<PAGE> 1
Filed pursuant to Rule 424(b)(2)
Reg. No. 033-59113
033-54587
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. TWO
REGISTRATION STATEMENTS RELATING TO THESE SECURITIES HAVE BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
SEPTEMBER 13, 1995
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 9, 1995)
$240,000,000
LOGO
PASS THROUGH CERTIFICATES, SERIES 1995-A
Each Pass Through Certificate offered hereby (each, a "Certificate" and,
collectively, the "Certificates") will represent a fractional undivided interest
in one of the five Southwest Airlines 1995-A Pass Through Trusts (the "1995-A1
Trust", the "1995-A2 Trust", the "1995-A3 Trust", the "1995-A4 Trust" and the
"1995-A5 Trust" and, collectively, the "Trusts") to be formed pursuant to Trust
Supplement Nos. 1995-A1, 1995-A2, 1995-A3, 1995-A4 and 1995-A5 (each, a "Trust
Supplement" and, collectively, the "Trust Supplements"), which supplement the
Pass Through Trust Agreement dated as of February 1, 1993 (the "Basic
Agreement") between Southwest Airlines Co. ("Southwest" or the "Company") and
Wilmington Trust Company (the "Trustee"), as trustee of each Trust. The
Certificates issued in respect of the 1995-A1 Trust, the 1995-A2 Trust, the
1995-A3 Trust, the 1995-A4 Trust and the 1995-A5 Trust will have final
distribution dates of , , ,
and , respectively.
Each Trust will own equipment notes (the "Equipment Notes") issued on a
nonrecourse basis by ten owner trustees pursuant to ten separate leveraged lease
transactions (or, in the case of the 1995-A1 Trust, the 1995-A2 Trust and the
1995-A3 Trust, by eight owner trustees pursuant to eight separate leveraged
lease transactions) to refinance not more than 80% of the equipment cost to the
related Owner Trustee of each of ten Boeing 737-300 aircraft (each, and
collectively, the "Aircraft") (or, in the case of the 1995-A1 Trust, the 1995-A2
Trust and the 1995-A3 Trust, eight Aircraft) which have been leased to
Southwest.
(continued on following page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
FINAL
PASS THROUGH DISTRIBUTION PRINCIPAL INTEREST PRICE TO
CERTIFICATES DATE AMOUNT RATE PUBLIC(1)(2)
<S> <C> <C> <C> <C>
Series 1995-A1........................... $ % 100%
Series 1995-A2........................... 100
Series 1995-A3........................... 100
Series 1995-A4........................... 100
Series 1995-A5...........................
Total.................................... $240,000,000 $240,000,000
----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from , 1995.
(2) The underwriting commission aggregates $ , which constitutes . % of
the principal amount of the Certificates. The underwriting commission will
be initially payable by Southwest and the Owner Participants in the
leveraged lease transactions will reimburse Southwest for such expenses. All
of the proceeds from the sale of the Certificates will be used to purchase
Equipment Notes from the Owner Trustees.
The Certificates are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Certificates will be made in book-entry form
only through the facilities of The Depository Trust Company on or about
, 1995, against payment therefor in same-day funds.
SALOMON BROTHERS INC MORGAN STANLEY & CO.
INCORPORATED
The date of this Prospectus Supplement is , 1995.
<PAGE> 2
(continued from previous page)
Interest paid on the Equipment Notes held in each Trust will be passed
through to Certificateholders of such Trust at the applicable rate per annum for
such Trust on each January 1 and July 1 commencing on January 1, 1996.
Principal paid on the Equipment Notes held in each Trust will be passed
through to Certificateholders in scheduled amounts on January 1 or July 1, or
both, in certain years, commencing in the case of the 1995-A1 Trust,
in the case of the 1995-A2 Trust, in the case of the
1995-A3 Trust, in the case of the 1995-A4 Trust and in
the case of the 1995-A5 Trust. The maturity dates of the Equipment Notes
acquired by each Trust will occur on or before the final distribution date
applicable to the Certificates issued by such Trust.
The Equipment Notes issued with respect to each Aircraft will be secured by
a security interest in such Aircraft and the Lease relating thereto, including
the right to receive rent payable with respect to such Aircraft by Southwest.
Although neither the Certificates nor the Equipment Notes are direct obligations
of or guaranteed by Southwest, the amounts unconditionally payable by Southwest
for lease of the Aircraft will be in amounts sufficient to pay in full when due
all payments required to be made on the Equipment Notes held in the Trusts.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and the Prospectus accompanying this Prospectus
Supplement (the "Prospectus"). Certain capitalized terms used in this summary
are defined elsewhere in this Prospectus Supplement or in the Prospectus.
THE COMPANY
Southwest is a major United States airline that provides service primarily
in the midwestern, southwestern and western regions of the United States.
Southwest will inaugurate daily service to Florida in first quarter 1996 with
flights from Tampa and Ft. Lauderdale, followed by Orlando service in second
quarter 1996. Southwest is the only major U.S. airline that has been profitable
each year since 1972. In terms of originating domestic passengers boarded,
Southwest is the sixth largest U.S. airline. As of September 12, 1995, Southwest
operated 216 Boeing 737 aircraft. Southwest will purchase ten additional Boeing
737 aircraft in 1995, has contracted to purchase 94 such aircraft in 1996-2001,
and has options to purchase an additional 71 such aircraft through 2004.
THE OFFERING
Glossary................... Included at the end of the accompanying Prospectus
as Appendix I is a Glossary of certain of the
significant defined terms used herein and in the
Prospectus.
Trusts..................... The 1995-A1 Trust, the 1995-A2 Trust, the 1995-A3
Trust, the 1995-A4 Trust and the 1995-A5 Trust are
each to be formed pursuant to a separate Trust
Supplement to the Basic Agreement, between
Southwest and the Trustee. Each Trust will be a
separate entity.
Trust Property............. The property of each Trust will consist of
Equipment Notes issued on a nonrecourse basis by
each of the Owner Trustees in ten separate
leveraged lease transactions (or, in the case of
the 1995-A1 Trust, 1995-A2 Trust and 1995-A3 Trust,
eight separate leveraged lease transactions) to
refinance not more than 80% of the equipment cost
to the Owner Trustees of the Aircraft leased to
Southwest earlier this year. The Equipment Notes
will be issued in five series with respect to eight
of the Aircraft and two series with respect to two
of the Aircraft. The maturity dates of the
Equipment Notes acquired by each Trust will occur
on or before the final distribution date applicable
to the Certificates issued by such Trust. The
aggregate principal amount of the Equipment Notes
held in each Trust will be the same as the
aggregate principal amount of the Certificates
issued by such Trust.
Certificates Offered;
Book-Entry
Registration............. Each Certificate will represent a fractional
undivided interest in the related Trust. The
Certificates will be issued in fully registered
form only and will be registered in the name of
Cede & Co. as the nominee of The Depository Trust
Company. No person acquiring an interest in the
Certificates will be entitled to receive a
definitive certificate representing such person's
interest in the related Trust, unless definitive
certificates are issued, which will only occur
under limited circumstances. See "Description of
the Certificates -- General," "-- Book-Entry
Registration" and "-- Definitive Certificates" in
the Prospectus.
Use of Proceeds............ The proceeds from the sale of the Certificates will
be used to purchase the Equipment Notes issued by
the respective Owner
S-3
<PAGE> 4
Trustees in connection with the refinancing of not
more than 80% of the equipment cost to the
applicable Owner Trustee of each of the Aircraft.
The Equipment Notes will represent in the aggregate
the entire debt portion of ten leveraged lease
transactions. See "Use of Proceeds" in this
Prospectus Supplement.
Trustee.................... Wilmington Trust Company will act as Trustee and
paying agent and registrar for the Certificates of
each Trust. Wilmington Trust Company also acts as
Loan Trustee for each series of Equipment Notes.
See "Description of the Certificates -- The
Trustee" in the Prospectus.
Regular Distribution
Dates...................... Each January 1 and July 1, commencing January 1,
1996.
Special Distribution
Dates...................... Any Business Day on which a Special Payment is to
be distributed.
Record Dates............... The fifteenth day preceding a Regular or Special
Distribution Date.
Distributions.............. All scheduled payments of principal and interest
received by the Trustee on the Equipment Notes held
in each Trust will be distributed by the Trustee to
the Certificateholders of such Trust on the dates
referred to below except in certain cases where
such Equipment Notes are in default. Payments of
principal, premium, if any, and interest on the
Equipment Notes held in each Trust resulting from
the early redemption thereof, if any, will be
distributed on the date of such redemption, which
will be a Special Distribution Date. The Trustee
will provide not less than 20 days' notice of such
distribution to the Certificateholders of such
Trust. For a discussion of distributions upon an
Event of Default, see "Description of the
Certificates -- Events of Default and Certain
Rights Upon an Event of Default" in the Prospectus.
Equipment Notes:
Principal.................. Principal paid on the Equipment Notes held in each
Trust will be passed through to the
Certificateholders of such Trust in scheduled
amounts on January 1 or July 1, or both, in certain
years, commencing in the case of the
1995-A1 Trust, in the case of the
1995-A2 Trust, in the case of the
1995-A3 Trust, in the case of the
1995-A4 Trust and in the case
of the 1995-A5 Trust. Principal payments received
will be passed through to the Certificateholders on
the corresponding Regular Distribution Date. See
"Description of the Certificates -- Payments and
Distributions" in the Prospectus and this
Prospectus Supplement.
Equipment Notes:
Interest................... The Equipment Notes held in each Trust will accrue
interest payable in cash, at the applicable rate
per annum for such Trust, on each January 1 and
July 1, commencing January 1, 1996, which will be
passed through to Certificateholders of such Trust
on each such date. Interest is calculated on the
basis of a 360-day year consisting of twelve 30-day
months. See "Description of the Certificates --
General" in the Prospectus and "Description of the
Certificates -- Payments and Distributions" in this
Prospectus Supplement.
Equipment Notes:
Redemption............... (a) The Equipment Notes issued with respect to any
Aircraft will be redeemed in whole 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
premium, on any Special Distribution Date upon the
occurrence of an Event of Loss (as
S-4
<PAGE> 5
hereinafter defined) to such Aircraft if such
Aircraft is not replaced by Southwest.
(b) If (i) any Lease shall be terminated on the
first day of any month occurring on or after the
seventh anniversary of the delivery date of an
Aircraft under the applicable Lease by Southwest at
its option if the related Aircraft has been
determined by Southwest to be surplus to its
requirements or economically obsolete to it, (ii)
any Lease shall be terminated on a Regular
Distribution Date occurring no earlier than January
1, 2014 in connection with a purchase by Southwest
of the Aircraft subject to the terminated Lease
where Southwest does not assume the obligations of
the applicable Owner Trustee under the related
Indenture, (iii) the applicable Owner Trustee or
Owner Participant shall have given notice of a
redemption or purchase at any time after a Lease
Event of Default shall have occurred and be
continuing for a period of 180 days or more but
less than one year (or, in the case of eight of the
Indentures, for a period up to 180 days) and the
Equipment Notes have not been accelerated or (iv)
Southwest shall have requested an optional
redemption of the Equipment Notes as part of a
refunding or refinancing thereof, then the
Equipment Notes issued with respect to the related
Aircraft may be redeemed or purchased on the
Special Distribution Date at a price equal to the
aggregate unpaid principal amount thereof, together
with accrued interest thereon to, but not
including, the date of redemption or purchase, as
the case may be, plus, in the case of the Equipment
Notes held in the 1995-A4 Trust or the 1995-A5
Trust, if such redemption or purchase, as the case
may be, is made prior to the dates set forth below
(each, a "Premium Termination Date") or, in the
case of the Equipment Notes held in the 1995-A1
Trust, the 1995-A2 Trust or the 1995-A3 Trust, a
Make-Whole Premium, if any. See "Description of the
Equipment Notes -- Redemption -- Redemption with
Premium" in this Prospectus Supplement for a
description of the manner of computing the
Make-Whole Premium.
