comply with any requirement of the Commission, any applicable law,
rules or regulations of any exchange or quotation system on which the
Certificates are listed, or any regulatory body.
- To modify, eliminate or add to the provisions of such Pass Through Trust
Agreement, the Intercreditor Agreement or any Liquidity Facility to such
extent as shall be necessary to continue the qualification of such Pass
Through Trust Agreement (including any supplemental agreement) under the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), or
any similar federal statute enacted after the execution of such Pass
Through Trust Agreement, and to add to such Pass Through Trust Agreement,
the Intercreditor Agreement or any Liquidity Facility such other
provisions as may be expressly permitted by the Trust Indenture Act.
- To evidence and provide for the acceptance of appointment under such Pass
Through Trust Agreement, the Intercreditor Agreement or any Liquidity
Facility by a successor Trustee and to add to or change any of the
provisions of such Pass Through Trust Agreement, the Intercreditor
Agreement or any Liquidity Facility as shall be necessary to provide for
or facilitate the administration of the Trusts under the Basic Agreement
by more than one Trustee.
- To modify, eliminate or add to the provisions of such Pass Through Trust
Agreement, the Intercreditor Agreement or any Liquidity Facility to the
extent necessary to provide for the issuance of Class C Certificates as
described in "-- Possible Issuance of Class C Certificates".
In each case, such modification or supplement may not adversely affect the
status of the Trust as a grantor trust under Subpart E, Part I of Subchapter J
of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended (the
"Code"), for U.S. federal income tax purposes. (Section 9.01; Trust Supplements,
Section 6.02)
Each Pass Through Trust Agreement also contains provisions permitting the
execution, with the consent of the holders of the Certificates of the related
Trust evidencing fractional undivided interests aggregating not less than a
majority in interest of such Trust, of amendments or supplements adding any
provisions to or changing or eliminating any of the provisions of such Pass
Through Trust Agreement, the Intercreditor Agreement or with respect to the
Class A-1 and Class A-2 Trusts, the relevant Liquidity Facility to the extent
applicable to such Certificateholders, or of modifying the rights and
obligations of such Certificateholders under such Pass Through Trust Agreement,
the Intercreditor Agreement or any Liquidity Facility. No such amendment or
supplement may, without the consent of the holder of each Certificate so
affected thereby:
- Reduce in any manner the amount of, or delay the timing of, any receipt
by the Trustee of payments with respect to the Equipment Notes held in
such Trust or distributions in respect of any Certificate related to such
Trust, or change the date or place of any payment in respect of any
Certificate, or make distributions payable in coin or currency other than
that provided for in such Certificates, or impair the right of any
Certificateholder of such Trust to institute suit for the enforcement of
any such payment when due.
- Permit the disposition of any Equipment Note held in such Trust, except
as provided in such Pass Through Trust Agreement, or otherwise deprive
such Certificateholder of the benefit of the ownership of the applicable
Equipment Notes.
- Alter the priority of distributions specified in the Intercreditor
Agreement in a manner materially adverse to such Certificateholders.
- Reduce the percentage of the aggregate fractional undivided interests of
the Trust provided for in such Pass Through Trust Agreement, the consent
of the holders of which is required for any such supplemental trust
agreement or for any waiver provided for in such Pass Through Trust
Agreement.
- Modify any of the provisions relating to the rights of the
Certificateholders in respect of the waiver of events of default or
receipt of payment.
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- Adversely affect the status of any Trust as a grantor trust under Subpart
E, Part I of Subchapter J of Chapter 1 of Subtitle A of the Code for U.S.
federal income tax purposes. (Section 9.02; Trust Supplements, Section
6.03)
In the event that a Trustee, as holder (or beneficial owner through the
Subordination Agent) of any Equipment Note in trust for the benefit of the
Certificateholders of the relevant Trust or as Controlling Party under the
Intercreditor Agreement, receives (directly or indirectly through the
Subordination Agent) a request for a consent to any amendment, modification,
waiver or supplement under any Indenture, any Participation Agreement, any
Equipment Note or any other related document, the Trustee shall forthwith send a
notice of such proposed amendment, modification, waiver or supplement to each
Certificateholder of the relevant Trust as of the date of such notice. The
Trustee shall request from the Certificateholders a direction as to:
- Whether or not to take or refrain from taking (or direct the
Subordination Agent to take or refrain from taking) any action which a
holder of such Equipment Note or the Controlling Party has the option to
direct.
- Whether or not to give or execute (or direct the Subordination Agent to
give or execute) any waivers, consents, amendments, modifications or
supplements as a holder of such Equipment Note or as Controlling Party.
- How to vote (or direct the Subordination Agent to vote) any Equipment
Note if a vote has been called for with respect thereto.
Provided such a request for Certificateholder direction shall have been made, in
directing any action or casting any vote or giving any consent as the holder of
any Equipment Note (or in directing the Subordination Agent in any of the
foregoing):
- Other than as Controlling Party, the Trustee shall vote for or give
consent to any such action with respect to such Equipment Note in the
same proportion as that of (x) the aggregate face amount of all
Certificates actually voted in favor of or for giving consent to such
action by such direction of Certificateholders to (y) the aggregate face
amount of all outstanding Certificates of the relevant Trust.
- As the Controlling Party, the Trustee shall vote as directed in such
Certificateholder direction by the Certificateholders evidencing
fractional undivided interests aggregating not less than a majority in
interest in the relevant Trust.
For purposes of the immediately preceding paragraph, a Certificate shall
have been "actually voted" if the Certificateholder has delivered to the Trustee
an instrument evidencing such Certificateholder's consent to such direction
prior to one Business Day before the Trustee directs such action or casts such
vote or gives such consent. Notwithstanding the foregoing, but subject to
certain rights of the Certificateholders under the relevant Pass Through Trust
Agreement and subject to the Intercreditor Agreement, the Trustee may, in its
own discretion and at its own direction, consent and notify the relevant
Indenture Trustee of such consent (or direct the Subordination Agent to consent
and notify the relevant Indenture Trustee of such consent) to any amendment,
modification, waiver or supplement under the relevant Indenture, Participation
Agreement, any relevant Equipment Note or any other related document, if an
Indenture Default under any Indenture shall have occurred and be continuing, or
if such amendment, modification, waiver or supplement will not materially
adversely affect the interests of the Certificateholders of such Trust. (Section
10.01)
POSSIBLE ISSUANCE OF CLASS C CERTIFICATES
Southwest may elect to issue Series C Equipment Notes in connection with
the financing of Aircraft, which will be funded from sources other than this
offering (the "Offering"). Southwest may elect to fund the sale of the Series C
Equipment Notes through the sale of Pass Through Certificates (the "Class C
Certificates") issued by a Class C Southwest Airlines 2001-1 Pass Through Trust
(the "Class C Trust").
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Southwest will not issue any Series C Equipment Notes at any time prior to the
consummation of this Offering. Each Participation Agreement provides that
Southwest's ability to issue any Series C Equipment Notes is contingent upon its
obtaining a Ratings Confirmation from each Rating Agency. If the Class C
Certificates are issued, the Trustee with respect to such Certificates will
become a party to the Intercreditor Agreement. If Series C Equipment Notes are
issued to any one other than the Class C Trust, such Series C Equipment Notes
will nevertheless be subject to provisions of the Intercreditor Agreement that
allow the Controlling Party, during the continuance of an Indenture Default, to
direct the Indenture Trustee in taking action under the applicable Indenture.
See "Description of the Intercreditor Agreement".
TERMINATION OF THE TRUSTS
The obligations of Southwest and the applicable Trustee with respect to a
Trust will terminate upon the distribution to Certificateholders of such Trust
of all amounts required to be distributed to them pursuant to the applicable
Pass Through Trust Agreement and the disposition of all property held in such
Trust. The applicable Trustee will send to each Certificateholder of such Trust
notice of the termination of such Trust, the amount of the proposed final
payment and the proposed date for the distribution of such final payment for
such Trust. The final distribution to any Certificateholder of such Trust will
be made only upon surrender of such Certificateholder's Certificates at the
office or agency of the applicable Trustee specified in such notice of
termination. (Trust Supplements, Section 7.01)
THE TRUSTEES
The Trustee for each Trust will be Wilmington Trust Company. The Trustees'
address is Wilmington Trust Company, Rodney Square North, 1100 North Market
Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust
Administration.
BOOK-ENTRY; DELIVERY AND FORM
Upon issuance, each Class of Certificates will be represented by one or
more fully registered global certificates. Each global certificate will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of Cede & Co. ("Cede"), the nominee of DTC. DTC was
created to hold securities for its participants ("DTC Participants") and
facilitate the clearance and settlement of securities transactions between DTC
Participants through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Interests in a
global certificate may also be held through the Euroclear System and Clearstream
Banking, Luxembourg. See "Description of the Certificates -- Book-Entry
Registration" in the Prospectus for a discussion of the book-entry procedures
applicable to the Certificates and the limited circumstances under which
definitive certificates may be issued for the Certificates.
So long as such book-entry procedures are applicable, no person acquiring
an interest in the Certificates ("Certificate Owner") will be entitled to
receive a certificate representing such person's interest in such Certificates.
Unless and until definitive certificates are issued under the limited
circumstances described in the Prospectus, all references to actions by
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants, and all references herein to distributions, notices, reports
and statements to Certificateholders shall refer, as the case may be, to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of such Certificates, or to DTC Participants for distribution to
Certificate Owners in accordance with DTC procedures.
DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes all material terms of the Liquidity
Facilities for the Class A-1 and Class A-2 Certificates and certain provisions
of the Intercreditor Agreement relating to the Liquidity
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Facilities. The summary supplements (and, to the extent inconsistent therewith,
replaces) the description of the general terms and provisions relating to the
Liquidity Facilities and the Intercreditor Agreement set forth in the
Prospectus. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Liquidity Facilities and
the Intercreditor Agreement, each of which will be filed as an exhibit to a
Current Report on Form 8-K to be filed by Southwest with the Commission. The
provisions of the Liquidity Facilities are substantially identical except as
otherwise indicated.
GENERAL
Westdeutsche Landesbank Girozentrale, New York branch (the "Liquidity
Provider") will enter into a separate revolving credit agreement (each, an
"Liquidity Facility") with the Subordination Agent with respect to each of the
Class A-1 and Class A-2 Trusts. Under each Liquidity Facility, the Liquidity
Provider will, if necessary, make one or more advances ("Interest Drawings") to
the Subordination Agent in an aggregate amount (the "Required Amount")
sufficient to pay interest on the Pool Balances of the related Certificates on
up to three consecutive semiannual Regular Distribution Dates at the respective
interest rates shown on the cover page of this Prospectus Supplement for such
Certificates (the "Stated Interest Rates"). If interest payment defaults occur
which exceed the amount covered by or available under the Liquidity Facility for
any Trust, the Certificateholders of such Trust will bear their allocable share
of the deficiencies to the extent that there are no other sources of funds. The
initial liquidity provider with respect to each Trust may be replaced by one or
more other entities with respect to any of such Trusts under certain
circumstances. The Class B Certificates will not have the benefit of a Liquidity
Facility and any references in this summary to a liquidity facility for each or
any pass through trust or class of pass through trust certificates should be
read to exclude the Class B Certificates.
DRAWINGS
The initial aggregate amount available under the Liquidity Facility for the
Class A-1 and Class A-2 Trusts will be as follows:
TRUST AVAILABLE AMOUNT
----- ----------------
Class A-1................................................... $11,496,250
Class A-2................................................... 30,972,250
Except as otherwise provided below, the Liquidity Facility for each Trust
will enable the Subordination Agent to make Interest Drawings thereunder
promptly on or after any Regular Distribution Date to pay interest then due and
payable on the Certificates of such Trust at the Stated Interest Rate for such
Trust to the extent that the amount, if any, available to the Subordination
Agent on such Regular Distribution Date is not sufficient to pay such interest;
provided, however, that the maximum amount available to be drawn under the
Liquidity Facility with respect to any Trust on any Regular Distribution Date to
fund any shortfall of interest on Certificates of such Trust will not exceed the
then Maximum Available Commitment under such Liquidity Facility. The "Maximum
Available Commitment" at any time under each Liquidity Facility is an amount
equal to the then Required Amount of such Liquidity Facility less the aggregate
amount of each Interest Drawing outstanding under such Liquidity Facility at
such time, provided that following a Downgrade Drawing, a Final Drawing or a
Non-Extension Drawing under a Liquidity Facility, the Maximum Available
Commitment under such Liquidity Facility shall be zero.
The Liquidity Facility for any Class of Certificates does not provide for
drawings thereunder to pay for principal of or premium on the Certificates of
such Class or any interest on the Certificates of such Class in excess of the
Stated Interest Rate for such Class or more than three semiannual installments
of interest thereon or principal of or interest or premium on the Certificates
of any other Class. (Liquidity Facilities, Section 2.02; Intercreditor
Agreement, Section 3.6)
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Each payment by a Liquidity Provider reduces by the same amount the Maximum
Available Commitment under the related Liquidity Facility, subject to
reinstatement as hereinafter described. With respect to any Interest Drawings,
upon reimbursement of the applicable Liquidity Provider in full for the amount
of such Interest Drawings plus accrued interest thereon, the Maximum Available
Commitment under such Liquidity Facility in respect of interest on the
Certificates of such Trust will be reinstated to an amount not to exceed the
then Required Amount of the related Liquidity Facility. However, such Liquidity
Facility will not be so reinstated at any time if (i) a Liquidity Event of
Default shall have occurred and be continuing and (ii) less than 65% of the then
aggregate outstanding principal amount of all Equipment Notes are Performing
Equipment Notes. With respect to any other drawings under such Liquidity
Facility, amounts available to be drawn thereunder are not subject to
reinstatement. The Required Amount of the Liquidity Facility for any Trust will
be automatically reduced from time to time to an amount equal to the next three
successive interest payments due on the Certificates of such Trust (without
regard to expected future payment of principal of such Certificates) at the
Stated Interest Rate for such Trust. (Liquidity Facilities, Section 2.02(a);
Intercreditor Agreement, Section 3.6(j))
"Performing Equipment Note" means an Equipment Note with respect to which
no payment default has occurred and is continuing (without giving effect to any
acceleration); provided that in the event of a bankruptcy proceeding under the
U.S. Bankruptcy Code in which Southwest is a debtor any payment default existing
during the 60-day period under Section 1110(a)(2)(A) of the U.S. Bankruptcy Code
(or such longer period as may apply under Section 1110(b) of the U.S. Bankruptcy
Code or as may apply for the cure of such payment default under Section
1110(a)(2)(B) of the U.S. Bankruptcy Code) shall not be taken into consideration
until the expiration of the applicable period. (Intercreditor Agreement, Section
1.1)
If at any time the related debt rating of the Liquidity Provider then
issued by either Rating Agency is lower than the Threshold Rating for the
relevant Class, and such Liquidity Facility is not replaced with a Replacement
Facility within ten days (or 45 days if Standard and Poor's downgrades the
Liquidity Provider's ratings from A-1+ to A-1) after such downgrading and as
otherwise provided in the Intercreditor Agreement, such Liquidity Facility will
be drawn in full up to the then Maximum Available Commitment under such
Liquidity Facility (the "Downgrade Drawing").
The proceeds of a Downgrade Drawing will be deposited into a cash
collateral account (the "Cash Collateral Account") for such Class of
Certificates and used for the same purposes and under the same circumstances and
subject to the same conditions as cash payments of Interest Drawings under such
Liquidity Facility would be used. (Liquidity Facilities, Section 2.02(c);
Intercreditor Agreement, Section 3.6(c)) If a qualified Replacement Facility is
subsequently provided, the balance of the Cash Collateral Account will be repaid
to the replaced Liquidity Provider.
A "Replacement Facility" for any Liquidity Facility will mean an
irrevocable liquidity facility (or liquidity facilities) in substantially the
form of the replaced Liquidity Facility, including reinstatement provisions, or
in such other form (which may include a letter of credit) as shall permit the
Rating Agencies to confirm in writing their respective ratings then in effect
for the Certificates (before downgrading of such ratings, if any, as a result of
the downgrading of the applicable Liquidity Provider), in a face amount (or in
an aggregate face amount) equal to the amount of interest payable on the Pool
Balances of the Certificates of such Trust (at the Stated Interest Rate for such
Trust, and without regard to expected future principal payments) on the three
Regular Distribution Dates following the date of replacement of such Liquidity
Facility and issued by a person (or persons) having unsecured short-term debt
ratings issued by both Rating Agencies which are equal to or higher than the
Threshold Rating for the relevant Class. (Intercreditor Agreement, Section 1.1)
The provider of any Replacement Facility will have the same rights (including,
without limitation, priority distribution rights and rights as "Controlling
Party") under the Intercreditor Agreement as the applicable initial Liquidity
Provider.
"Threshold Rating" means the short-term unsecured debt rating of P-1 by
Moody's and A-1+ by Standard & Poor's. (Intercreditor Agreement, Section 1.1)
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The Liquidity Facility for each Trust provides that the applicable
Liquidity Provider's obligations thereunder will expire on the earliest of:
- 364 days after the initial issuance date of the Certificates (the
"Issuance Date") (counting from, and including, the Issuance Date).
- The date on which the Subordination Agent delivers to such Liquidity
Provider a certification that all of the Certificates of such Trust have
been paid in full.
- The date on which the Subordination Agent delivers to such Liquidity
Provider a certification that a Replacement Facility has been substituted
for such Liquidity Facility.
- The fifth Business Day following receipt by the Subordination Agent and
Southwest of a Termination Notice from such Liquidity Provider (see
"-- Liquidity Events of Default").
- The date on which no amount is or may (by reason of reinstatement) become
available for drawing under such Liquidity Facility. (Liquidity
Facilities, Section 1.01)
Each Liquidity Facility provides that it may be extended for additional
364-day periods by mutual agreement of the relevant Liquidity Provider and the
Subordination Agent.
The Intercreditor Agreement will provide for the replacement of the
Liquidity Facility for any Trust if such Liquidity Facility is scheduled to
expire earlier than 15 days after the Final Maturity Date for the Certificates
of such Trust and such Liquidity Facility is not extended at least 25 days prior
to its then scheduled expiration date. If such Liquidity Facility is not so
extended or replaced by the 25th day prior to its then scheduled expiration
date, such Liquidity Facility will be drawn in full up to the then Maximum
Available Commitment under such Liquidity Facility (the "Non-Extension
Drawing"). The proceeds of the Non-Extension Drawing will be deposited in the
Cash Collateral Account for the related Class of Certificates as cash collateral
to be used for the same purposes and under the same circumstances, and subject
to the same conditions, as cash payments of Interest Drawings under such
Liquidity Facility would be used. (Liquidity Facilities, Section 2.02(b);
Intercreditor Agreement, Section 3.6(d))
Subject to certain limitations, Southwest may, at its option, arrange for a
Replacement Facility at any time to replace the Liquidity Facility for any Trust
(including without limitation any Replacement Facility described in the
following sentence). In addition, if any Liquidity Provider shall determine not
to extend any Liquidity Facility for a Trust, then such Liquidity Provider may,
at its option, arrange for a Replacement Facility to replace such Liquidity
Facility during the period no earlier than 40 days and no later than 25 days
prior to the then scheduled expiration date of such Liquidity Facility. The
Liquidity Provider may also arrange for a Replacement Facility to replace any of
its Liquidity Facilities at any time after it has extended such Liquidity
Facility to the date that is 15 days after the Final Maturity Date for the
relevant class of Certificates or at any time after a Non-Extension Drawing
under such Liquidity Facility. If any Replacement Facility is provided at any
time after a Downgrade Drawing or a Non-Extension Drawing under any Liquidity
Facility, the funds with respect to such Liquidity Facility on deposit in the
Cash Collateral Account for such Trust will be returned to the Liquidity
Provider being replaced. (Intercreditor Agreement, Section 3.6(e))
Upon receipt by the Subordination Agent of a Termination Notice with
respect to any Liquidity Facility from the relevant Liquidity Provider, the
Subordination Agent shall request a final drawing (a "Final Drawing") under such
Liquidity Facility in an amount equal to the then Maximum Available Commitment
thereunder. The Subordination Agent will hold the proceeds of the Final Drawing
in the Cash Collateral Account for the related Trust as cash collateral to be
used for the same purposes and under the same circumstances, and subject to the
same conditions, as cash payments of Interest Drawings under such Liquidity
Facility would be used. (Liquidity Facilities, Section 2.02(d); Intercreditor
Agreement, Section 3.6(i))
Drawings under any Liquidity Facility will be made by delivery by the
Subordination Agent of a certificate in the form required by such Liquidity
Facility. Upon receipt of such a certificate, the relevant Liquidity Provider is
obligated to make payment of the drawing requested thereby in immediately
available
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funds. Upon payment by the relevant Liquidity Provider of the amount specified
in any drawing under any Liquidity Facility, such Liquidity Provider will be
fully discharged of its obligations under such Liquidity Facility with respect
to such drawing and will not thereafter be obligated to make any further
payments under such Liquidity Facility in respect of such drawing to the
Subordination Agent or any other person. (Liquidity Facilities, Section 2.02(e)
and (f))
REIMBURSEMENT OF DRAWINGS
The Subordination Agent must reimburse amounts drawn under any Liquidity
Facility by reason of an Interest Drawing, Final Drawing, Downgrade Drawing or
Non-Extension Drawing and interest thereon, but only to the extent that the
Subordination Agent has funds available therefor. (Liquidity Facilities, Section
2.09)
INTEREST DRAWINGS AND FINAL DRAWINGS
Amounts drawn by reason of an Interest Drawing or Final Drawing under a
Liquidity Facility will be immediately due and payable, together with interest
on the amount of such drawing. From the date of the drawing to (but excluding)
the third Business Day following the applicable Liquidity Provider's receipt of
the notice of such Interest Drawing, interest will accrue at the Base Rate plus
1.75% per annum. Thereafter, interest will accrue at LIBOR for the applicable
interest period plus 1.75% per annum. In the case of the Final Drawing, however,
the Subordination Agent may convert the Final Drawing into a drawing bearing
interest at the Base Rate plus 1.75% per annum on the last day of an interest
period for such Drawing. (Liquidity Facilities, Section 3.07)
"Base Rate" means a fluctuating interest rate per annum in effect from time
to time, which rate per annum shall at all times be equal to (a) the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for each
day in the period for which the Base Rate is to be determined (or, if such day
is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York, or if such rate is not so published for any day that
is a Business Day, the average of the quotations for such day for such
transactions received by the applicable Liquidity Provider from three Federal
funds brokers of recognized standing selected by it, plus (b) one-quarter of one
percent (0.25%).
"LIBOR" means, with respect to any interest period, (i) the interest rate
per annum at which deposit in United States dollars are offered to prime banks
in the London interbank market as indicated on display page 3750 (British
Bankers Association -- LIBOR) of the Dow Jones Markets Service (or such other
page as may replace such display page 3750 for the purpose of displaying London
interbank offered rates for United States dollar deposits), or, if the rate
specified in clause (i) is not available, (ii) the average (rounded upwards to
the nearest 1/16%), as determined by the Liquidity Provider, of such rates
offered by certain London reference banks to prime banks in the London interbank
market, in each case at or about 11:00 a.m. (London time) on the date two
business days prior to the first day of such Interest Period for deposits of a
duration equal to such interest period (or such other period most nearly
corresponding to such period) in an amount approximately equal to the principal
amount of the applicable LIBOR Advance as of the first day of such interest
period. If at least two quotations from such reference banks are not obtained,
the rate will be the Base Rate.
DOWNGRADE DRAWINGS AND NON-EXTENSION DRAWINGS
The amount drawn under any Liquidity Facility by reason of a Downgrade
Drawing or a Non-Extension Drawing will be treated as follows:
- Such amount will be released on any Distribution Date to the applicable
Liquidity Provider to the extent that such amount exceeds the Required
Amount.
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- Any portion of such amount withdrawn from the Cash Collateral Account for
such Certificates to pay interest on such Certificates will be treated in
the same way as Interest Drawings.
- The balance of such amount will be invested in certain specified eligible
investments.
Any Downgrade Drawing or Non-Extension Drawing under any of the Liquidity
Facilities, other than any portion thereof applied to the payment of interest on
the Class A-1 or Class A-2 Certificates, will bear interest (x) subject to
clause (y) below, in an amount equal to the investment earnings on amounts
deposited in the Cash Collateral Account attributable to such Liquidity Facility
plus a specified margin on the outstanding amount from time to time of such
Downgrade Drawing or Non-Extension Drawing and (y) from and after the date, if
any, on which it is converted into a Final Drawing as described below under
"-- Liquidity Events of Default", at a rate equal to LIBOR for the applicable
interest period (or, as described in the first paragraph under "-- Interest
Drawings and Final Drawings", the Base Rate) plus 1.75% per annum.
LIQUIDITY EVENTS OF DEFAULT
Events of default under each Liquidity Facility (each, a "Liquidity Event
of Default") will consist of:
- The acceleration of all the Equipment Notes.
- Certain bankruptcy or similar events involving Southwest. (Liquidity
Facilities, Section 1.01)
If (i) any Liquidity Event of Default under any Liquidity Facility has
occurred and is continuing and (ii) less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes, the
applicable Liquidity Provider may, in its discretion, give a notice of
termination of such Liquidity Facility (a "Termination Notice"). The Termination
Notice will have the following consequences:
- The related Liquidity Facility will expire on the fifth Business Day
after the date on which such Termination Notice is received by the
Subordination Agent.
- The Subordination Agent will promptly request, and the applicable
Liquidity Provider will make, a Final Drawing thereunder in an amount
equal to the then Maximum Available Commitment thereunder.
- Any Drawing remaining unreimbursed as of the date of termination will be
automatically converted into a Final Drawing under such Liquidity
Facility.
- All amounts owing to the applicable Liquidity Provider automatically will
be accelerated.
Notwithstanding the foregoing, the Subordination Agent will be obligated to
pay amounts owing to the Liquidity Provider only to the extent of funds
available therefor after giving effect to the payments in accordance with the
provisions set forth under "Description of the Intercreditor
Agreement -- Priority of Distributions". (Liquidity Facilities, Section 6.01)
Upon the circumstances described below under "Description of the Intercreditor
Agreement -- Intercreditor Rights", a Liquidity Provider may become the
Controlling Party with respect to the exercise of remedies under the Indentures.
(Intercreditor Agreement, Section 2.6(c))
LIQUIDITY PROVIDER
The initial Liquidity Provider for the Certificates will be Westdeutsche
Landesbank Girozentrale, a German banking institution organized under the laws
of the State of North Rhine-Westphalia, acting through its New York branch.
Westdeutsche Landesbank Girozentrale has short-term unsecured debt ratings of
P-1 from Moody's Investors Service, Inc. ("Moody's") and A-1+ from Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.
("Standard & Poor's" and together with Moody's, the "Rating Agencies").
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DESCRIPTION OF THE INTERCREDITOR AGREEMENT
The following summary describes all material provisions of the
Intercreditor Agreement (the "Intercreditor Agreement") among the Trustees, the
Liquidity Providers and Wilmington Trust Company, as subordination agent (the
"Subordination Agent"). The summary supplements (and, to the extent inconsistent
therewith, replaces) the description of the general terms and provisions
relating to the Intercreditor Agreement set forth in the Prospectus. This
summary does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the Intercreditor Agreement, which will be
filed as an exhibit to a Current Report on Form 8-K to be filed by Southwest
with the SEC.
INTERCREDITOR RIGHTS
GENERAL
The Equipment Notes relating to each Trust will be issued to and registered
in the name of the Subordination Agent as agent and trustee for the Trustee of
such Trust.
CONTROLLING PARTY
Each Indenture Trustee will be directed in taking, or refraining from
taking, any action thereunder or with respect to the Equipment Notes issued
under such Indenture, by the holders of at least a majority of the outstanding
principal amount of the Equipment Notes issued under such Indenture, so long as
no Indenture Default shall have occurred and be continuing thereunder. For so
long as the Subordination Agent is the registered holder of the Equipment Notes,
the Subordination Agent will act with respect to the preceding sentence in
accordance with the directions of the Trustees for whom the Equipment Notes
issued under such Indenture are held as Trust Property, to the extent
constituting, in the aggregate, directions with respect to the required
principal amount of Equipment Notes.
After the occurrence and during the continuance of an Indenture Default
under such Indenture, each Indenture Trustee will be directed in taking, or
refraining from taking, any action thereunder or with respect to the Equipment
Notes issued under the related Indenture, including acceleration of such
Equipment Notes or foreclosing the lien on the related Aircraft, by the
Controlling Party, subject to the limitations described below. See "Description
of the Certificates -- Indenture Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the Certificateholders of each Trust
to direct the respective Trustees.
The "Controlling Party" will be:
- The Class A-1 Trustee or Class A-2 Trustee, whichever represents the
Class with the larger principal amount of Certificates outstanding at the
time that the Indenture Default occurs.
- Upon payment of Final Distributions to the holders of such larger Class,
the other of the Class A-1 Trustee or Class A-2 Trustee.
- Upon payment of Final Distributions to the holders of Class A-1 and A-2
Certificates, the Class B Trustee.
- Under certain circumstances, and notwithstanding the foregoing, the
Liquidity Provider with the largest amount owed to it, as discussed in
the next paragraph.
At any time after 18 months from the earlier to occur of (x) the date on
which the entire available amount under any Liquidity Facility shall have been
drawn (for any reason other than a Downgrade Drawing or a Non-Extension Drawing)
and remain unreimbursed, (y) the date on which the entire amount of any
Downgrade Drawing or Non-Extension Drawing shall have been withdrawn from the
relevant Cash Collateral Account to pay interest on the relevant Class of
Certificates and remain unreimbursed and (z) the date on which all Equipment
Notes shall have been accelerated, the Liquidity Provider with the highest
outstanding amount of Liquidity Obligations shall have the right to become the
Controlling Party with respect to any Indenture.
