<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 33-59113
PROSPECTUS SUPPLEMENT
(To Prospectus Dated May 9, 1995)
$146,195,000
Southwest Airlines
1996-A Pass Through Trusts
PASS THROUGH CERTIFICATES, SERIES 1996-A
------------------------
Each Pass Through Certificate offered hereby (each, a "Certificate" and,
collectively, the "Certificates") will represent a fractional undivided interest
in one of the two Southwest Airlines 1996-A Pass Through Trusts (the "1996-A1
Trust" and the "1996-A2 Trust" and, collectively, the "Trusts") to be formed
pursuant to Trust Supplement Nos. 1996-A1 and 1996-A2 (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 property of the Trusts will include, among other things, equipment notes
(the "Equipment Notes") issued on a nonrecourse basis by the trustees of
separate owner trusts (each an "Owner Trustee") in connection with six separate
leveraged lease transactions to finance not more than 80% of the equipment cost
to the related Owner Trustee of each of six Boeing 737-300 aircraft (each, and
collectively, the "Aircraft") which will be leased to Southwest. Each Trust will
purchase one series of Equipment Notes issued with respect to all of the
Aircraft such that all of the Equipment Notes held in each Trust will have an
interest rate corresponding to the interest rate applicable to the Certificates
to be issued by such Trust. The maturity dates of the Equipment Notes acquired
by each Trust will occur on or before the final expected 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 an assignment of certain rights under the lease relating thereto
(each, a "Lease"), including the right to receive rentals payable with respect
to such Aircraft by Southwest. Although neither the Certificates nor the
Equipment Notes are obligations of, or guaranteed by, Southwest, the amounts
unconditionally payable by Southwest for lease of the Aircraft will be
sufficient to pay in full when due all amounts required to be paid on the
Equipment Notes held in the Trusts.
All of the Equipment Notes held in each Trust will accrue interest at the
applicable rate per annum for such Trust, payable on January 2 and July 2 of
each year, commencing January 2, 1997. Such interest will be passed through to
Certificateholders (as defined herein) of such Trust on each such date. See
"Description of the Certificates -- Payments and Distributions".
Scheduled principal payments on the Equipment Notes held in each Trust will
be passed through to the Certificateholders of each such Trust on January 2 or
July 2 or both in certain years, commencing January 2, 1997, in the case of the
1996-A1 Trust and January 2, 2014, in the case of the 1996-A2 Trust, in
accordance with the principal repayment schedule set forth herein under
"Description of the Certificates -- Pool Factors" and "Description of the
Equipment Notes -- General".
------------------------
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>
Initial
Scheduled
Principal Final
Pass Through Principal Distribution Distribution Price to
Certificates Amount Interest Rate Date Date Public(1)(2)
-------------- ----------------- --------------- -------------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
1996-A1 $113,136,000 7.67% January 2, 1997 January 2, 2014 100%
1996-A2 33,059,000 8.00 January 2, 2014 January 2, 2021 100
</TABLE>
- ------------
(1) Plus accrued interest, if any, at the applicable interest rate from
September 18, 1996.
(2) The underwriting commission aggregates $950,267, which constitutes 0.65% 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 offered hereby are offered by the Underwriters, subject to
prior sale, when, as and if accepted by the Underwriters and subject to approval
of certain legal matters by Shearman & Sterling, counsel for the Underwriters.