<TABLE>
<CAPTION>
PREMIUM
TERMINATION
TRUST DATE
------------------------------------ ---------------
<S> <C>
1995-A4.............................
1995-A5.............................
</TABLE>
(c) If under any Indenture (i) a Lease Event of
Default shall have occurred and be continuing for a
period of one year or more (or, in the case of
eight of the Indentures, for a period of 181 days
or more) or (ii) the Equipment Notes relating
thereto shall have been accelerated, the applicable
Owner Trustee or Owner Participant may elect to
redeem or purchase on a Special Distribution Date
the Equipment Notes issued under such Indenture at
a price equal to the aggregate unpaid principal
amount thereof, together with accrued interest
thereon to, but not including, the date of
redemption or purchase, but without premium. See
"Description of the Equipment
Notes -- Redemption -- Redemption Without Premium"
in this Prospectus Supplement.
Equipment Notes:
Security................. The Equipment Notes issued with respect to each
Aircraft will be secured by a security interest in
such Aircraft and an assignment to the related Loan
Trustee of certain of the related Owner Trustee's
S-5
<PAGE> 6
rights under the Lease with respect to such
Aircraft, including the right to receive rentals
and other amounts payable thereunder by Southwest
in respect of such Aircraft, with certain
exceptions. The Equipment Notes are not
cross-collateralized, and consequently the
Equipment Notes issued in respect of any one
Aircraft are not secured by any of the other
Aircraft or the Leases related thereto. There are
no cross-default provisions in the Indentures, and
consequently events resulting in any Indenture
Default under any particular Indenture may not
necessarily result in an Indenture Default
occurring under any other Indenture. If the
Equipment Notes issued in respect of one or more
Aircraft are in default, the Equipment Notes issued
in respect of the remaining Aircraft may not be in
default and, if not in default, no remedies will be
exercisable under the Indentures with respect to
such remaining Aircraft.
Although the Equipment Notes are not direct
obligations of, or guaranteed by, Southwest, the
amounts unconditionally payable by Southwest for
lease of the Aircraft will be in amounts sufficient
to pay in full when due all payments required to be
made on the Equipment Notes. See "Description of
the Equipment Notes -- General" in this Prospectus
Supplement and in the Prospectus.
Federal Income Tax
Consequences............. Each Trust will be classified as a grantor trust
for federal income tax purposes, and therefore each
Certificate Owner will be treated as the owner of a
pro rata undivided interest in each of the
Equipment Notes and any other property held in such
Trust and will be required to report on its federal
income tax return its pro rata share of income from
such Equipment Notes and such other property in
accordance with such Certificate Owner's method of
accounting. See "Federal Income Tax Consequences"
in the Prospectus.
ERISA Considerations....... The Certificates, with certain exceptions, are
eligible for purchase by employee benefit plans.
See "ERISA Considerations" in this Prospectus
Supplement.
S-6
<PAGE> 7
THE COMPANY
Southwest is a major United States airline that provides service primarily
in the midwestern, southwestern and western regions of the United States.
Southwest will inaugurate daily service to Florida in first quarter 1996 with
flights from Tampa and Ft. Lauderdale, followed by Orlando service in second
quarter 1996. Southwest is the only major U.S. airline that has been profitable
each year since 1972. In terms of originating domestic passengers boarded,
Southwest is the sixth largest U.S. airline. As of September 12, 1995, Southwest
operated 216 Boeing 737 aircraft. Southwest will purchase ten additional Boeing
737 aircraft in 1995, has contracted to purchase 94 such aircraft in 1996-2001,
and has options to purchase an additional 71 such aircraft through 2004.
RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------ ---------------------------------
1995 1994 1994 1993 1992 1991 1990
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratios of Earnings to Fixed Charges................ 2.52 3.62 3.28 3.12 2.41 1.51 2.32
</TABLE>
The ratios of earnings to fixed charges have been computed using earnings
which are the sum of net income, income taxes and fixed charges adjusted to
exclude interest capitalized during the period. Fixed charges are interest,
whether expensed or capitalized, amortization of debt discount and expense and
that portion of rental charges estimated to be representative of an interest
factor.
S-7
<PAGE> 8
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following financial data for the three years ended December 31, 1994
have been derived from Southwest's consolidated financial statements, which
statements have been audited by Ernst & Young LLP, independent auditors, as
indicated in their reports incorporated by reference herein. The selected
financial data for the six months ended June 30, 1995 and June 30, 1994 have
been derived from Southwest's consolidated financial statements which have not
been audited but which, in the opinion of management, reflect all adjustments
(consisting of only normal recurring items) necessary to present fairly the
information contained therein. The following should be read in conjunction with
the consolidated financial statements and related notes of Southwest included in
its Annual Report on Form 10-K for the year ended December 31, 1994, and its
Quarterly Report on Form 10-Q for the six months ended June 30, 1995. See
"Incorporation of Certain Documents by Reference" in the Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------------- ----------------------------------------------
1995 1994 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Financial Data(1):
(in thousands)
Operating revenues............. $ 1,359,204 $ 1,280,468 $ 2,591,933 $ 2,296,673 $ 1,802,979
Operating expenses............. 1,232,370 1,102,588 2,275,224 2,004,700 1,609,175
------------ ------------ ------------ ------------ ------------
Operating income............... 126,834 177,880 316,709 291,973 193,804
Other expenses, net............ 5,999 11,186 17,186 32,336 36,361
------------ ------------ ------------ ------------ ------------
Income before income taxes and
cumulative effect of
accounting changes........... 120,835 166,694 299,523 259,637 157,443
Provision for income taxes..... 49,285 66,325 120,192 105,353 60,058(3)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect
of accounting changes........ $ 71,550 $ 100,369 $ 179,331 $ 154,284 $ 97,385(3)
Cumulative effect of accounting
changes...................... -- -- -- 15,259(4) 12,538(5)
------------ ------------ ------------ ------------ ------------
Net income.............. $ 71,550 $ 100,369 $ 179,331 $ 169,543 $ 109,923(3)
=========== =========== =========== =========== ===========
Total assets at period-end..... $ 3,192,508 $ 2,713,522 $ 2,823,071 $ 2,576,037 $ 2,368,856
Longterm obligations at period-
end.......................... $ 673,980 $ 587,112 $ 583,071 $ 639,136 $ 735,754
Stockholders' equity at period-
end.......................... $ 1,312,698 $ 1,156,195 $ 1,238,706 $ 1,054,019 $ 879,536
Consolidated Operating Data(2):
Revenue passengers carried..... 21,617,113 20,693,465(6) 42,742,602(6) 36,955,221(6) 27,839,284
Revenue passenger miles (RPMs)
(000s)....................... 11,198,329 10,496,351 21,611,266 18,827,288 13,787,005
Available seat miles (ASMs)
(000s)....................... 17,447,197 15,334,297 32,123,974 27,511,000 21,366,642
Load factor.................... 64.2% 68.5% 67.3% 68.4% 64.5%
Average length of passenger
haul (miles)................. 518 507 506 509 495
Trips flown.................... 333,795 299,466 624,476 546,297 438,184
Average passenger fare......... $ 60.47 $ 59.68 $ 58.44 $ 59.97 $ 58.33
Passenger revenue yield per
RPM.......................... 11.67c 11.77c 11.56c 11.77c 11.78c
Operating revenue yield per
ASM.......................... 7.79c 8.35c 8.07c 8.35c 7.89c
Operating expenses per ASM..... 7.06c 7.19c 7.08c 7.25c(8) 7.03c
Average fuel cost per gallon... 53.74c 52.53c 53.92c 59.15c 60.82c
Number of employees at period-
end.......................... 18,985 15,796 16,818 15,175 11,397
Size of fleet at
period-end(7)................ 210 189 199 178 141
</TABLE>
---------------
(1) The Selected Consolidated Financial Data for the year ended December 31,
1992 have been restated to include the financial results of Morris Air
Corporation ("Morris"), which Southwest acquired on December 31, 1993 in a
transaction accounted for as a pooling.
(2) Prior to 1993, Morris operated as a charter carrier; therefore, no Morris
statistics are included for 1992.
(3) Pro forma assuming Morris, an S-corporation prior to 1993, was taxed at
statutory rates.
(4) Represents the net cumulative effect of adopting Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" and Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." For additional information,
see the consolidated financial statements of Southwest and the accompanying
notes incorporated by reference herein.
(5) Represents one-time adjustment for the cumulative effect of change in method
of accounting for scheduled airframe overhaul costs from the direct expense
method to that of capitalizing and amortizing the costs over the periods
benefitted. For additional information, see the consolidated financial
statements of Southwest and the accompanying notes incorporated by reference
herein.
(6) Includes certain estimates for Morris, whose operations were integrated with
Southwest's during fourth quarter 1994.
(7) Includes leased aircraft.
(8) Excludes merger expenses of $10.8 million.
S-8
<PAGE> 9
USE OF PROCEEDS
The Certificates offered hereby are being issued in connection with the
refinancing of the debt portion of ten separate leveraged lease transactions
entered into by Southwest, as lessee, earlier this year with respect to ten
Boeing 737-300 aircraft. Nine of the Aircraft were delivered new from their
manufacturer to Southwest in 1995, and the other Aircraft was so delivered in
November 1994. Each Aircraft was sold by Southwest to an Owner Trustee and
leased back to Southwest. The debt currently outstanding under the leveraged
lease transactions with respect to the Aircraft consists of variable interest
rate amortizing loan certificates having stated maturities of (i) January 1,
2016 in respect of one of the Aircraft, (ii) July 1, 2016 in respect of one of
the Aircraft, (iii) July 1, 2017 in respect of six of the Aircraft and (iv) July
1, 2018 in respect of two of the Aircraft. The proceeds from the sale of the
Certificates offered hereby will be used by the Trustee on behalf of each Trust
to purchase Equipment Notes issued by the respective Owner Trustees to refinance
not more than 80% of the equipment cost to such Owner Trustees of each Aircraft.
The Equipment Notes with respect to the Aircraft will be issued under ten
separate Indentures, each such Indenture being between Wilmington Trust Company,
as Loan Trustee thereunder, and Shawmut Bank Connecticut, National Association,
not in its individual capacity, but solely as Owner Trustee of a separate trust
for the benefit of an Owner Participant. Each Owner Participant has provided
from sources other than the Equipment Notes at least 20% of the equipment cost
to the related Owner Trustee of the related Aircraft and beneficially owns the
related Aircraft. No Owner Participant, however, will be personally liable for
any amount payable under the related Indenture or the Equipment Notes issued
thereunder.
S-9
<PAGE> 10
DIAGRAM OF PAYMENTS
The following diagram illustrates certain aspects of the payment flows
among Southwest, the Owner Trustees, the Loan Trustees, the Trustee, the Owner
Participants and the Certificateholders with respect to the Trusts and the ten
Aircraft.