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For purposes of giving effect to the rights of the Controlling Party, the
Trustees (other than the Controlling Party) shall irrevocably agree, and the
Certificateholders (other than the Certificateholders represented by the
Controlling Party) will be deemed to agree by virtue of their purchase of
Certificates, that the Subordination Agent, as record holder of the Equipment
Notes, shall exercise its voting rights in respect of the Equipment Notes as
directed by the Controlling Party. (Intercreditor Agreement, Section 2.6) For a
description of certain limitations on the Controlling Party's rights to exercise
remedies, see "Description of the Equipment Notes -- Remedies".
"Final Distributions" means, with respect to the Certificates of any Trust
on any Distribution Date, the sum of (x) the aggregate amount of all accrued and
unpaid interest on such Certificates and (y) the Pool Balance of such
Certificates as of the immediately preceding Distribution Date. For purposes of
calculating Final Distributions with respect to the Certificates of any Trust,
any premium paid on the Equipment Notes held in such Trust which has not been
distributed to the Certificateholders of such Trust (other than such premium or
a portion thereof applied to the payment of interest on the Certificates of such
Trust or the reduction of the Pool Balance of such Trust) shall be added to the
amount of such Final Distributions.
SALE OF EQUIPMENT NOTES OR AIRCRAFT
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the immediately following sentence, sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person. So long
as any Certificates are outstanding, during nine months after the earlier of (x)
the acceleration of the Equipment Notes under any Indenture and (y) the
bankruptcy or insolvency of Southwest, without the consent of each Trustee, no
Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes.
"Minimum Sale Price" means, with respect to any Aircraft or the Equipment
Notes issued in respect of such Aircraft, at any time, the lesser of (1) 75% of
the Appraised Current Market Value of such Aircraft and (2) the aggregate
outstanding principal amount of such Equipment Notes, plus accrued and unpaid
interest thereon.
PRIORITY OF DISTRIBUTIONS
BEFORE A TRIGGERING EVENT
So long as no Triggering Event shall have occurred (whether or not
continuing), all payments in respect of the Equipment Notes and certain other
payments received on any Regular Distribution Date or Special Distribution Date
(each, a "Distribution Date") will be promptly distributed by the Subordination
Agent on such Distribution Date in the following order of priority:
- To the Liquidity Providers to the extent required to pay the Liquidity
Expenses.
- To the Liquidity Providers to the extent required to pay interest accrued
and unpaid on the Liquidity Obligations.
- To the Liquidity Providers to the extent required to pay or reimburse the
Liquidity Providers for certain Liquidity Obligations (other than amounts
payable pursuant to the two preceding clauses) and/or, if applicable, to
replenish each Cash Collateral Account up to the Required Amount.
- To the trustee for the Class A-1 Trust (the "Class A-1 Trustee") and the
trustee for the Class A-2 Trust (the "Class A-2 Trustee") to the extent
required to pay Expected Distributions on the Class A-1 Certificates and
the Class A-2 Certificates. If available funds are insufficient to pay an
Expected Distribution to each such Class in full, available funds will be
distributed to each of the Class A-1 Trustee and Class A-2 Trustee in the
same proportion as such Trustee's proportionate share of the aggregate
amount of such Expected Distributions.
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- To the trustee for the Class B Trust (the "Class B Trustee") to the
extent required to pay Expected Distributions on the Class B
Certificates.
- If the Class C Certificates have been issued, to the trustee for the
Class C Trust (the "Class C Trustee") to the extent required to pay
"Expected Distributions" (to be defined in a manner equivalent to the
definition below for other Classes of Certificates) on the Class C
Certificates.
- To the Subordination Agent and each Trustee for the payment of certain
fees and expenses. (Intercreditor Agreement, Section 3.2)
"Liquidity Obligations" means the obligations to reimburse or to pay the
Liquidity Providers all principal, interest, fees and other amounts owing to
them under each Liquidity Facility or certain other agreements (or such lesser
amount as any Liquidity Provider may otherwise agree).
"Liquidity Expenses" means the Liquidity Obligations other than any
interest accrued thereon or the principal amount of any drawing under the
Liquidity Facilities.
"Expected Distributions" means, with respect to the Certificates of any
Trust on any Distribution Date (the "Current Distribution Date"), the sum of (1)
accrued and unpaid interest on such Certificates and (2) the difference between:
(A) the Pool Balance of such Certificates as of the immediately
preceding Distribution Date (or, if the Current Distribution Date is the
first Distribution Date, the original aggregate face amount of the
Certificates of such Trust) and
(B) the Pool Balance of such Certificates as of the Current
Distribution Date calculated on the basis that (i) the principal of the
Equipment Notes held in such Trust has been paid when due (whether at
stated maturity, upon redemption, prepayment, purchase, acceleration or
otherwise) and such payments have been distributed to the holders of such
Certificates and (ii) the principal of any Equipment Notes formerly held in
such Trust that have been sold pursuant to the Intercreditor Agreement has
been paid in full and such payments have been distributed to the holders of
such Certificates.
"Triggering Event" means (x) the occurrence of an Indenture Default under
all Indentures resulting in a PTC Event of Default with respect to the most
senior Class of Certificates then outstanding, (y) the acceleration of all of
the outstanding Equipment Notes or (z) certain bankruptcy or insolvency events
involving Southwest.
For purposes of determining the priority of distributions on account of the
redemption, purchase or prepayment of all of the Equipment Notes issued pursuant
to an Indenture, clause (1) of the definition of Expected Distributions shall be
deemed to read as follows: "(1) accrued, due and unpaid interest on such
Certificates together with (without duplication) accrued and unpaid interest on
a portion of such Certificates equal to the outstanding principal amount of the
Equipment Notes held in such Trust and being redeemed, purchased or prepaid
(immediately prior to such redemption, purchase or prepayment)."
AFTER A TRIGGERING EVENT
Subject to the terms of the Intercreditor Agreement, upon the occurrence of
a Triggering Event and at all times thereafter, all funds received by the
Subordination Agent in respect of the Equipment Notes and certain other payments
will be promptly distributed by the Subordination Agent in the following order
of priority:
- To the Subordination Agent, any Trustee, any Certificateholder and any
Liquidity Provider to the extent required to pay certain out-of-pocket
costs and expenses actually incurred by the Subordination Agent or any
Trustee or to reimburse any Certificateholder or any Liquidity Provider
in respect of payments made to the Subordination Agent or any Trustee in
connection with the protection or realization of the value of the
Equipment Notes or Collateral under (and as defined in) any Indenture
(collectively, the "Administration Expenses").
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- To the Liquidity Providers to the extent required to pay the Liquidity
Expenses.
- To the Liquidity Providers to the extent required to pay interest accrued
and unpaid on the Liquidity Obligations.
- To the Liquidity Providers to the extent required to pay the outstanding
amount of all Liquidity Obligations and/or, if applicable, with respect
to any particular Liquidity Facility, unless (x) less than 65% of the
aggregate outstanding principal amount of all Equipment Notes are
Performing Equipment Notes and a Liquidity Event of Default shall have
occurred and is continuing under such Liquidity Facility or (y) a Final
Drawing shall have occurred under such Liquidity Facility, to replenish
the Cash Collateral Account with respect to such Liquidity Facility up to
the Required Amount for the related Class of Certificates (less the
amount of any repayments of Interest Drawings under such Liquidity
Facility while sub-clause (x) of this clause is applicable).
- To the Subordination Agent, any Trustee or any Certificateholder to the
extent required to pay certain fees, taxes, charges and other amounts
payable.
- To the Class A-1 Trustee and the Class A-2 Trustee to the extent required
to pay Adjusted Expected Distributions on the Class A-1 Certificates and
the Class A-2 Certificates. If available funds are insufficient to pay an
Adjusted Expected Distribution to each such Class in full, available
funds will be distributed to each of the Class A-1 Trustee and Class A-2
Trustee in the same proportion as such Trustee's proportionate share of
the aggregate amount of such Adjusted Expected Distributions.
- To the Class B Trustee to the extent required to pay Adjusted Expected
Distributions on the Class B Certificates.
- If the Class C Certificates have been issued, to the Class C Trustee to
the extent required to pay "Adjusted Expected Distributions" (to be
defined in a manner equivalent to the definition below for other Classes
of Certificates) on the Class C Certificates. (Intercreditor Agreement,
Section 3.3)
"Adjusted Expected Distributions" means, with respect to the Certificates
of any Trust on any Current Distribution Date, the sum of (1) accrued and unpaid
interest on such Certificates and (2) the greater of:
(A) the difference between (x) the Pool Balance of such Certificates
as of the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, the original aggregate
face amount of the Certificates of such Trust) and (y) the Pool Balance of
such Certificates as of the Current Distribution Date calculated on the
basis that (i) the principal of the Equipment Notes other than Performing
Equipment Notes (the "Non-Performing Equipment Notes") held in such Trust
has been paid in full and such payments have been distributed to the
holders of such Certificates, (ii) the principal of the Performing
Equipment Notes held in such Trust has been paid when due (but without
giving effect to any acceleration of Performing Equipment Notes) and such
payments have been distributed to the holders of such Certificates and
(iii) the principal of any Equipment Notes formerly held in such Trust that
have been sold pursuant to the Intercreditor Agreement has been paid in
full and such payments have been distributed to the holders of such
Certificates; and
(B) the amount of the excess, if any, of (i) the Pool Balance of such
Class of Certificates as of the immediately preceding Distribution Date
(or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), (the
amount described in this clause (i), the "Current Pool Balance"), over (ii)
the Aggregate LTV Collateral Amount for such Class of Certificates for the
Current Distribution Date; provided that, until the date of the initial LTV
Appraisals, clause (B) shall not apply.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
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applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
"Aggregate LTV Collateral Amount" for any Class of Certificates for any
Distribution Date means the product of (A) (i) the sum of the applicable LTV
Collateral Amounts for each Aircraft, minus (ii) the Pool Balance for each Class
of Certificates, if any, senior to such Class, after giving effect to any
distribution of principal on such Distribution Date with respect to such senior
Class or Classes, multiplied by (B) (i) in the case of the Class A-1
Certificates or Class A-2 Certificates, a fraction, the numerator of which
equals the Current Pool Balance for the Class A-1 Certificates or Class A-2
Certificates, as the case may be, and the denominator of which equals the
aggregate Current Pool Balance for the Class A-1 Certificates and Class A-2
Certificates, and (ii) in the case of the Class B Certificates, 1.0.
"LTV Collateral Amount" of any Aircraft for any Class of Certificates
means, as of any Distribution Date, the lesser of (i) the LTV Ratio for such
Class of Certificates multiplied by the Appraised Current Market Value of such
Aircraft (or with respect to any such Aircraft which has suffered an Event of
Loss under and as defined in the relevant Indenture, the amount of the insurance
proceeds paid to the related Indenture Trustee in respect thereof to the extent
then held by such Indenture Trustee (and/or on deposit in the Special Payments
Account) or payable to such Indenture Trustee in respect thereof) and (ii) the
outstanding principal amount of the Equipment Notes secured by such Aircraft
after giving effect to any principal payments of such Equipment Notes on or
before such Distribution Date.
"LTV Ratio" means, for the Class A-1 Certificates and the Class A-2
Certificates, 53.1%, and for the Class B Certificates, 62.1%.
"Appraised Current Market Value" of any Aircraft means the lower of the
average and the median of the most recent three LTV Appraisals of such Aircraft.
After a Triggering Event occurs and any Equipment Note becomes a Non-Performing
Equipment Note, the Subordination Agent shall obtain LTV Appraisals of all of
the Aircraft as soon as practicable and additional LTV Appraisals on or prior to
each anniversary of the date of such initial LTV Appraisals; provided that if
the Controlling Party reasonably objects to the appraised value of the Aircraft
shown in such LTV Appraisals, the Controlling Party shall have the right to
obtain or cause to be obtained substitute LTV Appraisals (including LTV
Appraisals based upon physical inspection of such Aircraft). (Intercreditor
Agreement, Section 4.1(a)(iv))
"LTV Appraisal" means a current fair market value appraisal (which may be a
"desk-top" appraisal) performed by any Appraiser or any other nationally
recognized appraiser on the basis of an arm's-length transaction between an
informed and willing purchaser under no compulsion to buy and an informed and
willing seller under no compulsion to sell and both having knowledge of all
relevant facts.
Interest Drawings under the Liquidity Facility and withdrawals from the
Cash Collateral Account, in each case in respect of interest on the Certificates
of the Class A-1 or Class A-2 Trust, will be distributed to the Trustee for such
Trust, notwithstanding the priority of distributions set forth in the
Intercreditor Agreement and otherwise described herein. All amounts on deposit
in the Cash Collateral Account for any such Trust that are in excess of the
Required Amount will be paid to the applicable Liquidity Provider.
VOTING OF EQUIPMENT NOTES
In the event that the Subordination Agent, as the registered holder of any
Equipment Note, receives a request for its consent to any amendment,
modification, consent or waiver under such Equipment Note or the related
Indenture (or, if applicable, the related Participation Agreement or other
related document), (i) if no Indenture Default shall have occurred and be
continuing with respect to such Indenture, the Subordination Agent shall request
instructions from the Trustee(s) and shall vote or consent in accordance with
the directions of such Trustee(s) and (ii) if any Indenture Default shall have
occurred and be continuing with respect to such Indenture, the Subordination
Agent will exercise its voting rights as directed by the Controlling Party,
subject to certain limitations; provided that no such amendment, modification,
consent or waiver shall, without the consent of the Liquidity Providers, reduce
the amount of
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principal or interest payable by Southwest under any Equipment Note issued under
any Indenture. (Intercreditor Agreement, Section 9.1(b)).
If the Class C Certificates are issued, the Class C Trustee will become a
party to the Intercreditor Agreement.
THE SUBORDINATION AGENT
Wilmington Trust Company will be the Subordination Agent under the
Intercreditor Agreement. Southwest and its affiliates may from time to time
enter into banking and trustee relationships with the Subordination Agent and
its affiliates. The Subordination Agent's address is Wilmington Trust Company,
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Corporate Trust Administration.
The Subordination Agent may resign at any time, in which event a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. The Controlling Party may remove the Subordination Agent for cause as
provided in the Intercreditor Agreement. In such circumstances, a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. Any resignation or removal of the Subordination Agent and appointment
of a successor Subordination Agent does not become effective until acceptance of
the appointment by the successor Subordination Agent. (Intercreditor Agreement,
Section 8.1)
DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft to be mortgaged as security for the Equipment Notes consist of
29 Boeing 737-700 aircraft (collectively, the "Aircraft"). Southwest has taken
delivery of, owns and currently operates, the Aircraft. The Aircraft have been
designed to be in compliance with Stage 3 noise level standards, which are the
most restrictive regulatory standards currently in effect in the United States
for aircraft noise abatement.
BOEING 737-700 AIRCRAFT
The Boeing 737-700 is a single-aisle commercial jet aircraft with a seating
capacity, in Southwest's single-class configuration, of 137 passengers. The
engine type utilized on Southwest's 737-700 aircraft is the CFM International,
Inc. CFM56-7B22.
AGE OF AIRCRAFT
With the exception of one Aircraft manufactured in 1998 that Southwest
purchased in 2000, the Aircraft were new when delivered to Southwest from The
Boeing Company ("Boeing") and consist of three aircraft delivered in 1997, ten
aircraft delivered in 1998, five aircraft delivered in 1999, five aircraft
delivered in 2000 and five aircraft delivered in 2001.
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THE APPRAISALS
The table below sets forth the appraised values of the Aircraft, as
determined by AvSolutions Inc. ("AvS"), BK Associates, Inc. ("BKA") and Simat,
Helliesen & Eichner, Inc. ("SH&E"), independent aircraft appraisal and
consulting firms (the "Appraisers"), and additional information regarding the
Aircraft. Each Aircraft is a Boeing 737-700.
AIRCRAFT APPRAISER'S VALUATION
REGISTRATION MANUFACTURER'S AIRCRAFT --------------------------------------- APPRAISED
NUMBER SERIAL NUMBER DELIVERY DATE AVS BKA SH&E BASE VALUE(1)
------------ -------------- ------------- ----------- ----------- ----------- -------------
N700GS 27835 12/17/1997 $32,730,000 $33,950,000 $29,000,000 $31,893,333
N701GS 27836 12/19/1997 32,730,000 33,950,000 29,000,000 31,893,333
N703SW 27837 12/31/1997 32,730,000 33,950,000 29,000,000 31,893,333
N706SW 27840 5/31/1998 33,140,000 34,300,000 29,920,000 32,453,333
N712SW 27846 5/31/1998 33,140,000 34,300,000 29,920,000 32,453,333
N798SW 28436 5/13/1998(2) 33,140,000 34,300,000 29,920,000 32,453,333
N713SW 27847 6/8/1998 33,230,000 34,350,000 30,100,000 32,560,000
N714CB 27848 6/19/1998 33,230,000 34,350,000 30,100,000 32,560,000
N715SW 27849 6/30/1998 33,230,000 34,350,000 30,100,000 32,560,000
N716SW 27850 6/30/1998 33,230,000 34,350,000 30,100,000 32,560,000
N719SW 27853 8/5/1998 33,510,000 34,500,000 30,470,000 32,826,667
N720WN 27854 9/30/1998 33,650,000 34,550,000 30,650,000 32,950,000
N707SA 27841 10/30/1998 33,790,000 34,600,000 30,830,000 33,073,333
N742SW 29278 12/28/1998 34,070,000 34,750,000 31,200,000 33,340,000
N726SW 27858 2/25/1999 34,350,000 34,900,000 31,570,000 33,606,667
N745SW 29491 3/31/1999 34,500,000 34,950,000 31,750,000 33,733,333
N727SA 27859 5/20/1999 34,790,000 35,100,000 32,120,000 34,033,333
N728SW 27860 5/19/1999 34,790,000 35,100,000 32,120,000 34,033,333
N729SW 27861 5/24/1999 34,790,000 35,100,000 32,120,000 34,033,333
N770SA 30589 6/28/2000 36,800,000 35,950,000 34,600,000 35,783,333
N772SW 27880 7/6/2000 36,980,000 36,000,000 34,780,000 35,920,000
N782SA 29808 9/29/2000 37,350,000 36,150,000 35,150,000 36,150,000
N789SW 29816 11/19/2000 37,730,000 36,300,000 35,520,000 36,300,000
N791SW 27886 12/26/2000 37,920,000 36,350,000 35,700,000 36,350,000
N400WN 27891 3/28/2001 38,490,000 36,500,000 36,430,000 36,500,000
N797MX 27890 3/23/2001 38,490,000 36,500,000 36,430,000 36,500,000
N403WN 29815 4/16/2001 36,680,000 36,600,000 36,620,000 36,620,000
N405WN 27893 6/28/2001 39,070,000 36,750,000 36,800,000 36,800,000
N406WN 27894 6/28/2001 39,070,000 36,750,000 36,800,000 36,800,000
---------------
(1) The appraised base value of each Aircraft is the lesser of the average and
median base values of such Aircraft as determined by the Appraisers.
According to the International Society of Transport Aircraft Trading,
"appraised base value" is defined as each Appraiser's opinion of the
underlying economic value of an Aircraft in an open, unrestricted, stable
market environment with a reasonable balance of supply and demand, and
assumes full consideration of its "highest and best use". An Aircraft's
appraised base value is founded in the historical trend of values and in the
projection of value trends and presumes an arm's length, cash transaction
between willing, able and knowledgeable parties, acting prudently, with an
absence of duress and with a reasonable period of time available for
marketing.
(2) Southwest purchased this Aircraft used in 2000.
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For purposes of the foregoing chart, AvS, BKA and SH&E each was asked to
provide its opinion as to the appraised base value of each Aircraft. As part of
this process, all three Appraisers performed "desk-top" appraisals (the
"Appraisals") without any physical inspection of the Aircraft. The Appraisals
are based on various assumptions and methodologies, which vary among the
Appraisals. The Appraisers have delivered letters summarizing their respective
appraisals, copies of which are annexed to this Prospectus Supplement as
Appendix II. For a discussion of the assumptions and methodologies used in each
of the Appraisals, reference is hereby made to such summaries.
An appraisal is only an estimate of value. It is not indicative of the
price at which an aircraft may be purchased from the manufacturer. Nor should it
be relied upon as a measure of realizable value. The proceeds realized upon a
sale of any Aircraft may be less than its appraised value. The value of the
Aircraft in the event of the exercise of remedies under the applicable Indenture
will depend on market and economic conditions, the availability of buyers, the
condition of the Aircraft and other similar factors. Although each of the
Appraisals is dated after September 11, 2001, the Appraisals contain a
disclaimer as to the effect of the events of that day on the appraised values.
Nevertheless, one of the Appraisals contains a statement that consideration has
been given to such events and two of them contain a statement that values have
not been adjusted to reflect the effects of such events. We cannot assure you
that the proceeds realized upon any such exercise with respect to the Equipment
Notes and the Aircraft pursuant to the applicable Indenture would equal the
appraised value of such Aircraft or be sufficient to satisfy in full payments
due on such Equipment Notes or the Certificates. See "Risk Factors -- Appraisals
and Realizable Value of Aircraft".
If any of the above Aircraft is not available to be mortgaged on the
Issuance Date, due to an Event of Loss or otherwise, Southwest may substitute a
replacement aircraft of the same type and of equal or greater appraised value
for such Aircraft.
DESCRIPTION OF THE EQUIPMENT NOTES
The following summary describes all material terms of the Equipment Notes
and supplements (and, to the extent inconsistent therewith, replaces) the
description of the general terms and provisions relating to the Equipment Notes,
the Indentures and the Participation Agreements, set forth in the Prospectus.
The summaries make use of terms defined in and are qualified in their entirety
by reference to all of the provisions of the Equipment Notes, the Indentures and
the Participation Agreements, a form of each of which will be filed as an
exhibit to a Current Report on Form 8-K to be filed by Southwest with the
Commission. Except as otherwise indicated, the following summaries relate to the
Equipment Notes, the Indenture and the Participation Agreement applicable to
each Aircraft.
PURCHASE OF EQUIPMENT NOTES
Under the terms of the Participation Agreement for each Aircraft between
Southwest and Wilmington Trust Company, as Indenture Trustee, Subordination
Agent and Trustee for each Trust (each a "Participation Agreement"), subject to
certain customary conditions precedent, each Trustee will purchase from
Southwest the Equipment Notes to be issued under the Indenture related to that
Aircraft. Equipment Notes will be issued in three series with respect to each
Aircraft (the "Series A-1 Equipment Notes", the "Series A-2 Equipment Notes" and
the "Series B Equipment Notes", and, collectively, the "Equipment Notes").
Southwest may elect to issue a fourth series of Equipment Notes with respect to
an Aircraft (the "Series C Equipment Notes"), which will be funded from sources
other than this Offering. See "Description of the Certificates -- Possible
Issuance of Class C Certificates". The Equipment Notes with respect to each
Aircraft will be issued under a separate Trust Indenture and Mortgage (each an
"Indenture") between Southwest and Wilmington Trust Company, as indenture
trustee thereunder (each, an "Indenture Trustee").
Southwest's obligations under the Equipment Notes issued with respect to
each Aircraft will be general obligations of Southwest.
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SUBORDINATION
The Indentures provide for the following subordination provisions
applicable to the Equipment Notes:
- Series A-1 and Series A-2 Equipment Notes issued in respect of an
Aircraft will rank equally in right of payment and will rank senior to
other Equipment Notes issued in respect of such Aircraft.
- Series B Equipment Notes issued in respect of an Aircraft will rank
junior in right of payment to the Series A-1 and Series A-2 Equipment
Notes issued in respect of such Aircraft and, if Series C Equipment Notes
are issued, will rank senior to the Series C Equipment Notes issued in
respect of such Aircraft.
- If Southwest elects to issue Series C Equipment Notes with respect to an
Aircraft, they will be subordinated in right of payment to the Series
A-1, Series A-2 and Series B Equipment Notes issued with respect to such
Aircraft.
PRINCIPAL AND INTEREST PAYMENTS
Subject to the provisions of the Intercreditor Agreement, interest paid on
the Equipment Notes held in each Trust will be passed through to the
Certificateholders of such Trust on the dates and at the rate per annum set
forth on the cover page of this Prospectus Supplement with respect to
Certificates issued by such Trust until the final expected Regular Distribution
Date for such Trust. Subject to the provisions of the Intercreditor Agreement,
principal paid on the Equipment Notes held in each Trust will be passed through
to the Certificateholders of such Trust in scheduled amounts on the dates set
forth in Appendix III to this Prospectus Supplement until the final expected
Regular Distribution Date for such Trust.
Interest will be payable on the unpaid principal amount of each Series A-1,
Series A-2 and Series B Equipment Note at the rate applicable to such Equipment
Note on May 1 and November 1 of each year, commencing on May 1, 2002. Such
interest will be computed on the basis of a 360-day year of twelve 30-day
months. Overdue amounts of principal, Make-Whole Premium (if any) and interest
on any Equipment Note will, to the extent permitted by applicable law, bear
interest at the applicable Stated Interest Rate plus 1% per annum.
Scheduled principal payments on the Series A-1 Equipment Notes will be made
on May 1 and November 1 in certain years. The entire principal amount of the
Series A-2 Equipment Notes and the entire principal amount of the Series B
Equipment Notes is scheduled to be paid on November 1, 2006. See "Description of
the Certificates -- Pool Factors" for a discussion of the scheduled payments of
principal of the Equipment Notes and possible revisions thereto.
If any date scheduled for a payment of principal, Make-Whole Premium (if
any) or interest with respect to the Equipment Notes is not a Business Day, such
payment will be made on the next succeeding Business Day without any additional
interest.
REDEMPTION
If an Event of Loss occurs with respect to an Aircraft and such Aircraft is
not replaced by Southwest under the related Indenture, the Equipment Notes
issued with respect to such Aircraft will be redeemed, in whole, in each case at
a price equal to the aggregate unpaid principal amount thereof, together with
accrued interest thereon to, but not including, the date of redemption, but
without Make-Whole Premium, on a Special Distribution Date. (Indentures, Section
2.10)
At the option of Southwest, all of the Equipment Notes issued with respect
to the Aircraft or, with the Ratings Confirmation of the Rating Agencies, all of
the Equipment Notes of any Series may be redeemed prior to maturity at any time,
in each case at a price equal to the aggregate unpaid principal thereof,
together with accrued and unpaid interest thereon to, but not including, the
date of redemption, plus a Make-Whole Premium. (Indentures, Section 2.11)
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"Make-Whole Premium" means, with respect to any Equipment Note, an amount
(as determined by an independent investment bank of national standing) equal to
the excess, if any, of (a) the present value of the remaining scheduled payments
of principal and interest to maturity of such Equipment Note computed by
discounting such payments on a semiannual basis on each payment date under the
applicable Indenture (assuming a 360-day year of twelve 30-day months) using a
discount rate equal to the Treasury Yield over (b) the outstanding principal
amount of such Equipment Note plus accrued interest to the date of
determination. (Indentures, Annex A)
"Ratings Confirmation" means with respect to any action proposed to be
taken, a written confirmation from each Rating Agency that such action would not
result in (i) a reduction of the rating for any Class of Certificates below the
then current rating for such Class of Certificates or (ii) a withdrawal or
suspension of the rating of any Class of Certificates.
For purposes of determining the Make-Whole Premium, "Treasury Yield" means,
at the date of determination with respect to any Equipment Note, the interest
rate (expressed as a decimal and, in the case of United States Treasury bills,
converted to a bond equivalent yield) determined to be the per annum rate equal
to the semiannual yield to maturity for United States Treasury securities
maturing on the Average Life Date of such Equipment Note and trading in the
public securities markets either as determined by interpolation between the most
recent weekly average yield to maturity for two series of United States Treasury
securities trading in the public securities markets, (A) one maturing as close
as possible to, but earlier than, the Average Life Date of such Equipment Note
and (B) the other maturing as close as possible to, but later than, the Average
Life Date of such Equipment Note, in each case as published in the most recent
H.15(519) or, if a weekly average yield to maturity for United States Treasury
securities maturing on the Average Life Date of such Equipment Note is reported
in the most recent H.15(519), such weekly average yield to maturity as published
in such H.15(519). "H.15(519)" means the weekly statistical release designated
as such, or any successor publication, published by the Board of Governors of
the Federal Reserve System. The date of determination of a Make-Whole Premium
shall be the third Business Day prior to the applicable payment or redemption
date and the "most recent H.15(519)" means the H.15(519) published prior to the
close of business on the third Business Day prior to the applicable payment or
redemption date. (Indentures, Annex A)
"Average Life Date" for any Equipment Note shall be the date which follows
the time of determination by a period equal to the Remaining Weighted Average
Life of such Equipment Note.
"Remaining Weighted Average Life" on a given date with respect to any
Equipment Note shall be the number of days equal to the quotient obtained by
dividing (a) the sum of each of the products obtained by multiplying (i) the
amount of each then remaining scheduled payment of principal of such Equipment
Note by (ii) the number of days from and including such determination date to
but excluding the date on which such payment of principal is scheduled to be
made, by (b) the then outstanding principal amount of such Equipment Note.
(Indentures, Annex A)
SECURITY
The Equipment Notes issued with respect to each Aircraft will be secured
by:
- a mortgage to the Indenture Trustee of such Aircraft;
- an assignment to the Indenture Trustee of Southwest's warranty rights
under its purchase agreement with Boeing; and
- cash, if any, held from time to time by the Indenture Trustee with
respect to any Aircraft, including funds held as the result of an Event
of Loss to such Aircraft, which will be invested and reinvested by such
Indenture Trustee, at the direction of Southwest, in investments
described in the related Indenture. (Indentures, Section 6.06)
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LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The tables in Appendix IV shows the aggregate LTVs for the Equipment Notes
issued for each Aircraft as of the Issuance Date and each November 1 Regular
Distribution Date thereafter. The LTV was obtained by dividing (i) the
outstanding balance (assuming no payment default) of such Equipment Notes
determined immediately after giving effect to the payments scheduled to be made
on each such Regular Distribution Date by (ii) the assumed value (the "Assumed
Aircraft Value") of the Aircraft securing such Equipment Notes.