It is expected that delivery of the Certificates in book-entry form will be made
on or about September 18, 1996 through the facilities of The Depository Trust
Company, against payment therefor in immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
September 4, 1996
<PAGE> 2
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SOUTHWEST OR BY THE UNDERWRITERS.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO
SELL, OR THE SOLICITATION OF AN OFFER TO BUY, CERTIFICATES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN THE
FACTS SET FORTH IN THE PROSPECTUS SUPPLEMENT OR THE PROSPECTUS OR IN THE AFFAIRS
OF SOUTHWEST SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary........................................................ S-3
The Company.......................................................................... S-8
Ratios of Earnings to Fixed Charges.................................................. S-8
Selected Consolidated Financial and Operating Data................................... S-9
Use of Proceeds...................................................................... S-10
Diagram of Payments.................................................................. S-11
Description of the Certificates...................................................... S-12
Description of the Equipment Notes................................................... S-15
Federal Income Tax Consequences...................................................... S-28
ERISA Considerations................................................................. S-28
Underwriting......................................................................... S-29
Legal Opinions....................................................................... S-30
PROSPECTUS
Available Information................................................................ 2
Reports to Certificateholders by the Trustee......................................... 2
Documents Incorporated by Reference.................................................. 2
Glossary............................................................................. 2
The Company.......................................................................... 3
Ratios of Earnings to Fixed Charges.................................................. 3
Formation of the Trusts.............................................................. 3
Use of Proceeds...................................................................... 3
Description of the Certificates...................................................... 4
Description of the Equipment Notes................................................... 13
Federal Income Tax Consequences...................................................... 16
Certain Delaware Taxes............................................................... 19
ERISA Considerations................................................................. 19
Plan of Distribution................................................................. 20
Legal Opinions....................................................................... 21
Experts.............................................................................. 21
Glossary of Certain Terms............................................................ A-1
</TABLE>
------------------------
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 primarily
short-haul service across the United States, serving 48 cities in 23 states.
Southwest commenced service to Florida earlier this year with flights to Tampa,
Ft. Lauderdale and Orlando, and will begin service to Providence, Rhode Island,
in October 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 fifth largest U.S. airline. As of June 30, 1996,
Southwest operated 237 Boeing 737 aircraft. Southwest intends to purchase seven
additional Boeing 737 aircraft by year-end 1996, has contracted to purchase 80
such aircraft in 1997-2001, and has options to purchase an additional 67 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 1996-A1 Trust and the 1996-A2 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................ Except for periods prior to a delayed purchase
of any Equipment Notes, the property of each
Trust will consist of Equipment Notes issued
on a nonrecourse basis by each of the Owner
Trustees in six separate leveraged lease
transactions to finance not more than 80% of
the equipment cost to the Owner Trustees of
six Boeing 737-300 aircraft to be leased by
the related Owner Trustee to Southwest in
September 1996. The Equipment Notes with
respect to each of the six Aircraft will be
issued in two series under an indenture
(each, an "Indenture") between the applicable
Owner Trustee and the indenture trustee
thereunder (the "Loan Trustee"). Each Trust
will acquire those Equipment Notes having an
interest rate equal to the interest rate
applicable to the Certificates to be issued
by such 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 aggregate principal amount of
the Equipment Notes to be held in each Trust
will be the same as the aggregate principal
amount of the Certificates issued by such
Trust. See "Description of the
Certificates -- Delayed Purchase of Equipment
Notes" in this Prospectus Supplement for a
description of Trust Property prior to a
delayed purchase of any Equipment Notes.
S-3
<PAGE> 4
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 Trustees in
connection with the financing 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
six leveraged lease transactions. To the
extent that all of the proceeds from the sale
of the Certificates are not used on the date
of issuance of such Certificates to purchase
the Equipment Notes contemplated to be held
in the related Trust, the Trustee will hold
such proceeds in an escrow account pending
purchase of such Equipment Notes at any time
on or prior to September 30, 1996. See "Use
of Proceeds" in this Prospectus Supplement.
Delayed Purchase of Equipment
Notes....................... It is contemplated that all of the Equipment
Notes will be purchased by the Trustee in
September 1996, on or after the date of
issuance of the Certificates. The Trustee
will hold the proceeds from the sale of the
Certificates not used to purchase Equipment
Notes on the date of issuance of such
Certificates in an escrow account pending the
purchase of the Equipment Notes. Such
proceeds will be invested in Specified
Investments having maturity dates in no event
later than October 21, 1996 at the direction
and risk of, and for the account of,
Southwest. Southwest will be responsible for
any losses. On the first Regular Distribution
Date following the issuance of the
Certificates, Southwest will pay to the
Trustee of each Trust an amount equal to the
interest that would have accrued on any
Equipment Notes purchased on a delayed basis
had such Equipment Notes been purchased on
the date of issuance of such Certificates
from the date of such issuance to, but
excluding, the date of the purchase of such
Equipment Notes by the Trustee. See
"Description of the Certificates -- Delayed
Purchase of Equipment Notes" 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 will also act as Loan Trustee for
each series of Equipment Notes. See
"Description of the Certificates -- The
Trustee" in the Prospectus.