Southwest leases each Aircraft under a separate Lease from the Owner
Trustee for such Aircraft. The Equipment Notes for each such Aircraft will be
issued by such Owner Trustee in five (or, in the case of two Aircraft, two)
series and will be secured by such Aircraft and by an assignment of certain
rights of the related Owner Trustee under the related Lease. As a result of the
assignment of each Lease, Southwest will make rental payments for each Aircraft
directly to the Loan Trustee. From these rental payments the related Loan
Trustee will, on behalf of each Owner Trustee, first make payments to the
Trustee for each of the Trusts on the Equipment Notes held in such Trust and
will pay the remaining balance to the respective Owner Trustee for the benefit
of the respective Owner Participant. The Trustee for each of the Trusts will
pass through to the Certificateholders payments received with respect to the
Equipment Notes held in each Trust. Wilmington Trust Company will act both as
Trustee of the five Trusts and as Loan Trustee under the ten Indentures.
[CHART]
---------------
* A separate Owner Trustee and Owner Participant structure exists for each
Aircraft. Aircraft No. 1 is shown as an example.
** Aircraft Nos. 1 through 4 are shown as examples. The identical structure
exists for Aircraft Nos. 5 through 10, except that no Equipment Notes for
Aircraft Nos. 9 and 10 will be purchased by the 1995-A1 Trust, the 1995-A2
Trust or the 1995-A3 Trust.
S-10
<PAGE> 11
DESCRIPTION OF THE CERTIFICATES
The Certificates offered hereby will be issued pursuant to five separate
Trust Supplements to be entered into between Southwest and the Trustee pursuant
to the terms of the Basic Agreement. Each Trust Supplement will contain
substantially the same terms and conditions, except that the interest rate and
maturity date applicable to the Equipment Notes held in each Trust, the
aggregate principal amount of Equipment Notes held in each Trust and the final
distribution date applicable to each Trust, will differ. The following summary
of the particular terms of the Certificates offered hereby supplements, and to
the extent inconsistent therewith replaces, the description of the general terms
and provisions of the Certificates set forth in the accompanying Prospectus
under the caption "Description of the Certificates." The statements under this
caption are a summary and do not purport to be complete. The summary makes use
of terms defined in and is qualified in its entirety by reference to all of the
provisions of the Basic Agreement, a form of which has been filed as an exhibit
to the Registration Statements of which this Prospectus Supplement is a part,
and to all of the provisions of the Trust Supplements which, together with the
forms of the related Note Purchase Agreements (which are described herein as the
Participation Agreements and the Refinancing Agreements), Indentures, Leases and
Trust Agreements, will be filed by Southwest with the Commission as exhibits to
a Current Report on Form 8-K. Except as otherwise indicated, the following
summaries relate to the Basic Agreement, the Trust Supplements and the Trusts
formed thereby and the Certificates issued by each Trust. Citations to the
relevant sections of the Basic Agreement appear below in parentheses unless
otherwise indicated.
PAYMENTS AND DISTRIBUTIONS
The Certificates will be issued in fully registered form and will be
registered in the name of Cede & Co., as the nominee of The Depository Trust
Company. See "Description of the Certificates -- General" in the Prospectus. No
person acquiring an interest in the Certificates will be entitled to receive a
definitive certificate representing such person's interest in the related Trust
unless definitive certificates are issued under the limited circumstances
described in the Prospectus under the caption "Description of the
Certificates -- Book-Entry Registration."
Payments of principal, premium, if any, and interest with respect to the
Equipment Notes held in each Trust will be distributed by the Trustee to
Certificateholders of such Trust on the date receipt of such payment is
confirmed by the Trustee, except in certain cases when some or all of such
Equipment Notes are in default. See "Description of the Certificates -- Events
of Default and Certain Rights Upon an Event of Default" in the Prospectus.
Interest paid on the Equipment Notes held in each Trust will be passed through
to the Certificateholders of such Trust on each January 1 and July 1 commencing
on January 1, 1996 at the applicable rate per annum for such Trust until the
final distribution date for such Trust. Payments of principal on the Equipment
Notes held in each Trust are scheduled to be received by the Trustee on January
1 or July 1, or both, in certain years, depending upon the terms of the
Equipment Notes held in each Trust, commencing in the case of
1995-A1 Trust, in the case of 1995-A2 Trust, in
the case of 1995-A3 Trust, in the case of 1995-A4 Trust and
in the case of the 1995-A5 Trust (such scheduled payments of
principal or interest on the Equipment Notes are herein referred to as
"Scheduled Payments"). Scheduled Payments of principal on the Equipment Notes
held in each Trust are set forth below under "Description of the Equipment
Notes -- General." The Trustee will distribute on each Regular Distribution Date
to the Certificateholders of a Trust all Scheduled Payments in respect of the
Equipment Notes held in such Trust the receipt of which is confirmed by the
Trustee on such Regular Distribution Date. Each Certificateholder of a Trust
will be entitled to receive a pro rata share of any distribution in respect of
Scheduled Payments of principal or interest made on the Equipment Notes held in
such Trust. Each such distribution in respect of Scheduled Payments will be made
by the Trustee to the holders of record of the Certificates of the applicable
Trust on the fifteenth day preceding such Regular Distribution Date, subject to
certain exceptions. (Sections 4.01 and 4.02) If a Scheduled Payment is not
received by the Trustee on a Regular Distribution Date but is received within
five days thereafter, it will be distributed on the date
S-11
<PAGE> 12
received to such holders of record. If it is received after such five day
period, it will be treated as a Special Payment (as defined below) and
distributed as described below.
Payments of principal, premium, if any, and interest received by the
Trustee on account of the early redemption, if any, of the Equipment Notes
relating to one or more Aircraft held in a Trust, and payments received by the
Trustee following a default in respect of the Equipment Notes relating to one or
more Aircraft held in a Trust (including payments received by the Trustee on
account of the purchase by the related Owner Trustee of such Equipment Notes or
payments received on account of the sale of such Equipment Notes by the Trustee)
("Special Payments") will be distributed (i) in the case of an early redemption
of Equipment Notes arising by virtue of an Event of Loss, a refinancing of such
Equipment Notes, a purchase or early redemption by the related Owner Participant
or Owner Trustee of such Equipment Notes, an early redemption of Equipment Notes
arising by virtue of a voluntary termination of the related Lease due to
obsolescence or exercise by Southwest of specified purchase options, the date of
the receipt of the applicable redemption or purchase price therefor, which shall
be a Business Day, and (ii) otherwise, on the Business Day specified for
distribution in a notice mailed by the Trustee as soon as practicable after
receipt of such funds (a "Special Distribution Date"). The Trustee will mail
notice to the Certificateholders of the applicable Trust not less than 20 days
prior to the Special Distribution Date on which any Special Payment is scheduled
to be distributed by the Trustee, or, in certain circumstances, as soon as
practicable after receipt of the Special Payment, stating such anticipated
Special Distribution Date. (Section 4.02) 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 fifteenth day next preceding such Special Distribution Date. See
"Description of the Equipment Notes -- Redemption" in this Prospectus Supplement
and "Description of the Certificates -- Events of Default and Certain Rights
Upon an Event of Default" in the Prospectus.
In the event that, on the delivery date of any Certificates, all of the
proceeds from the sale of such Certificates are not used to purchase the
Equipment Notes contemplated to be held in the related Trust, such Equipment
Notes may be purchased by the Trustee at any time on or prior to November ,
1995. In such event, the Trustee will hold the proceeds from the sale of such
Certificates not used to purchase Equipment Notes in an escrow account pending
the purchase of the Equipment Notes not so purchased. Such proceeds will be
invested in Specified Investments having maturity dates in no event later than
December , 1995 at the direction and risk of, and for the account of,
Southwest. Southwest will be responsible for any losses. To the extent that any
amount of the proceeds from the sale of any Certificates held in the escrow
account referred to above is not used to purchase Equipment Notes on or prior to
November , 1995, an amount equal to the unused proceeds will be distributed by
the Trustee to the holders of record of such Certificates on a pro rata basis
upon not less than 20 days' prior notice to them as a Special Payment on a
Special Distribution Date not later than December , 1995 together with
interest thereon at a rate equal to the rate applicable to such Certificates,
but without premium, and Southwest will pay to the Trustee on such date an
amount equal to such interest. (Section 2.02(b))
The Trustee shall initially be the paying agent and registrar with respect
to the Certificates of each Trust. (Section 7.11(b))
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<PAGE> 13
POOL FACTORS
As of the date of sale by the Trustee of the Certificates and assuming that
no early redemption, default or purchase of any Equipment Notes shall occur (i)
payments on Trusts 1995-A1, 1995-A2 and 1995-A3 will be interest only, and
accordingly the Pool Factors for Trusts 1995-A1, 1995-A2 and 1995-A3 will not
decline until the single Scheduled Payment of principal of Equipment Notes held
in each such Trust is distributed on the final distribution date applicable to
such Trust and (ii) the Scheduled Payments of principal on the Equipment Notes
to be held in Trusts 1995-A4 and 1995-A5 and the resulting Pool Factors for such
Trusts after taking into account each Scheduled Payment are set forth below:
<TABLE>
<CAPTION>
1995-A4 TRUST 1995-A5 TRUST
% EQUIPMENT % EQUIPMENT
NOTES NOTES
REGULAR DISTRIBUTION SCHEDULED PAYMENTS 1995-A4 TRUST SCHEDULED PAYMENTS 1995-A5 TRUST
DATE OF PRINCIPAL POOL FACTOR OF PRINCIPAL POOL FACTOR
-------------------- ------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
</TABLE>
See "Description of the Certificates -- Pool Factors" in the Prospectus and
the definitions of "Pool Balance" and "Pool Factor" in the Glossary.
S-13
<PAGE> 14
DESCRIPTION OF THE EQUIPMENT NOTES
The following summary of the particular terms and provisions of the
Equipment Notes supplements, and to the extent inconsistent therewith replaces,
the description of the general terms and provisions of the Equipment Notes set
forth in the Prospectus under the heading "Description of the Equipment Notes."
The statements under this caption are summaries and do not purport to be
complete. 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, the Leases, the Participation Agreements and the Refinancing
Agreements, the forms of which will be filed by Southwest with the Commission as
exhibits to a Current Report on Form 8-K. The summaries should be read in
conjunction with the statements under the heading "Description of the Equipment
Notes" in the Prospectus. The following summaries relate to the Equipment Notes,
the Indenture, the Lease, the Participation Agreement, the Trust Agreement and
the Refinancing Agreement relating to each Aircraft.
GENERAL
The Equipment Notes will be issued in two series with respect to two of the
Aircraft and five series with respect to eight of the Aircraft. Each series will
have a different principal amount, interest rate, maturity date and scheduled
payments of principal. The Equipment Notes with respect to each Aircraft will be
issued under a separate Indenture between Shawmut Bank Connecticut, National
Association, as Owner Trustee of a separate trust for the benefit of the Owner
Participant who is the beneficial owner of such Aircraft, and Wilmington Trust
Company, as Loan Trustee.
The related Owner Trustee leases each Aircraft to Southwest pursuant to a
separate Lease between such Owner Trustee and Southwest with respect to such
Aircraft. Southwest is obligated to make or cause to be made rental and other
payments to the related Loan Trustee on behalf of the related Owner Trustee in
amounts that will be at least sufficient to pay in full when due all payments
required to be made on the Equipment Notes issued with respect to such Aircraft.