The tables in Appendix IV are based on the assumption (the "Depreciation
Assumption") that the value of each Aircraft set forth opposite the initial
Regular Distribution Date included in each table depreciates by approximately 3%
of the initial appraised value per year. Other rates or methods of depreciation
would result in materially different loan to Aircraft value ratios, and no
assurance can be given (i) that the depreciation rates and method assumed for
the purposes of the tables are the ones most likely to occur or (ii) as to the
actual future value of any Aircraft. Thus the tables should not be considered a
forecast or prediction of expected or likely loan to Aircraft value ratios, but
simply a mathematical calculation based on one set of assumptions.
DEFEASANCE
Under specified circumstances, Southwest may legally release itself from
any payment or other obligations on all, but not less than all, of the Equipment
Notes issued under one or more Indentures if Southwest receives a Ratings
Confirmation from each Rating Agency and puts in place the following
arrangements for the benefit of the Note Holders:
- Southwest must deposit in trust for the benefit of the Note Holders of
such Equipment Notes a combination of money and direct obligations of the
United States and certain depository receipts representing interests in
the direct obligations that will generate enough money to pay when due
the principal of and interest on such Equipment Notes; and
- Southwest must deliver to the Trustees and the relevant Indenture Trustee
a legal opinion reasonably acceptable to both the Trustees and the
relevant Indenture Trustee stating the there has been a change in the
federal tax law from the law as in effect on the date of this Prospectus
Supplement or that there has been an IRS ruling, in either case that lets
Southwest make the above deposit without causing the holders of the
Certificates to be taxed on their Certificates any differently than if
Southwest did not make the deposit and simply repaid such equipment notes
itself.
If Southwest were to accomplish a full defeasance, Note Holders of the
Equipment Notes so defeased would rely solely on the trust deposit for repayment
on such Equipment Notes. Note Holders of such Equipment Notes could not look to
Southwest for repayment if a shortfall in the payment of principal of or
interest on such equipment notes occurred. In addition, the Note Holders of such
Equipment Notes would have no interest in or other rights with respect to the
related Aircraft or other assets subject to the lien of the related Indenture,
and the lien would terminate as to such Equipment Notes. (Indentures, Section
11.01(y))
LIMITATION OF LIABILITY
The Equipment Notes issued with respect to the Aircraft will be direct
obligations of Southwest. Except as otherwise provided in the Indentures, each
Indenture Trustee, in its individual capacity, will not be answerable or
accountable under the Indentures or under the Equipment Notes under any
circumstances except for, among other things, its own willful misconduct or
gross negligence.
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INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will include:
- the failure by Southwest to pay any interest or principal or Make-Whole
Premium, if any, when due, under such Indenture or under any Equipment
Note issued thereunder that continues for more than 10 Business Days, in
the case of principal, interest or Make-Whole Premium, and, in all other
cases, 20 Business Days after Southwest receives written demand from the
related Indenture Trustee or holder of an Equipment Note;
- any representation or warranty made by Southwest in such Indenture, the
related Participation Agreement or certain related documents furnished to
the Indenture Trustee or any holder of an Equipment Note pursuant thereto
being false or inaccurate in any material respect when made that
continues to be material and adverse to the interests of the Indenture
Trustee or registered holders of the Equipment Notes ("Note Holders") and
remains unremedied after notice and specified cure periods;
- failure by Southwest to perform or observe any other covenant or
obligation for the benefit of the Indenture Trustee or holders of
Equipment Notes under such Indenture or certain related documents that
continues after notice and specified cure periods;
- the lapse or cancellation of insurance required under the related
Indenture; and
- the occurrence of certain events of bankruptcy, reorganization or
insolvency of Southwest. (Indentures, Section 5.01)
There will not be cross-default provisions in the Indentures. Consequently,
events resulting in an Indenture Default under any particular Indenture may or
may not result in an Indenture Default occurring under any other Indenture.
The holders of a majority in principal amount of the outstanding Equipment
Notes issued with respect to any Aircraft, by notice to the Indenture Trustee,
may on behalf of all the holders waive any existing default and its consequences
under the Indenture with respect to such Aircraft, except a default in the
payment of the principal of, or Make-Whole Premium or interest on any such
Equipment Notes or a default in respect of any covenant or provision of such
Indenture that cannot be modified or amended without the consent of each holder
of Equipment Notes. (Indentures, Section 5.06)
REMEDIES
If an Indenture Default occurs and is continuing under an Indenture, the
related Indenture Trustee or the holders of a majority in principal amount of
the Equipment Notes outstanding under such Indenture may declare the principal
of all such Equipment Notes issued thereunder immediately due and payable,
together with all accrued but unpaid interest thereon, provided that in the
event of a reorganization proceeding involving Southwest instituted under
Chapter 11 of the U.S. Bankruptcy Code, if no other Indenture Default (other
than the failure to pay the outstanding amount of the Equipment Notes which by
such declaration shall have become payable) exists at any time after the
consummation of such proceeding, such declaration will be automatically
rescinded without any further action on the part of any holder of Equipment
Notes. The holders of a majority in principal amount of Equipment Notes
outstanding under an Indenture may rescind any declaration of acceleration of
such Equipment Notes at any time before the judgment or decree for the payment
of the money so due shall be entered if (i) there has been paid to the related
Indenture Trustee an amount sufficient to pay all principal, interest, and
premium, if any, on any such Equipment Notes, to the extent such amounts have
become due otherwise than by such declaration of acceleration and (ii) all other
Indenture Defaults and incipient Indenture Defaults with respect to any covenant
or provision of such Indenture have been cured. (Indentures, Section 5.02(b)).
Each Indenture provides that if an Indenture Default under such Indenture
has occurred and is continuing, the related Indenture Trustee may exercise
certain rights or remedies available to it under such
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Indenture or under applicable law, including one or more of the remedies under
such Indenture. (Indentures, Section 5.02(a))
If the Equipment Notes issued in respect of one Aircraft are in default,
the Equipment Notes issued in respect of the other Aircraft may not be in
default, and, if not, no remedies will be exercisable under the applicable
Indentures with respect to such other Aircraft.
In the case of Chapter 11 bankruptcy proceedings in which an air carrier is
a debtor, Section 1110 of the U.S. Bankruptcy Code ("Section 1110") provides
special rights to lessors, conditional vendors and holders of security interests
with respect to "equipment" (as defined below). Under Section 1110, the right of
such financing parties to take possession of such equipment in compliance with
the provisions of a lease, conditional sale contract or security agreement is
not affected by any provision of the U.S. Bankruptcy Code or any power of the
bankruptcy court. Such right to take possession may not be exercised for 60 days
following the date of commencement of the reorganization proceedings.
Thereafter, such right to take possession may be exercised during such
proceedings unless, within the 60-day period or any longer period consented to
by the relevant parties, the debtor agrees to perform its future obligations and
cures all existing and future defaults on a timely basis. Defaults resulting
solely from the financial condition, bankruptcy, insolvency or reorganization of
the debtor need not be cured.
"Equipment" is defined in Section 1110, in part, as an aircraft, aircraft
engine, propeller, appliance, or spare part (as defined in Section 40102 of
Title 49 of the U.S. Code) that is subject to a security interest granted by,
leased to, or conditionally sold to a debtor that, at the time such transaction
is entered into, holds an air carrier operating certificate issued pursuant to
chapter 447 of Title 49 of the U.S. Code for aircraft capable of carrying ten or
more individuals or 6,000 pounds or more of cargo. Rights under Section 1110 are
subject to certain limitations in the case of equipment first placed in service
on or prior to October 22, 1994.
It is a condition to each Trustee's obligation to purchase Equipment Notes
with respect to each Aircraft that outside counsel to Southwest, which is
expected to be Vinson & Elkins L.L.P., provide its opinion to the Trustees that
each Indenture Trustee will be entitled to the benefits of Section 1110 with
respect to the Airframe and Engines (each as defined in the Indentures)
comprising such Aircraft, assuming that, at the time of such transaction,
Southwest holds an air carrier operating certificate issued pursuant to chapter
447 of Title 49 of the U.S. Code for aircraft capable of carrying ten or more
individuals or 6,000 pounds or more of cargo. For a description of certain
limitations on the Indenture Trustee's exercise of rights contained in the
Indenture, see "-- Indenture Defaults, Notice and Waiver".
The opinion of Vinson & Elkins L.L.P. will not address the possible
replacement of an Aircraft after an Event of Loss in the future, the
consummation of which is conditioned upon the contemporaneous delivery of an
opinion of counsel to the effect that the related Indenture Trustee will be
entitled to Section 1110 benefits with respect to such replacement unless there
is a change in law or court interpretation that results in Section 1110 not
being available. See "-- Certain Provisions of the Indentures -- Events of
Loss". The opinion of Vinson & Elkins L.L.P. will also not address the
availability of Section 1110 with respect to any possible lessee of an Aircraft
if it is leased by Southwest.
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the related Indenture Trustee may be applied to
reimburse such Indenture Trustee for any tax, expense or other loss incurred by
it and to pay any other amounts due to such Indenture Trustee prior to any
payments to holders of the Equipment Notes issued under such Indenture.
(Indentures, Section 3.03)
MODIFICATION OF INDENTURES
Without the consent of holders of a majority in principal amount of the
Equipment Notes outstanding under any Indenture, the provisions of such
Indenture and the related Participation Agreement may not be amended or
modified, except to the extent indicated below. (Indentures, Section 10.01)
Any Indenture may be amended without the consent of the holders of
Equipment Notes to, among other things, cure any defect or inconsistency in such
Indenture or the Equipment Notes issued
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thereunder, provided that such change does not adversely affect the interests of
any such holder. (Indentures, Section 10.01(b))
Without the consent of the Liquidity Providers and the holder of each
Equipment Note outstanding under any Indenture affected thereby, no amendment or
modification of such Indenture may among other things (a) reduce the principal
amount of, or Make-Whole Premium, if any, or interest payable on, any Equipment
Notes issued under such Indenture or change the date on which any principal,
Make-Whole Premium, if any, or interest is due and payable, (b) permit the
creation of any security interest with respect to the property subject to the
lien of such Indenture, except as provided in such Indenture, or deprive any
holder of an Equipment Note issued under such Indenture of the benefit of the
lien of such Indenture upon the property subject thereto or (c) modify the
percentage of holders of Equipment Notes issued under such Indenture required to
take or approve any action under such Indenture. (Indentures, Section 10.01(a))
INDEMNIFICATION
Southwest will be required to indemnify each Indenture Trustee, each
Liquidity Provider, the Subordination Agent and each Trustee, but not the
holders of Certificates, for certain losses, claims and other matters.
CERTAIN PROVISIONS OF THE INDENTURES
Each Aircraft will be owned by Southwest.
PAYMENTS
Payments of interest on the Series A-1, Series A-2 and Series B Equipment
Notes issued by Southwest under an Indenture are payable on May 1 and November 1
of each year, commencing on May 1, 2002. Payments of principal of the Series A-1
Equipment Notes issued by Southwest under an Indenture will be payable on May 1
and November 1 in certain years or, in the case of Series A-2 and Series B
Equipment Notes, in full on final maturity.
MAINTENANCE
Under the terms of each Indenture, Southwest's obligations in respect of
each Aircraft include, among other things and at its expense, to keep each
Aircraft duly registered and insured, to pay all costs of operating the Aircraft
and to maintain, service, repair and overhaul the Aircraft so as to keep it in
as good an operating condition as when delivered to Southwest, ordinary wear and
tear excepted, and in such condition as required to maintain the airworthiness
certificate for the Aircraft in good standing at all times. (Indentures, Section
4.02)
POSSESSION, LEASE AND TRANSFER
Each Aircraft may be operated by Southwest or, subject to certain
restrictions, by certain other persons. Normal interchange and pooling
agreements customary in the commercial airline industry with respect to any
Airframe or Engine are permitted. Leases of the Aircraft by Southwest are also
permitted to U.S. air carriers and foreign air carriers that have their
principal executive office in certain specified countries, subject to a
reasonably satisfactory legal opinion that, among other things, such country
would recognize the Indenture Trustee's security interest in respect of the
applicable Aircraft. In addition, a lessee may not be subject to insolvency or
similar proceedings at the commencement of such lease. (Indentures, Section
4.02) Permitted foreign air carriers are not limited to those based in a country
that is a party to the Convention on the International Recognition of Rights in
Aircraft (Geneva 1948) (the "Convention"). It is uncertain to what extent the
relevant Indenture Trustee's security interest would be recognized if an
Aircraft is registered or located in a jurisdiction not a party to the
Convention. Moreover, in the case of an Indenture Default, the ability of the
related Indenture Trustee to realize upon its security
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interest in an Aircraft could be adversely affected as a legal or practical
matter if such Aircraft were registered or located outside the United States.
REGISTRATION
Southwest is required to keep each Aircraft duly registered under the
Transportation Code with the Federal Aviation Administration ("FAA").
(Indentures, Section 4.02(e)) Such recordation of the Indenture and certain
other documents with respect to each Aircraft, will give the relevant Indenture
Trustee a first-priority, perfected security interest in such Aircraft whenever
it is located in the United States or any of its territories and possessions.
The Convention provides that such security interest will also be recognized,
with certain limited exceptions, in those jurisdictions that have ratified or
adhere to the Convention.
So long as no Indenture Event of Default exists, Southwest has the right to
register the Aircraft in a country other than the United States at its own
expense in connection with a permitted lease of the Aircraft to a permitted
foreign air carrier, subject to certain conditions set forth in the related
Participation Agreement. These conditions include a requirement that an opinion
of counsel be provided that the lien of the applicable Indenture will continue
as a first priority security interest in the applicable Aircraft. (Indentures,
Section 4.02(e); Participation Agreements, Section 6.4.5)
LIENS
Southwest is required to maintain each Aircraft free of any liens, other
than the rights of the relevant Indenture Trustee, the holders of the related
Equipment Notes and Southwest arising under the applicable Indenture or the
other operative documents related thereto, and other than certain limited liens
permitted under such documents, including but not limited to (i) liens for taxes
either not yet due or being contested in good faith by appropriate proceedings;
(ii) materialmen's, mechanics' and other similar liens arising in the ordinary
course of business and securing obligations that either are not yet delinquent
for more than 60 days or are being contested in good faith by appropriate
proceedings; (iii) judgment liens so long as such judgment is discharged or
vacated within 60 days or the execution of such judgment is stayed pending
appeal or discharged, vacated or reversed within 60 days after expiration of
such stay; and (iv) any other lien as to which Southwest has provided a bond or
other security adequate in the reasonable opinion of the Indenture Trustee;
provided that in the case of each of the liens described in the foregoing
clauses (i), (ii) and (iii), such liens and proceedings do not involve any
material risk of the sale, forfeiture or loss of such Aircraft or the interest
of any Participant therein or impair the lien of the relevant Indenture.
(Indentures, Section 4.01)
REPLACEMENT OF PARTS; ALTERATIONS
Southwest is obligated to replace all parts at its expense that may from
time to time be incorporated or installed in or attached to any Aircraft and
that may become lost, damaged beyond repair, worn out, stolen, seized,
confiscated or rendered permanently unfit for use. Southwest or any permitted
lessee has the right, at its own expense, to make such alterations,
modifications and additions with respect to each Aircraft as it deems desirable
in the proper conduct of its business and to remove parts which it deems to be
obsolete or no longer suitable or appropriate for use, so long as such
alteration, modification, addition or removal does not materially diminish the
fair market value, utility or useful life of the related Aircraft or Engine or
invalidate the Aircraft's airworthiness certificate. (Indentures, Section 4.04)
INSURANCE
Southwest is required to maintain, at its expense (or at the expense of a
permitted lessee), all-risk aircraft hull insurance covering each Aircraft, at
all times in an amount not less than the aggregate outstanding principal amount
of the Equipment Notes relating to such Aircraft, together with six months of
interest accrued thereon (the "Debt Balance"). However, after giving effect to
self-insurance permitted as described below, the amount payable under such
insurance may be less than such amounts payable with
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respect to the Equipment Notes. In the event of a loss involving insurance
proceeds in excess of $5,500,000 per occurrence in respect of any Aircraft, such
proceeds up to the stipulated loss value or Debt Balance, as the case may be, of
the relevant Aircraft will be payable to the applicable Indenture Trustee, for
so long as the relevant Indenture shall be in effect. In the event of a loss
involving insurance proceeds of up to $5,500,000 per occurrence in respect of
any Aircraft, such proceeds will be payable directly to Southwest so long as an
Indenture Event of Default does not exist with respect to the Indenture. So long
as the loss does not constitute an Event of Loss, insurance proceeds will be
applied to repair or replace the property. (Indentures, Section 4.06 and Annex
B)
In addition, Southwest is obligated to maintain comprehensive airline
liability insurance at its expense (or at the expense of a permitted lessee),
including, without limitation, passenger liability, baggage liability, cargo and
mail liability, hangarkeeper's liability and contractual liability insurance
with respect to each Aircraft. Such liability insurance must be underwritten by
insurers of nationally or internationally recognized responsibility. The amount
of such liability insurance coverage per occurrence may not be less than the
amount of comprehensive airline liability insurance from time to time applicable
to aircraft owned or leased and operated by Southwest of the same type and
operating on similar routes as such Aircraft. (Indentures, Section 4.06 and
Annex B)
Southwest is also required to maintain war-risk, hijacking or allied perils
insurance if it (or any permitted lessee) operates any Aircraft, Airframe or
Engine in any area of recognized hostilities or if Southwest (or any permitted
lessee) maintains such insurance with respect to other aircraft operated on the
same international routes or areas on or in which the Aircraft is operated.
(Indentures, Section 4.06 and Annex B)
Southwest may self-insure with respect to the Aircraft to the same extent
as it does with respect to, or maintain policies with deductibles or premium
adjustment provisions consistent with similar provisions applicable to, other
comparable aircraft operated by Southwest; provided, however, that in the case
of public liability insurance, such self-insurance shall in no event exceed
$50,000,000; and provided, further that if at any time Southwest's unsecured
senior long-term debt securities are not rated Investment Grade, such
self-insurance (inclusive of any such public liability insurance and without
derogation from the preceding proviso) shall in no case be in amounts greater
than 4% of Southwest's tangible net worth. The term "Investment Grade" means a
rating of "Baa3" or higher from Moody's, or a rating of "BBB-" or higher from
Standard & Poor's. Currently, Moody's and Standard & Poor's rate Southwest's
unsecured senior long-term debt securities as "Baa1" and "A", respectively.
In respect of each Aircraft, Southwest is required to name as additional
insured parties the relevant Indenture Trustee and holders of the Equipment
Notes and the Liquidity Providers under all liability, hull and property and war
risk, hijacking and allied perils insurance policies required with respect to
such Aircraft. In addition, the insurance policies will be required to provide
that, in respect of the interests of such additional insured persons, the
insurance shall not be invalidated or impaired by any act or omission of
Southwest, any permitted sublessee or any other person. (Indentures, Section
4.06 and Annex B)
EVENTS OF LOSS
If an Event of Loss occurs with respect to the Airframe or the Airframe and
Engines of an Aircraft, Southwest must elect within 45 days after such
occurrence either to make payment with respect to such Event of Loss or to
replace such Airframe and any such Engines. Not later than the first Business
Day following the earlier of (i) the 120th day following the date of occurrence
of such Event of Loss, and (ii) the fourth Business Day following the receipt of
the insurance proceeds in respect of such Event of Loss, Southwest must either
(i) pay to the Indenture Trustee the outstanding principal amount of the
Equipment Notes, together with certain additional amounts, but, in any case,
without any Make-Whole Premium or (ii) unless any Indenture Event of Default or
failure to pay principal or interest under the Indenture or certain bankruptcy
defaults shall have occurred and is continuing, substitute an airframe (or
airframe and one or more engines, as the case may be) for the Airframe, or
Airframe and Engine(s), that suffered such Event of Loss. (Sections 2.10 and
4.05(a))
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If Southwest elects to replace an Airframe (or Airframe and one or more
Engines, as the case may be) that suffered such Event of Loss, it shall, subject
such an airframe (or airframe and one or more engines) to the lien of the
Indenture, and such replacement airframe or airframe and engines must be the
same model as the Airframe or Airframe and Engines to be replaced or an improved
model, with a value, utility and remaining useful life (without regard to hours
or cycles remaining until the next regular maintenance check) at least equal to
the Airframe or Airframe and Engines to be replaced, assuming that such Airframe
and such Engines had been maintained in accordance with the related Indenture,
as the case may be. Southwest is also required to provide to the relevant
Indenture Trustee reasonably acceptable opinions of counsel to the effect, among
other things, that (i) certain specified documents have been duly filed under
the Transportation Code and (ii) such Indenture Trustee will be entitled to
receive the benefits of Section 1110 of the U.S. Bankruptcy Code with respect to
any such replacement airframe (unless, as a result of a change in law or court
interpretation, such benefits are not then available). (Indentures, Section
4.05(c))
If Southwest elects not to replace such Airframe, or Airframe and
Engine(s), then upon payment of the outstanding principal amount of the
Equipment Notes issued with respect to such Aircraft, together with all
additional amounts then due and unpaid with respect to such Aircraft, which must
be at least sufficient to pay in full as of the date of payment thereof the
aggregate unpaid principal amount under such Equipment Notes together with
accrued but unpaid interest thereon and all other amounts due and owing in
respect of such Equipment Notes, the lien of the Indenture or interest and
principal payments with respect thereto shall cease. The payments made under the
Indenture by Southwest shall be deposited with the applicable Indenture Trustee.
Amounts in excess of the amounts due and owing under the Equipment Notes issued
with respect to such Aircraft will be distributed by such Indenture Trustee to
Southwest. (Indentures, Sections 2.10, 3.02 and 4.05(a)(ii))
If an Event of Loss occurs with respect to an Engine alone, Southwest will
be required to replace such Engine within 60 days after the occurrence of such
Event of Loss with another engine, free and clear of all liens (other than
certain permitted liens). Such replacement engine shall be the same make and
model as the Engine to be replaced, or an improved model, suitable for
installation and use on the Airframe, and having a value, utility and remaining
useful life (without regard to hours or cycles remaining until overhaul) at
least equal to the Engine to be replaced, assuming that such Engine had been
maintained in accordance with the relevant Indenture, as the case may be.
(Indentures, Section 4.04(e))
An "Event of Loss" with respect to an Aircraft, Airframe or any Engine
means any of the following events with respect to such property:
- The destruction of such property, damage to such property beyond economic
repair or rendition of such property permanently unfit for normal use.
- The actual or constructive total loss of such property or any damage to
such property or requisition of title or use of such property which
results in an insurance settlement with respect to such property on the
basis of a total loss or a constructive or compromised total loss.
- Any theft, hijacking or disappearance of such property for a period of
180 consecutive days or more.
- Any seizure, condemnation, confiscation, taking or requisition of title
to such property by any governmental entity or purported governmental
entity (other than a U.S. government entity, the government of Canada,
France, Germany, Japan, The Netherlands, Sweden, Switzerland, the United
Kingdom or an entity of the country of registration of the relevant
Aircraft) for a period exceeding 12 consecutive months.
- As a result of any law, rule, regulation, order or other action by the
FAA or any other governmental entity, the use of such property in the
normal course of Southwest's business of passenger air transportation is
prohibited for 18 consecutive months, unless Southwest, prior to the
expiration of such 18 consecutive month period, shall have undertaken and
shall be diligently carrying forward steps which are necessary or
desirable to permit the normal use of such property
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by Southwest, but in any event if such use shall have been prohibited for
a period of three consecutive years.
- With respect to any Engine, any divestiture of title to such Engine in
connection with pooling or certain other arrangements shall be treated as
an Event of Loss. (Indentures, Annex A)
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary describes all material generally applicable U.S.
federal income tax consequences to Certificateholders of the purchase, ownership
and disposition of the Certificates and in the opinion of Vinson & Elkins
L.L.P., special tax counsel to Southwest ("Tax Counsel"), is accurate in all
material respects with respect to the matters discussed therein. This summary
supplements (and, to the extent inconsistent therewith, replaces) the summary of
U.S. federal income tax consequences set forth in the Prospectus. Except as
otherwise specified, the summary is addressed to beneficial owners of
Certificates ("U.S. Certificateholders") that are citizens or residents of the
United States, corporations, partnerships or other entities created or organized
in or under the laws of the United States or any state therein, estates the
income of which is subject to U.S. federal income taxation regardless of its
source, or trusts that meet the following two tests: (a) a U.S. court is able to
exercise primary supervision over the administration of the trust and (b) one or
more U.S. fiduciaries have the authority to control all substantial decisions of
the trust ("U.S. Persons") that will hold the Certificates as capital assets.
This summary does not address the tax treatment of U.S. Certificateholders that
may be subject to special tax rules, such as banks, insurance companies, dealers
in securities or commodities, holders subject to the mark-to-market rules,
tax-exempt entities, holders that will hold Certificates as part of a straddle
or holders that have a "functional currency" other than the U.S. Dollar, nor,
except as specifically indicated, does it address the tax treatment of U.S.
Certificateholders that do not acquire Certificates at the public offering price
as part of the initial offering. The summary does not purport to be a
comprehensive description of all of the tax considerations that may be relevant
to a decision to purchase Certificates. This summary does not describe any tax
consequences arising under the laws of any state, locality or taxing
jurisdiction other than the United States and does not describe any estate or
gift tax consequences.
The summary is based upon the tax laws and practice of the United States as
in effect on the date of this Prospectus Supplement, as well as judicial and
administrative interpretations thereof (in final or proposed form) available on
or before such date. All of the foregoing are subject to change, which change
could apply retroactively. We have not sought any ruling from the U.S. Internal
Revenue Service (the "IRS") with respect to the tax consequences described
below, and we cannot assure you that the IRS will not take contrary positions.
The Trusts are not indemnified for any U.S. federal income taxes that may be
imposed upon them, and the imposition of any such taxes on a Trust could result
in a reduction in the amounts available for distribution to the
Certificateholders of such Trust. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
CERTIFICATES.
TAX STATUS OF THE TRUSTS
In the opinion of Tax Counsel, each of the Trusts will be classified as a
grantor trust and not as an association taxable as a corporation for U.S.
federal income tax purposes. Accordingly, each U.S. Certificateholder will be
subject to federal income taxation as if it owned directly a pro rata undivided
interest in each asset owned by the corresponding Trust and paid directly its
share of fees and expenses paid by the pass through trust.
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TAXATION OF CERTIFICATEHOLDERS GENERALLY
A U.S. Certificateholder will be treated as owning its pro rata undivided
interest in each of the Equipment Notes, and any other property held by the
Trust. Each U.S. Certificateholder's share of interest paid on Equipment Notes
will be taxable as ordinary income, as it is paid or accrued, in accordance with
such U.S. Certificateholder's method of accounting for U.S. federal income tax
purposes, and a U.S. Certificateholder's share of premium, if any, paid on
redemption of an Equipment Note will be treated as capital gain. Any amounts
received by a Trust under a Liquidity Facility in order to make interest
payments will be treated for U.S. federal income tax purposes as having the same
characteristics as the payments they replace.
Each U.S. Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding Trust as provided in Section 162 or 212 of the Code.
Certain fees and expenses, including fees paid to the Trustee and the Liquidity
Provider, will be borne by parties other than the Certificateholders. It is
possible that such fees and expenses will be treated as constructively received
by the Trust, in which event a U.S. Certificateholder will be required to
include in income and will be entitled to deduct its pro rata share of such fees
and expenses. If a U.S. Certificateholder is an individual, estate or trust, the
deduction for such holder's share of such fees or expenses will be allowed only
to the extent that all of such holder's miscellaneous itemized deductions,
including such holder's share of such fees and expenses, exceed 2% of such
holder's adjusted gross income. In addition, in the case of U.S.
Certificateholders who are individuals, certain otherwise allowable itemized
deductions will be subject generally to additional limitations on itemized
deductions under applicable provisions of the Code.
EFFECT OF REALLOCATION OF PAYMENTS UNDER THE INTERCREDITOR AGREEMENT
In the event that the Class B Trust receives less than the full amount of
the receipts of interest, principal or premium paid with respect to the
Equipment Notes held by it because of the subordination of the Class B Trust
under the Intercreditor Agreement, the corresponding owners of beneficial
interests in the Class B Certificates would probably be treated for federal
income tax purposes as if they had:
- received as distributions their full share of interest, principal or
premium;
- paid over to the Class A-1 Certificateholders and Class A-2
Certificateholders an amount equal to their share of the amount of the
shortfall; and
- retained the right to reimbursement of the amount of the shortfall to the
extent of future amounts payable to them on account of the shortfall.
Under this analysis:
- Class B Certificateholders incurring a shortfall would be required to
include as current income any interest or other income of the Class B
Trust that was a component of the shortfall, even though that amount was
in fact paid to the Class A-1 Certificateholders and Class A-2
Certificateholders;
- a loss would only be allowed to Class B Certificateholders when their
right to receive reimbursement of the shortfall becomes worthless; that
is, when it becomes clear that funds will not be available from any
source to reimburse the shortfall; and
- reimbursement of the shortfall before a claim of worthlessness would not
be taxable income to the Class B Certificateholders because the amount
reimbursed would have been previously included in income.
These results should not significantly affect the inclusion of income for
Class B Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Class B Certificateholders on the cash method
of accounting by, in effect, placing them on the accrual method.
Similar treatment would apply if the Class A-1 Trust or the Class A-2 Trust
receives less than the full amount of the receipts of interest, principal or
premium paid with respect to the Equipment Notes
S-51
held by it because of the provisions in the Intercreditor Agreement requiring
that distributions be allocated on a pro rata basis between Trusts of equal
seniority.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of an Certificate, a U.S.