Regular Distribution Dates.... Each January 2 and July 2, commencing January
2, 1997.
S-4
<PAGE> 5
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 2 or July 2, or both, in
certain years, commencing January 2, 1997 in
the case of the 1996-A1 Trust and January 2,
2014 in the case of the 1996-A2 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 2 and July 2, commencing January
2, 1997, 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) 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 2,
2015 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, and the
Equipment Notes have not been
S-5
<PAGE> 6
accelerated or (iv) Southwest shall have
requested an optional redemption of the
Equipment Notes related to any Aircraft 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 any 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, if such
redemption or purchase, as the case may be,
is made prior to the dates set forth below
(each, a "Premium Termination Date"), 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>
1996-A1 September 18, 2007
1996-A2 March 2, 2018
</TABLE>
(b) 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
hereinafter defined) to such Aircraft if such
Aircraft is not replaced by Southwest.
(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 (ii) the
Equipment Notes issued thereunder 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 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 will not be
cross-collateralized, and consequently the
Equipment Notes issued in respect of any one
Aircraft will not be secured by any of the
other Aircraft or the Leases related thereto.
There will be 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
S-6
<PAGE> 7
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 will not be 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-7
<PAGE> 8
THE COMPANY
Southwest is a major United States airline that provides primarily
short-haul service across the United States, serving 48 cities in 23 states.
Southwest commenced service to Florida earlier this year with flights to Tampa,
Ft. Lauderdale and Orlando, and will begin service to Providence, Rhode Island,
in October 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 fifth largest U.S. airline. As of June 30, 1996,
Southwest operated 237 Boeing 737 aircraft. Southwest intends to purchase seven
additional Boeing 737 aircraft by year-end 1996, has contracted to purchase 80
such aircraft in 1997-2001, and has options to purchase an additional 67 such
aircraft through 2004.
RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------- -----------------------------------------
1996 1995 1995 1994 1993 1992 1991
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratios of Earnings to Fixed Charges.... 3.44x 2.52x 2.94x 3.28x 3.12x 2.41x 1.51x
</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-8
<PAGE> 9
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following financial data for the three years ended December 31, 1995
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, 1996 and June 30, 1995 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. Operating results for the six months ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. 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, 1995,
and its Quarterly Report on Form 10-Q for the six months ended June 30, 1996.
See "Incorporation of Certain Documents by Reference" in the Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED FINANCIAL DATA:
(IN THOUSANDS)
Operating revenues....................... $1,682,837 $1,359,204 $2,872,751 $2,591,933 $2,296,673
Operating expenses....................... 1,483,238 1,232,370 2,559,220 2,275,224 2,004,700
---------- ---------- ---------- ---------- ----------
Operating income......................... 199,599 126,834 313,531 316,709 291,973
Other expenses, net...................... 4,839 5,999 8,391 17,186 32,336
---------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting changes........... 194,760 120,835 305,140 299,523 259,637
Provision for income taxes............... 76,443 49,285 122,514 120,192 105,353
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
accounting changes..................... 118,317 71,550 182,626 179,331 154,284
Cumulative effect of accounting
changes................................ -- -- -- -- 15,259(1)
---------- ---------- ---------- ---------- ----------
Net income............................... $ 118,317 $ 71,550 $ 182,626 $ 179,331 $ 169,543
========== ========== ========== ========== ==========
Total assets at period-end............... $3,571,512 $3,192,508 $3,256,122 $2,823,071 $2,576,037
Longterm obligations at period-end....... $ 655,726 $ 673,980 $ 661,010 $ 583,071 $ 639,136