The Equipment Notes are not, however, direct obligations of, or guaranteed by,
Southwest. Southwest's rental obligations under each Lease are general
obligations of Southwest.
The aggregate principal amount of the Equipment Notes issued with respect
to each Boeing 737-300 Aircraft, as such Equipment Notes will be held in the
Trusts, is as follows:
<TABLE>
<CAPTION>
1995-A1 1995-A2 1995-A3 1995-A4 1995-A5
TRUST % TRUST % TRUST % TRUST % TRUST %
AIRCRAFT EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT 1995-A
NO. NOTES NOTES NOTES NOTES NOTES TRUSTS TOTAL
------------------------ --------------- --------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1..................... $ $ $ $ $ $
2.....................
3.....................
4.....................
5.....................
6.....................
7.....................
8.....................
9..................... 0.00 0.00 0.00
10..................... 0.00 0.00 0.00
--------------- --------------- --------------- --------------- --------------- ------------
Total................... $ $ $ $ $ $240,000,000
============= ============= ============= ============= ============= =============
</TABLE>
Interest will be payable on each Equipment Note at the rate applicable to
such Equipment Note on the unpaid principal amount thereof on January 1 and July
1 in each year, commencing January 1, 1996. Such interest will be computed on
the basis of a 360-day year of twelve 30-day months.
S-14
<PAGE> 15
The single Scheduled Payment of principal of the Equipment Notes held in the
1995-A1 Trust, the 1995-A2 Trust and the 1995-A3 Trust will be ,
and , respectively. The Scheduled Payments of
principal of the Equipment Notes issued in respect of each Aircraft and
held in the 1995-A4 Trust and the 1995-A5 Trust will be payable as set
forth below:
1995-A4 TRUST
% EQUIPMENT NOTES
<TABLE>
<CAPTION>
REGULAR DISTRIBUTION AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT
DATE NO. 1 NO. 2 NO. 3 NO. 4 NO. 5 NO. 6 NO. 7
-------------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Total........ $ $ $ $ $ $ $
============== ============== ============== ============== ============== ============== ==============
<CAPTION>
REGULAR DISTRIBUTION AIRCRAFT AIRCRAFT AIRCRAFT AGGREGATE
DATE NO. 8 NO. 9 NO. 10 TOTAL
-------------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
$ $ $ $
-------------- -------------- -------------- ----------------
Total........ $ $ $ $
============== ============== ============== ================
</TABLE>
1995-A5 TRUST
% EQUIPMENT NOTES
<TABLE>
<CAPTION>
REGULAR DISTRIBUTION AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT
DATE NO. 1 NO. 2 NO. 3 NO. 4 NO. 5 NO. 6 NO. 7
-------------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Total........ $ $ $ $ $ $ $
============== ============== ============== ============== ============== ============== ==============
<CAPTION>
REGULAR DISTRIBUTION AIRCRAFT AIRCRAFT AIRCRAFT AGGREGATE
DATE NO. 8 NO. 9 NO. 10 TOTAL
-------------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
$ $ $ $
-------------- -------------- -------------- ----------------
Total........ $ $ $ $
============== ============== ============== ================
</TABLE>
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<PAGE> 16
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, such payment
will be made on the next succeeding Business Day without any additional
interest.
REDEMPTION
Redemption with Premium. The Equipment Notes issued with respect to each
Aircraft are separately subject to redemption or purchase in whole prior to
maturity, without the consent of the Trustee, (i) on the first day of any month
occurring after the seventh anniversary of the date of delivery of the Aircraft
under the applicable Lease in connection with a voluntary termination by
Southwest of the related Lease if such Aircraft has been determined by Southwest
to be surplus to its requirements or economically obsolete to it, (ii) on
January 1, 2014 (or, in the case of two Leases, January 1, 2015, or, in the case
of two other Leases, January 1, 2017), in connection with a voluntary
termination by Southwest of such Lease for any reason and a purchase by
Southwest of such Aircraft where Southwest does not assume the obligations of
the applicable Owner Trustee under the related Indenture, (iii) on any Special
Distribution Date in connection with an optional redemption as a part of a
refunding or refinancing thereof, or (iv) at the option of the applicable Owner
Trustee or Owner Participant at any time after a Lease Event of Default under
the related Lease shall have occurred and be continuing for a period of 180 days
or more but less than one year (or, in the case of eight of the Indentures, for
a period of up to 180 days) during which period such Equipment Notes shall not
have been accelerated following notice by such Owner Trustee or Owner
Participant of its election to so redeem or purchase such Equipment Notes. The
price for the Equipment Notes redeemed under the circumstances set forth above
shall be equal to the Redemption Price, plus, if such redemption relates to
Equipment Notes held in either the 1995-A1 Trust, 1995-A2 Trust or 1995-A3 Trust
or it is made prior to in the case of Equipment Notes held in the
1995-A4 Trust and in the case of Equipment Notes held in the
1995-A5 Trust (each such date, a "Premium Termination Date"), a Make-Whole
Premium (as defined below), if any, or if on or after the Premium Termination
Date, without premium. (Indentures, Article 6; Leases, Sections 9.1, 18(b) and
18(c)). If the proposed sale of an Aircraft (as described in "Description of the
Equipment Notes -- The Leases -- Termination") on a lease termination date is
not completed, the corresponding redemption will not take place and any notice
of redemption will be deemed revoked. (Indentures, Section 6.03(a))
The "Make-Whole Premium," if any, on each Equipment Note issued under a
particular Indenture will be determined by an independent investment banking
institution of national standing selected by Southwest. The Make-Whole Premium
will be determined as of the Business Day prior to the redemption date and will
equal the excess, if any, of (i) the present values of all of the remaining
Scheduled Payments from the redemption date to the scheduled maturity of such
Equipment Note (excluding interest accrued from the immediately preceding
interest payment date to such redemption date), discounted semi-annually on each
interest payment date at a rate equal to the Treasury Yield, based on a 360-day
year of twelve 30-day months over (ii) the aggregate unpaid principal amount of
such Equipment Note.
The "Treasury Yield" means, with respect to each Equipment Note to be
redeemed, (x) in the case of an Equipment Note having a maturity less than one
year after the applicable redemption date, the average yield to maturity on a
government bond equivalent basis of the applicable United States Treasury Bill
due the week of the scheduled maturity of such Equipment Note or (y) in the case
of an Equipment Note having a maturity of one year or more after the applicable
redemption date, the average yield of the most actively traded United States
Treasury Notes corresponding in maturity to the Average Life Date (as defined
below) of such Equipment Note (or, if there is no maturity corresponding to such
Remaining Weighted Average Life, an interpolation of maturities by such
independent investment banking institution), in each case under (x) and (y)
above determined by such independent investment banking institution based on the
average of the yields to stated maturity determined from the certain bid prices
on the second Business Day preceding the applicable redemption date.
(Indentures, Section 1.01(b))
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<PAGE> 17
The "Average Life Date" for each Equipment Note to be redeemed will be the
date which follows the redemption date by a period equal to the Remaining
Weighted Average Life at the redemption date of such Equipment Note. The
"Remaining Weighted Average Life" of such Equipment Note, at the redemption date
of such Equipment Note, will be the number of days equal to the quotient
obtained by dividing (a) the sum of the products obtained by multiplying (i) the
amount of each then remaining installment of principal, including the payment
due on the maturity date of such Equipment Note, by (ii) the number of days from
and including the redemption date to but excluding the scheduled payment date of
such principal installment by (b) the then unpaid principal amount of such
Equipment Note. (Indentures, Section 1.01(b))
Redemption Without Premium. The Equipment Notes issued with respect to each
Aircraft are separately subject to redemption or purchase prior to maturity,
without the consent of the Trustee, at a price equal to the Redemption Price,
but without any premium: (i) in whole at the option of the applicable Owner
Trustee or Owner Participant, at any time after the occurrence and continuation
of a Lease Event of Default under the related Lease for a period of one year or
more (or, in the case of eight of the Indentures, for a period of 181 days or
more) during which period such Equipment Notes shall not have been accelerated;
(ii) in whole upon the acceleration of such Equipment Notes; (iii) in whole upon
an Event of Loss with respect to such Aircraft if Southwest has elected not to
replace such Aircraft under the applicable Lease; or (iv) as specified above in
respect of redemptions made on or after the Premium Termination Date applicable
to the Equipment Notes held in either the 1995-A4 Trust or 1995-A5 Trust.
(Indentures, Sections 6.01, 6.02 and 8.02)
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture include: (a) failure to pay any
interest or principal or premium, if any, when due, continued for more than
seven Business Days or failure to pay when due any other amount for more than 10
Business Days after notice thereof to the related Owner Trustee, (b) the
occurrence of any Lease Event of Default under the related Lease (other than,
without the consent of the related Owner Trustee, the failure to make certain
indemnity and certain other payments to the related Owner Trustee or Owner
Participant), (c) the failure by the related Owner Trustee or Owner Participant
to perform or observe certain covenants, conditions or agreements to be
performed or observed by it under such Indenture or certain related documents,
continued after notice and specified cure periods, (d) any representation or
warranty made by the related Owner Trustee or Owner Participant in the Indenture
or the Participation Agreement being false or incorrect in any material respect
when made, is material at the time of discovery and, if curable, is not cured
within 30 days of notice, (e) the occurrence of certain events of bankruptcy,
reorganization or insolvency of the related Trust Estate, Owner Trustee or Owner
Participant, provided that, in the case of such Owner Participant, the same
shall not constitute an Indenture Default if the Loan Trustee receives certain
assurances that such Owner Participant's bankruptcy, reorganization or
insolvency will not affect the Trust Estate, or (f) the failure by the related
Owner Participant or the Owner Trustee to discharge certain liens, continued
after knowledge and specified cure periods. (Indentures, Section 8.01)
There are no cross-default provisions in the Indentures and, consequently,
events resulting in an Indenture Default under any particular Indenture may not
result in an Indenture Default occurring under any other Indenture.