Certificateholder generally will recognize capital gain or loss (subject to the
possible recognition of ordinary income under the market discount rules) equal
to the difference between the amount realized on the disposition (other than any
amount attributable to accrued interest which will be taxable as ordinary
income) and the U.S. Certificateholder's adjusted tax basis in the Equipment
Notes and any other property held by the corresponding Trust. Any gain or loss
will be long-term capital gain or loss to the extent attributable to property
held by the Trust for more than one year. In the case of individuals, estates
and trusts, the maximum rate of tax on net long-term capital gains generally is
20%. Notwithstanding the foregoing, if the Trusts are classified as
partnerships, gain or loss with respect to an interest in an Trust will be
calculated and characterized by reference to the U.S. Certificateholder's
adjusted tax basis and holding period for its interest in the Trust.
FOREIGN CERTIFICATEHOLDERS
Subject to the discussion of backup withholding below, payments of
principal and interest on the Equipment Notes to, or on behalf of, any
beneficial owner of an Certificate that is not a U.S. Person will not be subject
to U.S. federal withholding tax provided that:
- the non-U.S. Certificateholder does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of
Southwest;
- the non-U.S. Certificateholder is not a bank receiving interest pursuant
to a loan agreement entered into in the ordinary course of its trade or
business, or a controlled foreign corporation for U.S. tax purposes that
is related to Southwest; and
- certain certification requirements (including identification of the
beneficial owner of the Certificate) are complied with.
Any capital gain realized upon the sale, exchange, retirement or other
disposition of an Certificate or upon receipt of premium paid on an Equipment
Note by a non-U.S. Certificateholder will not be subject to U.S. federal income
or withholding taxes if (i) such gain is not effectively connected with a U.S.
trade or business of the holder and (ii) in the case of an individual, such
holder is not present in the United States for 183 days or more in the taxable
year of the sale, exchange, retirement or other disposition or receipt.
BACKUP WITHHOLDING
Payments made on the Certificates and proceeds from the sale of
Certificates will not be subject to backup withholding tax (currently 30.5%)
unless, in general, the Certificateholder fails to comply with certain reporting
procedures or otherwise fails to establish an exemption from such tax under
applicable provisions of the Code.
CERTAIN DELAWARE TAXES
The Trustee is a Delaware banking corporation with its corporate trust
office in Delaware. In the opinion of Morris, James, Hitchens & Williams L.L.P.,
Wilmington, Delaware, counsel to the Trustee, under currently applicable law,
assuming that the Trusts will not be taxable as corporations, but, rather, will
be classified as grantor trusts under subpart E, Part I of Subchapter J of the
Code or as partnerships under Subchapter K of the Code, (i) the Trusts will not
be subject to any tax (including, without limitation, net or gross income,
tangible or intangible property, net worth, capital, franchise or doing business
tax), fee or other governmental charge under the laws of the State of Delaware
or any political
S-52
subdivision thereof and (ii) Certificateholders that are not residents of or
otherwise subject to tax in Delaware will not be subject to any tax (including,
without limitation, net or gross income, tangible or intangible property, net
worth, capital, franchise or doing business tax), fee or other governmental
charge under the laws of the State of Delaware or any political subdivision
thereof as a result of purchasing, holding (including receiving payments with
respect to) or selling an Certificate.
Neither the Trusts nor the Certificateholders will be indemnified for any
state or local taxes imposed on them, and the imposition of any such taxes on a
Trust could result in a reduction in the amounts available for distribution to
the Certificateholders of such Trust. In general, should a Certificateholder or
any Trust be subject to any state or local tax which would not be imposed if the
Trustee were located in a different jurisdiction in the United States, the
Trustee will resign and a new Trustee in such other jurisdiction will be
appointed.
CERTAIN ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on employee benefit plans subject to Title I of
ERISA ("ERISA Plans"), and on those persons who are fiduciaries with respect to
ERISA Plans. Investments by ERISA Plans are subject to ERISA's general fiduciary
requirements, including, but not limited to, the requirement of investment
prudence and diversification and the requirement that an ERISA Plan's
investments be made in accordance with the documents governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code, such
as individual retirement accounts (together with ERISA Plans, "Plans")) and
certain persons (referred to as "parties in interest" or "disqualified persons")
having certain relationships to such Plans, unless a statutory or administrative
exemption is applicable to the transaction. A party in interest or disqualified
person who engages in a prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code.
The Department of Labor has promulgated a regulation, 29 CFR Section
2510.3-101 (the "Plan Asset Regulation"), describing what constitutes the assets
of a Plan with respect to the Plan's investment in an entity for purposes of
ERISA and Section 4975 of the Code. Under the Plan Asset Regulation, if a Plan
invests (directly or indirectly) in a Certificate, the Plan's assets will
include both the Certificate and an undivided interest in each of the underlying
assets of the corresponding Trust, including the Equipment Notes held by such
Trust, unless it is established that equity participation in the Trust by
benefit plan investors (including but not limited to Plans and entities whose
underlying assets include Plan assets by reason of an employee benefit plan's
investment in the entity) is not "significant" within the meaning of the Plan
Asset Regulation. In this regard, the extent to which there is equity
participation in a particular Trust by, or on behalf of, employee benefit plans
will not be monitored. If the assets of a Trust are deemed to constitute the
assets of a Plan, transactions involving the assets of such Trust could be
subject to the prohibited transaction provisions of ERISA and Section 4975 of
the Code unless a statutory or administrative exemption is applicable to the
transaction.
The fiduciary of a Plan that proposes to purchase and hold any Certificates
should consider, among other things, whether such purchase and holding may
involve (i) the direct or indirect extension of credit to a party in interest or
a disqualified person, (ii) the sale or exchange of any property between a Plan
and a party in interest or a disqualified person, and (iii) the transfer to, or
use by or for the benefit of, a party in interest or a disqualified person, of
any Plan assets. Such parties in interest or disqualified persons could include,
without limitation, Southwest and its affiliates, the Underwriters, the Trustees
and the Liquidity Provider. In addition, whether or not the assets of a Trust
are deemed to be Plan assets under the Plan Asset Regulation, if Certificates
are purchased by a Plan and Certificates of a subordinate Class are held by a
party in interest or a disqualified person with respect to such Plan, the
exercise by the holder of the subordinate Class of Certificates of its right to
purchase the senior Classes of Certificates upon the occurrence and during the
continuation of a Triggering Event could be considered to constitute a
S-53
prohibited transaction unless a statutory or administrative exemption were
applicable. Depending on the identity of the Plan fiduciary making the decision
to acquire or hold Certificates on behalf of a Plan, Prohibited Transaction
Class Exemption ("PTCE") 91-38 (relating to investments by bank collective
investment funds), PTCE 84-14 (relating to transactions effected by a "qualified
professional asset manager"), PTCE 95-60 (relating to investments by an
insurance company general account), PTCE 96-23 (relating to transactions
directed by an in-house professional asset manager) or PTCE 90-1 (relating to
investments by insurance company pooled separate accounts) (collectively, the
"Class Exemptions") could provide an exemption from the prohibited transaction
provisions of ERISA and Section 4975 of the Code. However, there can be no
assurance that any of these Class Exemptions or any other exemption will be
available with respect to any particular transaction involving the Certificates.
Governmental plans and certain church plans, while not subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of ERISA and Section 4975 of the Code, may nevertheless be subject to
state or other federal laws that are substantially similar to the foregoing
provisions of ERISA and the Code. Fiduciaries of any such plans should consult
with their counsel before purchasing any Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase any
Certificates should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 of the Code to such an investment, and to confirm that such
purchase and holding will not constitute or result in a non-exempt prohibited
transaction or any other violation of an applicable requirement of ERISA.
In addition to the Class Exemptions referred to above, an individual
exemption may apply to the purchase, holding and secondary market sale of Class
A-1 Certificates and Class A-2 Certificates by Plans, provided that certain
specified conditions are met. In particular, the Department of Labor has issued
individual administrative exemptions to the Underwriters which are substantially
the same as the administrative exemptions issued to Salomon Smith Barney Inc.,
Prohibited Transaction Exemption 89-89 et al. (54 Fed. Reg. 42,589 (1989)), and
Chase Manhattan Bank, Prohibited Transaction Exemption 90-33 (55 Fed. Reg.
23,144 (1990)), each as most recently amended by Prohibited Transaction
Exemption 2000-58 (65 Fed. Reg. 67,765 (2000)) (together, the "Underwriter
Exemption"). The Underwriter Exemption generally exempts from the application of
certain, but not all, of the prohibited transaction provisions of Section 406 of
ERISA and Section 4975 of the Code certain transactions relating to the initial
purchase, holding and subsequent secondary market sale of pass through
certificates which represent an interest in a trust that holds secured credit
instruments that bear interest or are purchased at a discount in transactions by
or between business entities and certain other assets, provided that certain
conditions set forth in the Underwriter Exemption are satisfied.
The Underwriter Exemption sets forth a number of general and specific
conditions which must be satisfied for a transaction involving the initial
purchase, holding or secondary market sale of certificates representing a
beneficial ownership interest in a trust to be eligible for exemptive relief
thereunder. In particular, the Underwriter Exemption requires that the
acquisition of certificates by a Plan be on terms that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an unrelated
party; the rights and interests evidenced by the certificates not be
subordinated to the rights and interests evidenced by other certificates of the
same trust estate; the certificates at the time of acquisition by the Plan be
rated in one of the three highest generic rating categories by Moody's, Standard
& Poor's or Fitch; and the investing Plan be an accredited investor as defined
in Rule 501(a)(1) of Regulation D of the Commission under the Securities Act of
1933, as amended.
There can be no assurance that the Department of Labor would determine that
the Underwriter Exemption would be applicable to Class A-1 Certificates and
Class A-2 Certificates. In addition, even if all of the conditions of the
Underwriter Exemption are satisfied with respect to the Class A-1 Certificates
and Class A-2 Certificates, no assurance can be given that the Underwriter
Exemption would apply with respect to all transactions involving the Class A-1
Certificates or the Class A-2 Certificates or the assets of the Class A-1 Trust
or the Class A-2 Trust. In particular, it appears that the Underwriter Exemption
S-54
would not apply to the purchase by Class B Certificateholders of Class A-1
Certificates or Class A-2 Certificates in connection with the exercise of their
rights upon the occurrence and during the continuance of a Triggering Event.
Therefore, the fiduciary of a Plan considering the purchase of a Class A-1
Certificate or Class A-2 Certificate should consider the availability of the
exemptive relief provided by the Underwriter Exemption, as well as the
availability of any other exemptions that may be applicable, such as the Class
Exemptions.
The Underwriter Exemption does not apply to the Class B Certificates.
Therefore, the fiduciary of a Plan considering the purchase of a Class B
Certificate should consider the availability of other exemptions, such as the
Class Exemptions.
Each person who acquires or accepts a Certificate or an interest therein,
will be deemed by such acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been used to purchase or hold
such Certificate or an interest therein or (ii) the purchase and holding of such
Certificate or an interest therein are exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
S-55
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this Prospectus Supplement, each underwriter named below (the
"Underwriters") has agreed to purchase, and Southwest has agreed to cause each
Trust to sell to that Underwriter, the principal amount of Certificates set
forth opposite the Underwriter's name.
PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF CLASS A-1 OF CLASS A-2 OF CLASS B
UNDERWRITERS CERTIFICATES CERTIFICATES CERTIFICATES
------------ ---------------- ---------------- ----------------
Salomon Smith Barney Inc. .............. $ 50,000,000 $125,000,000 $29,750,000
J.P. Morgan Securities Inc. ............ 50,000,000 125,000,000 29,750,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............... 50,000,000 125,000,000 29,750,000
------------ ------------ -----------
Total......................... $150,000,000 $375,000,000 $89,250,000
============ ============ ===========
The underwriting agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the Certificates if any
Certificates are purchased. If an Underwriter defaults on its purchase
commitment, the purchase commitments of non-defaulting Underwriters may be
increased or the Offering of the Certificates may be terminated.
The Underwriters have advised us that the Underwriters propose initially to
offer the Certificates at the public offering prices on the cover page of this
Prospectus Supplement, and to certain dealers at such price less the concessions
set forth below. The Underwriters may allow, and the dealers may reallow, a
concession to certain other dealers not in excess of the amounts set forth
below. After the initial public offering, the public offering prices and such
concessions may be changed.
CONCESSION TO
PASS THROUGH SELLING GROUP DISCOUNT TO
CERTIFICATES DESIGNATION MEMBERS BROKER/DEALERS
------------------------ ------------- --------------
2001-1-A1................................................. 0.40% 0.25%
2001-1-A2................................................. 0.40 0.25
2001-1-B.................................................. 0.40 0.25
The Certificates are new securities for which there currently is no market.
Southwest does not intend to apply for the listing of the Certificates on a
national securities exchange, but has been advised by the Underwriters that they
presently intend to make a market in the Certificates, as permitted by
applicable laws and regulations. No Underwriter is obligated, however, to make a
market in the Certificates, and any such market-making may be discontinued at
any time, at the sole discretion of the applicable Underwriter. Accordingly, no
assurance can be given as to the liquidity of, or trading markets for, the
Certificates.
The underwriting agreement provides that Southwest will reimburse the
Underwriters for certain expenses and indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and contribute to
payments which the Underwriters may be required to make in that respect.
It is expected that delivery of the Certificates will be made against
payment therefor on or about the date specified on the cover page of this
Prospectus Supplement, which will be the eighth business day following the date
of pricing of the Certificates (this settlement cycle being referred to as
"T+8"). Under Rule 15c6-1 of the Commission under the Securities Exchange Act of
1934, trades in the secondary market generally are required to settle in three
business days, unless the parties to the trade expressly agree otherwise.
Accordingly, purchasers who wish to trade Certificates on the date of pricing or
the next succeeding four business days will be required, by virtue of the fact
that the Certificates initially will settle in T+8, to specify an alternate
settlement cycle at the time of any trade to prevent a failed settlement.
Purchasers of Certificates who wish to trade Certificates on the date of pricing
or the next four succeeding business days should consult their own advisor.
S-56
To facilitate the Offering of the Certificates, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the price of the
Certificates. Specifically, the Underwriters may overallot in connection with
the Offering, creating a short position in the Certificates for their own
account. In addition, to cover overallotments or to stabilize the price of the
Certificates, the Underwriters may bid for, and purchase, Certificates in the
open market. Finally, the Underwriters may reclaim selling concessions allowed
to an agent or a dealer for distributing Certificates in the offering, if the
Underwriters repurchase previously distributed Certificates in transactions to
cover syndicate short positions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the
Certificates above independent market levels. The Underwriters are not required
to engage in these activities, and may end any of these activities at any time.
Southwest estimates that the total expenses of this Offering, excluding
underwriters' discounts and commissions and the ongoing costs of the Liquidity
Facilities, will be $1,100,000.
Salomon Smith Barney Inc. and J.P. Morgan Securities Inc. are underwriters
in this Offering and their respective affiliates, Citibank, N.A. and The Chase
Manhattan Bank, participate in Southwest's bank credit facility and will receive
a portion of the amounts, if any, which may be repaid under such facility with
net proceeds of the Offering. See "Use of Proceeds". Because more than 10% of
the net proceeds of the Offering may be paid to affiliates of the Underwriters,
the Offering is being made pursuant to Rule 2710(c)(8) of the Conduct Rules of
the National Association of Securities Dealers, Inc.
From time to time, one or more of the Underwriters or their affiliates
perform investment banking and advisory services for, and provide general
financing and banking services to, Southwest and its affiliates.
LEGAL MATTERS
The validity of the Certificates offered hereby will be passed upon for
Southwest by Vinson & Elkins L.L.P., Houston, Texas, and for the Underwriters by
Milbank, Tweed, Hadley & McCloy LLP, New York, New York. Vinson & Elkins L.L.P.
and Milbank, Tweed, Hadley & McCloy LLP will rely on the opinion of Morris,
James, Hitchens & Williams L.L.P., Wilmington, Delaware, counsel for Wilmington
Trust Company, as Trustee, as to matters of Delaware law. The statements of law
and legal conclusions set forth under the caption "Certain U.S. Federal Income
Tax Consequences" in both this Prospectus Supplement and the Prospectus are
based on the opinion of Vinson & Elkins L.L.P., Dallas, Texas. Members of the
firm of Vinson & Elkins L.L.P., having responsibility for the Company's legal
matters, beneficially own approximately 27,500 shares of common stock of the
Company.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2000, as set forth in their report, which is incorporated by
reference in this Prospectus Supplement. Our consolidated financial statements
are incorporated by reference in reliance on Ernst & Young LLP's report, given
on their authority as experts in accounting and auditing.
The references to AvS, BKA and SH&E, and to their respective appraisal
reports, dated as of October 9, October 15 and October 16, 2001, respectively,
are included herein in reliance upon the authority of each such firm as an
expert with respect to the matters contained in its appraisal report.
S-57
APPENDIX I -- INDEX OF TERMS
DEFINED TERM PAGE
------------ ----
Administration Expenses............... S-35
Adjusted Expected Distributions....... S-36
Aggregate LTV Collateral Amount....... S-37
Aircraft.............................. S-38
Appraisals............................ S-40
Appraised Current Market Value........ S-37
Appraisers............................ S-39
Assumed Aircraft Value................ S-43
AvS .................................. S-39
Average Life Date..................... S-42
Base Rate............................. S-31
Basic Agreement....................... S-17
BKA .................................. S-39
Boeing................................ S-38
Business Day.......................... S-19
Cash Collateral Account............... S-29
Cede.................................. S-27
Certificate Account................... S-19
Certificate Owner..................... S-27
Certificates.......................... S-17
Certificateholders.................... S-18
Class A-1 Certificates................ S-17
Class A-1 Trust....................... S-17
Class A-1 Trustee..................... S-34
Class A-2 Certificates................ S-17
Class A-2 Trust....................... S-17
Class A-2 Trustee..................... S-34
Class B Certificates.................. S-17
Class B Trust......................... S-17
Class B Trustee....................... S-35
Class C Certificates.................. S-26
Class C Trust......................... S-26
Class C Trustee....................... S-35
Class Exemptions...................... S-54
Code.................................. S-25
Company............................... S-15
Controlling Party..................... S-33
Convention............................ S-46
Current Distribution Date............. S-35
Current Pool Balance.................. S-36
Debt Balance.......................... S-47
default............................... S-22
Depreciation Assumption............... S-43
DEFINED TERM PAGE
------------ ----
disqualified persons.................. S-53
Distribution Date..................... S-34
Downgrade Drawing..................... S-29
DTC................................... S-27
DTC Participants...................... S-27
Equipment............................. S-45
Equipment Notes....................... S-40
ERISA................................. S-53
ERISA Plans........................... S-53
event of default...................... S-23
Event of Loss......................... S-49
Expected Distributions................ S-35
FAA................................... S-47
Final Distributions................... S-34
Final Drawing......................... S-30
Final Maturity Date................... S-18
H.15(519)............................. S-42
Indenture Default..................... S-21
Indenture Trustee..................... S-40
Indenture............................. S-40
Intercreditor Agreement............... S-33
Interest Drawings..................... S-28
Investment Grade...................... S-48
IRS................................... S-50
Issuance Date......................... S-30
LIBOR................................. S-31
Liquidity Event of Default............ S-32
Liquidity Expenses.................... S-35
Liquidity Facilities.................. S-28
Liquidity Obligations................. S-35
Liquidity Provider.................... S-28
LTV Appraisal......................... S-37
LTV Collateral Amount................. S-37
LTV Ratio............................. S-37
LTVs.................................. S-3
Make-Whole Premium.................... S-42
Maximum Available Commitment.......... S-28
Minimum Sale Price.................... S-34
Moody's............................... S-32
most recent H.15(519)................. S-42
Non-Extension Drawing................. S-30
Non-Performing Equipment Notes........ S-36
Note Holders.......................... S-44
I-1
APPENDIX I -- INDEX OF TERMS -- (CONTINUED)
DEFINED TERM PAGE
------------ ----
Offering.............................. S-26
Participation Agreement............... S-40
parties in interest................... S-53
Pass Through Trust Agreements......... S-17
Performing Equipment Note............. S-29
Plan Asset Regulation................. S-53
Plans................................. S-53
Pool Balance.......................... S-19
Pool Factor........................... S-20
Prospectus............................ S-17
PTC Event of Default.................. S-23
PTCE.................................. S-54
Rating Agencies....................... S-32
Ratings Confirmation.................. S-42
Regular Distribution Dates............ S-18
Remaining Weighted Average Life....... S-42
Replacement Facility.................. S-29
Required Amount....................... S-28
Scheduled Payments.................... S-18
SEC................................... S-17
Section 1110.......................... S-45
Series A-1 Equipment Notes............ S-40
Series A-2 Equipment Notes............ S-40
Series B Equipment Notes.............. S-40
DEFINED TERM PAGE
------------ ----
Series C Equipment Notes.............. S-40
SH&E.................................. S-39
Southwest............................. S-15
Special Distribution Date............. S-19
Special Payment....................... S-19
Special Payments Account.............. S-19
Standard & Poor's..................... S-32
Stated Interest Rates................. S-28
Subordination Agent................... S-33
Tax Counsel........................... S-50
Termination Notice.................... S-32
Threshold Rating...................... S-29
Transportation Code................... S-24
Treasury Yield........................ S-42
Triggering Event...................... S-35
Trust Indenture Act................... S-25
Trust Property........................ S-17
Trust Supplement...................... S-17
Trustee............................... S-17
Trusts................................ S-17
U.S. Certificateholders............... S-50
U.S. Persons.......................... S-50
Underwriter Exemption................. S-54
Underwriters.......................... S-56
I-2
APPENDIX II -- APPRAISAL LETTERS
AVSOLUTIONS
October 9, 2001
Southwest Airlines
Laura Wright
Vice President-Finance & Treasurer
2702 Love Field Drive
Dallas, TX 75235-1611
Dear Ms. Wright:
AvSOLUTIONS is pleased to provide its opinion on the base values as of
October 2001 of 29 Boeing 737-700 aircraft (collectively, the "Aircraft"). A
list of the Aircraft, along with their delivery dates, engine types,
registration and serial numbers, and MTOW, is provided as Attachment 1 of this
document.
Set forth below is a summary of the methodology, considerations and
assumptions utilized in this appraisal.
BASE VALUE
Base value is the appraiser's opinion of the underlying economic value of
an aircraft in an open, unrestricted, stable market environment with a
reasonable balance of supply and demand, and assumes full consideration of its
"highest and best use". An aircraft's base value is founded in the historical
trend of values and in the projection of future value trends and presumes an
arm's length, cash transaction between willing, able and knowledgeable parties
acting prudently, with an absence of duress and with a reasonable period of time
available for marketing.
APPRAISAL METHODOLOGY
The method employed by AvSOLUTIONS to appraise the base values of aircraft
and associated equipment addresses the factors that influence the market value
of an aircraft, such as its age, condition, configuration, the population of
similar aircraft, similar aircraft on the market, operating costs, cost to
acquire a new aircraft, and the state of demand for transportation services.
To achieve this objective, cross-sectional data concerning the values of
aircraft in each of several general categories is collected and analyzed.
Cross-sectional data is then compared with reported market values at a specified
point in time. Such data reflects the effect of deterioration in aircraft
performance due to usage and exposure to the elements, as well as the effect of
obsolescence due to the evolutionary development and implementation of new
designs and materials.
The product of the analysis identifies the relationship between the value
of each aircraft and its characteristics, such as age, model designation,
service configuration and engine type. Once the relationship is identified, one
can then postulate the effects of the difference between the economic
circumstances at the time when the cross-sectional data were collected and the
current situation.
The manufacturer and size of the aircraft usually determine the specific
category to which it is assigned. Segregating the world airplane fleet in this
manner accommodates the potential effects of different size and different design
philosophies.
II-1
AVSOLUTIONS
LIMITING CONDITIONS AND ASSUMPTIONS
In order to conduct this valuation, AvSOLUTIONS is primarily relying on
information supplied by Southwest Airlines and from data within AvSOLUTIONS' own
database. In determining the base value of the subject Aircraft, the following
assumptions have been researched and determined:
1. AvSOLUTIONS has not inspected the Aircraft or their maintenance records;
accordingly, AvSOLUTIONS cannot attest to their specific location or
condition.
2. The Aircraft already have been delivered to Southwest Airlines.
3. The Aircraft are certified, maintained and operated under United States
Federal Aviation Regulation (FAR) part 121.
4. All mandatory inspections and Airworthiness Directives have been
complied with.
5. The Aircraft have no damage history.
6. The Aircraft are in good condition.
7. AvSOLUTIONS considers the economic useful life of these aircraft to be
at least 32 years.
Based upon the above methodology, considerations and assumptions, it is
AvSOLUTIONS' opinion that the base value of each Aircraft is as listed in
Attachment 1.
STATEMENT OF INDEPENDENCE
This appraisal report represents the opinion of AvSOLUTIONS, Inc. and is
intended to be advisory in nature. Therefore, AvSOLUTIONS assumes no
responsibility or legal liability for actions taken or not taken by the Client
or any other party with regard to the subject Aircraft. By accepting this
report, the Client agrees that AvSOLUTIONS shall bear no responsibility or legal
liability regarding this report. Further, this report is prepared for the
exclusive use of the Client and shall not be provided to other parties without
the Client's express consent.
AvSOLUTIONS hereby states that this valuation report has been independently
prepared and fairly represents the Aircraft and AvSOLUTIONS' opinion of their
values. AvSOLUTIONS further states that it has no present or contemplated future
interest or association with the subject Aircraft.
Sincerely yours,
/s/ SCOTT E. DANIELS
Scott E. Daniels
Director, Asset Management
DISCLAIMER
The effect on values as a result of the events of September 11, 2001 is
somewhat unclear. However, at the current time, AvSOLUTIONS is prepared to stand
by its values considering the lack of specific aircraft trading information
available since these events.
II-2
AVSOLUTIONS
Attachment 1
SOUTHWEST AIRLINES
SERIAL
NUMBER REGISTRATION ENGINE MTOW BASE VALUE
MSN NUMBER DELIVERY DATE TYPE (LB) $ MILLIONS
------ ------------ ------------- ------- ------- ----------
BOEING 737-700
1 27835 N700GS 17-Dec-97 CFM56-7 153,000 32.73
2 27836 N701GS 19-Dec-97 CFM56-7 153,000 32.73
3 27837 N703SW 31-Dec-97 CFM56-7 153,000 32.73
4 27840 N706SW 31-May-98 CFM56-7 153,000 33.14
5 27846 N712SW 31-May-98 CFM56-7 153,000 33.14
6 28436 N798SW 13-May-98 CFM56-7 153,000 33.14
7 27847 N713SW 08-Jun-98 CFM56-7 153,000 33.23
8 27848 N714CB 19-Jun-98 CFM56-7 153,000 33.23
9 27849 N715SW 30-Jun-98 CFM56-7 153,000 33.23
10 27850 N716SW 30-Jun-98 CFM56-7 153,000 33.23
11 27853 N719SW 05-Aug-98 CFM56-7 153,000 33.51
12 27854 N720WN 30-Sep-98 CFM56-7 153,000 33.65
13 27841 N707SA 30-Oct-98 CFM56-7 153,000 33.79
14 29278 N742SW 28-Dec-98 CFM56-7 153,000 34.07
15 27858 N726SW 25-Feb-99 CFM56-7 153,000 34.35
16 29491 N745SW 31-Mar-99 CFM56-7 153,000 34.50
17 27859 N727SA 20-May-99 CFM56-7 153,000 34.79
18 27860 N728SW 19-May-99 CFM56-7 153,000 34.79
19 27861 N729SW 24-May-99 CFM56-7 153,000 34.79
20 30589 N770SA 28-Jun-00 CFM56-7 153,000 36.80
21 27880 N772SW 06-Jul-00 CFM56-7 153,000 36.98
22 29808 N782SA 29-Sep-00 CFM56-7 153,000 37.35
23 29816 N789SW 19-Nov-00 CFM56-7 153,000 37.73
24 27886 N791SW 26-Dec-00 CFM56-7 153,000 37.92
25 27891 N400WN 28-Mar-01 CFM56-7 153,000 38.49
26 27890 N797MX 23-Mar-01 CFM56-7 153,000 38.49
27 29815 N403WN 16-Apr-01 CFM56-7 153,000 36.68
28 27893 N405WN 28-Jun-01 CFM56-7 153,000 39.07
29 27894 N406WN 28-Jun-01 CFM56-7 153,000 39.07
II-3
BK ASSOCIATES, INC.
1295 Northern Boulevard
Manhasset, New York 11030
(516) 365-6272 - Fax (516) 365-6287
October 15, 2001
Ms. Laura Wright
Vice President Finance & Treasurer
Southwest Airlines
2702 Love Field Drive
Dallas TX 75235-1611
Dear Ms. Wright:
In response to your request, BK Associates, Inc. is pleased to provide this
opinion of the current Base Value on each of 29 commercial jet transport
aircraft, identified as the Southwest 2001-1 Aircraft Collateral Pool
(Aircraft). The Aircraft are further identified in the attached Figure 1 by
type, serial number, manufacture date, engine model and maximum takeoff weight.
Set forth below is a summary of the methodology, considerations and
assumptions utilized in this appraisal.
CURRENT FAIR MARKET VALUE
According to the International Society of Transport Aircraft Trading's
(ISTAT) definition of FMV, to which BK Associates subscribes, the quoted FMV is
the Appraiser's opinion of the most likely trading price that may be generated
for an aircraft under the market circumstances that are perceived to exist at
the time in question. The FMV assumes that the aircraft is valued for its
highest and best use, that the parties to the hypothetical sale transaction are
willing, able, prudent and knowledgeable, and under no unusual pressure for a
prompt sale, and that the transaction would be negotiated in an open and
unrestricted market on an arm's length basis, for cash or equivalent
consideration, and given an adequate amount of time for effective exposure to
prospective buyers, which BK Associates considers to be 12 to 18 months.
BASE VALUE
Base value is the Appraiser's opinion of the underlying economic value of
an aircraft in an open, unrestricted, stable market environment with a
reasonable balance of supply and demand, and assumes full consideration of its
"highest and best use". An aircraft's base value is founded in the historical
trend of values and in the projection of future value trends and presumes an
arm's length, cash transaction between willing, able and knowledgeable parties,
acting prudently, with an absence of duress and with a reasonable period of time
available for marketing.