Stockholders' equity at period-end....... $1,553,911 $1,312,698 $1,427,318 $1,238,706 $1,054,019
CONSOLIDATED OPERATING DATA:
Revenue passengers carried............... 23,979,977 21,617,113 44,785,573 42,742,602(2) 36,955,221(2)
Revenue passenger miles (RPMs) (000s).... 12,646,455 11,198,329 23,327,804 21,611,266 18,827,288
Available seat miles (ASMs) (000s)....... 19,806,873 17,447,197 36,180,001 32,123,974 27,511,000
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Load factor.............................. 63.8% 64.2% 64.5% 67.3% 68.4%
Average length of passenger haul
(miles)................................ 527 518 521 506 509
Trips flown.............................. 366,809 333,795 685,524 624,746 546,297
Average passenger fare................... $ 67.45 $ 60.47 $ 61.64 $ 58.44 $ 59.97
Passenger revenue yield per RPM.......... 12.79cents 11.67cents 11.83cents 11.56cents 11.77cents
Operating revenue yield per ASM.......... 8.50cents 7.79cents 7.94cents 8.07cents 8.35cents
Operating expenses per ASM............... 7.49cents 7.06cents 7.07cents 7.08cents 7.25cents (3)
Average fuel cost per gallon............. 61.01cents 53.74cents 55.22cents 53.92cents 59.15cents
Number of employees at period-end........ 21,907 18,985 19,933 16,818 15,175
Size of fleet at period-end(4)........... 237 210 224 199 178
</TABLE>
- ------------
(1) 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.
(2) Includes certain estimates for Morris Air Corporation, whose operations were
integrated with Southwest's during fourth quarter 1994.
(3) Excludes merger expenses of $10.8 million.
(4) Includes leased aircraft.
S-9
<PAGE> 10
USE OF PROCEEDS
The Certificates offered hereby are being issued in connection with the
financing of the debt portion of six separate leveraged lease transactions which
Southwest, as lessee, expects to enter into in September 1996 with respect to
six Boeing 737-300 aircraft. Five of the Aircraft were delivered from the
manufacturer to Southwest earlier this year; the remaining Aircraft is expected
to be delivered on September 9, 1996. Each Aircraft will be sold by Southwest to
an Owner Trustee and leased back to Southwest. 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 finance
not more than 80% of the equipment cost to such Owner Trustees of the related
Aircraft. The Equipment Notes will be purchased on or after the date of issuance
of the Certificates and the Trustee will hold the proceeds from the sale of the
Certificates not used to purchase Equipment Notes on the date of issuance of
such Certificates in an escrow account pending purchase of the Equipment Notes.
To the extent that any amount of the proceeds held in such escrow account is not
used to purchase Equipment Notes on or prior to September 30, 1996, such amount
will be distributed by the applicable Trustee as a Special Payment on or prior
to October 21, 1996. See "Description of the Certificates -- Delayed Purchase of
Equipment Notes" in this Prospectus Supplement.
The Equipment Notes will be issued under six separate Indentures, each such
Indenture being between Wilmington Trust Company, as Loan Trustee thereunder,
and First Union National Bank of North Carolina, not in its individual capacity,
but solely as Owner Trustee of separate trusts for the benefit of the Owner
Participants. Each Owner Participant has agreed to provide from sources other
than the Equipment Notes at least 20% of the equipment cost to the related Owner
Trustee of the related Aircraft and will beneficially own the related Aircraft.
No Owner Participant, however, will be personally liable for any amount payable
under any Indenture or the Equipment Notes issued thereunder.
S-10
<PAGE> 11
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 six
Aircraft.
Southwest will lease 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 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 two Trusts and as Loan Trustee under the six
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 and 6.
S-11
<PAGE> 12
DESCRIPTION OF THE CERTIFICATES
The Certificates offered hereby will be issued pursuant to two 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 Statement 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), 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 2 and July 2 commencing
on January 2, 1997 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
2 or July 2, or both, in certain years, depending upon the terms of the
Equipment Notes held in each Trust, commencing January 2, 1997 in the case of
1996-A1 Trust and January 2, 2014 in the case of 1996-A2 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 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
S-12
<PAGE> 13
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 either 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.