In the event Southwest fails to make any semiannual basic rental payment
within the period of seven Business Days after the same shall become due under
any Lease, within 10 Business Days after such period the applicable Owner
Participant or Owner Trustee may furnish to the Loan Trustee the amount of such
rental payment, together with any interest thereon on account of the delayed
payment thereof, in which event the Loan Trustee and the holders of outstanding
Equipment Notes issued under such Indenture may not exercise any remedies
otherwise available under such Indenture or such Lease as the result of such
failure to make such rental payment, unless Southwest has failed to make a basic
rental payment when due on the two consecutive immediately preceding semiannual
basic rental payment dates or on any four or more previous semiannual basic
rental payment dates. The applicable Owner
S-17
<PAGE> 18
Participant or Owner Trustee also, subject to certain restrictions, may cure any
other default by Southwest in the performance of its obligations under any Lease
which can be cured with the payment of money. (Indentures, Section 8.03(e)(i))
Each Indenture provides that the Loan Trustee thereunder shall, after the
occurrence of any event known to it to be an Indenture Default, promptly send
written notice thereof to Southwest, the Owner Trustee and the applicable Owner
Participant, and within 90 days after the occurrence thereof, if such Indenture
Default remains uncured, mail notice thereof to the holders of outstanding
Equipment Notes issued under such Indenture, but such Loan Trustee may withhold
such notice, except in the case of a default in the payment of the principal,
interest or premium, if any, with respect to any such Equipment Notes, if it in
good faith determines that withholding such notice is in the interest of such
holders. (Indentures, Section 9.05)
The holders of a majority in aggregate principal amount of the outstanding
Equipment Notes issued with respect to any Aircraft, by notice to the Loan
Trustee, may on behalf of all of the holders waive any existing event of default
or default and its consequences under the Indenture with respect to such
Aircraft, except a default in the payment of the principal of 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 affected thereby. (Indentures, Section 8.05)
Southwest is required to furnish annually to the Trustee a statement as to
the fulfillment of its covenants under the Basic Agreement during the preceding
year. (Basic Agreement, Section 8.04(d))
REMEDIES
If an Indenture Default occurs under an Indenture as a result of certain
specified events of bankruptcy, insolvency or reorganization of the related
Trust Estate, Owner Trustee or Owner Participant or Southwest, then the unpaid
principal of all outstanding Equipment Notes issued under such Indenture,
together with interest accrued but unpaid thereon and all other amounts due
under such Indenture, immediately and without further act shall become due and
payable. If an Indenture Default occurs and is continuing under an Indenture,
the related Loan Trustee or the holders of at least 25% in aggregate 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 and all other
amounts due under such Indenture. The holders of a majority in aggregate
principal amount of Equipment Notes outstanding under such Indenture may rescind
any such declaration by the related Loan Trustee or by the holders at any time
prior to the sale of the related Aircraft after such an Indenture Default if (i)
there has been deposited with the related Loan Trustee an amount sufficient to
pay all overdue principal and interest on any such Equipment Notes that have
become due otherwise than by such declaration of acceleration, and any interest
on overdue installments of interest and principal, (ii) the rescission would not
conflict with any judgment or decree, and (iii) all other Indenture Defaults
under such Indenture have been cured or waived. (Indentures, Section 8.02)
Each Indenture provides that if an Indenture Default under such Indenture
has occurred and is continuing, the related Loan Trustee may exercise certain
rights or remedies available to it under such Indenture or under applicable law,
including (if the corresponding Lease is in default) one or more of the remedies
under such Indenture or such Lease with respect to the Aircraft subject to such
Lease. See "Description of the Equipment Notes -- The Leases -- Lease Events of
Default." Such remedies may be exercised by the related Loan Trustee to the
exclusion of the related Owner Trustee and, subject to the terms of such Lease,
Southwest. Any Aircraft sold in the exercise of such remedies will be free and
clear of any rights of those parties, including the rights of Southwest under
the Lease with respect to such Aircraft; provided that no exercise of any
remedies by the related Loan Trustee may affect the rights of Southwest under
any Lease unless a Lease Event of Default has occurred and is continuing under
such Lease; and provided further that such Loan Trustee may not sell any part of
the related Indenture Estate unless the related Equipment Notes have been
accelerated or have become due. (Indentures, Section 8.03; Leases, Section 15)
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<PAGE> 19
Notwithstanding the rights and powers of the Loan Trustee described above,
the Loan Trustee may not exercise any remedy under an Indenture as a result of
an Indenture Default under such Indenture occurring solely by virtue of one or
more Lease Events of Default under the related Lease unless the Loan Trustee, as
assignee of the related Owner Trustee's rights under such Lease, has exercised
or is concurrently exercising one or more of the remedies thereunder with
respect to the Aircraft, provided that the requirement to exercise such remedies
under the related Lease shall not apply in circumstances where the Loan Trustee
is involuntarily stayed or otherwise prohibited by applicable law or court order
from exercising such remedies under such Lease after the Section 1110 Period.
The "Section 1110 Period" is the period commencing on the date of such stay or
prohibition and ending on the earlier of (x) 60 days (or such longer period (A)
as may be specified in Section 1110(a)(1) of the federal Bankruptcy Code (the
"Bankruptcy Code"), (B) equal to the period of an extension with the consent of
the Loan Trustee of the 60-day period specified therein pursuant to Section
1110(b) of the Bankruptcy Code or (C) resulting from the Loan Trustee's own
failure to give any requisite notice to any Person) and (y) the date of
repossession of the related Aircraft. The Loan Trustee must notify the related
Owner Trustee at least 10 days in advance of any foreclosure on the lien of an
Indenture. (Indentures, Section 8.03; Leases, Section 15)
If the Equipment Notes issued in respect of one or more Aircraft are in
default, the Equipment Notes issued in respect of the remaining Aircraft may not
be in default, and, if not, no remedies will be exercisable under the Indentures
with respect to such remaining Aircraft.
The holders of a majority in aggregate unpaid principal amount of the
Equipment Notes outstanding under any Indenture may direct the time, method and
place of conducting any proceeding for any remedy available to the related Loan
Trustee or exercising any trust or power conferred on such Loan Trustee under
such Indenture, but in such event such Loan Trustee shall be entitled to be
indemnified by the holders of such Equipment Notes before proceeding so to act
and may under certain circumstances refuse to follow such a direction.
(Indentures, Sections 8.06, 9.01 and 9.02)
The right of any holder of Equipment Notes to institute action for any
remedy under the Indenture pursuant to which such Equipment Notes are issued
(except the right to enforce payment of the principal, interest and premium, if
any, with respect to its Equipment Notes when due) is subject to certain
conditions precedent, including a written request to the related Loan Trustee by
the holders of not less than 25% in aggregate principal amount of such Equipment
Notes outstanding to take action and an offer to such Loan Trustee of
satisfactory indemnification against liabilities incurred by it in so doing.
(Indentures, Sections 8.07 and 8.08)
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the related Loan Trustee may be applied to reimburse
such Loan Trustee for any tax, expense or other loss incurred by it and to pay
any other amounts due to such Loan Trustee prior to any payments to holders of
the Equipment Notes issued under such Indenture. (Indentures, Sections 3.05 and
9.06)
In the event of bankruptcy, insolvency, receivership or like proceedings
involving an Owner Participant, it is possible that, notwithstanding that the
applicable Aircraft is owned by the related Owner Trustee in trust, such
Aircraft and the related Lease and Equipment Notes might become part of such
proceeding. In such event, payments under such Lease or on such Equipment Notes
might be interrupted and the ability of the related Loan Trustee to exercise its
remedies under the related Indenture might be restricted, although such Loan
Trustee would retain its status as a secured creditor in respect of the related
Lease and the related Aircraft.
Section 1110 of the Bankruptcy Code. Section 1110 of the Bankruptcy Code
provides that the right of lessors, conditional vendors and holders of security
interests with respect to aircraft used by U.S. air carriers holding air carrier
operating certificates issued by the Secretary of Transportation for certain
large passenger or cargo aircraft such as the Aircraft to take possession of
such aircraft in compliance with the provisions of a lease, conditional sale
contract or security agreement, as the case may be, is not affected by (a) the
automatic stay provision of the Bankruptcy Code, which provision enjoins
repossessions by creditors for the duration of the reorganization period, (b)
the provision of the Bankruptcy Code allowing
S-19
<PAGE> 20
the trustee in reorganization to use property of the debtor during the
reorganization period, (c) the so-called "cramdown" provision of the Bankruptcy
Code and (d) any power of the bankruptcy court to enjoin a repossession. Section
1110 provides, however, that the right of a lessor, conditional vendor or holder
of a security interest to take possession of an aircraft in the event of an
event of default may not be exercised for 60 days following the date of
commencement of the reorganization proceedings (unless specifically permitted by
the bankruptcy court) and may not be exercised at all if, within such 60-day
period, the trustee in reorganization agrees to perform the debtor's obligations
that become due on or after such date and cures all existing defaults (other
than defaults resulting solely from the financial condition, bankruptcy,
insolvency or reorganization of the debtor).
Southwest has been advised by its counsel that, with respect to each Lease,
the related Owner Trustee, as Lessor under such Lease, and the related Loan
Trustee, as assignee of such Owner Trustee's rights under such Lease pursuant to
the Indenture corresponding to such Lease, are entitled to the benefits of
Section 1110 of the Bankruptcy Code with respect to the Aircraft initially
delivered under such Lease and subjected to the related Indenture. Such opinion
does 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 Loan Trustee's
entitlement to Section 1110 benefits will not be diminished as a result of such
replacement. See "Description of the Equipment Notes -- The Leases -- Events of
Loss."
Marketability of Aircraft. The market for aircraft, whether new or used, is
and will be affected by many factors including, among other things, the supply
of similarly equipped aircraft of the same make and model, the demand for such
aircraft by airlines and the cost and availability of financing to potential
purchasers of such aircraft. Each of these factors, in turn, will be affected by
various circumstances including, among other things, current and anticipated
demand for passenger and cargo air services, the relative capacity of airlines
to provide such services, the current and projected profitability of providing
such services, the economic condition of the domestic and international airline
industries and global economic and financial developments generally. In
addition, the marketability of a particular used aircraft will be affected by
factors such as the reputation and actual performance record of the current
operator with respect to maintenance, the compliance of the aircraft with
federal noise and other environmental standards and the manufacturer's support.
Since the market for aircraft will fluctuate over time to reflect changes in
these circumstances, and because of the unique factors that would affect market
value in a forced disposition of an aircraft, it is impossible to predict the
resale value of any Aircraft to be sold upon the exercise of the Loan Trustee's
remedies under the related Indenture. Accordingly, there can be no assurance
that the net proceeds which might be realized from the sale or other disposition
of any Aircraft in the exercise of such remedies will be sufficient to satisfy
in full amounts due and payable on the related Equipment Notes.
MODIFICATION OF INDENTURES, LEASES AND PARTICIPATION AGREEMENTS
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 Lease and the Participation Agreement corresponding thereto
may not be amended or modified, except to the extent indicated below.
Certain provisions of any Indenture, and of the Lease and the Participation
Agreement related thereto, may be modified by the parties thereto without the
consent of any holders of the Equipment Notes outstanding under such Indenture.
In the case of each Lease, such provisions include, among others, provisions
relating to (i) the return to the related Owner Trustee of the related Aircraft
at the end of the scheduled term of such Lease, (ii) the renewal of such Lease
and the option of Southwest at the end of the term of such Lease to purchase the
related Aircraft, and (iii) adjustments of basic rent, stipulated loss values
and certain other dollar values in connection with permitted reoptimizations.