VALUE METHODOLOGY
As the definition suggests, Base Value is determined from historic and
future value trends and is not influenced by current market conditions. It is
often determined as a function of the original cost of the aircraft, technical
characteristics of competing aircraft, and development of new models. BK
Associates has determined from analysis of historic data, a relationship between
aircraft age and its value as a percentage of original value for the average
aircraft. These data form the basis for base value and forecast value
determinations but must be adjusted to reflect the value of engine and gross
weight options and other features of the aircraft.
II-4
October 15, 2001
Page 2
LIMITING CONDITIONS AND ASSUMPTIONS
BK has neither inspected the Aircraft nor their maintenance records but
relied upon information supplied by you and from BK's own database. In
determining the base value of each Aircraft, the following assumptions apply to
the Aircraft:
1. Each Aircraft has half-time remaining to its next major overhaul or
scheduled shop visit on its airframe, engines, landing gear and
auxiliary power unit.
2. The Aircraft is in compliance under a Federal Aviation Administration
approved airline maintenance program, with all airworthiness directives,
mandatory modifications and applicable service bulletins currently up to
industry standard.
3. The interior of the Aircraft is in a standard configuration for its
specific type, with the buyer furnished equipment and options of the
types and models generally accepted and utilized in the industry.
4. The Aircraft is in current flight operations.
5. The Aircraft is sold for cash without seller financing.
6. The Aircraft is in average or better condition.
7. There is no accident damage.
CONCLUSIONS
Our base value opinion stated herein is given after consideration of the
significant event of terrorism that occurred within the United States on
September 11, 2001. During the ensuing days since that event, we have begun to
see how our industry has been adversely affected. Passenger demand for air
travel has dropped dramatically causing airlines to reduce flight schedules and
ground significant quantities of their fleets. In response to this initial
industry reaction, BK Associates has selectively reduced our opinion of aircraft
current fair market values. Today, we are unsure of the long-term effect on
aircraft values and will continue to review the industry status. Since our base
values, as provided in this appraisal letter, are derived from historical value
trends and are not immediately influenced by current supply and demand issues,
we have not affected base values at this time.
Based on the above methodology, considerations and assumptions, it is our
opinion that the current base value of each of the Aircraft as of today is as
shown in Figure 1 attached hereto.
II-5
October 15, 2001
Page 3
BK Associates, Inc. has no present or contemplated future interest in the
Aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation and the time and budget constraints imposed by the client. It is
not given as a recommendation, or as an inducement, for any financial
transaction and further, BK Associates, Inc. assumes no responsibility or legal
liability for any action taken or not taken by the addressee, or any other
party, with regard to the appraised Aircraft. By accepting this appraisal, the
addressee agrees that BK Associates, Inc. shall bear no such responsibility or
legal liability. This appraisal is prepared for the use of the addressee and
shall not be provided to other parties without the express consent of the
addressee.
Sincerely yours,
BK ASSOCIATES, INC.
/s/ R. L. BRITTON
R. L. Britton
Vice President
ISTAT Senior Certified Appraiser
RLB/rb
Attachment
II-6
SOUTHWEST 2001-1 AIRCRAFT
COLLATERAL POOL
HALFTIME
ACFT SERIAL BASE VALUE
ITEM TYPE NUMBER MFG. DATE ENGINE MTOW ($MIL)
---- -------- ------ ---------- ------- ------- ----------
1 B737-700 27835 12/17/1997 CFM56-7 153,000 33.95
2 B737-700 27836 12/19/1997 CFM56-7 153,000 33.95
3 B737-700 27837 12/31/1997 CFM56-7 153,000 33.95
4 B737-700 27840 5/31/1998 CFM56-7 153,000 34.30
5 B737-700 27846 5/31/1998 CFM56-7 153,000 34.30
6 B737-700 28436 5/13/1998 CFM56-7 153,000 34.30
7 B737-700 27847 6/8/1998 CFM56-7 153,000 34.35
8 B737-700 27848 6/19/1998 CFM56-7 153,000 34.35
9 B737-700 27849 6/30/1998 CFM56-7 153,000 34.35
10 B737-700 27850 6/30/1998 CFM56-7 153,000 34.35
11 B737-700 27853 8/5/1998 CFM56-7 153,000 34.50
12 B737-700 27854 9/30/1998 CFM56-7 153,000 34.55
13 B737-700 27841 10/30/1998 CFM56-7 153,000 34.60
14 B737-700 29278 12/28/1998 CFM56-7 153,000 34.75
15 B737-700 27858 2/25/1999 CFM56-7 153,000 34.90
16 B737-700 29491 3/31/1999 CFM56-7 153,000 34.95
17 B737-700 27859 5/20/1999 CFM56-7 153,000 35.10
18 B737-700 27860 5/19/1999 CFM56-7 153,000 35.10
19 B737-700 27861 5/24/1999 CFM56-7 153,000 35.10
20 B737-700 30589 6/28/2000 CFM56-7 153,000 35.95
21 B737-700 27880 7/6/2000 CFM56-7 153,000 36.00
22 B737-700 29808 9/29/2000 CFM56-7 153,000 36.15
23 B737-700 29816 11/19/2000 CFM56-7 153,000 36.30
24 B737-700 27886 12/26/2000 CFM56-7 153,000 36.35
25 B737-700 27891 3/28/2001 CFM56-7 153,000 36.50
26 B737-700 27890 3/23/2001 CFM56-7 153,000 36.50
27 B737-700 29815 4/16/2001 CFM56-7 153,000 36.60
28 B737-700 27893 6/28/2001 CFM56-7 153,000 36.75
29 B737-700 27894 6/28/2001 CFM56-7 153,000 36.75
TOTALS 1019.55
II-7
Simat, Helliesen & Eichner, Inc. Tel:+1-212-682-8455 90
Park Avenue Fax:+1-212-986-1825
New York, New York 10016 Email: newyork@sh-e.com
SH&E
October 16, 2001
Southwest Airlines
2702 Love Field Drive
Dallas, TX 75235-1611
Attention:
Ms Laura Wright
Vice President Finance & Treasurer
BASE VALUE OPINION OF TWENTY NINE BOEING 737-700 AIRCRAFT
INTRODUCTION
Simat, Helliesen & Eichner, Inc. ("SH&E") was asked by Southwest Airlines
Co. (the "Client") to determine the Base Value ("BV") of twenty nine (29) Boeing
737-700 aircraft that were delivered to the Client between December 1997 and
June 2001 (the "Subject Airlines"). The summary specifications for the Subject
Aircraft are shown in Appendix B attached hereto.
DETERMINATION
SH&E has determined the aggregate BV of the Subject Aircraft to be $938.82
million. The individual values of the Subject Aircraft are shown in Appendix A
attached hereto.
SH&E VALUATION METHODOLOGY
SH&E's appraisal's are performed according to the International Society of
Transport Aircraft Trading (ISTAT) principles of appraisal practice and code of
ethics.
The SH&E valuation approach starts by determining a half-life value for the
appraised asset. The term "half-life" represents an asset that is mid-way
between scheduled or routine major repairs and overhauls, with all life-limited
components at half-life. This initial appraisal can then be adjusted (positive
or negative) for each individual unit to reflect the asset's maintenance status
relative to the next overhaul. In most cases, the half-life value of an asset
assumes its physical condition is average and its maintenance time is at
mid-life (or benefiting from an above-average maintenance status if it is new or
nearly new, as the case may be).
SH&E half-life values are determined on an annual basis by reviewing recent
past sales, aircraft and engine availability trends, technological aspects,
environmental constraints and maintenance requirements.
Base Value Definition
The Base Value ("BV") is the appraiser's opinion of the underlying economic
value of an asset in an open, unrestricted and stable market environment with a
reasonable balance of supply and demand, and also assumes full considerations of
its "highest and best use". An asset's BV is founded in the historical trend of
values and in the projection of value trends and presumes an arm's-length, cash
transaction between willing, able and knowledgeable parties, acting prudently,
with an absence of duress and with a reasonable period of time available for
marketing.
II-8
SH&E Southwest Airlines, Inc.
October 16, 2001
Page 2
Since BV pertains to a somewhat idealized asset and market combination it
may not necessarily reflect the actual value of the asset in question, but is a
nominal starting value to which adjustments may be applied to determine an
actual value. Since BV is related to long-term market trends, the BV definition
is normally applied to analyses of historical values and projections of residual
values and lease rates.
ASSUMPTIONS
SH&E used information supplied by the Client together with in-house data
accumulated through other recent studies of aircraft transactions. Specific
assumptions include the following:
- SH&E did not perform a physical inspection of the Subject Aircraft and
has assumed them to be in a condition similar to equipment of comparable
age and type.
- SH&E did not review the Subject Aircraft maintenance records and assumed
them to be complete and accurate.
SH&E's opinions are based upon historical relationships and expectations
that it believes are reasonable. Some of the underlying assumptions, including
those described above are detailed explicitly or implicitly elsewhere in this
report, and may not materialize because of unanticipated events and
circumstances. SH&E's opinions could, and would, vary materially, should any of
the above assumptions prove to be inaccurate.
CONSIDERATIONS
It must be noted that the values provided herein are SH&E's opinion as to
values prior to the terrorist activity of September 11, 2001. SH&E has not
forecast what impact, if any, this terrorist activity may have on the general
and international economy or upon aircraft values as a result of such economic
changes.
QUALIFICATIONS
Founded in 1963 and with offices in New York, Boston, Washington, London
and Amsterdam, SH&E is the world's largest consulting firm specializing in
commercial aviation. Its staff of over 90 personnel encompasses expertise in all
disciplines of the industry and the firm has provided appraisal, consulting,
strategic planning and technical services to airlines, leasing companies,
government agencies, airframe and engine manufacturers, and financial
institutions.
A related service that SH&E offers its clients is Asset Management. Over
the last few years, SH&E has been the principal Asset Manager responsible for
the recovery and subsequent re-marketing of a number of individual aircraft and
some significant portfolios. In addition, we have been the advisors and
re-marketing agents to Bank of New York, NationsCredit, NationsBank, Greyrock
Capital, Potomac, Concorde, Integrated Resources and the First Fidelity Trust.
In the course of those and other similar assignments we have sold, leased or
parted-out over 150 aircraft, a like number of engines and approximately $30
million worth of spare parts.
In addition to the above aircraft valuations, SH&E annually values in
excess of $1 billion worth of aircraft spare parts and spare engines. We have
developed a statistically based methodology for the appraisal of spare parts
that provides accurate valuations with known confidence levels. SH&E has also
valued a number of portfolios of ground equipment, the valuations of which have
been assisted by our recent acquisition, on behalf of a client, of sufficient
ground equipment for the start-up of an eight aircraft airline.
II-9
SH&E Southwest Airlines, Inc.
October 16, 2001
Page 3
This active participation in the market place provides SH&E with practical
and first hand knowledge of aircraft values and lease rates. SH&E annually
appraises aviation equipment worth over $10 billion. The major U.S. bond rating
agencies have used SH&E's Residual Value model to validate their own
depreciation schedules.
LIMITATIONS
The opinions expressed herein are not given as an inducement or endorsement
for any financial transaction. Although they are prepared for the exclusive use
of the addressee, the addressee may provide this report to third parties without
SH&E's written consent.
SH&E accepts no responsibility for damages, if any, that may result from
decisions made or actions taken by third parties that may be based upon this
report. In accepting this report the Client agrees to indemnify and hold SH&E
harmless against all losses, claims and costs arising as a result of this report
except when attributable to SH&E's negligence or willful misconduct.
This report reflects SH&E's expert opinion and best judgment based upon the
information available to it at the time of its preparation. SH&E does not have,
and does not expect to have, any financial interest in the appraised property.
Yours sincerely,
/s/ CLIVE G. MEDLAND, FRAES
Clive G. Medland, FRAeS
Vice President
Senior Appraiser
International Society of Transport Aircraft Trading
II-10
Appendix A
SOUTHWEST AIRLINES 2001-1 COLLATERAL POOL
REG. MODEL MSN DELIVERY DATE BV
---- ------- ----- ------------- -------
N700GS 737-7H4 27835 17-Dec-97 $ 29.00
N701GS 737-7H4 27836 19-Dec-97 $ 29.00
N703SW 737-7H4 27837 31-Dec-97 $ 29.00
N706SW 737-7H4 27840 31-May-98 $ 29.92
N712SW 737-7H4 27846 31-May-98 $ 29.92
N798SW 737-7AD 28436 13-May-98 $ 29.92
N713SW 737-7H4 27847 8-Jun-98 $ 30.10
N714CB 737-7H4 27848 19-Jun-98 $ 30.10
N715SW 737-7H4 27849 30-Jun-98 $ 30.10
N716SW 737-7H4 27850 30-Jun-98 $ 30.10
N719SW 737-7H4 27853 5-Aug-98 $ 30.47
N720WN 737-7H4 27854 30-Sep-98 $ 30.65
N707SA 737-7H4 27841 30-Oct-98 $ 30.83
N742SW 737-7H4 29278 28-Dec-98 $ 31.20
N726SW 737-7H4 27858 25-Feb-99 $ 31.57
N745SW 737-7H4 29491 31-Mar-99 $ 31.75
N727SA 737-7H4 27859 20-May-99 $ 32.12
N728SW 737-7H4 27860 19-May-99 $ 32.12
N729SW 737-7H4 27861 24-May-99 $ 32.12
N770SA 737-7H4 30589 28-Jun-00 $ 34.60
N772SW 737-7H4 27880 6-Jul-00 $ 34.78
N782SA 737-7H4 29808 29-Sep-00 $ 35.15
N789SW 737-7H4 29816 19-Nov-00 $ 35.52
N791SW 737-7H4 27886 26-Dec-00 $ 35.70
N400WN 737-7H4 27891 28-Mar-01 $ 36.43
N797MX 737-7H4 27890 23-Mar-01 $ 36.43
N403WN 737-7H4 29815 16-Apr-01 $ 36.62
N405WN 737-7H4 27893 28-Jun-01 $ 36.80
N406WN 737-7H4 27894 28-Jun-01 $ 36.80
Totals: $938.82
NOTE:
IT MUST BE NOTED THAT THE VALUES PROVIDED HEREIN ARE SH&E'S OPINION AS TO VALUES
PRIOR TO THE TERRORIST ACTIVITY OF SEPTEMBER 11, 2001. SH&E HAS NOT FORECAST
WHAT IMPACT, IF ANY, THIS TERRORIST ACTIVITY MAY HAVE ON THE GENERAL AND
INTERNATIONAL ECONOMY OR UPON AIRCRAFT VALUES AS A RESULT OF SUCH ECONOMIC
CHANGES.
II-11
Appendix B
SOUTHWEST AIRLINES
BOEING 737-700
SPECIFICATION SUMMARY
SEATING CAPACITY
137 Economy Class
ENGINES
CFM International CFM56-7 -- 22,700 lbs. thrust
WEIGHTS
Maximum Takeoff = 153,000 pounds
Maximum Landing = 128,000 pounds
SIGNIFICANT OPTIONS
Passenger Preference Items
- BE Aerospace Innovator II seats
- 2 Lavatories, with vacuum flush
- On-board wheelchair
- Defibrillators
- Independent Control & Passenger Cabin Temperature Control Systems
- Gaspher Fan Enhanced Environmental Control System
OPERATIONAL ITEMS
- Category IIIA with Heads-up Guidance System
- Digital VHF Radios
- Onboard data acquisition system
- Water/Waste freeze protection
- Enhanced Ground Proximity Warning System equipped
- Quantum Line Avionics Suite equipped
- Maximum Range of 3,752 miles
FLIGHT CREW ITEMS
- Total of 3 Flight Attendants
II-12
APPENDIX III -- EQUIPMENT NOTE PRINCIPAL PAYMENTS
SERIES A-1 EQUIPMENT NOTES
REGULAR
DISTRIBUTION DATES N700GS N701GS N703SW N706SW N712SW N798SW
------------------ ------------- ------------- ------------- ------------- ------------- -------------
May 1, 2002............... $ 337,751.12 $ 337,750.74 $ 337,750.74 $ 936,906.21 $ 936,906.21 $ 936,906.21
November 1, 2002.......... 588,555.80 588,555.80 588,555.80 0.00 0.00 0.00
May 1, 2003............... 0.00 0.00 0.00 594,598.96 594,598.96 594,598.96
November 1, 2003.......... 588,555.81 588,555.81 588,555.81 0.00 0.00 0.00
May 1, 2004............... 0.00 0.00 0.00 594,598.96 594,598.96 594,598.96
November 1, 2004.......... 588,555.80 588,555.80 588,555.80 0.00 0.00 0.00
May 1, 2005............... 0.00 0.00 0.00 675,236.09 675,236.09 675,236.09
November 1, 2005.......... 669,590.14 669,590.14 669,590.14 0.00 0.00 0.00
May 1, 2006 1,744,144.44.. 1,744,144.44 1,744,144.44 2,288,576.39 2,288,576.39 2,288,576.39
REGULAR
DISTRIBUTION DATES N713SW N714CB N715SW
------------------ ------------- ------------- -------------
May 1, 2002............... $ 938,465.12 $ 938,465.12 $ 938,465.12
November 1, 2002.......... 0.00 0.00 0.00
May 1, 2003............... 595,588.31 595,588.31 595,588.31
November 1, 2003.......... 0.00 0.00 0.00
May 1, 2004............... 595,588.31 595,588.31 595,588.31
November 1, 2004.......... 0.00 0.00 0.00
May 1, 2005............... 676,359.61 676,359.61 676,359.61
November 1, 2005.......... 0.00 0.00 0.00
May 1, 2006 2,292,384.34 2,292,384.34 2,292,384.34
REGULAR
DISTRIBUTION DATES N716SW N719SW N720WN N707SA N742SW N726SW
------------------ ------------- ------------- ------------- ------------- ------------- -------------
May 1, 2002................ $ 938,465.12 $ 344,585.50 $ 345,155.06 $ 345,724.62 $ 346,863.75 $ 956,179.90
November 1, 2002........... 0.00 598,556.36 599,545.71 600,535.06 602,513.75 0.00
May 1, 2003................ 595,588.31 0.00 0.00 0.00 0.00 606,126.60
November 1, 2003........... 0.00 598,556.36 599,545.70 600,535.05 602,513.76 0.00
May 1, 2004................ 595,588.31 0.00 0.00 0.00 0.00 606,126.59
November 1, 2004........... 0.00 598,556.35 599,545.71 600,535.06 602,513.75 0.00
May 1, 2005................ 676,359.61 0.00 0.00 0.00 0.00 687,074.00
November 1, 2005........... 0.00 679,730.18 680,853.70 681,977.23 684,224.26 0.00
May 1, 2006................ 2,292,384.34 1,781,917.75 1,784,863.07 1,787,808.38 1,793,699.03 2,341,185.86
REGULAR
DISTRIBUTION DATES N745SW N727SA N728SW
------------------ ------------- ------------- -------------
May 1, 2002................ $ 961,780.69 $ 972,671.13 $ 972,671.13
November 1, 2002........... 0.00 0.00 0.00
May 1, 2003................ 609,676.97 616,580.45 616,580.45
November 1, 2003........... 0.00 0.00 0.00
May 1, 2004................ 609,676.96 616,580.46 616,580.46
November 1, 2004........... 0.00 0.00 0.00
May 1, 2005................ 691,098.51 698,923.95 698,923.95
November 1, 2005........... 0.00 0.00 0.00
May 1, 2006................ 2,354,899.28 2,381,564.27 2,381,564.27
REGULAR
DISTRIBUTION DATES N729SW N770SA N772SW N782SA N789SW N791SW
------------------ ------------- ------------- ------------- ------------- ------------- -------------
May 1, 2002............... $ 972,671.13 $1,027,860.63 $1,033,450.20 $ 383,087.94 $ 387,074.88 $ 389,011.40
November 1, 2002.......... 0.00 0.00 0.00 661,230.88 668,112.55 671,455.08
May 1, 2003............... 616,580.45 650,810.05 654,349.20 0.00 0.00 0.00
November 1, 2003.......... 0.00 0.00 0.00 661,230.87 668,112.56 671,455.09
May 1, 2004............... 616,580.46 650,810.05 654,349.20 0.00 0.00 0.00
November 1, 2004.......... 0.00 0.00 0.00 661,230.88 668,112.55 671,455.08
May 1, 2005............... 698,923.95 736,379.41 740,383.89 0.00 0.00 0.00
November 1, 2005.......... 0.00 0.00 0.00 748,170.39 755,956.88 759,738.88
May 1, 2006............... 2,381,564.27 2,522,625.07 2,536,343.26 1,986,480.24 2,007,154.28 2,017,195.96
REGULAR
DISTRIBUTION DATES N400WN N797MX N403WN
------------------ ------------- ------------- -------------
May 1, 2002............... $1,077,256.06 $1,077,256.06 $1,081,181.62
November 1, 2002.......... 0.00 0.00 0.00
May 1, 2003............... 681,296.00 681,296.00 683,778.67
November 1, 2003.......... 0.00 0.00 0.00
May 1, 2004............... 681,296.00 681,296.00 683,778.67
November 1, 2004.......... 0.00 0.00 0.00
May 1, 2005............... 769,465.22 769,465.22 772,269.17
November 1, 2005.......... 0.00 0.00 0.00
May 1, 2006............... 2,650,054.79 2,650,054.79 2,659,711.69
REGULAR
DISTRIBUTION DATES N405WN N406WN
------------------ ------------- -------------
May 1, 2002............... $1,084,590.66 $1,084,590.66
November 1, 2002.......... 0.00 0.00
May 1, 2003............... 685,934.67 685,934.67
November 1, 2003.......... 0.00 0.00
May 1, 2004............... 685,934.67 685,934.67
November 1, 2004.......... 0.00 0.00
May 1, 2005............... 774,704.19 774,704.19
November 1, 2005.......... 0.00 0.00
May 1, 2006............... 2,668,097.93 2,668,097.93
III-1
EQUIPMENT NOTE PRINCIPAL PAYMENTS
SERIES A-2 EQUIPMENT NOTES
REGULAR
DISTRIBUTION DATES N700GS N701GS N703SW N706SW N712SW N798SW
------------------ -------------- -------------- -------------- -------------- -------------- --------------
May 1, 2002.......... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
November 1, 2002..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2003.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2003..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2004.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2004..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2005.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2005..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2006.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2006..... 12,424,597.58 12,424,598.01 12,424,598.01 12,080,390.64 12,080,390.64 12,080,390.64
REGULAR
DISTRIBUTION DATES N713SW N714CB N715SW
------------------ -------------- -------------- --------------
May 1, 2002.......... $ 0.00 $ 0.00 $ 0.00
November 1, 2002..... 0.00 0.00 0.00
May 1, 2003.......... 0.00 0.00 0.00
November 1, 2003..... 0.00 0.00 0.00
May 1, 2004.......... 0.00 0.00 0.00
November 1, 2004..... 0.00 0.00 0.00
May 1, 2005.......... 0.00 0.00 0.00
November 1, 2005..... 0.00 0.00 0.00
May 1, 2006.......... 0.00 0.00 0.00
November 1, 2006..... 12,100,491.12 12,100,491.12 12,100,491.12
REGULAR
DISTRIBUTION DATES N716SW N719SW N720WN N707SA N742SW N726SW
--------------------- -------------- -------------- -------------- -------------- -------------- --------------
May 1, 2002.......... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
November 1, 2002..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2003.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2003..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2004.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2004..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2005.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2005..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2006.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2006..... 12,100,491.12 12,682,683.00 12,703,646.11 12,724,609.22 12,766,535.45 12,362,160.35
REGULAR
DISTRIBUTION DATES N745SW N727SA N728SW
--------------------- -------------- -------------- --------------
May 1, 2002.......... $ 0.00 $ 0.00 $ 0.00
November 1, 2002..... 0.00 0.00 0.00
May 1, 2003.......... 0.00 0.00 0.00
November 1, 2003..... 0.00 0.00 0.00
May 1, 2004.......... 0.00 0.00 0.00
November 1, 2004..... 0.00 0.00 0.00
May 1, 2005.......... 0.00 0.00 0.00
November 1, 2005..... 0.00 0.00 0.00
May 1, 2006.......... 0.00 0.00 0.00
November 1, 2006..... 12,434,571.32 12,575,370.41 12,575,370.41
REGULAR
DISTRIBUTION DATES N729SW N770SA N772SW N782SA N789SW N791SW
------------------ -------------- -------------- -------------- -------------- -------------- --------------
May 1, 2002.......... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
November 1, 2002..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2003.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2003..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2004.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2004..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2005.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2005..... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2006.......... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2006..... 12,575,370.41 13,324,565.37 13,397,025.25 14,114,456.74 14,261,351.18 14,332,699.91
REGULAR
DISTRIBUTION DATES N400WN N797MX N403WN
------------------ -------------- -------------- --------------
May 1, 2002.......... $ 0.00 $ 0.00 $ 0.00
November 1, 2002..... 0.00 0.00 0.00
May 1, 2003.......... 0.00 0.00 0.00
November 1, 2003..... 0.00 0.00 0.00
May 1, 2004.......... 0.00 0.00 0.00
November 1, 2004..... 0.00 0.00 0.00
May 1, 2005.......... 0.00 0.00 0.00
November 1, 2005..... 0.00 0.00 0.00
May 1, 2006.......... 0.00 0.00 0.00
November 1, 2006..... 14,002,191.99 14,002,191.99 14,053,216.47
REGULAR
DISTRIBUTION DATES N405WN N406WN
------------------ -------------- --------------
May 1, 2002.......... $ 0.00 $ 0.00
November 1, 2002..... 0.00 0.00
May 1, 2003.......... 0.00 0.00
November 1, 2003..... 0.00 0.00
May 1, 2004.......... 0.00 0.00
November 1, 2004..... 0.00 0.00
May 1, 2005.......... 0.00 0.00
November 1, 2005..... 0.00 0.00
May 1, 2006.......... 0.00 0.00
November 1, 2006..... 14,097,527.21 14,097,527.21
III-2
EQUIPMENT NOTE PRINCIPAL PAYMENTS
SERIES B EQUIPMENT NOTES
REGULAR
DISTRIBUTION DATES N700GS N701GS N703SW N706SW N712SW N798SW
------------------ ------------- ------------- ------------- ------------- ------------- -------------
May 1, 2002............... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
November 1, 2002.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2003............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2003.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2004............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2004.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2005............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2005.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2006............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2006.......... 2,880,097.46 2,880,097.64 2,880,097.64 2,918,952.23 2,918,952.23 2,918,952.23
REGULAR
DISTRIBUTION DATES N713SW N714CB N715SW
------------------ ------------- ------------- -------------
May 1, 2002............... $ 0.00 $ 0.00 $ 0.00
November 1, 2002.......... 0.00 0.00 0.00
May 1, 2003............... 0.00 0.00 0.00
November 1, 2003.......... 0.00 0.00 0.00
May 1, 2004............... 0.00 0.00 0.00
November 1, 2004.......... 0.00 0.00 0.00
May 1, 2005............... 0.00 0.00 0.00
November 1, 2005.......... 0.00 0.00 0.00
May 1, 2006............... 0.00 0.00 0.00
November 1, 2006.......... 2,923,809.06 2,923,809.06 2,923,809.06
REGULAR
DISTRIBUTION DATES N716SW N719SW N720WN N707SA N742SW N726SW
------------------ ------------- ------------- ------------- ------------- ------------- -------------
May 1, 2002............... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
November 1, 2002.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2003............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2003.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2004............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2004.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2005............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2005.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2006............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2006.......... 2,923,809.06 2,938,379.54 2,943,236.37 2,948,093.20 2,957,806.84 2,985,005.07
REGULAR
DISTRIBUTION DATES N745SW N727SA N728SW
------------------ ------------- ------------- -------------
May 1, 2002............... $ 0.00 $ 0.00 $ 0.00
November 1, 2002.......... 0.00 0.00 0.00
May 1, 2003............... 0.00 0.00 0.00
November 1, 2003.......... 0.00 0.00 0.00
May 1, 2004............... 0.00 0.00 0.00
November 1, 2004.......... 0.00 0.00 0.00
May 1, 2005............... 0.00 0.00 0.00
November 1, 2005.......... 0.00 0.00 0.00
May 1, 2006............... 0.00 0.00 0.00
November 1, 2006.......... 3,002,489.64 3,036,487.42 3,036,487.42
REGULAR
DISTRIBUTION DATES N729SW N770SA N772SW N782SA N789SW N791SW
------------------ ------------- ------------- ------------- ------------- ------------- -------------
May 1, 2002............... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
November 1, 2002.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2003............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2003.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2004............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2004.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2005............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2005.......... 0.00 0.00 0.00 0.00 0.00 0.00
May 1, 2006............... 0.00 0.00 0.00 0.00 0.00 0.00
November 1, 2006.......... 3,036,487.42 3,215,218.60 3,232,703.18 3,266,700.96 3,300,698.74 3,317,211.94
REGULAR
DISTRIBUTION DATES N400WN N797MX N403WN
------------------ ------------- ------------- -------------
May 1, 2002............... $ 0.00 $ 0.00 $ 0.00
November 1, 2002.......... 0.00 0.00 0.00
May 1, 2003............... 0.00 0.00 0.00
November 1, 2003.......... 0.00 0.00 0.00
May 1, 2004............... 0.00 0.00 0.00
November 1, 2004.......... 0.00 0.00 0.00
May 1, 2005............... 0.00 0.00 0.00
November 1, 2005.......... 0.00 0.00 0.00
May 1, 2006............... 0.00 0.00 0.00
November 1, 2006.......... 3,376,465.22 3,376,465.22 3,388,769.17
REGULAR
DISTRIBUTION DATES N405WN N406WN
------------------ ------------- -------------
May 1, 2002............... $ 0.00 $ 0.00
November 1, 2002.......... 0.00 0.00
May 1, 2003............... 0.00 0.00
November 1, 2003.......... 0.00 0.00
May 1, 2004............... 0.00 0.00
November 1, 2004.......... 0.00 0.00
May 1, 2005............... 0.00 0.00
November 1, 2005.......... 0.00 0.00
May 1, 2006............... 0.00 0.00
November 1, 2006.......... 3,399,454.19 3,399,454.19
III-3
APPENDIX IV -- LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
N700GS N701GS
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $19.82 $31.89 62.2% $19.82 $31.89 62.2%
November 1, 2002........ 18.90 30.81 61.3% 18.90 30.81 61.3%
November 1, 2003........ 18.31 29.72 61.6% 18.31 29.72 61.6%
November 1, 2004........ 17.72 28.63 61.9% 17.72 28.63 61.9%
November 1, 2005........ 17.05 27.54 61.9% 17.05 27.54 61.9%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N703SW N706SW
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $19.82 $31.89 62.2% $20.09 $32.45 61.9%
November 1, 2002........ 18.90 30.81 61.3% 19.15 31.38 61.0%
November 1, 2003........ 18.31 29.72 61.6% 18.56 30.31 61.2%
November 1, 2004........ 17.72 28.63 61.9% 17.96 29.24 61.4%
November 1, 2005........ 17.05 27.54 61.9% 17.29 28.17 61.4%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N712SW N798SW
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $20.09 $32.45 61.9% $20.09 $32.45 61.9%
November 1, 2002........ 19.15 31.38 61.0% 19.15 31.38 61.0%
November 1, 2003........ 18.56 30.31 61.2% 18.56 30.31 61.2%
November 1, 2004........ 17.96 29.24 61.4% 17.96 29.24 61.4%
November 1, 2005........ 17.29 28.17 61.4% 17.29 28.17 61.4%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N713SW N714CB
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $20.12 $32.56 61.8% $20.12 $32.56 61.8%
November 1, 2002........ 19.18 31.49 60.9% 19.18 31.49 60.9%
November 1, 2003........ 18.59 30.41 61.1% 18.59 30.41 61.1%
November 1, 2004........ 17.99 29.34 61.3% 17.99 29.34 61.3%
November 1, 2005........ 17.32 28.27 61.3% 17.32 28.27 61.3%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
IV-1
N715SW N716SW
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $20.12 $32.56 61.8% $20.12 $32.56 61.8%
November 1, 2002........ 19.18 31.49 60.9% 19.18 31.49 60.9%
November 1, 2003........ 18.59 30.41 61.1% 18.59 30.41 61.1%
November 1, 2004........ 17.99 29.34 61.3% 17.99 29.34 61.3%
November 1, 2005........ 17.32 28.27 61.3% 17.32 28.27 61.3%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N719SW N720WN
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $20.22 $32.83 61.6% $20.26 $32.95 61.5%
November 1, 2002........ 19.28 31.74 60.7% 19.31 31.86 60.6%
November 1, 2003........ 18.68 30.66 60.9% 18.71 30.78 60.8%
November 1, 2004........ 18.08 29.58 61.1% 18.11 29.69 61.0%
November 1, 2005........ 17.40 28.50 61.1% 17.43 28.60 60.9%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N707SA N742SW
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $20.29 $33.07 61.3% $20.36 $33.34 61.1%
November 1, 2002........ 19.34 31.98 60.5% 19.41 32.24 60.2%
November 1, 2003........ 18.74 30.89 60.7% 18.80 31.14 60.4%
November 1, 2004........ 18.14 29.80 60.9% 18.20 30.04 60.6%
November 1, 2005........ 17.46 28.71 60.8% 17.52 28.94 60.5%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N726SW N745SW
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $20.54 $33.61 61.1% $20.66 $33.73 61.3%
November 1, 2002........ 19.59 32.53 60.2% 19.70 32.66 60.3%
November 1, 2003........ 18.98 31.46 60.3% 19.09 31.58 60.5%
November 1, 2004........ 18.38 30.39 60.5% 18.48 30.50 60.6%
November 1, 2005........ 17.69 29.32 60.3% 17.79 29.43 60.5%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
IV-2
N727SA N728SW
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $20.90 $34.00 61.5% $20.90 $34.00 61.5%
November 1, 2002........ 19.93 32.92 60.5% 19.93 32.92 60.5%
November 1, 2003........ 19.31 31.83 60.7% 19.31 31.83 60.7%
November 1, 2004........ 18.69 30.75 60.8% 18.69 30.75 60.8%
November 1, 2005........ 17.99 29.66 60.7% 17.99 29.66 60.7%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N729SW N770SA
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $20.90 $34.00 61.5% $22.13 $35.78 61.8%
November 1, 2002........ 19.93 32.92 60.5% 21.10 34.68 60.8%
November 1, 2003........ 19.31 31.83 60.7% 20.45 33.57 60.9%
November 1, 2004........ 18.69 30.75 60.8% 19.80 32.46 61.0%
November 1, 2005........ 17.99 29.66 60.7% 19.06 31.36 60.8%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N772SW N782SA
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $22.25 $35.92 61.9% $22.48 $36.15 62.2%
November 1, 2002........ 21.22 34.81 60.9% 21.44 35.03 61.2%
November 1, 2003........ 20.56 33.70 61.0% 20.78 33.91 61.3%
November 1, 2004........ 19.91 32.59 61.1% 20.12 32.80 61.3%
November 1, 2005........ 19.17 31.48 60.9% 19.37 31.68 61.1%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N789SW N791SW
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $22.72 $36.30 62.6% $22.83 $36.35 62.8%
November 1, 2002........ 21.66 35.18 61.6% 21.77 35.23 61.8%
November 1, 2003........ 20.99 34.05 61.6% 21.10 34.10 61.9%
November 1, 2004........ 20.33 32.93 61.7% 20.43 32.98 61.9%
November 1, 2005........ 19.57 31.81 61.5% 19.67 31.85 61.7%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
IV-3
N400WN N797MX
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $23.24 $36.50 63.7% $23.24 $36.50 63.7%
November 1, 2002........ 22.16 35.41 62.6% 22.16 35.41 62.6%
November 1, 2003........ 21.48 34.31 62.6% 21.48 34.31 62.6%
November 1, 2004........ 20.80 33.22 62.6% 20.80 33.22 62.6%
November 1, 2005........ 20.03 32.12 62.4% 20.03 32.12 62.4%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N403WN N405WN
-------------------------------------------- --------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
---- -------------- ------------- ----------- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
October 30, 2001........ $23.32 $36.62 63.7% $23.40 $36.80 63.6%
November 1, 2002........ 22.24 35.52 62.6% 22.31 35.70 62.5%
November 1, 2003........ 21.56 34.42 62.6% 21.63 34.59 62.5%
November 1, 2004........ 20.87 33.32 62.6% 20.94 33.49 62.5%
November 1, 2005........ 20.10 32.23 62.4% 20.17 32.38 62.3%
November 1, 2006........ 0.00 -- NA 0.00 -- NA
N406WN
--------------------------------------------
EQUIPMENT NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT AIRCRAFT
DATE BALANCE VALUE VALUE RATIO
---- -------------- ------------- -----------
(IN MILLIONS) (IN MILLIONS)
October 30, 2001........................................... $23.40 $36.80 63.6%
November 1, 2002........................................... 22.31 35.70 62.5%
November 1, 2003........................................... 21.63 34.59 62.5%
November 1, 2004........................................... 20.94 33.49 62.5%
November 1, 2005........................................... 20.17 32.38 62.3%
November 1, 2006........................................... 0.00 -- NA
IV-4
PROSPECTUS
SOUTHWEST AIRLINES CO.
PASS THROUGH CERTIFICATES
---------------------
This prospectus relates to the issuance of Pass Through Certificates by one
or more Pass Through Trusts to be formed by Southwest Airlines Co.
THE CERTIFICATES:
- Will be issued in one or more series with distribution rates and
distribution dates specified in the prospectus supplement;
- Will represent interests in the relevant Pass Through Trust only and will
be repaid only from the assets of that Trust, and will not represent
obligations of, or be guaranteed by, Southwest;
- May have one or more forms of liquidity enhancement; and
- Will be issued in registered form and may be issued in accordance with a
book-entry system.
The aggregate public offering price of the Certificates will not exceed
$1,000,000,000.
EACH PASS THROUGH TRUST:
- Will issue one or more series of Certificates;
- Will use the proceeds of each series of Certificates to purchase
Equipment Notes of one or more series, each with an interest rate equal
to the rate on the related series of Certificates and with a maturity
date on or prior to the final distribution date for the related series of
Certificates; and
- Will pass through principal and interest paid on the Equipment Notes that
it owns, subject to any applicable subordination provisions.
THE EQUIPMENT NOTES:
- Will be issued in series;
- Will be issued either in connection with sale/leaseback transactions
relating to aircraft leased to us, or to finance or refinance all or a
portion of the cost of aircraft owned by us or to raise funds for general
corporate purposes;
- If issued in connection with leased aircraft, will not be our obligations
and will not be guaranteed by us, but amounts due from us under the
relevant lease will be sufficient to make all payments required under
those Equipment Notes; and
- Will be secured by the aircraft specified in the prospectus supplement
and, in the case of any leased aircraft, by the interest of lessor in
that lease.
This prospectus is accompanied by a prospectus supplement which includes
additional information as to the particular series of Certificates being sold
and the underlying Equipment Notes. Sales of Certificates may not be consummated
without both this prospectus and a prospectus supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
The date of this prospectus is October 15, 2001
TABLE OF CONTENTS
PAGE
----
About This Prospectus....................................... (i)
Southwest Airlines Co....................................... 1
Summary..................................................... 1
Use of Proceeds............................................. 3
Ratios of Earnings to Fixed Charges......................... 4
Description of the Certificates............................. 4
Description of the Equipment Notes.......................... 18
Certain United States Federal Income Tax Consequences....... 22
ERISA Considerations........................................ 25
Plan of Distribution........................................ 25
Validity of the Certificates................................ 27
Experts..................................................... 27
Where You Can Find More Information......................... 27
---------------------
You should rely only on the information contained in this prospectus or any
prospectus supplement or information contained in documents which you are
referred to in this prospectus or any prospectus supplement. Southwest has not
authorized anyone to provide you with information different from that contained
in this prospectus or any prospectus supplement. Southwest is offering to sell
the pass through certificates only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus or any prospectus
supplement is accurate only as of the date on the front of those documents,
regardless of the time of delivery of the documents or any sale of the pass
through certificates.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that Southwest filed
with the Securities and Exchange Commission utilizing a shelf registration
process. Under this shelf process, the Certificates described in this prospectus
may be sold in one or more offerings up to a total offering amount of
$1,000,000,000. This prospectus provides you with a general description of the
Certificates that may be offered.
Each time Certificates are sold, Southwest will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read both this prospectus and any
prospectus supplement together with additional information described in the
section entitled "Where You Can Find More Information."
For more detail, you should read our registration statement and the
exhibits filed with our registration statement.
In this prospectus, references to "Southwest," "we," "us" and "our" mean
Southwest Airlines Co.
(i)
SOUTHWEST AIRLINES CO.
Southwest Airlines Co. is a major domestic airline which provides single
class air transportation characterized by frequent, high quality service at
affordable prices. Our service primarily appeals to the business commuter as
well as the leisure traveler. Southwest Airlines began serving Customers in 1971
with three Boeing 737 aircraft serving three cities. As of September 30, 2001,
Southwest operated 358 Boeing 737 aircraft and provided service to 58 airports
in 57 cities in 29 states throughout the United States. Please refer to the
Section "Where You Can Find More Information" to learn more about Southwest
Airlines.
Our principal executive offices are located at 2702 Love Field Drive, P.O.
Box 36611, Dallas, Texas 75235, and our telephone number is (214) 792-4000.
Southwest is incorporated under the laws of the State of Texas.
SUMMARY
CERTIFICATES
Pass through certificates are securities that evidence an ownership
interest in a pass through trust. The holders of the certificates issued by a
pass through trust will be the beneficiaries of that trust. For convenience, we
may refer to pass through certificates as "certificates" and refer to the holder
of a pass through certificate as a "certificateholder."
The beneficial interest in a pass through trust represented by a
certificate will be a percentage interest in the property of that trust equal to
the original face amount of such certificate divided by the original face amount
of all of the certificates issued by that trust. Each certificate will represent
a beneficial interest only in the property of the pass through trust that issued
the certificate. Multiple series of certificates may be issued. If more than one
series of certificates is issued, each series of certificates will be issued by
a separate pass through trust.
The property that will be held by each pass through trust will include
equipment notes secured by aircraft that we own or lease. Payments of principal
and interest on the equipment notes owned by a pass through trust will be passed
through to holders of certificates issued by that trust in accordance with the
terms of the pass through trust agreement pursuant to which the trust was
formed.
If certificates of any series are entitled to the benefits of a liquidity
facility or other form of credit enhancement, the prospectus supplement relating
to that series will describe the terms of the liquidity facility or other form
of credit enhancement. A liquidity facility is a revolving credit agreement,
letter of credit, bank guarantee, insurance policy or other instrument or
agreement under which another person agrees to make certain payments in respect
of the certificates if there is a shortfall in amounts otherwise available for
distribution. While a liquidity facility is designed to increase the likelihood
of the timely payment of certain amounts due under certificates, it is not a
guarantee of timely or ultimate payment.
The rights of a pass through trustee to receive monies payable under
equipment notes held for that pass through trustee may be subject to the effect
of subordination provisions contained in an intercreditor agreement described in
the prospectus supplement for a series of certificates. An intercreditor
agreement will set forth the terms and conditions upon which payments made under
the equipment notes and payments made under any liquidity facility will be
received, shared and distributed among the several pass through trustees and the
liquidity provider.
We may offer and sell up to $1,000,000,000 of aggregate initial offering
price of certificates pursuant to this prospectus and related prospectus
supplements in one or more offerings of certificates.
1
PASS THROUGH TRUSTS
We will form a separate pass through trust to issue each series of
certificates. Each pass through trust will be formed by us, as creator of each
pass through trust, and a national or state bank or trust company, as trustee.
Unless otherwise stated in a prospectus supplement, Wilmington Trust
Company will be the trustee of each pass through trust. For convenience, we may
refer to the pass through trustee as the trustee.
Each pass through trust will be governed by a trust instrument that creates
the trust and sets forth the powers of the trustee and the rights of the
beneficiaries. The beneficiaries of a pass through trust will be the holders of
certificates issued by that trust. The trust instrument for each pass through
trust will consist of a basic pass through trust agreement between us and the
pass through trustee, which we refer to as the "Basic Agreement," and a
supplement to that basic agreement, which we refer to as a "pass through trust
supplement."
When a pass through trust supplement is signed and delivered, the pass
through trustee, on behalf of the related pass through trust, will enter into
one or more purchase or refunding agreements, typically referred to as "note
purchase agreements" or "participation agreements" under which it will agree to
purchase one or more promissory notes secured by aircraft described in the
applicable prospectus supplement. These secured promissory notes are referred to
as "equipment notes."
Under the applicable note purchase agreement or participation agreement,
the pass through trustee, on behalf of the related pass through trust, will
purchase one or more equipment notes. The equipment notes that are the property
of a pass through trust will have:
- identical interest rates, in each case equal to the rate applicable to
the certificates issued by such pass through trust; and
- identical priority of payment relative to each of the other equipment
notes held for such pass through trust.
If any portion of the proceeds of an offering of a series of certificates
is not used to purchase equipment notes on the date the certificates are
originally issued, those proceeds will be held for the benefit of the
certificateholders. If any of the proceeds are not later used to purchase
equipment notes by the date specified in the applicable prospectus supplement,
the proceeds will be returned to the certificateholders.
EQUIPMENT NOTES
The equipment notes owned by a pass through trust may consist of any
combination of:
- Equipment notes issued by an owner trustee and secured by an aircraft
owned by that trustee and leased to us. We refer to these equipment notes
as "leased aircraft notes."
- Equipment notes issued by us and secured by an aircraft owned by us. We
refer to these equipment notes as "owned aircraft notes."
Leased Aircraft Notes. Except as specified in a prospectus supplement,
leased aircraft notes will be issued by a bank, trust company, financial
institution or other entity solely in its capacity as owner trustee in a
leveraged lease transaction. In a leveraged lease transaction, one or more
persons will form an owner trust to acquire an aircraft and then that owner
trust will lease the aircraft to us. The investors that are the beneficiaries of
the owner trusts are typically referred to as owner participants. Each owner
participant will contribute a portion of the purchase price of the aircraft to
the owner trust, and the remainder of the purchase price of the aircraft will be
financed, or "leveraged," through the issuance of leased aircraft notes. Leased
aircraft notes may also be issued to refinance an aircraft previously financed
in a leveraged lease transaction or otherwise.
2
The leased aircraft notes will be issued pursuant to a separate indenture
between the owner trustee and a bank, trust company, financial institution or
other entity, as loan trustee. The indenture entered into in connection with the
issuance of leased aircraft notes will be referred to as a "leased aircraft
indenture." The loan trustee under a leased aircraft indenture will act as a
trustee for the holders of the leased aircraft notes issued under that leased
aircraft indenture.
In a leveraged lease transaction, we will pay or advance rent and other
amounts to the owner trustee in its capacity as lessor under the lease. The
owner trustee will use the rent payments and certain other amounts received by
it to make payments of principal and interest on the leased aircraft notes. The
owner trustee also will assign its rights to receive basic rent and certain
other payments to a loan trustee as security for the owner trustee's obligations
to pay principal of, premium, if any, and interest on the leased aircraft notes.
Payments or advances required to be made under a lease and related
agreements will at all times be sufficient to make scheduled payments of
principal of, and interest on, the leased aircraft notes issued to finance the
aircraft subject to that lease. However, we will not have any direct obligation
to pay principal of, or interest on, the leased aircraft notes. No owner
participant or owner trustee will be personally liable for any amount payable
under a leased aircraft indenture or the leased aircraft notes issued under that
indenture.
Owned Aircraft Notes. We may finance or refinance aircraft that we own
through the issuance of owned aircraft notes. Owned aircraft notes relating to
an owned aircraft will be issued under a separate indenture relating to that
owned aircraft. Each separate indenture relating to owned aircraft notes will be
between us and a bank, trust company, financial institution or other entity, as
loan trustee. The indenture entered into in connection with the issuance of
owned aircraft notes will be referred to as an "owned aircraft indenture."
Because we often refer to owned aircraft indentures and leased aircraft
indentures together, we sometimes refer to them collectively as the
"indentures." The loan trustee under an owned aircraft indenture will act as a
trustee for the holders of the owned aircraft notes issued under that owned
aircraft indenture.
Unlike the leased aircraft notes, we will have a direct obligation to pay
the principal of, and interest on, the owned aircraft notes.
USE OF PROCEEDS
The trustee will use the proceeds of the certificates for the purchase of
one or more equipment notes. Except as set forth in a prospectus supplement for
a specific offering of certificates, the equipment notes will be issued:
- To finance the purchase of aircraft by us, or to refinance any debt
previously issued by us in connection with our purchase of aircraft;
- To finance or refinance the debt portion and, in certain cases, to
refinance some of the equity portion of one or more separate leveraged
lease transactions entered into by us, as lessee of aircraft; and
- To provide us with funds for general corporate purposes.
General corporate purposes of Southwest may include, among other possible
uses, the repayment of short-term or long-term indebtedness and capital
expenditures.
To the extent that the proceeds of any offering of certificates are not
used to purchase equipment notes on the date of issuance of those certificates,
the relevant proceeds will be held for the benefit of those certificateholders.
If those proceeds are not used to purchase equipment notes by the date specified
in the applicable prospectus supplement, they will be returned to the applicable
certificateholders. See "Description of Certificates -- Delayed Purchase of
Equipment Notes" for a description of the procedure for delayed purchase of
equipment notes.
3
The prospectus supplement with respect to any offering of certificates will
provide additional details with respect to the use of proceeds of those
certificates, and with respect to the use of proceeds of any equipment notes to
be purchased by the Trust.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges of Southwest for the periods indicated:
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------
2000 2001 1996 1997 1998 1999 2000
------- ------- ---- ---- ---- ---- ----
5.56.. 5.77 2.73 3.50 4.58 5.01 5.97
Earnings represent:
- Income before income taxes, excluding the cumulative effect of accounting
changes; plus
- Fixed charges, excluding capitalized interest.
Fixed charges include:
- Interest, whether expensed or capitalized; and
- A portion of rental expense. Management of Southwest believes this is
representative of the interest factor in those periods.
DESCRIPTION OF THE CERTIFICATES
The following description is a summary of the terms of the certificates
that we expect will be common to all series of certificates. We will describe
the financial terms and other specific terms of any series of certificates in a
prospectus supplement. To the extent that any provision in any prospectus
supplement is inconsistent with any provision in this prospectus, the provision
of the prospectus supplement will control.
Because the following description is a summary, it does not describe every
aspect of the certificates, and it is subject to and qualified in its entirety
by reference to all the provisions of the pass through trust agreement and the
applicable supplements to the pass through trust agreement. For convenience, we
will refer to the pass through trust agreement between the pass through trustee
and us as the "Basic Agreement," and to the Basic Agreement as supplemented by a
supplement as a "pass through trust agreement." The form of Basic Agreement has
been filed as an exhibit to the registration statement of which this prospectus
is a part. The supplement to the Basic Agreement relating to each series of
certificates and the forms of the other agreements described in this prospectus
and the applicable prospectus supplement will be filed as exhibits to a
post-effective amendment to the registration statement of which this prospectus
is a part, a Current Report on Form 8-K, a Quarterly Report on Form 10-Q or an
Annual Report on Form 10-K, as applicable, filed by us with the SEC.
GENERAL
Except as amended by a supplement to the Basic Agreement, the terms of the
Basic Agreement generally will apply to all of the pass through trusts that we
form to issue certificates. We will create a separate pass through trust for
each series of certificates by entering into a separate supplement to the Basic
Agreement. Each supplement to the Basic Agreement will contain the additional
terms governing the specific pass through trust to which it relates and, to the
extent inconsistent with the Basic Agreement, will supersede the Basic
Agreement.
Certificates for a pass through trust will be issued pursuant to the pass
through trust agreement applicable to such pass through trust. Unless otherwise
stated in the applicable prospectus supplement,
4
each pass through certificate will be issued in a minimum denomination of $1,000
or a multiple of $1,000, except that one certificate of each series may be
issued in a different denomination.
Each certificate will represent a fractional undivided interest in the
property of the pass through trust that issued the certificate. All payments and
distributions made with respect to a certificate will be made only from the
property owned by the pass through trust that issued the certificate. The
certificates do not represent an interest in or obligation of Southwest, the
pass through trustee, any of the owner trustees or loan trustees, in their
individual capacities, or any owner participant. Each certificateholder by its
acceptance of a certificate agrees to look solely to the income and proceeds
from the property of the applicable pass through trust as provided in the pass
through trust agreement.
The property of each pass through trust for which a series of certificates
will be issued will include:
- the equipment notes held for the pass through trust;
- all monies at any time paid under the equipment notes held for the pass
through trust;
- the rights of such pass through trust to acquire equipment notes;
- funds from time to time deposited with the pass through trustee in
accounts relating to that pass through trust; and
- if so specified in the relevant prospectus supplement, rights under
intercreditor agreements relating to cross-subordination arrangements and
monies receivable under a liquidity facility.
The rights of a pass through trustee to receive monies payable under
equipment notes held for that pass through trustee may be subject to the effect
of subordination provisions contained in an intercreditor agreement described in
the prospectus supplement for a series of certificates. An intercreditor
agreement refers to an agreement among the pass through trustees and, if
applicable, a liquidity provider under a liquidity facility, as creditors of the
issuers of the equipment notes owned by the pass through trustees. An
intercreditor agreement will set forth the terms and conditions upon which
payments made under the equipment notes and payments made under any liquidity
facility will be received, shared and distributed among the several pass through
trustees and the liquidity provider. In addition, the intercreditor agreement
will set forth agreements among the pass through trustees and the liquidity
provider relating to the exercise of remedies under the equipment notes and the
indentures.
Cross-subordination refers to an agreement under which payments on a junior
class of equipment notes issued under an indenture are distributed to a pass
through trustee that holds a senior class of equipment notes issued under a
different indenture on which all required payments were not made. The effect of
this distribution mechanism is that holders of certificates of a pass through
trust that owns a junior class of equipment notes will not receive payments made
on that junior class of equipment notes until certain distributions are made on
the certificates of the pass through trust that owns a senior class of equipment
notes.
Equipment notes owned by a pass through trust may be leased aircraft notes,
owned aircraft notes or a combination of leased aircraft notes and owned
aircraft notes.
Leased aircraft notes will be issued in connection with the leveraged lease
of an aircraft to us. Except as set forth in the applicable prospectus
supplement, each leased aircraft will be leased to us under a lease between us,
as lessee, and an owner trustee, as lessor. Each owner trustee will issue leased
aircraft notes on a non-recourse basis under a separate leased aircraft
indenture between it and the applicable loan trustee. The owner trustee will use
the proceeds of the sale of the leased aircraft notes to finance or refinance a
portion of the purchase price paid or to be paid by the owner trustee for the
applicable leased aircraft. The owner trustee will obtain the remainder of the
funding for the leased aircraft from an equity contribution from the owner
participant that is the beneficiary of the owner trust and, to the extent set
forth in the applicable prospectus supplement, additional debt secured by the
applicable leased aircraft or other sources. A leased aircraft also may be
subject to other financing arrangements.
5
Generally, neither the owner trustee nor the owner participant will be
personally liable for any principal or interest payable under any leased
aircraft indenture or any leased aircraft notes. In some cases, an owner
participant may be required to make payments to an owner trustee that are to be
used by the owner trustee to pay principal of, and interest on, the equipment
notes. If an owner participant is required to make payments to be used by an
owner trustee to pay principal of, and interest on, the equipment notes and the
owner participant fails to make the payment, we will be required to provide the
owner trustee with funds sufficient to make the payment. We will be obligated to
make payments or advances under a lease and the related documents sufficient to
pay when due all scheduled principal and interest payments on the leased
aircraft notes issued to finance the aircraft subject to that lease.
We will issue owned aircraft notes under separate owned aircraft
indentures. Owned aircraft notes will be issued in connection with the financing
or refinancing of an aircraft that we own. Owned aircraft notes will be
obligations that have recourse to us and the related aircraft. Any owned
aircraft may secure additional debt or be subject to other financing
arrangements.
An indenture may provide for the issuance of multiple classes of equipment
notes. If an indenture provides for multiple classes of equipment notes, it may
also provide for differing priority of payments among the different classes.
Equipment notes issued under an indenture may be held in more than one pass
through trust, and one pass through trust may hold equipment notes issued under
more than one indenture. Unless otherwise provided in a prospectus supplement,
only equipment notes having the same priority of payment may be held for the
same pass through trust.
Except as set forth in the prospectus supplement for any series of
certificates, interest payments on the equipment notes held for a pass through
trust will be passed through to the registered holders of certificates of that
pass through trust at the annual rate shown on the cover page of the prospectus
supplement for the certificates issued by that pass through trust. The
certificateholders' right to receive payments made in respect of the equipment
notes is subject to the effect of any cross-subordination provisions described
in the prospectus supplement for a series of certificates.
We refer you to the prospectus supplement that accompanies this prospectus
for a description of the specific series of certificates being offered by this
prospectus and the applicable prospectus supplement, including:
- the specific designation, title and amount of the certificates;
- amounts payable on and distribution dates for the certificates;
- the specific form of the certificates, including whether or not the
certificates are to be issued in accordance with a book-entry system;
- a description of the equipment notes to be purchased by the pass through
trust issuing that series of certificates, including:
- the period or periods within which, the price or prices at which, and
the terms and conditions upon which the equipment notes may or must be
redeemed or defeased in whole or in part, by us or an owner trustee;
- the payment priority of the equipment notes in relation to any other
equipment notes issued with respect to the related aircraft; and
- any intercreditor or other rights or limitations between or among the
holders of equipment notes of different priorities issued with respect
to the same aircraft;
- a description of the aircraft to be financed with the proceeds of the
issuance of the equipment notes;
- a description of the note purchase agreement or participation agreement
setting forth the terms and conditions upon which that pass through trust
will purchase equipment notes;
6
- a description of the indentures under which the equipment notes to be
purchased for that pass through trust will be issued;
- a description of the events of default, the remedies exercisable upon the
occurrence of events of default and any limitations on the exercise of
those remedies under the indentures pursuant to which the equipment notes
to be purchased for that pass through trust will be issued;
- if the certificates relate to leased aircraft, a description of the
leases to be entered into by the owner trustees and us;
- if the certificates relate to leased aircraft, a description of the
provisions of the leased aircraft indentures governing:
- the rights of the related owner trustee and/or owner participant to cure
our failure to pay rent under the leases; and
- any limitations on the exercise of remedies with respect to the leased
aircraft notes;
- if the certificates relate to leased aircraft, a description of the
participation agreements that will set forth the terms and conditions
upon which the owner participant, the owner trustee, the pass through
trustees, the loan trustee and we agree to enter into a leveraged lease
transaction;
- if the certificates relate to an owned aircraft, a description of the
participation agreements that will set forth the terms and conditions
upon which the applicable pass through trustees, the loan trustee and we
agree to enter into a financing transaction for the owned aircraft;
- a description of the limitations, if any, on amendments to leases,
indentures, pass through trust agreements, participation agreements and
other material agreements entered into in connection with the issuance of
equipment notes;
- a description of any cross-default provisions in the indentures;
- a description of any cross-collateralization provisions in the
indentures;
- a description of any agreement among the holders of equipment notes and
any liquidity provider governing the receipt and distribution of monies
with respect to the equipment notes and the enforcement of remedies under
the indentures, including a description of any applicable intercreditor
and cross-subordination arrangements;
- a description of any liquidity facility or other credit enhancement
relating to the certificates;
- if the certificates relate to aircraft that have not yet been delivered
or financed, a description of any deposit or escrow agreement or other
arrangement providing for the deposit and investment of funds pending the
purchase of equipment notes and the financing of an owned aircraft or
leased aircraft; and
- any other special terms pertaining to the certificates.