Certain other provisions of any Lease may be modified by the parties thereto
without the consent of any holders of the Equipment Notes outstanding under the
related Indenture so long as such modification would not adversely affect the
Loan Trustee's interest in the Trust Estate, reduce Southwest's obligations in
respect of maintaining the related Aircraft or otherwise impair the value of the
related Trust Estate. Notwithstand-
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ing the foregoing, if an Indenture Default shall have occurred and be
continuing, the Indenture Trustee, subject to certain limitations, will have all
rights of the related Owner Trustee to modify, amend or supplement the related
Lease or give any consent, waiver, authorization or approval thereunder for any
purpose. In addition, the related Owner Trustee will have the right, so long as
no Indenture Default shall have occurred and be continuing, to the exclusion of
the Loan Trustee, to approve as satisfactory any accountants, inspectors,
engineers or counsel to render services for or issue opinions to such Owner
Trustee pursuant to the express provisions of the related Lease and other
documentation and to grant such consents, approvals and waivers as may be
requested thereunder. Finally, the assignment by the Owner Trustee to the Loan
Trustee of its rights under the related Lease will exclude certain rights of
such Owner Trustee and the related Owner Participant, including rights relating
to indemnification by Southwest for certain matters, insurance proceeds payable
to such Owner Trustee in its individual capacity or to such Owner Participant
under liability insurance maintained by Southwest under such Lease or by any
other Person, insurance proceeds payable to such Owner Trustee in its individual
or trust capacity or to such Owner Participant under insurance maintained by
such Owner Trustee or such Owner Participant and certain reimbursement payments
made by Southwest to such Owner Trustee or Owner Participant. (Indentures,
Granting Clause and Sections 9.13, 11.01 and 11.06)
Without the consent of the holder of each Equipment Note outstanding under
any Indenture affected thereby, no amendment or modification of such Indenture
may (a) reduce the principal amount of, or premium, if any, or interest payable
on, any Equipment Notes issued under such Indenture or change the date on which
any principal or premium, if any, or interest is due and payable, (b) create any
security interest with respect to the property subject to the lien of such
Indenture ranking prior to or on a parity with the security interest created by
such Indenture, except as provided in such Indenture, or deprive any holder of
an Equipment Note issued under such Indenture of the lien of such Indenture upon
the property subject thereto, (c) reduce the percentage in principal amount of
outstanding Equipment Notes issued under such Indenture necessary to modify or
amend any provision of such Indenture or to waive compliance therewith or (d)
modify any of the provisions relating to the rights of holders in respect of
defaults or events of default in the payment of principal and interest, or
certain other specified provisions. (Indentures, Section 11.02)
DEFEASANCE OF THE INDENTURES AND THE EQUIPMENT NOTES IN CERTAIN CIRCUMSTANCES
Each Indenture provides that such Indenture and the obligations of the
related Owner Trustee and the related Loan Trustee thereunder shall be deemed to
have been discharged in full (except for certain obligations, including the
obligation to hold money for payment in trust) on the 91st day after the date of
irrevocable deposit with the Defeasance Trustee of money or certain obligations
of the United States which will provide money in an aggregate amount sufficient
to pay when due all of the Equipment Notes issued thereunder in accordance with
the terms of such Indenture. Such discharge may occur only if, among other
things, the Internal Revenue Service has published a ruling to the effect that
holders of such Equipment Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amounts and in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred. (Indentures, Section 10.05)
Upon such defeasance, or upon payment in full of all Equipment Notes issued
under an Indenture or deposit with the related Loan Trustee of money sufficient
therefor no earlier than one year prior to the maturity or redemption thereof,
the holders of such 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 such Indenture and such lien shall terminate. (Indentures, Section 10.01)
ASSUMPTION OF OBLIGATIONS BY SOUTHWEST
Upon the voluntary termination of a Lease in connection with the exercise
by Southwest of any of its options to purchase the Aircraft subject to such
Lease prior to the end of the term of such Lease, Southwest may assume on a full
recourse basis all of the rights and obligations of the related Owner
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Trustee (other than its obligations and liabilities in its individual capacity)
under the related Indenture, including the obligations to make payments in
respect of the Equipment Notes issued thereunder. In such event, events of
default substantially similar in scope and effect to those set forth in the
related Lease and covenants substantially similar to the covenants of Southwest
under such Lease and the related Participation Agreement will be incorporated
into such Indenture, and the Equipment Notes issued under such Indenture will
not be redeemed and will continue to be secured by such Aircraft. It is a
condition to such assumption that an opinion of counsel be delivered at the time
of such assumption substantially to the effect that the Loan Trustee under such
Indenture should, immediately following such assumption, be entitled to the
benefits of Section 1110 of the Bankruptcy Code with respect to such Aircraft
(including the engines related thereto), but (except with respect to one
Aircraft) such opinion need not be delivered to the extent that, by reason of a
change of law or governmental interpretation thereof, the benefits of such
Section 1110 are not available to such Loan Trustee with respect to such
Aircraft or any engine related thereto immediately prior to such assumption.
(Indentures, Section 7.03)
If Southwest has assumed the rights and obligations of an Owner Trustee
under the Indenture to which such Owner Trustee is a party in connection with
Southwest's exercise of any of its options to purchase the related Aircraft as
contemplated by the previous paragraph, Southwest has the further option (in all
but one of the Leases) of paying the equity portion of the purchase price for
such Aircraft in installments. In the event that Southwest has elected to pay
the equity portion of the purchase price for an Aircraft in installments, the
obligations of Southwest to the related Owner Trustee to pay such installments
will be secured by such Aircraft (and, in respect of six Aircraft, by a letter
of credit or such other additional security as the related Owner Participant may
request), provided that the rights of such Owner Trustee to such installments
and security in the Aircraft will be subordinated to the rights of the holders
of the related Equipment Notes to substantially the same degree (including cure
and buy-out rights, rights to exercise remedies, distribution of proceeds and
payments, but, in respect of six Aircraft, excluding a rent trap) as existed, as
between such holders and such Owner Trustee, prior to the assumption by
Southwest of the related Indenture. (Leases, Section 18.2; Participation
Agreements, Section 8(aa))
THE LEASES
Term and Rent. Each Aircraft has been leased separately by the related
Owner Trustee to Southwest for a term commencing on the delivery date thereof to
such Owner Trustee and expiring on a date not earlier than the latest maturity
date of the Equipment Notes issued with respect to such Aircraft, unless
previously terminated as permitted by the related Lease. The semiannual basic
rent payments by Southwest under each Lease will be payable on each January 1
and July 1, commencing January 1, 1996 for six of the Leases and July 1, 1996
for the other four Leases (or, if such day is not a Business Day, on the next
succeeding Business Day), and have been assigned by the related Owner Trustee
under the related Indenture to provide the funds necessary to make payments of
principal and interest due from the related Owner Trustee on the Equipment Notes
issued under the related Indenture. (Leases, Section 3; Indentures, Granting
Clause and Section 3.03). Southwest has also agreed to pay as rent under four of
the Leases on January 1, 1996, such amounts as shall be necessary, to the extent
not paid by the related Owner Participant, to enable the related Loan Trustee to
receive on such dates the scheduled payment of principal of and interest on the
Equipment Notes issued under the Indenture relating to each such Lease. (Leases,
Section 3.8) Although in certain cases the semiannual basic rent payments under
the Leases may be adjusted, under no circumstances will rent, together with
other payments obligated to be made, be less than the scheduled payments of
principal and interest on the Equipment Notes issued under the Indenture
relating to such Lease. The balance of any semiannual basic rent payment under
each Lease, after payment of the scheduled principal and interest on the
Equipment Notes issued under the Indenture relating to such Lease, will (subject
to certain holdbacks if an Indenture Default is continuing) be paid over to the
related Owner Trustee. Southwest's obligation to pay rent and to cause other
payments to be made under each Lease is a general obligation of Southwest.
(Leases, Section 3; Indentures, Article 3)
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Although in certain cases Stipulated Loss Value (as defined below),
Termination Value (as defined below) and certain other amounts payable by
Southwest upon the termination of a Lease may be adjusted, under no
circumstances will any such amount (whether or not adjusted), together with
other payments obligated to be made, be less than the aggregate unpaid principal
of, and unpaid interest and Make-Whole Premium, if any, on, the outstanding
Equipment Notes issued under the Indenture relating to such Lease on the date of
payment thereof. (Leases, Section 3.3)
Possession, Sublease and Transfer. Southwest may sublease any Aircraft to
any United States certificated air carrier or to certain foreign air carriers
(such United States and foreign air carriers being "Permitted Air Carriers") so
long as the term of the sublease does not continue beyond the end of the term of
the related Lease. In addition, subject to certain limitations, Southwest may
transfer possession of any Aircraft other than by sublease, including transfers
in connection with normal interchange and pooling arrangements with Permitted
Air Carriers, "wet leases," transfers of possession in connection with the Civil
Reserve Air Fleet Program and transfers in connection with maintenance or
modifications. If an Aircraft is subleased or the possession thereof is
otherwise transferred, such Aircraft will remain subject to the related Lease
and to the lien of the related Indenture. Moreover, any such sublease or
transfer notwithstanding, Southwest will remain primarily liable for rental
payments and for the performance of the other obligations of Southwest set forth
in the related Lease as if no sublease or other transfer had occurred. (Leases,
Section 7.2) The Aircraft may be operated by Southwest or under sublease or
interchange arrangements in countries that are not parties to the Convention on
the International Recognition of Rights in Aircraft (the "Convention"), and the
extent to which the related Loan Trustee's security interest would be recognized
in any jurisdiction, whether or not such jurisdiction adheres to the Convention,
is uncertain.
Generally, Southwest may install an Engine subject to a Lease on another
aircraft. Such Engine, however, will remain subject to such Lease and to the
lien of the related Indenture. (Leases, Section 7.2)
Registration. Each Aircraft is, and pursuant to its related Lease will
continue to be, registered in the name of the related Owner Trustee under the
laws of the United States; provided, however, such Aircraft will be reregistered
in Southwest's name in the event it elects to assume all of the rights and
obligations of the related Owner Trustee under the related Indenture as
described above under "Description of the Equipment Notes -- Assumption of
Obligations by Southwest." (Leases, Section 7.1.1; Indentures, Section 7.03)
Liens. Each Aircraft will be maintained free of any liens, other than the
respective rights of the related Owner Participant, the related Owner Trustee,
the related Loan Trustee, the holders of the Equipment Notes with respect
thereto and Southwest arising under the related Lease, Indenture, Participation
Agreement, Refinancing Agreement or Trust Agreement, and other than, in the case
of each Aircraft, certain limited liens permitted under the Lease and Indenture
relating thereto, including liens for taxes either not yet due and payable or
being contested in good faith by appropriate proceedings so long as such
proceedings do not involve any material danger of the sale, forfeiture, loss or
loss of use of the related Aircraft or any interest therein; materialmen's,
mechanics' and other similar liens arising in the ordinary course of business
and either not yet due or not overdue for a period of more than 60 days or being
contested in good faith by appropriate proceedings so long as such proceedings
do not involve any material danger of the sale, forfeiture, loss or loss of use
of the related Aircraft or any interest therein; liens arising out of judgments
or awards against Southwest, unless not discharged or stayed pending appeal
within 45 days of entry; and liens with respect to which Southwest shall have
posted a bond or other security. (Leases, Section 6) In addition, all but one
Aircraft may become subject to a junior lien in favor of the related Owner
Trustee if Southwest assumes the Equipment Notes issued under the Indenture
relating to such Aircraft in connection with its exercise of any purchase option
for such Aircraft and Southwest further elects to pay the equity portion of the
purchase price in installments. See "Description of the Equipment
Notes -- Assumption of Obligations by Southwest."
Insurance. Southwest will maintain or cause to be maintained "all risk"
ground and flight aircraft hull insurance against loss of or damage to each
Aircraft and "all risk" coverage on each Engine and on Parts
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while removed from the Aircraft or Engines, that is of the type and form and in
an amount not less than that carried by Southwest on similar equipment owned or
leased by Southwest and in an amount not less than that usually carried by
similarly situated United States commercial air carriers generally, provided
that such insurance shall at all times be in an amount not less than the
stipulated loss value of each Aircraft (which shall be an amount at least equal
to the aggregate unpaid principal of, and unpaid interest on, the outstanding
Equipment Notes related to such Aircraft on the date of payment thereof (the
"Stipulated Loss Value")). All policies covering loss of or damage to each
Aircraft shall be made payable to the related Loan Trustee for any loss in
excess of $4,000,000 (or $2,000,000 in respect of two of the Aircraft if
Southwest's unsecured senior long-term debt securities are not rated Investment
Grade (as defined below)), up to the Stipulated Loss Value.