The concept of cross-default mentioned above refers to a situation where a
default under one indenture or lease results in a default under other indentures
or leases. We currently do not expect any indentures or leases to contain
cross-default provisions. The concept of cross-collateralization mentioned above
refers to the situation where collateral that secures obligations incurred under
one indenture also serves as collateral for obligations under one or more other
indentures. We currently do not expect any indentures to be
cross-collateralized.
7
BOOK-ENTRY REGISTRATION
General. If specified in the applicable prospectus supplement, the
certificates will be subject to the procedures and provisions described below.
Upon issuance, each series of certificates will be represented by one or
more fully registered global certificates. Each global certificate will be
deposited with, or on behalf of, The Depository Trust Company, referred to as
DTC, and registered in the name of Cede & Co., the nominee of DTC. No purchaser
of a certificate will be entitled to receive a physical certificate representing
an interest in the global certificates, except as set forth below under
"-- Physical Certificates." For convenience, we refer to such purchasers as
"certificate owners." Unless and until physical certificates are issued under
the limited circumstances described below, all references in this prospectus and
any prospectus supplement to actions by certificateholders will refer to actions
taken by DTC upon instructions from DTC participants, and all references to
distributions, notices, reports and statements to certificateholders will refer,
as the case may be, to distributions, notices, reports and statements to DTC or
Cede, as the registered holder of the certificates, or to DTC participants for
distribution to certificateholders in accordance with DTC procedures.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934.
Under the New York Uniform Commercial Code, a "clearing corporation" is
defined as:
- a person that is registered as a "clearing agency" under the federal
securities laws;
- a federal reserve bank; or
- any other person that provides clearance or settlement services with
respect to financial assets that would require it to register as a
clearing agency under the federal securities laws but for an exclusion or
exemption from the registration requirement, if its activities as a
clearing corporation, including promulgation of rules, are subject to
regulation by a federal or state governmental authority.
A "clearing agency" is an organization established for the execution of
trades by transferring funds, assigning deliveries and guaranteeing the
performance of the obligations of parties to trades.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between DTC participants
through electronic book-entry changes in the accounts of DTC participants. The
ability to execute transactions through book-entry changes in accounts
eliminates the need for transfer of physical certificates. DTC is owned by a
number of DTC participants and by the New York Stock Exchange, the American
Stock Exchange, and the National Association of Securities Dealers. DTC
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Banks, brokers, dealers,
trust companies and other entities that clear through or maintain a custodial
relationship with a DTC participant, either directly or indirectly, are indirect
participants in the DTC system.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of the certificates
among DTC participants on whose behalf it acts with respect to the certificates
and to receive and transmit distributions of principal, premium, if any, and
interest with respect to the certificates. DTC participants and indirect DTC
participants with which certificate owners have accounts similarly are required
to make book-entry transfers and receive and transmit the payments on behalf of
their respective customers. Certificate owners that are not DTC participants or
indirect DTC participants but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, the certificates may do so only through DTC
participants and indirect DTC participants. In addition, certificate owners will
receive all distributions of principal, premium, if any, and interest from the
pass through trustee through DTC participants or indirect DTC participants, as
the case may be.
8
Under a book-entry format, certificate owners may experience some delay in
their receipt of payments, because payments with respect to the certificates
will be forwarded by the pass through trustee to Cede, as nominee for DTC. DTC
will forward payments in same-day funds to each DTC participant who is credited
with ownership of the certificates in an amount proportionate to the principal
amount of that DTC participant's holdings of beneficial interests in the
certificates, as shown on the records of DTC or its nominee. Each such DTC
participant will forward payments to its indirect DTC participants in accordance
with standing instructions and customary industry practices. DTC participants
and indirect DTC participants will be responsible for forwarding distributions
to certificate owners for whom they act. Accordingly, although certificate
owners will not possess physical certificates, DTC's rules provide a mechanism
by which certificate owners will receive payments on the certificates and will
be able to transfer their interests.
Unless and until physical certificates are issued under the limited
circumstances described below, the only physical certificateholder will be Cede,
as nominee of DTC. Certificate owners will not be recognized by the pass through
trustee as registered owners of certificates under the pass through trust
agreement. Certificate owners will be permitted to exercise their rights under
the pass through trust agreement only indirectly through DTC. DTC will take any
action permitted to be taken by a certificateholder under the pass through trust
agreement only at the direction of one or more DTC participants to whose
accounts with DTC the certificates are credited. In the event any action
requires approval by certificateholders of a certain percentage of the
beneficial interests in a pass through trust, DTC will take action only at the
direction of and on behalf of DTC participants whose holdings include undivided
interests that satisfy the required percentage. DTC may take conflicting actions
with respect to other undivided interests to the extent that the actions are
taken on behalf of DTC participants whose holdings include those undivided
interests. DTC will convey notices and other communications to DTC participants,
and DTC participants will convey notices and other communications to indirect
DTC participants in accordance with arrangements among them. Arrangements among
DTC and its direct and indirect participants are subject to any statutory or
regulatory requirements as may be in effect from time to time. DTC's rules
applicable to itself and DTC participants are on file with the SEC.
A certificate owner's ability to pledge the certificates to persons or
entities that do not participate in the DTC system, or otherwise to act with
respect to the certificates, may be limited due to the lack of a physical
certificate to evidence ownership of the certificates, and because DTC can only
act on behalf of DTC participants, who in turn act on behalf of indirect DTC
participants.
Neither we nor the pass through trustee will have any liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the certificates held by Cede, as nominee for DTC, for
maintaining, supervising or reviewing any records relating to the beneficial
ownership interests or for the performance by DTC, any DTC participant or any
indirect DTC participant of their respective obligations under the rules and
procedures governing their obligations.
The applicable prospectus supplement will specify any additional book-entry
registration procedures applicable to certificates denominated in a currency
other than U.S. dollars.
Same-Day Settlement and Payment. As long as the certificates are
registered in the name of DTC or its nominee, we will make all payments to the
loan trustee under any lease or any owned aircraft indenture in immediately
available funds. The pass through trustee will pass through to DTC in
immediately available funds all payments received from us, including the final
distribution of principal with respect to the certificates of any pass through
trust.
Any certificates registered in the name of DTC or its nominee will trade in
DTC's Same-Day Funds Settlement System until maturity. DTC will require
secondary market trading activity in the certificates to settle in immediately
available funds. We cannot give any assurance as to the effect, if any, of
settlement in same-day funds on trading activity in the certificates.
9
Physical Certificates. Physical certificates will be issued in paper form
to certificateholders or their nominees, rather than to DTC or its nominee, only
if:
- we advise the pass through trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository
with respect to the certificates and we are unable to locate a qualified
successor;
- we elect to terminate the book-entry system through DTC; or
- after the occurrence of certain events of default or other events
specified in the related prospectus supplement, certificateholders owning
at least a majority in interest in a pass through trust advise the
applicable pass through trustee, us and DTC through DTC participants that
the continuation of a book-entry system through DTC or a successor to DTC
is no longer in the certificate owners' best interest.
Upon the occurrence of any of the events described in the three
subparagraphs above, the applicable pass through trustee will notify all
certificate owners through DTC participants of the availability of physical
certificates. Upon surrender by DTC of the global certificates and receipt of
instructions for re-registration, the pass through trustee will reissue the
certificates as physical certificates to certificate owners.
After physical certificates are issued, the pass through trustee or a
paying agent will make distributions of principal, premium, if any, and interest
with respect to certificates directly to holders in whose names the physical
certificates were registered at the close of business on the applicable record
date. Except for the final payment to be made with respect to a certificate, the
pass through trustee or a paying agent will make distributions by check mailed
to the addresses of the registered holders as they appear on the register
maintained by the pass through trustee. The pass through trustee or a paying
agent will make the final payment with respect to any pass through certificate
only upon presentation and surrender of the applicable pass through certificate
at the office or agency specified in the notice of final distribution to
certificateholders.
Physical certificates will be freely transferable and exchangeable at the
office of the pass through trustee upon compliance with the requirements set
forth in the pass through trust agreement. Neither the pass through trustee nor
any transfer or exchange agent will impose a service charge for any registration
of transfer or exchange. However, the pass through trustee or transfer or
exchange agent will require payment of a sum sufficient to cover any tax or
other governmental charge attributable to a transfer or exchange.
PAYMENTS AND DISTRIBUTIONS
Subject to the effect of any cross-subordination provisions set forth in
the prospectus supplement for a series of certificates:
- Payments of principal, premium, if any, and interest with respect to the
equipment notes held for each pass through trust will be distributed by
the pass through trustee, upon receipt, to certificateholders of that
trust on the dates and in the currency specified in the applicable
prospectus supplement, except in certain cases when some or all of the
equipment notes are in default as described in the applicable prospectus
supplement. Payments of principal of, and interest on, the unpaid
principal amount of the equipment notes held in each pass through trust
will be scheduled to be received by the pass through trustee on the dates
specified in the applicable prospectus supplement.
- Each certificateholder of a pass through trust will be entitled to
receive a pro rata share of any distribution in respect of scheduled
payments of principal and interest made on the equipment notes held for
such pass through trust.
If we elect or are required to redeem equipment notes relating to one or
more aircraft prior to their scheduled maturity date, payments of principal,
premium (if any) and interest received by the pass through trustee as a result
of the early redemption will be distributed on a special distribution date
10
determined as described in the applicable prospectus supplement. Payments
received by the pass through trustee following a default under the equipment
notes held for a pass through trust will also be distributed on a special
distribution date determined in the same way. However, if following such a
default the pass through trustee receives any scheduled payments on equipment
notes on a regular distribution date or within five days thereafter, the pass
through trustee will distribute those payments on the date they are received. In
addition, if following a default under equipment notes the pass through trustee
receives payments on the equipment notes on a regular distribution date by
making a drawing under any liquidity facility, as described in the applicable
prospectus supplement, those payments will be distributed to certificateholders
on the regular distribution date. The pass through trustee will mail notice to
the certificateholders of record of the applicable pass through trust stating
the anticipated special distribution date.
POOL FACTORS
Unless otherwise described in the applicable prospectus supplement, the
"pool balance" for each pass through trust or for the certificates issued by any
pass through trust indicates, as of any date, the portion of the original
aggregate face amount of the certificates issued by that pass through trust that
has not been distributed to certificateholders (excluding any payments of
interest or premium). The pool balance for each pass through trust as of any
distribution date will be computed after giving effect to any distribution to
certificateholders to be made on that date.
Unless otherwise described in the applicable prospectus supplement, the
"pool factor" for a pass through trust as of any distribution date for that
trust is the quotient (rounded to the seventh decimal place) computed by
dividing (a) the pool balance by (b) the aggregate original face amount of the
certificates issued by that pass through trust. The pool factor for a pass
through trust as of any distribution date will be computed after giving effect
to the payment of principal, if any, on the equipment notes held for that pass
through trust and distribution to certificateholders of the payment of principal
to be made on that date. Each pass through trust will have a separate pool
factor.
The pool factor for a pass through trust initially will be 1.0000000. The
pool factor for a pass through trust will decline as described in this
prospectus and the related prospectus supplement to reflect reductions in the
pool balance of that pass through trust. As of any distribution date for a pass
through trust, a certificate will represent a share of the pool balance of that
pass through trust equal to the product obtained by multiplying the original
face amount of the certificate by the pool factor for the pass through trust
that issued such certificate. The pool factor and pool balance of each past
through trust will be mailed to the certificateholders of the pass through trust
on each distribution date.
The pool factor for each pass through trust will decline in proportion to
the scheduled repayments of principal on the equipment notes held by that pass
through trust, unless there is an early redemption or purchase of equipment
notes held by a pass through trust or if a default occurs in the repayment of
equipment notes held by a pass through trust. In the event of a redemption,
purchase or default, the pool factor and the pool balance of each pass through
trust affected by the redemption, purchase or default will be recomputed, and a
notice will be mailed to the certificateholders of the pass through trust.
REPORTS TO CERTIFICATEHOLDERS
The pass through trustee will include with each distribution of a payment
to certificateholders a statement setting forth the following information:
- the amount of the distribution allocable to principal and the amount
allocable to premium, if any;
- the amount of the distribution allocable to interest; and
- the pool balance and the pool factor for the pass through trust after
giving effect to the distribution.
As long as the certificates are registered in the name of DTC or its
nominee, on the record date prior to each distribution date, the pass through
trustee will request from DTC a securities position listing
11
setting forth the names of all DTC participants reflected on DTC's books as
holding interests in the certificates on that record date. On each distribution
date, the applicable pass through trustee will mail to each DTC participant
holding certificates the statement described above and will make available
additional copies as requested by the DTC participants for forwarding to
certificate owners.
After the end of each calendar year, each pass through trustee will prepare
a report for each person that was a holder of one or more of its pass through
certificates at any time during the preceding calendar year. This report will
contain the sum of the amount of distributions allocable to principal, premium
and interest with respect to that pass through trust for the preceding calendar
year or, if the person was a holder of a pass through certificate during only a
portion of the preceding calendar year, for the applicable portion of the
preceding calendar year. In addition, each pass through trustee will prepare for
each person that was a holder of one or more of its pass through certificates at
any time during the preceding calendar year any other information that are
readily available to the pass through trustee and which a certificateholder
reasonably requests as necessary for the purpose of preparing its federal income
tax returns. The reports and other items described in this section will be
prepared on the basis of information supplied to the pass through trustee by DTC
participants and will be delivered by the pass through trustee to DTC
participants to be available for forwarding by DTC participants to certificate
owners in the manner described above.
If the certificates of a pass through trust are issued in the form of
physical certificates, the pass through trustee of that pass through trust will
prepare and deliver the information described above to each record holder of a
pass through certificate issued by that pass through trust as the name and
period of ownership of the holder appears on the records of the registrar of the
certificates.
VOTING OF EQUIPMENT NOTES
A pass through trustee has the right to vote and give consents and waivers
with respect to the equipment notes held by that pass through trust. However,
the pass through trustee's right to vote and give consents or waivers may be
restricted or may be exercisable by another person in accordance with the terms
of an intercreditor agreement, as described in the applicable prospectus
supplement. The pass through trust agreement will set forth:
- the circumstances in which a pass through trustee may direct any action
or cast any vote with respect to the equipment notes held for its pass
through trust at its own discretion;
- the circumstances in which a pass through trustee will seek instructions
from its certificateholders; and
- if applicable, the percentage of certificateholders required to direct
the pass through trustee to take action.
If the holders of certificates are entitled to the benefits of a liquidity
facility, and the liquidity facility is used to make any payments to
certificateholders, the provider of the liquidity facility may be entitled to
exercise rights to vote or give consents and waivers with respect to the
equipment notes held for the pass through trust that issued the certificates, as
described in the applicable prospectus supplement.
EVENTS OF DEFAULT AND CERTAIN RIGHTS UPON AN EVENT OF DEFAULT
The prospectus supplement will specify the events of default that can occur
under the pass through trust agreement and under the indentures relating to the
equipment notes held for the related pass through trust. In the case of a leased
aircraft indenture, an indenture default will include events of default under
the related lease. In the case of any equipment notes that are supported by a
liquidity facility, a default may include events of default under that liquidity
facility.
Unless otherwise provided in a prospectus supplement, all of the equipment
notes issued under the same indenture will relate to a specific aircraft and
there will be no cross-collateralization or cross-default provisions in the
indentures. As a result, events resulting in a default under any particular
indenture will
12
not necessarily result in an a default under any other indenture. If a default
occurs in fewer than all of the indentures, payments of principal and interest
on the equipment notes issued under the indentures with respect to which a
default has not occurred will continue to be made as originally scheduled.
As described below under "-- Cross-Subordination Issues," a prospectus
supplement may describe the terms of any cross-subordination provisions among
certificateholders of separate pass through trusts. If cross-subordination is
provided, payments made pursuant to an indenture under which a default has not
occurred may be distributed first to the holders of the certificates issued
under the pass through trust which holds the most senior equipment notes issued
under all of the indentures.
The ability of the applicable owner trustee or owner participant under a
leased aircraft indenture to cure a default under the indenture, including a
default that results from the occurrence of a default under the related lease,
will be described in the prospectus supplement. Unless otherwise provided in a
prospectus supplement, with respect to any pass through certificates or
equipment notes entitled to the benefits of a liquidity facility, a drawing
under the liquidity facility for the purpose of making a payment of interest as
a result of our failure to have made a corresponding payment will not cure a
default related to our failure.
The prospectus supplement related to a series of pass through certificates
will describe the circumstances under which the pass through trustee of the
related pass through trust may vote some or all of the equipment notes held in
the pass through trust. The prospectus supplement also will set forth the
percentage of certificateholders of the pass through trust entitled to direct
the pass through trustee to take any action with respect to the equipment notes.
If the equipment notes outstanding under an indenture are held by more than one
pass through trust, then the ability of the certificateholders issued with
respect to any one pass through trust to cause the loan trustee with respect to
any equipment notes held in the pass through trust to accelerate the equipment
notes under the applicable indenture or to direct the exercise of remedies by
the loan trustee under the applicable indenture will depend, in part, upon the
proportion of the aggregate principal amount of the equipment notes outstanding
under that indenture and held in that pass through trust to the aggregate
principal amount of all equipment notes outstanding under that indenture.
In addition, if cross-subordination provisions are applicable to any series
of certificates, then the ability of the certificateholders of any one pass
through trust holding equipment notes issued under an indenture to cause the
loan trustee with respect to any equipment notes held in that pass through trust
to accelerate the equipment notes under that indenture or to direct the exercise
of remedies by the loan trustee under that indenture will depend, in part, upon
the class of equipment notes held in the pass through trust. If the equipment
notes outstanding under an indenture are held by more than one pass through
trust, then each pass through trust will hold equipment notes with different
terms from the equipment notes held in the other pass through trusts and
therefore the certificateholders of each pass through trust may have divergent
or conflicting interests from those of the certificateholders of the other pass
through trusts holding equipment notes issued under the same indenture. In
addition, so long as the same institution acts as pass through trustee of each
pass through trust, in the absence of instructions from the certificateholders
of any pass through trust, the pass through trustee for the pass through trust
could for the same reason be faced with a potential conflict of interest upon a
default under an indenture. In that event, the pass through trustee has
indicated that it would resign as pass through trustee of one or all the pass
through trusts, and a successor trustee would be appointed in accordance with
the terms of the Basic Agreement.
The prospectus supplement for a series of certificates will specify whether
and under what circumstances the pass through trustee may sell for cash to any
person all or part of the equipment notes held in the related pass through
trust. Any proceeds received by the pass through trustee upon a sale will be
deposited in an account established by the pass through trustee for the benefit
of the certificateholders of the pass through trust for the deposit of the
special payments and will be distributed to the certificateholders of the pass
through trust on a special distribution date.
13
The market for equipment notes in default may be very limited, and we
cannot assure you that they could be sold for a reasonable price. Furthermore,
so long as the same institution acts as pass through trustee of multiple pass
through trusts, it may be faced with a conflict in deciding from which pass
through trust to sell equipment notes to available buyers. If the pass through
trustee sells any equipment notes with respect to which a default under an
indenture exists for less than their outstanding principal amount, the
certificateholders of that pass through trust will receive a smaller amount of
principal distributions than anticipated and will not have any claim for the
shortfall against us, any owner trustee, owner participant or the pass through
trustee. Furthermore, neither the pass through trustee nor the
certificateholders of that pass through trust could take any action with respect
to any remaining equipment notes held in that pass through trust so long as no
default under an indenture exists.
Any amount, other than scheduled payments received on a regular
distribution date, distributed to the pass through trustee of any pass through
trust by the loan trustee under any indenture on account of the equipment notes
held in that pass through trust following a default under such indenture will be
deposited in the special payments account for that pass through trust and will
be distributed to the certificateholders of that pass through trust on a special
distribution date. In addition, if a prospectus supplement provides that the
applicable owner trustee may, under circumstances specified in the prospectus
supplement, redeem or purchase the outstanding equipment notes issued under the
applicable indenture, the price paid by the owner trustee to the pass through
trustee of any pass through trust for the equipment notes issued under that
indenture and held in that pass through trust will be deposited in the special
payments account for the pass through trust and will be distributed to the
certificateholders of the pass through trust on a special distribution date.
Any funds representing payments received with respect to any equipment
notes in default held in a pass through trust, or the proceeds from the sale by
the pass through trustee of any of those equipment notes, held by the pass
through trustee in the special payments account for that pass through trust
will, to the extent practicable, be invested and reinvested by the pass through
trustee in permitted investments pending the distribution of the funds on a
special distribution date. Permitted investments will be specified in the
related prospectus supplement.
The Basic Agreement provides that the pass through trustee of each pass
through trust will give to the certificateholders of that pass through trust
notice of all uncured or unwaived defaults known to it with respect to that pass
through trust. The Basic Agreement requires the pass through trustee to provide
the notice of default within 90 days after the occurrence of the default.
However, except in the case of default in the payment of principal, premium, if
any, or interest on any of the equipment notes held for a pass through trust,
the pass through trustee will be protected in withholding a notice of default if
it in good faith determines that withholding the notice is in the interest of
the certificateholders of such pass through trust. The term "default" as used in
this paragraph means only the occurrence of a default under an indenture with
respect to equipment notes held in a pass through trust as described above,
except that in determining whether any default under an indenture has occurred,
any related grace period or notice will be disregarded.
The Basic Agreement requires the pass through trustee to act with a
specified standard of care while a default is continuing under an indenture. In
addition, the Basic Agreement contains a provision entitling the pass through
trustee to require reasonable security or indemnification by the
certificateholders of the pass through trust before proceeding to exercise any
right or power under the Basic Agreement at the request of those
certificateholders.
The prospectus supplement for a series of certificates will specify the
percentage of certificateholders entitled to waive, or to instruct the pass
through trustee to waive, any past default with respect to the related pass
through trust and its consequences. The prospectus supplement for a series of
certificates also will specify the percentage of certificateholders entitled to
waive, or to instruct the pass through trustee or the loan trustee to waive, any
past default under an indenture.
14
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
We will be prohibited from consolidating with or merging into any other
corporation or transferring substantially all of our assets as an entirety to
any other corporation unless the surviving, successor or transferee corporation:
- is validly existing under the laws of the United States or any of its
states;
- is a citizen of the United States, as defined in Title 49 of the U.S.
Code relating to aviation, referred to as the "Transportation Code,"
holding an air carrier operating certificate issued pursuant to Chapter
447 of Title 49, U.S. Code, if, and so long as, that status is a
condition of entitlement to the benefits of Section 1110 of the U.S.
Bankruptcy Code relating to the rights of creditors of an airline in the
event of the airline's bankruptcy; and
- expressly assumes all of our obligations contained in the Basic Agreement
and any pass through trust supplement, the note purchase agreements, any
indentures, any participation agreements and, with respect to aircraft
leased by us, the applicable leases.
In addition, we will be required to deliver a certificate and an opinion or
opinions of counsel indicating that the transaction, in effect, complies with
these conditions.
MODIFICATIONS OF THE BASIC AGREEMENT
The Basic Agreement contains provisions permitting us and the pass through
trustee of each pass through trust to enter into a supplemental trust agreement,
without the consent of the holders of any of the certificates issued by such
pass through trust, in order to do the following, among other things:
- to provide for the formation of such pass through trust and the issuance
of a series of certificates and to set forth the terms of the
certificates;
- to evidence the succession of another corporation to us and the
assumption by that corporation of our obligations under the Basic
Agreement and the pass through trust agreements;
- to add to our covenants for the benefit of holders of such certificates,
or to surrender any right or power in the Basic Agreement conferred upon
us;
- to cure any ambiguity or correct or supplement any defective or
inconsistent provision of the Basic Agreement or any pass through trust
agreement, so long as those changes will not materially adversely affect
the interests of the holders of such certificates, or to cure any
ambiguity or correct any mistake or, to give effect to or provide for
replacement liquidity facilities, if applicable, to such certificates;
- to comply with any requirement of the SEC, any applicable law, rules or
regulations of any exchange or quotation system on which any certificates
may be listed or of any regulatory body;
- to modify, eliminate or add to the provisions of the Basic Agreement to
the extent necessary to continue the qualification of the pass through
trust agreement under the Trust Indenture Act of 1939, and to add to the
Basic Agreement other provisions as may be expressly permitted by the
Trust Indenture Act;
- to provide for a successor pass through trustee or to add to or change
any provision of the Basic Agreement as necessary to facilitate the
administration of the pass through trusts created under the pass through
trust agreement by more than one pass through trustee; and
- to make any other amendments or modifications to the Basic Agreement so
long as those amendments or modifications apply only to certificates of a
series issued after the date of the amendment or modification.
No pass through trust supplement may be made that will adversely affect the
status of any pass through trust as a grantor trust for U.S. federal income tax
purposes.
15
The Basic Agreement also contains provisions permitting us and the pass
through trustee of each pass through trust, with the consent of a majority in
interest of the certificateholders of the pass through trust, to execute
supplemental trust agreements adding any provisions to or changing or
eliminating any of the provisions of the Basic Agreement, to the extent relating
to that pass through trust, and the applicable pass through trust supplement, or
modifying the rights of the certificateholders, except that no supplement may,
without the consent of each affected certificateholder:
- reduce in any manner the amount of, or delay the timing of, any receipt
by the pass through trustee of payments on the equipment notes held in
the pass through trust or distributions in respect of any pass through
certificate issued by the pass through trust;
- change the date or place of any payment in respect of any pass through
certificate, or make distributions payable in currency other than that
provided for in the certificates, or impair the right of any
certificateholder to institute suit for the enforcement of any payment
when due;
- permit the disposition of any equipment note held in the pass through
trust, except as provided in the pass through trust agreement, or
otherwise deprive any certificateholder of the benefit of the ownership
of the applicable equipment note;
- reduce the percentage of the aggregate fractional undivided interests of
the pass through trust that is required in order for any supplement or
waiver to be approved;
- modify any of the provisions relating to the rights of the
certificateholders in respect of the waiver of events of default or
receipt of payment;
- alter the priority of distributions described in any applicable
intercreditor agreement, in a manner materially adverse to the interests
of the certificateholders of such pass through trust; or
- adversely affect the status of any pass through trust as a grantor trust
for U.S. federal income tax purposes.
MODIFICATION OF INDENTURE AND RELATED AGREEMENTS
The prospectus supplement will specify the pass through trustee's
obligations if a pass through trustee, as the holder of any equipment notes held
for a pass through trust, receives a request for its consent to any amendment,
modification or waiver under the indenture under which the equipment notes were
issued, under the lease relating to the aircraft leased by us that was financed
with the proceeds of the equipment notes or under any liquidity facility.
CROSS-SUBORDINATION ISSUES
The equipment notes issued under an indenture may be held in more than one
pass through trust, and one pass through trust may hold equipment notes issued
under more than one indenture. Unless otherwise provided in a prospectus
supplement, only equipment notes having the same priority for distributions
under the applicable indenture may be held in the same pass through trust. In
that event, payments made on account of a subordinate class of certificates
issued under a prospectus supplement may be subordinated, under circumstances
described in the prospectus supplement, to the prior payment of all amounts
owing to certificateholders of a pass through trust which holds senior equipment
notes issued under the applicable indentures. The prospectus supplement related
to an issuance of certificates will describe the "cross-subordination"
provisions and any related terms, including the percentage of certificateholders
under any pass through trust which are permitted to:
- grant waivers of defaults under any applicable indenture;
- consent to the amendment or modification of any applicable indenture; or
- direct the exercise of remedial actions under any applicable indenture.
16
TERMINATION OF THE PASS THROUGH TRUSTS
Our obligations and those of the pass through trustee with respect to a
pass through trust will terminate upon the distribution to certificateholders of
the pass through trust of all amounts required to be distributed to them
pursuant to the applicable pass through trust agreement and the disposition of
all property held in the pass through trust. In no event will any pass through
trust continue beyond 110 years following the date of the execution of the
applicable pass through trust supplement, or any other final expiration date as
may be specified in the pass through trust supplement. The pass through trustee
will send to each certificateholder of record of the pass through trust notice
of the termination of the pass through trust, the amount of the proposed final
payment and the proposed date for the distribution of the final payment for the
pass through trust. The final distribution to any certificateholder of the pass
through trust will be made only upon surrender of that certificateholder's
certificates at the office or agency of the pass through trustee specified in
the notice of termination.
DELAYED PURCHASE OF EQUIPMENT NOTES
On the issuance date of any certificates, if all of the proceeds from the
sale of the certificates are not used to purchase the equipment notes
contemplated to be held in the related pass through trust, the equipment notes
may be purchased by the pass through trustee at any time on or prior to the date
specified in the applicable prospectus supplement. In that event, the proceeds
from the sale of the certificates not used to purchase equipment notes will be
held under an arrangement described in the applicable prospectus supplement
pending the purchase of equipment notes. The arrangements with respect to the
payment of interest on funds so held will be described in the applicable
prospectus supplement. If any proceeds are not used to purchase equipment notes
by the date specified in the applicable prospectus supplement, the proceeds will
be returned to the certificateholders.
LIQUIDITY FACILITY
The related prospectus supplement may provide that one or more payments of
interest on the certificates of one or more series will be supported by a
liquidity facility issued by an institution identified in the related prospectus
supplement. The provider of the liquidity facility may have a claim on money and
property belonging to a pass through trust that is senior to the
certificateholders' as specified in the related prospectus supplement.
THE PASS THROUGH TRUSTEE
Unless otherwise provided in the prospectus supplement for any series of
certificates, the pass through trustee for each series of certificates will be
Wilmington Trust Company. With certain exceptions, the pass through trustee
makes no representations as to the validity or sufficiency of the Basic
Agreement, the pass through trust supplements, the certificates, the equipment
notes, the indentures, the leases or other related documents. The pass through
trustee will not be liable with respect to any series of certificates for any
action taken or omitted to be taken by it in good faith in accordance with the
direction of the holders of a majority in principal amount of outstanding
certificates of that series issued under the Basic Agreement. Subject to those
provisions, the pass through trustee will be under no obligation to exercise any
of its rights or powers under the Basic Agreement at the request of any holders
of certificates issued under that agreement unless they will have offered to the
pass through trustee indemnity satisfactory to it. The Basic Agreement provides
that the pass through trustee in its individual or any other capacity may
acquire and hold certificates and, subject to certain conditions, may otherwise
deal with us and, with respect to the leased aircraft, with any owner trustee
with the same rights it would have if it were not the pass through trustee.
The pass through trustee may resign with respect to any or all of the pass
through trusts at any time, in which event we will be obligated to appoint a
successor trustee. If the pass through trustee ceases to be eligible to continue
as pass through trustee with respect to a pass through trust or becomes
incapable of acting as pass through trustee or becomes insolvent, we may remove
the pass through trustee, or any
17
certificateholder of the pass through trust for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the pass through trustee and the
appointment of a successor trustee. Any resignation or removal of the pass
through trustee with respect to a pass through trust and appointment of a
successor trustee for the pass through trust does not become effective until
acceptance of the appointment by the successor trustee. Pursuant to the
resignation and successor trustee provisions, it is possible that a different
trustee could be appointed to act as the successor trustee with respect to each
pass through trust. All references in this prospectus to the pass through
trustee should be read to take into account the possibility that the pass
through trusts could have different successor trustees in the event of a
resignation or removal.
The Basic Agreement provides that we will pay the pass through trustee's
fees and expenses and indemnify the pass through trustee against certain
liabilities.
DESCRIPTION OF THE EQUIPMENT NOTES
The statements made under this caption are summaries, and we refer you to
the entire prospectus and detailed information appearing in the applicable
prospectus supplement. Where no distinction is made between the leased aircraft
notes and the owned aircraft notes or between their respective indentures, those
statements refer to any equipment notes and any indenture.
To the extent that any provision in any prospectus supplement is
inconsistent with any provision in this summary, the provision of the prospectus
supplement will control.
GENERAL
The equipment notes will be issued under indentures. Equipment notes
secured by an aircraft that is leased to us will be issued under an indenture
between an owner trustee and a loan trustee. Equipment notes secured by an
aircraft that is owned by us will be issued under an indenture between a loan
trustee and us.
The leased aircraft notes will be non-recourse obligations of the
applicable owner trustee. All of the leased aircraft notes issued under the same
indenture will relate to and will be secured by one or more specific aircraft
leased to us. Unless otherwise specified in the applicable prospectus
supplement, leased aircraft notes will not be secured by any other aircraft. We
will be the issuer of owned aircraft notes. The owned aircraft notes will be our
direct recourse obligations. All of the owned aircraft notes issued under the
same indenture will relate to, and will be secured by, one or more specific
aircraft that we own. Unless otherwise specified in the applicable prospectus
supplement, the owned aircraft notes will not be secured by any other aircraft.
PRINCIPAL AND INTEREST PAYMENTS
Interest received by the pass through trustee on the equipment notes held
in a pass through trust will be passed through to the certificateholders of that
pass through trust on the dates and at the annual rate set forth in the
applicable prospectus supplement until the final distribution for that pass
through trust. Principal payments received by the pass through trustee on the
equipment notes held in a pass through trust will be passed through to the
certificateholders of that pass through trust in scheduled amounts on the dates
set forth in the applicable prospectus supplement until the final distribution
date for that pass through trust.
If any date scheduled for any payment of principal, premium, if any, or
interest with respect to the equipment notes is not a business day, the payment
will be made on the next succeeding business day without any additional
interest.
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REDEMPTION
The applicable prospectus supplement will describe the circumstances,
whether voluntary or involuntary, under which the equipment notes may be
redeemed or purchased prior to their stated maturity date, in whole or in part.
The prospectus supplement will also describe the premium, if any, applicable
upon redemptions or purchases and other terms applying to the redemptions or
purchases of the equipment notes.
SECURITY
The leased aircraft notes will be secured by:
- an assignment by the related owner trustee to the related loan trustee of
the owner trustee's rights, except for certain rights described below,
under the lease or leases with respect to the related aircraft, including
the right to receive payments of rent under those leases; and
- a mortgage granted to the loan trustee on the aircraft, subject to our
rights under the lease or leases.
Under the terms of each lease, our obligations in respect of each leased
aircraft will be those of a lessee under a "net lease." Accordingly, we will be
obligated, among other things and at our expense, to cause each leased aircraft
to be duly registered, to pay all costs of operating the aircraft and to
maintain, service, repair and overhaul the aircraft or cause it to be
maintained, serviced, repaired and overhauled. With respect to the leased
aircraft, the assignment by the related owner trustee to the related loan
trustee of its rights under the related lease will exclude, among other things:
- rights of the owner trustee and the related owner participant relating to
indemnification by us for certain matters;
- insurance proceeds payable to the owner trustee in its individual
capacity and to the owner participant under liability insurance
maintained by us pursuant to the lease or by the owner trustee or the
owner participant;
- insurance proceeds payable to the owner trustee in its individual
capacity or to the owner participant under certain casualty insurance
maintained by the owner trustee or the owner participant pursuant to the
lease; and
- any rights of the owner participant or the owner trustee to enforce
payment of the foregoing amounts and their respective rights to the
proceeds of the foregoing.
The owned aircraft notes will be secured by a mortgage granted to the
related loan trustee of all of our right, title and interest in and to the owned
aircraft. Under the terms of each owned aircraft indenture, we will be
obligated, among other things and at our expense, to cause each owned aircraft
to be duly registered, to pay all costs of operating the aircraft and to
maintain, service, repair and overhaul the aircraft or cause it to be
maintained, serviced, repaired and overhauled.
We will be required, except under certain circumstances, to keep each
aircraft registered under the Transportation Code, and to record the indenture
and the lease, if applicable, among other documents, with respect to each
aircraft under the Transportation Code. Recordation of the indenture, the lease,
if applicable, and other documents with respect to each aircraft will give the
related loan trustee a perfected security interest in the related aircraft
whenever it is located in the United States or any of its territories and
possessions. The Convention on the International Recognition of Rights in
Aircraft, referred to as the "Convention," provides that this security interest
will also be recognized, with certain limited exceptions, in those jurisdictions
that have ratified or adhere to the Convention.
We will have the right, subject to certain conditions, at our own expense
to register each aircraft in countries other than the United States. Each
aircraft may also be operated by us or under lease, sublease or interchange
arrangements in countries that are not parties to the Convention. The extent to
which the related loan trustee's security interest would be recognized in an
aircraft located in a country that is not a
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party to the Convention, and the extent to which the security interest would be
recognized in a jurisdiction adhering to the Convention if the aircraft is
registered in a jurisdiction not a party to the Convention, is uncertain.
Moreover, in the case of a default under an indenture, the ability of the
related loan trustee to realize upon its security interest in an aircraft could
be adversely affected as a legal or practical matter if the aircraft were
registered or located outside the United States.
Unless otherwise specified in the applicable prospectus supplement, the
equipment notes will not be cross-collateralized. Consequently, the equipment
notes issued in respect of any one aircraft will not be secured by any other
aircraft. Unless and until a default under an indenture with respect to a leased
aircraft has occurred and is continuing, the related loan trustee may exercise
only limited rights of the related owner trustee under the related lease. The
loan trustee will invest and reinvest funds, if any, held by it from time to
time under an indenture. The loan trustee will, at our direction, invest and
reinvest funds in certain investments described in the applicable indenture. We
will not be entitled to direct the loan trustee to invest and reinvest funds
with respect to a leased aircraft in the case of a default under the applicable
lease or, with respect to an owned aircraft, in the case of a default under the
applicable indenture. We will pay the net amount of any loss resulting from
these investments.
In the case of Chapter 11 bankruptcy proceedings involving a holder of
"equipment" (defined as described below), Section 1110 of the U.S. Bankruptcy
Code provides special rights to lessors, conditional vendors and holders of
security interests with respect to such equipment. Under Section 1110, the right
of such financing parties to take possession of such equipment in compliance
with the provisions of a lease, conditional sale contract or security agreement
is not affected by any provision of the U.S. Bankruptcy Code or any power of the
bankruptcy court. Ordinarily, such right would be limited by the "automatic
stay" under the Bankruptcy Code. Such right to take possession may not be
exercised for 60 days following the date of commencement of the reorganization
proceedings. Thereafter, such right to take possession may be exercised during
such proceedings unless, within the 60-day period or any longer period consented
to by the relevant parties, the debtor agrees to perform its obligations that
become due on or after that date and cures all defaults on a timely basis.
Defaults resulting solely from the financial condition, bankruptcy, insolvency
or reorganization of the debtor need not be cured.
"Equipment" is defined in Section 1110 of the U.S. Bankruptcy Code, in
part, as an aircraft, aircraft engine, propeller, appliance, or spare part (as
defined in Section 40102 of Title 49 of the U.S. Code) that is subject to a
security interest granted by, leased to, or conditionally sold to a debtor that,
at the time such transaction is entered into, holds an air carrier operating
certificate issued pursuant to chapter 447 of title 49 of the U.S. Code for
aircraft capable of carrying 10 or more individuals or 6,000 pounds of more of
cargo (subject to certain limitations in the case of equipment first placed in
service on or prior to October 22, 1994).
In connection with any issuance of certificates under this prospectus and
the applicable prospectus supplement, it will be a condition to the pass through
trustee's obligation to purchase equipment notes with respect to each aircraft
that our outside counsel provide its opinion (which may assume that we hold, at
the time of the lease or mortgage, as the case may be, an air carrier operating
certificate issued pursuant to chapter 447 of title 49 of the U.S. Code for
aircraft capable of carrying 10 or more individuals or 6,000 pounds or more of
cargo) to the Pass Through Trustee that:
- if the aircraft is a leased aircraft, the owner trustee, as lessor under
the lease for the aircraft, and the loan trustee, as assignee of the
owner trustee's rights under the lease pursuant to the applicable
indenture, will be entitled to the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to the airframe and engines comprising the
aircraft; or
- if the aircraft is an owned aircraft, the loan trustee will be entitled
to the benefits of Section 1110 with respect to the airframe and engines
comprising the owned aircraft.
The opinion will not address the possible replacement of an aircraft after
an "Event of Loss," as defined in the applicable indenture, in the future.
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RANKING OF EQUIPMENT NOTES
Some of the equipment notes related to one or more aircraft, as described
in the related prospectus supplement, may be subordinated and junior in right of
payment to other equipment notes related to the same aircraft. The terms of the
subordination, if any, will be described in the related prospectus supplement.
PAYMENTS AND LIMITATION OF LIABILITY
We will lease each leased aircraft from an owner trustee for a term
commencing on the delivery date of the aircraft to the owner trustee and
expiring on a date no earlier than the latest maturity date of the related
leased aircraft notes, unless previously terminated as permitted by the terms of
the related lease. We will make basic rent and other payments under each lease
to an owner trustee, as lessor. The owner trustee will assign these payments
under the applicable indenture to the related loan trustee to provide the funds
necessary to pay principal of, premium, if any, and interest due from the owner
trustee on the leased aircraft notes issued under the indenture. Each lease will
provide that under no circumstances will our rent payments be less than the
scheduled payments on the related leased aircraft notes. The balance of any
basic rent payment under each lease, after payment of amounts due on the leased
aircraft notes issued under the indenture corresponding to the lease, will be
paid over to the applicable owner trustee. Our obligation to pay rent and to
cause other payments to be made under each lease will be our direct obligation.
Except in circumstances in which we purchase a leased aircraft and assume the
related leased aircraft notes, the leased aircraft notes will not be our direct
obligation. None of the owner trustees, the owner participants or the loan
trustees will be personally liable to any holder of leased aircraft notes for
amounts payable under the leased aircraft notes. Except as provided in the
indentures relating to the leased aircraft notes, no owner trustee or loan
trustee will be liable for or incur any liability under the indentures. Except
in the circumstances described above, all amounts payable under any leased
aircraft notes, other than payments made in connection with an optional
redemption or purchase by the related owner trustee or the related owner
participant, will be made only from:
- the assets subject to the lien of the applicable indenture with respect
to the aircraft or the income and proceeds received by the related loan
trustee from that aircraft, including rent payable by us under the
related lease; or
- if so provided in the related prospectus supplement, the applicable
liquidity facility.
With respect to the leased aircraft notes, except as otherwise provided in
the applicable indenture, no owner trustee will be personally liable for any
amount payable or for any statements, representations, warranties, agreements or
obligations under any indenture or under any leased aircraft notes. None of the
owner participants will have any duty or responsibility under the leased
aircraft indentures or under the leased aircraft notes to the related loan
trustee or to any holder of any leased aircraft note.
Our obligations under each owned aircraft indenture and under the owned
aircraft notes will be our direct obligations.
DEFEASANCE OF THE INDENTURES AND THE EQUIPMENT NOTES IN CERTAIN CIRCUMSTANCES
Unless otherwise specified in the applicable prospectus supplement, an
indenture may provide that the obligations of the related loan trustee, the
related owner trustee or us, as the case may be, under that indenture will be
deemed to have been discharged and paid in full on the 91st day after the date
that money or certain United States government securities, in an aggregate
amount sufficient to pay when due (including as a consequence of redemption in
respect of which notice is given on or prior to the date of the deposit)
principal, premium, if any, and interest on all equipment notes issued under
that indenture, are irrevocably deposited with the related loan trustee. The
discharge may occur only if, among other things, there has been published by the
IRS a ruling to the effect that holders of the equipment notes will not
recognize income, gain or loss for federal income tax purposes as a result of
the deposit, defeasance
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and discharge and will be subject to federal income tax on the same amount and
in the same manner and at the same time as would have been the case if the
deposit, defeasance and discharge had not occurred.
Upon defeasance of the equipment notes, or upon payment in full of the
principal of, premium, if any, and interest on all equipment notes issued under
any indenture on the applicable maturity date, or upon deposit with the
applicable loan trustee of sufficient money no earlier than one year prior to
the date of maturity, the holders of the equipment notes will have no beneficial
interest in or other rights with respect to the related aircraft or other assets
subject to the lien of the indenture and the lien will terminate.
ASSUMPTION OF OBLIGATIONS BY SOUTHWEST
Unless otherwise specified in the applicable prospectus supplement, upon
our purchase of any leased aircraft prior to the end of the applicable term, we
may assume on a full recourse basis all of the obligations of the owner trustee,
other than its obligations in its individual capacity, under the indenture and
the leased aircraft notes relating to that lease. If we assume leased aircraft
notes, provisions relating to maintenance, possession and use of the related
aircraft, liens and insurance will be incorporated into the indenture. If we
assume leased aircraft notes in connection with our purchase of a leased
aircraft, leased aircraft notes issued under the indenture will not be redeemed
and will continue to be secured by the aircraft.
LIQUIDITY FACILITY
The related prospectus supplement may provide that one or more payments of
interest on the related equipment notes of one or more series will be supported
by a liquidity facility issued by an institution identified in the related
prospectus supplement. Unless otherwise provided in the related prospectus
supplement, the provider of the liquidity facility will have a claim upon the
assets securing the equipment notes senior to the claim of the pass through
trustee, as owner of the equipment notes.
INTERCREDITOR ISSUES
Equipment notes may be issued in different classes, which means that the
equipment notes may have different payment priorities even though they are
issued by the same borrower and relate to the same aircraft. If multiple classes
of equipment notes are issued, the related prospectus supplement will describe
the priority of distributions among the equipment notes, any liquidity
facilities, the ability of any class to exercise and/or enforce any or all
remedies with respect to the related aircraft, and, if the equipment notes are
leased aircraft notes, the related lease, and certain other intercreditor terms
and provisions.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
GENERAL
Unless otherwise indicated in the applicable prospectus supplement, the
following summary describes all material generally applicable U.S. federal
income tax consequences to certificateholders of the purchase, ownership and
disposition of the certificates offered by this prospectus, and in the opinion
of Vinson & Elkins L.L.P., our special tax counsel, is accurate in all material
respects with respect to the matters discussed in this prospectus. Except as
otherwise specified, the summary is addressed to beneficial owners of
certificates that are citizens or residents of the United States, corporations,
partnerships or other entities created or organized in or under the laws of the
United States or any state therein, or estates or trusts the income of which is
subject to U.S. federal income taxation regardless of its source, and that will
hold the certificates as capital assets.
This summary does not address the tax treatment of U.S. certificateholders
that may be subject to special tax rules, such as banks, insurance companies,
dealers in securities or commodities, tax-exempt entities, holders that will
hold certificates as part of a straddle or holders that have a "functional
currency" other than the U.S. dollar, nor, except as specifically indicated,
does it address the tax treatment of
22
U.S. certificateholders that do not acquire certificates at the public offering
price as part of the initial offering. The summary is not a comprehensive
description of all of the tax considerations that may be relevant to a decision
to purchase certificates. This summary does not describe any tax consequences
arising under the laws of any state, locality or taxing jurisdiction other than
the United States, nor does it describe any estate or gift tax consequences.
The summary is based upon the tax laws and practice of the United States as
in effect on the date of this prospectus, as well as judicial and administrative
interpretations, in final or proposed form, available on or before that date.
Changes to the existing laws could apply retroactively and could alter the tax
consequences discussed below. We have not sought any ruling from the IRS with
respect to the federal income tax consequences, discussed below, and we cannot
assure you that the IRS will not take contrary positions. The pass through
trusts are not indemnified for any federal income taxes that may be imposed upon
them, and the imposition of any such taxes on a pass through trust could result
in a reduction in the amounts available for distribution to the
certificateholders of that pass through trust. Prospective investors should
consult their own tax advisors with respect to the federal, state, local and
foreign tax consequences to them of the purchase, ownership and disposition of
the certificates.
TAX STATUS OF THE PASS THROUGH TRUSTS
In the opinion of our special tax counsel, each pass through trust will be
classified as a grantor trust for U.S. federal income tax purposes.
TAXATION OF CERTIFICATEHOLDERS GENERALLY
A U.S. certificateholder will be treated as owning its pro rata undivided
interest in each of the equipment notes and any other property held by the
related pass through trust. Accordingly, each U.S. certificateholder's share of
interest paid on the equipment notes will be taxable as ordinary income, as it
is paid or accrued, in accordance with such U.S. certificateholder's method of
accounting, and a U.S. certificateholder's share of any premium paid on
redemption of an equipment note will be treated as capital gain. If a pass
through trust is supported by a liquidity facility, any amounts received by the
pass through trust under the liquidity facility with respect to unpaid interest
will be treated for U.S. federal income tax purposes as having the same
characteristics as the payments they replace. If we assume an owner trust's
obligations under leased aircraft notes, the assumption would be treated for
federal income tax purposes as a taxable exchange of the leased aircraft notes,
resulting in recognition of gain or loss by the U.S. certificateholder.
Each U.S. certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding pass through trust as provided in Section 162 or 212 of the
Internal Revenue Code of 1986, as amended, referred to herein as the "Code."
Certain fees and expenses, including fees paid to the pass through trustee and
the provider of the liquidity facility, if applicable, will be paid by parties
other than the certificateholders. These fees and expenses could be treated as
constructively received by the pass through trust, in which event a U.S.
certificateholder will be required to include in income and will be entitled to
deduct its pro rata share of the fees and expenses. If a U.S. certificateholder
is an individual, estate or trust, the deduction for the certificateholder's
share of fees or expenses will be allowed only to the extent that all of the
certificateholder's miscellaneous itemized deductions, including the
certificateholder's share of fees and expenses, exceed 2% of the
certificateholder's adjusted gross income. In addition, in the case of U.S.
certificateholders who are individuals, certain otherwise allowable itemized
deductions will be subject generally to additional limitations on itemized
deductions under applicable provisions of the Code.
EFFECT OF SUBORDINATION OF CERTIFICATEHOLDERS OF SUBORDINATED TRUSTS
If any pass through trust is subordinated in right of payment to any other
pass through trust and the subordinated trust receives less than the full amount
of the interest, principal or premium paid with respect to the equipment notes
held by it because of the subordination of such pass through trust, the
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certificateholders of the subordinated trust would probably be treated for
federal income tax purposes as if they had:
- received as distributions their full share of interest, principal, or
premium;
- paid over to the preferred class of certificateholders an amount equal to
their share of the amount of the shortfall; and
- retained the right to reimbursement of the amount of the shortfall to the
extent of future amounts payable to the certificateholders of the
subordinated trust on account of the shortfall.
Under this analysis:
- subordinated certificateholders incurring a shortfall would be required
to include as current income any interest or other income of the
subordinated trust that was a component of the shortfall, even though
that amount was in fact paid to a preferred class of certificateholders;
- a loss would only be allowed to subordinated certificateholders when
their right to receive reimbursement of the shortfall becomes worthless;
that is, when it becomes clear that funds will not be available from any
source to reimburse the shortfall; and
- reimbursement of the shortfall before a claim of worthlessness would not
be taxable income to certificateholders because the amount reimbursed
would have been previously included in income.
These results should not significantly affect the inclusion of income for
certificateholders on the accrual method of accounting, but could accelerate
inclusion of income to certificateholders on the cash method of accounting by,
in effect, placing them on the accrual method.
ORIGINAL ISSUE DISCOUNT
The equipment notes may be issued with original issue discount, referred to
as OID. The prospectus supplement will state whether any equipment notes to be
held by the related pass through trust will be issued with OID. Generally, a
holder of a debt instrument issued with OID that is not negligible must include
the OID in income for federal income tax purposes as it accrues, in advance of
the receipt of the cash attributable to such income, under a method that takes
into account the compounding of interest.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of a certificate, a U.S.
certificateholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the disposition, other than any amount
attributable to accrued interest which will be taxable as ordinary income, and
the U.S. certificateholder's adjusted tax basis in the related equipment notes
and any other property held by the corresponding pass through trust. Any gain or
loss will be long-term capital gain or loss to the extent attributable to
property held by the pass through trust for more than one year. In the case of
individuals, estates, and trusts, the maximum rate of tax on net long-term
capital gains generally is 20%.
FOREIGN CERTIFICATEHOLDERS
Subject to the discussion of backup withholding below, payments of
principal and interest (including any OID) on the equipment notes to, or on
behalf of, any beneficial owner of a certificate that is not a U.S. person will
not be subject to U.S. federal withholding tax provided that:
- the non-U.S. certificateholder does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of
an owner participant or us;
- the non-U.S. certificateholder is not a bank receiving interest pursuant
to a loan agreement entered into in the ordinary course of its trade or
business, or a controlled foreign corporation for U.S. tax purposes that
is related to an owner participant or us; and
24
- certain certification requirements (including identification of the
beneficial owner of the certificate) are complied with.
Any capital gain realized upon the sale, exchange, retirement or other
disposition of a certificate or upon receipt of premium paid on an equipment
note by a non-U.S. certificateholder will not be subject to U.S. federal income
or withholding taxes if (i) such gain is not effectively connected with a U.S.
trade or business of the non-U.S. certificateholder and (ii) in the case of an
individual, such non-U.S. certificateholder is not present in the United States
for 183 days or more in the taxable year of the sale, exchange, retirement or
other disposition or receipt.
BACKUP WITHHOLDING
Payments made on the certificates will not be subject to a backup
withholding tax unless, in general, the certificateholder fails to comply with
certain reporting procedures or otherwise fails to establish an exemption from
such tax under applicable provisions of the Code. Currently, the backup
withholding tax rate is 30.5%. Under recent amendments to the Code, this rate
will be reduced to 30% in 2002, to 29% in 2004 and to 28% in 2006 and
thereafter.
ERISA CONSIDERATIONS
Unless otherwise indicated in the applicable prospectus supplement, the
certificates may, subject to certain legal restrictions, be purchased and held
by an employee benefit plan subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended, referred to as "ERISA," or an individual
retirement account or an employee benefit plan subject to section 4975 of the
Code. A fiduciary of an employee benefit plan must determine that the purchase
and holding of a certificate is consistent with its fiduciary duties under ERISA
and does not result in a non-exempt prohibited transaction as defined in section
406 of ERISA or section 4975 of the Code. Employee benefit plans which are
governmental plans, as defined in section 3(32) of ERISA, and certain church
plans, as defined in section 3(33) of ERISA, are not subject to Title I of ERISA
or section 4975 of the Code. The certificates may, subject to certain legal
restrictions, be purchased and held by such plans.
PLAN OF DISTRIBUTION
Certificates may be sold to one or more underwriters for public offering
and resale by them. Certificates may also be sold to investors or other persons
directly or through one or more dealers or agents. Any underwriter, dealer or
agent involved in the offer and sale of the certificates will be named in an
applicable prospectus supplement.
The certificates may be sold:
- at a fixed price or prices, which may be changed;
- at market prices prevailing at the time of sale;
- at prices related to prevailing market prices; or
- at negotiated prices.
Dealer trading may take place in certain of the certificates, including
certificates not listed on any securities exchange. We do not intend to apply
for listing of the certificates on a national securities exchange. From time to
time, we also may authorize underwriters acting as our agents to offer and sell
the certificates upon the terms and conditions as will be set forth in any
prospectus supplement.
In connection with the sale of certificates, underwriters may be deemed to
have received compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of certificates for
whom they may act as agent. Underwriters may sell certificates to or through
dealers, and those dealers may receive compensation in the form of discounts,
25
concessions or commissions from the underwriters and/or commissions, which may
be changed from time to time, from the purchasers for whom they may act as
agent.
If a dealer is used directly by us in the sale of certificates in respect
of which this prospectus is delivered, we will sell the certificates to the
dealer, as principal. The dealer may then resell the certificates to the public
at varying prices to be determined by the dealer at the time of resale. The
dealer will be named in, and the terms of the sale, will be set forth in the
applicable prospectus supplement.
Certificates may be offered and sold through agents designated by us from
time to time. The agent involved in the offer or sale of the certificates will
be named in, and any commissions payable by us to the agent will be set forth
in, the applicable prospectus supplement. Unless otherwise indicated in the
applicable prospectus supplement, the agent will be acting on a best efforts
basis for the period of its appointment.
We may solicit directly offers to purchase certificates, and certificates
may be sold directly to institutional investors or others who may be deemed to
be underwriters within the meaning of the Securities Act with respect to any
resale. The terms of these sales will be described in the applicable prospectus
supplement. Except as set forth in the applicable prospectus supplement, no
director, officer or employee of ours will solicit or receive a commission in
connection with direct sales by us of the certificates, although those persons
may respond to inquiries by potential purchasers and perform ministerial and
clerical work in connection with our direct sales.
Any underwriting compensation that we pay to underwriters, dealers or
agents in connection with the offering of certificates, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in an applicable prospectus supplement.
Underwriters, dealers and agents participating in the distribution of the
certificates may be deemed to be underwriters, and any discounts and commissions
received by them and any profit realized by them on resale of the certificates
may be deemed to be underwriting discounts and commissions under the Securities
Act. Underwriters, dealers and agents may be entitled under agreements with us
to indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act, and to reimbursement by us for
certain expenses.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, us and our subsidiaries in the ordinary course of
business.
If so indicated in an applicable prospectus supplement and subject to
existing market conditions, we will authorize dealers acting as our agents to
solicit offers by certain institutions to purchase certificates from us at the
public offering price set forth in the applicable prospectus supplement pursuant
to delayed delivery contracts. These contracts will provide for payment and
delivery on the date or dates stated in the applicable prospectus supplement.
Each contract will be for an amount not less than, and the aggregate principal
amount of certificates sold pursuant to these contracts will not be less nor
more than, the respective amounts stated in the applicable prospectus
supplement. Institutions with whom these contracts, when authorized, may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions and other
institutions, but will in all cases be subject to our approval. These contracts
will not be subject to any conditions, except for the condition that the
purchase by an institution of the certificates not be prohibited at the time of
delivery under the laws of any jurisdiction in the United States to which the
institution is subject. A commission set forth in the applicable prospectus
supplement will be granted to underwriters and agents soliciting purchases of
certificates pursuant to contracts accepted by us. Agents and underwriters will
have no responsibility in respect of the delivery or performance of these
contracts.
If an underwriter or underwriters is used in the sale of any certificates,
the applicable prospectus supplement will state the intention, if any, of the
underwriters at the date of the prospectus supplement to make a market in the
certificates. We cannot assure you that there will be a market for the
certificates.
26
The place and time of delivery for the certificates in respect of which
this prospectus is delivered will be set forth in the applicable prospectus
supplement.
VALIDITY OF THE CERTIFICATES
Unless otherwise indicated in the applicable prospectus supplement, the
validity of the offered Certificates will be passed upon for us by Deborah
Ackerman, Vice President -- General Counsel, Ms. Ackerman will rely on the
opinion of counsel for Wilmington Trust Company as to certain matters relating
to the authorization, execution and delivery of the Certificates by and the
valid binding effect on the Trustee.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2000, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
consolidated financial statements are incorporated by reference in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any documents we file at the
SEC's public reference room 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room. Our SEC filings are also available to the public on the SEC's
web site at http://www.sec.gov and through the New York Stock Exchange, 20 Broad
Street, New York, New York 10005, on which our common stock is listed.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede this information as well as
the information included in this prospectus. We incorporate by reference the
documents listed below and any future filings made with the SEC under Sections
13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 ("Exchange
Act") until we sell all the Certificates.
- Annual Report on Form 10-K for the fiscal year ended December 31, 2000;
- Quarterly Reports on Form 10-Q for the quarters ended March 31 and June
30, 2001; and
- Current Report on Form 8-K dated October 3, 2001.
Any party to whom this prospectus is delivered, including a holder in
street name, may request a copy of these filings (other than any exhibits unless
specifically incorporated by reference into this prospectus), at no cost, by
writing or telephoning us at the following address:
Southwest Airlines Co.
Investor Relations
P.O. Box 36611, HDQ-6FC
2702 Love Field Drive
Dallas, Texas 75235
(214) 792-4000
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[SOUTHWEST AIRLINES 30 YEARS SERVICE]