In addition, Southwest will maintain or cause to be maintained public
liability and property damage insurance (exclusive of manufacturer's product
liability insurance) with respect to each Aircraft (i) in amounts that are not
less than the public liability and property damage insurance applicable to
similar aircraft and engines that comprise Southwest's fleet on which Southwest
carries insurance; and (ii) of the type and form carried by similarly situated
United States commercial air carriers generally, and not less than $350,000,000
per occurrence combined single limit (or such greater amount as Lessee may carry
from time to time on other 737-300 series aircraft in its fleet). The related
Loan Trustee, the Trustee, the related Owner Trustee, the related Owner
Participant and Southwest will be named as insured parties as their respective
interests may appear under all liability insurance policies required with
respect to each of the Aircraft.
The insurance policies maintained under the Lease with respect to each
Aircraft will provide that, in respect of the respective interests of the
related Loan Trustee, the Trustee, the related Owner Trustee and the related
Owner Participant, the insurance shall not be invalidated by any action or
inaction of Southwest regardless of any breach or violation by Southwest of any
representation, warranty, declaration or condition contained in such policies.
Neither Southwest nor any of its sub-lessees may operate or locate any Aircraft
(i) in any area excluded from coverage by any insurance required by the Lease
related thereto, unless requisitioned for use by the government (including any
instrumentality or agency thereof) of the United States and the United States
provides indemnification in lieu of such insurance coverage, (ii) in any war
zone or recognized or threatened area of hostilities, unless such Aircraft is
covered by war risk insurance, or (iii) in any country with which the United
States does not maintain diplomatic relations or in which there is open warfare,
whether or not declared. (Leases, Sections 7.1 and 11)
Southwest may, so long as no Lease Event of Default has occurred and is
continuing, self-insure a portion of these risks by means of deductible or
premium adjustment provisions in insurance policies consistent with similar
self-insurance on comparable aircraft operated by Southwest, provided that if
Southwest's unsecured senior long-term debt securities are not rated "Investment
Grade" (as defined below), such self-insurance shall in no case be in amounts
greater than 4% of Southwest's tangible net worth and provided further that in
the case of public liability insurance, such self-insurance shall in no event
exceed $50,000,000. The term "Investment Grade" means, for these purposes, a
rating of "Baa3" or higher from Moody's Investors Service or a rating from any
other nationally recognized bond rating service equivalent to or better than
such a rating. Southwest is also permitted standard deductibles in respect of
its hull insurance coverage which are from time to time in effect in the
aviation industry generally and which are customarily maintained by similarly
situated U.S. commercial air carriers generally, but in any event, not in excess
of the amount generally maintained by Southwest on its fleet of Boeing 737-300
aircraft. (Leases, Sections 11.2.4 and 11.8).
Termination. Subject to certain conditions, Southwest may terminate each
Lease on the first day of any month occurring on or after the seventh
anniversary of the date of the delivery of the Aircraft under the applicable
Lease if it shall have determined that the Aircraft covered thereby is surplus
to its requirements or economically obsolete. Southwest will be required to give
to the related Owner Trustee and the related Loan Trustee notice of its
intention to terminate such Lease at least three months prior to the proposed
date of termination. Southwest may revoke such notice of termination if not less
than 30 days prior to the proposed termination date the related Owner Trustee
shall not have received a bid to
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purchase such Aircraft for at least the termination value thereof, provided that
the related Owner Trustee has not elected to retain such Aircraft as provided
below. In connection with a termination, the related Aircraft shall be sold
(unless the related Owner Trustee elects to retain such Aircraft) as provided
below and Southwest will act as non-exclusive agent for such Owner Trustee in
obtaining bids for such Aircraft. The related Owner Trustee may also seek bids
for such Aircraft and bid for the Aircraft itself. The related Owner Trustee
shall sell such Aircraft to the highest cash bidder for such Aircraft on the
termination date specified in Southwest's notice of termination. The proceeds of
such sale shall be paid to the related Owner Trustee. If the net proceeds
received from such sale are less than the termination value for such Aircraft
(which shall be an amount at least equal to the aggregate unpaid principal of,
and unpaid interest on, the outstanding Equipment Notes related to such Aircraft
on the date of such sale (the "Termination Value")), Southwest shall pay the
related Owner Trustee an amount equal to the difference between such proceeds
and such Termination Value, together with certain other amounts. Southwest will
also be obligated to pay, as supplemental rent, the premium, if any, on the
related Equipment Notes, payable in connection with such termination. All funds
to be paid to or deposited with the related Owner Trustee as described in this
paragraph shall, so long as the related Indenture shall not have been
discharged, be deposited directly with the related Loan Trustee. Amounts
received from such sale in excess of the outstanding principal amount of the
Equipment Notes issued under such Indenture, premium, if any, thereon and the
then accrued and unpaid interest thereon will be distributed by the related Loan
Trustee to the related Owner Trustee for the benefit of the related Owner
Participant. The lien of such Indenture shall terminate after the principal of
and premium, if any, and accrued interest on the related Equipment Notes have
been received by the related Loan Trustee and, if all amounts due such Owner
Participant have also been paid, the related Lease shall terminate and the
obligation of Southwest thereafter to make rental payments with respect thereto
shall cease. In the event any Aircraft is not sold by its proposed termination
date, the Lease relating thereto, including all of Southwest's obligations
thereunder, shall continue in effect. (Leases, Section 9; Indentures, Sections
3.02, 6.01(b) and 13.01)
The related Owner Trustee shall have the option to retain an Aircraft with
respect to which Southwest has given a notice of termination. In such event, the
related Owner Trustee shall pay, or cause to be paid, to the related Loan
Trustee funds in an amount equal to the aggregate outstanding principal of and
accrued interest on the Equipment Notes with respect to such Aircraft, and
Southwest shall pay to such Loan Trustee all other sums due and payable to the
holders thereof on the termination date (including premium, if any). (Leases,
Section 9)
Renewal and Purchase Options. At the end of the term of a Lease after final
maturity of the Equipment Notes issued with respect thereto, in the absence of
certain defaults or any Lease Event of Default thereunder, Southwest will have
certain options to renew such Lease for additional limited periods. In addition,
Southwest will have the right at the end of the term of such Lease to purchase
the Aircraft subject thereto for an amount to be calculated in accordance with
the terms of such Lease. (Leases, Section 18)
Southwest will also have the option, upon certain specified notice periods
and in the absence of certain defaults or any Lease Event of Default, to
purchase the Aircraft on January 1, 2014 in the case of six Leases, on January
1, 2015 in the case of two other Leases and on January 1, 2017 in the case of
the other two Leases. In the event Southwest exercises such an option, the
purchase price therefor shall be calculated in accordance with the provisions of
such Lease, but in any event shall be sufficient to pay the redemption price of
the related Equipment Notes and, upon receipt by the related Loan Trustee of
such redemption price, Southwest shall acquire such Aircraft free of the lien of
such Indenture, unless Southwest chooses to assume on a full recourse basis all
of the related Owner Trustee's obligations in respect of such Equipment Notes
and acquires such Aircraft subject to the lien of the related Indenture. See
"Description of the Equipment Notes -- Assumption of Obligations by Southwest"
in this Prospectus Supplement. (Leases, Section 18.2; Indentures, Sections 7.03
and 10.01)
Events of Loss. If an Event of Loss (as defined below) occurs with respect
to an Aircraft, Southwest shall pay to the related Owner Trustee the Stipulated
Loss Value of such Aircraft, or shall replace such Aircraft. In the event
Southwest elects to replace such Aircraft, it must do so on or before
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the Business Day preceding the 180th day following the Event of Loss, with a
Boeing 737-300 (or an improved model) aircraft having a value, remaining useful
life and utility at least equal to, and in at least as good operating condition
as, the Aircraft subject to the Event of Loss immediately prior to the
occurrence of such Event of Loss, assuming such Aircraft was in the condition
and repair required by the related Lease. If Southwest pays the Stipulated Loss
Value of an Aircraft subject to an Event of Loss (which in all circumstances
will be at least sufficient to pay in full as of the date of payment thereof the
aggregate unpaid principal of the outstanding Equipment Notes issued with
respect to such Aircraft, together with all unpaid interest thereon accrued and
to accrue to the date on which such amount is paid), the lien of the related
Indenture shall terminate, the Lease relating to such Aircraft shall terminate,
title to such Aircraft shall be transferred to Southwest and the obligation of
Southwest thereafter to make rental payments with respect thereto shall cease.
The Stipulated Loss Value and other payments made by Southwest shall be
deposited with the related Loan Trustee. Amounts in excess of the outstanding
principal amount of the Equipment Notes issued with respect to such Aircraft and
the then accrued and unpaid interest thereon will be distributed by the related
Loan Trustee to the related Owner Trustee. (Leases, Section 10.1; Indentures,
Sections 3.02, 6.01(a) and 10.01)
If an Event of Loss occurs with respect to an Engine alone, within 60 days
after such Event of Loss, Southwest shall replace such Engine with another
engine of the same model or an improved model of the same or another
manufacturer and suitable for installation and use on an Aircraft and compatible
for use on such Aircraft with the other Engine or engine installed thereon, and
having a value, remaining useful life and utility at least equal to, and in as
good operating condition as, the Engine subject to the Event of Loss, assuming
such Engine was in the condition and repair required by the related Lease
immediately prior to the occurrence of such Event of Loss. (Leases, Section
10.2)
An Event of Loss with respect to an Aircraft or any Engine means any of the
following events: (i) disappearance or theft of such property or the loss of the
use thereof for any reason not covered by another provision, including
hijacking, for a period of three consecutive months or for a period continuing
beyond the Lease term, whichever first occurs or the destruction, damage beyond
economic repair or rendition of such property permanently unfit for normal use
for any reason whatsoever; (ii) any damage to such property that results in an
insurance settlement with respect to such property on the basis of total loss or
a constructive or compromised total loss; (iii) the confiscation, condemnation
or requisition for use of such property by any government for a period in excess
of six consecutive months or for a period continuing beyond the Lease term,
whichever first occurs; (iv) as a result of any rule, regulation, order or other
action by the Federal Aviation Administration, the Department of Transportation
or other governmental body of the United States or other governmental body
having jurisdiction, the use of such property in the normal course of interstate
air transportation of persons shall have been prohibited for specified periods;
or (v) the confiscation, condemnation or requisition of title to such property
by any government. In addition, an Event of Loss with respect to any Engine
shall occur upon a divestiture of title to such Engine. (Leases, Section 1)
Lease Events of Default. Events of default (each, a "Lease Event of
Default") under each Lease include, among other things: (a) failure by Southwest
to make any payment of basic rent (and, in the case of six Leases, certain
supplemental rent) within seven Business Days after such payment shall have
become due or of other supplemental rent (with certain exceptions) within 10
Business Days after written notice of such failure; (b) failure by Southwest to
maintain insurance on or with respect to the related Aircraft in accordance with
the provisions of such Lease, provided that such failure shall not constitute a
Lease Event of Default for a period of not more than 30 days if such Aircraft is
not operated and appropriate ground insurance is maintained on such Aircraft;
(c) failure by Southwest to perform or observe any other covenant, condition or
agreement to be performed or observed by it under such Lease or certain related
documents, continued after notice and specified cure periods; (d) any
representation or warranty made by Southwest in such Lease or certain related
documents being incorrect in any material respect at the time made and such
incorrectness shall continue to be material and unremedied after notice and
specified cure periods; and (e) the occurrence of certain events of bankruptcy,
reorganization or insolvency of Southwest. There are no cross-default provisions
in the Leases and,
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consequently, events resulting in a Lease Event of Default under any particular
Lease may not result in a Lease Event of Default occurring under any other
Lease. (Leases, Section 14)
If a Lease Event of Default under a Lease has occurred and is continuing,
the related Loan Trustee, as assignee of the related Owner Trustee's rights
under such Lease, may exercise one or more of the remedies provided in such
Lease with respect to the Aircraft subject thereto. These remedies include the
right to repossess and use or operate such Aircraft, to sell or re-lease such
Aircraft free and clear of Southwest's rights and to terminate such lease, and
the related Loan Trustee, as assignee, is entitled to retain (subject to
application thereof in accordance with the related Indenture) the proceeds
resulting from the exercise of such remedies and to require Southwest to pay as
liquidated damages any unpaid rent plus an amount equal to the excess of the
Stipulated Loss Value of such Aircraft over, at the related Loan Trustee's
option, any of (i) the discounted fair market rental value thereof for the
remainder of the term for such Aircraft, (ii) the fair market sales value
thereof or (iii) if such Aircraft or any Engine has been sold, the net sales
proceeds. (Leases, Section 15)
THE PARTICIPATION AGREEMENTS
Southwest is required to indemnify the respective Loan Trustees, the
respective Owner Participants, the respective Owner Trustees and the Trustee for
certain taxes, losses, claims and other matters. Pursuant to certain tax
indemnity agreements, Southwest is required under certain circumstances to
indemnify each Owner Participant against the loss of depreciation deductions and
certain other benefits allowable for certain income tax purposes with respect to
the related Aircraft. Each Owner Participant is required to make restitution to
the Trust Estate in which such Owner Participant has an interest for certain
losses that may be suffered as a result of the failure of such Owner Participant
to discharge certain liens or claims on or against the assets subject to the
lien of the related Indenture. Subject to certain restrictions, each Owner
Participant may transfer its interest in the related Aircraft.
REGISTRATION OF THE AIRCRAFT
Each of the Aircraft has been registered in the United States in the name
of the related Owner Trustee. Each of the Owner Trustees in its individual
capacity, each of the Loan Trustees in its individual capacity and Southwest has
represented and warranted that it is a "citizen of the United States" within the
meaning of the Aviation Act (a "U.S. Citizen"). Each Owner Trustee has agreed
that if one of its responsible officers has actual knowledge of facts that it,
in its individual capacity, ceases to be a U.S. Citizen, it will promptly resign
as Owner Trustee effective upon the appointment of a successor Owner Trustee
that is a U.S. Citizen. Each Owner Participant has represented and warranted
either (i) that it is a U.S. Citizen or (ii) that it has transferred to a U.S.
Citizen all of its power to manage and control such rights in respect of the
Aircraft in which it has an interest so as to comply with FAA Regulations
permitting United States registration of an aircraft, the owner of which is a
trust whose beneficiary is neither a U.S. Citizen nor a resident alien. If an
Owner Participant that made the representation specified in clause (i) of the
preceding sentence ceases to be a U.S. Citizen at a time when such citizenship
is necessary for registration of the Aircraft in which it has an interest in the
United States or an Owner Participant that made the representation specified in
clause (ii) of the preceding sentence fails to maintain the arrangements
specified therein, then such Owner Participant is obligated to either (a) take
such action as may be required to maintain the United States registration of
such Aircraft and the recordation of the related Indenture and Lease with the
FAA or (b) transfer, in accordance with the related documents, all of its
interest in such Aircraft to a U.S. Citizen. (Participation Agreements, Sections
7(a), 8(b) and 8(k); Trust Agreements, Section 9.01)
S-27
<PAGE> 28
FEDERAL INCOME TAX CONSEQUENCES
Prospective investors should consult the section entitled "Federal Income
Tax Consequences" in the accompanying Prospectus for a discussion of the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Certificates.
ERISA CONSIDERATIONS
The Certificates may be purchased by an employee benefit plan (a "Plan")
that is subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). A fiduciary of such a Plan must determine that the purchase
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.
The United States Department of Labor has granted to each of Salomon
Brothers Inc and Morgan Stanley & Co. Incorporated an administrative exemption
(Prohibited Transaction Exemption 89-89, Exemption Application No. D-6446, 54
Fed. Reg. 42,589 (1989) as amended, 55 Fed. Reg. 48,939 (1990) and Prohibited
Transaction Exemption 90-24, Exemption Application No. 8019, 55 Fed. Reg. 20548
(1990)) (the "Exemptions") from certain of the prohibited transaction rules of
ERISA and the Code with respect to the purchase, both upon their initial
issuance and in the secondary market, the holding and the subsequent resale by
an employee benefit plan of certificates in certain pass through trusts, the
assets of which consist of secured credit instruments that bear interest,
including qualified equipment notes secured by leases. A number of conditions
must be satisfied in order for the Exemptions to apply, including the
requirement that the certificates have, at the time of their purchase by an
employee benefit plan, a specified credit rating. Under the Exemptions, an
equipment note secured by a lease will be considered qualified only if it is a
note (a) which is secured by equipment which is leased, (b) which is secured by
the obligation of the lessee to pay rent under the equipment lease and (c) with
respect to which the trust's security interest is at least as protective of the
rights of the trust as the trust would have if the equipment note were secured
only by the equipment and not by the lease. The Exemptions do not in certain
circumstances apply to the acquisition, holding or disposition of Certificates
by plans sponsored by the Company, the Underwriters, the Trustee, the Owner
Trustees, the Owner Participants or any of their affiliates.
It is not clear whether the Exemptions apply to participant directed plans
described in Section 404(c) of ERISA or plans that are subject to Section 4975
of the Code but that are not subject to Title I of ERISA, such as certain Keogh
plans and certain individual retirement accounts. In addition, there are various
other terms and conditions to the applicability of the Exemptions. Accordingly,
each fiduciary of a plan should independently determine if its purchase of a
Certificate will require an exemption and, if so, whether the Exemptions apply
to the purchase, or whether any other prohibited transaction exemption is
available.
In order to facilitate compliance with the Exemptions and other potentially
available exemptions, each Plan purchasing any Certificates must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D under the
Securities Act of 1933, as amended.
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 the fiduciary responsibility provisions of ERISA or Section
4975 of the Code. However, such a governmental plan may be subject to a federal,
state or local law or regulation, which is, to a material extent, similar to the
provisions of ERISA or Section 4975 of the Code. A fiduciary of a governmental
plan should make its own determination as to the need for and the availability
of any exemptive relief under any such federal, state or local law or
regulation.
S-28
<PAGE> 29
UNDERWRITING
Under the terms of and subject to the conditions contained in the
Underwriting Agreement (the "Underwriting Agreement"), Salomon Brothers Inc and
Morgan Stanley & Co. Incorporated (the "Underwriters") have severally agreed to
purchase from the Trustee the respective aggregate principal amount of each
series of the Certificates as set forth opposite their respective names below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
1995-A1 1995-A2 1995-A3 1995-A4 1995-A5
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
--------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Salomon Brothers Inc....... $ $ $ $ $
Morgan Stanley & Co.
Incorporated.............
------------ ------------ ------------ ------------ ------------
Total............ $ $ $ $ $
============ ============ ============= ============ ============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Certificates are subject to,
among other things, the approval of certain legal matters by counsel and certain
other conditions. The Underwriters are obligated to take and pay for all of the
Certificates to be purchased by them if any are taken. In the event of default
by either Underwriter, the Underwriting Agreement provides that, in certain
circumstances, purchase commitments of non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Underwriters initially propose to offer the Certificates to the public
at the public offering prices for each series set forth on the cover page of
this Prospectus Supplement and to certain dealers at such price less a
concession not in excess of the amounts for the respective series set forth
below. The Underwriters may allow, and such dealers may reallow, a discount to
certain other dealers not in excess of the amounts for the series of the
Certificates set forth below. After the initial public offering, the public
offering prices, concessions and discounts may be changed.
<TABLE>
<CAPTION>
CONCESSION
TO
SERIES DEALERS REALLOWANCE
-------- ---------- -----------
<S> <C> <C>
1995-A1......................................... % %
1995-A2......................................... % %
1995-A3......................................... % %
1995-A4......................................... % %
1995-A5......................................... % %
</TABLE>
Southwest has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Southwest does not intend to apply for 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. Neither 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 such Underwriter. Accordingly, no
assurance can be given as to the liquidity of, or trading markets for, the
Certificates.
The Underwriters and certain of their respective affiliates perform
investment banking and other financial services for Southwest in the ordinary
course of business.
S-29
<PAGE> 30
LEGAL OPINIONS
The validity of the Certificates offered hereby will be passed upon for
Southwest by Deborah Ackerman, Associate General Counsel for Southwest, who
beneficially owns approximately 8,700 shares of common stock of the Company, and
for the Underwriters by Shearman & Sterling, New York, New York. The statements
of law and legal conclusions set forth under the caption "Federal Income Tax
Consequences" in 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
5,500 shares of common stock of the Company.
S-30
<PAGE> 31
APPENDIX SUPPLEMENT
Diagram on page S-10 consisting of the following:
<TABLE>
<S> <C>
(i) one box containing the words 'Southwest Airlines Co.';
(ii) four lines from the box described in (i) above to boxes described in (iii) below, with the words 'Lease Rental Payments
Assigned by Owner Trustees' next to such lines;
(iii) four boxes containing the words 'Loan Trustee for Aircraft No. 1', 'Loan Trustee for Aircraft No. 2', 'Loan Trustee for
Aircraft No. 3' and 'Loan Trustee for Aircraft No. 4' together with the symbol '**', respectively;
(iv) four lines from boxes described in (iii) above to boxes described in (v) below, with the words 'Equipment Note
Payments' next to such lines;
(v) four boxes containing the words 'Trustee for Pass Through Trust 1994-A1', 'Trustee for Pass Through Trust 1994-A2',
'Trustee for Pass Through Trust 1994-A3' and 'Trustee for Pass Through Trust 1994-A4', respectively;
(vi) four lines from boxes described in (v) above to boxes described in (vii) below, with the words '1994-A Pass Through
Certificate Distributions' next to such lines;
(vii) four boxes containing the words 'Holders of Pass Through Certificates, Series 1994-A1', 'Holders of Pass Through
Certificates, Series 1994-A2', 'Holders of Pass Through Certificates, Series 1994-A3' and 'Holders of Pass Through
Certificates, Series 1994-A4', respectively;
(viii) one line from the box described in (iii) above containing the words 'Loan Trustee for Aircraft No. 1' to the box
described in (ix) below, and one line from the box described in (ix) below to the box described in (x) below, with the
words 'Excess Payments' next to each such line;
(ix) one box containing the words 'Owner Trustee for Aircraft No. 1' and the symbol '*';
(x) one box containing the words 'Owner Participant for Aircraft No. 1' and the symbol '*'; and
(xi) below all boxes and lines, the symbol '*' together with the words 'A separate Owner Trustee and Owner Participant
structure exists for each Aircraft. Aircraft No. 1 is shown as an example', and the symbol '**' together with the words
'Aircraft Nos. 1 through 4 are shown as examples. The identical structure exists for Aircraft Nos. 5 through 10'.
</TABLE>