DELAYED PURCHASE OF EQUIPMENT NOTES
It is contemplated that all of the Equipment Notes will be purchased by the
Trustee in September 1996, on or after the date of the issuance of the
Certificates. The Trustee will hold the proceeds from the sale of the
Certificates not used to purchase Equipment Notes on the date of issuance of
such Certificates in an escrow account pending the purchase of the Equipment
Notes. Such proceeds will be invested in Specified Investments having maturity
dates in no event later than October 21, 1996 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 September 30, 1996, 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 October 21, 1996
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))
On the first regular Distribution Date following the issuance of the
Certificates, Southwest will pay to the Trustee of each Trust an amount equal to
the interest that would have accrued on any Equipment Notes purchased on a
delayed basis had such Equipment Notes been purchased on the date of issuance of
such Certificates from the date of such issuance to, but excluding, the date of
the purchase of such Equipment Notes by the Trustee, which amount will be passed
through to the Certificateholders of such Trust on such date, together with any
cash interest on the Equipment Notes held in such Trust. (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))
S-13
<PAGE> 14
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, the
Scheduled Payments of principal on the Equipment Notes to be held in the Trusts
and the resulting Pool Factors after taking into account each Scheduled Payment
are set forth below:
<TABLE>
<CAPTION>
1996-A1 TRUST 1996-A2 TRUST
7.67% 8.00%
EQUIPMENT EQUIPMENT
NOTES NOTES
REGULAR SCHEDULED SCHEDULED
DISTRIBUTION PAYMENTS 1996-A1 TRUST PAYMENTS 1996-A2 TRUST
DATE OF PRINCIPAL POOL FACTOR OF PRINCIPAL POOL FACTOR
------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
January 2, 1997................ $ 613,604 0.9945764
January 2, 1998................ 2,187,232 0.9752436
January 2, 1999................ 2,369,551 0.9542994
January 2, 2000................ 9,212,414 0.8728716
January 2, 2001................ 5,035,324 0.8283648
January 2, 2002................ 3,767,955 0.7950601
January 2, 2003................ 4,090,801 0.7589018
January 2, 2004................ 4,376,702 0.7202165
January 2, 2005................ 4,162,516 0.6834244
January 2, 2006................ 4,604,590 0.6427248
January 2, 2007................ 5,037,631 0.5981976
January 2, 2008................ 6,729,247 0.5387183
January 2, 2009................ 9,098,866 0.4582942
January 2, 2010................ 9,761,628 0.3720119
January 2, 2011................ 10,354,824 0.2804864
January 2, 2012................ 11,821,246 0.1759994
January 2, 2013................ 12,764,094 0.0631786
January 2, 2014................ 7,147,775 0.0000000 $ 1,295,403 0.9608154
January 2, 2016................ 2,097,035 0.8973823
January 2, 2017................ 3,166,595 0.8015961
July 2, 2017................... 84,714 0.7990336
January 2, 2018................ 11,043,716 0.4649728
July 2, 2018................... 373,380 0.4536785
January 2, 2019................ 10,232,525 0.1441554
July 2, 2019................... 3,677,541 0.0329136
January 2, 2020................ 1,081,540 0.0001982
January 2, 2021................ 6,551 0.0000000
</TABLE>
See "Description of the Certificates -- Pool Factors" in the Prospectus and
the definitions of "Pool Balance" and "Pool Factor" in the Glossary.
S-14
<PAGE> 15
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 and the Participation 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 and the Trust Agreement relating to each Aircraft. As of
the date of this Prospectus Supplement, Southwest has entered into a
Participation Agreement with respect to each Aircraft, and each Owner
Participant and Owner Trustee is a party to a Trust Agreement relating to the
applicable Aircraft. Each Participation Agreement contemplates that, on or after
the date of issuance of the Certificates, a Lease and an Indenture will be
executed and delivered in a form prescribed therein and Equipment Notes will be
issued in a form prescribed in such Indenture.
GENERAL
The Equipment Notes for each of the six Aircraft will be issued in two
series. 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 First
Union National Bank of North Carolina, 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 will lease each Aircraft to Southwest pursuant to
a separate Lease between such Owner Trustee and Southwest with respect to such
Aircraft. Southwest will be 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, however, will not be direct obligations of, or
guaranteed by, Southwest. Southwest's rental obligations under each Lease will
be 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>
1996-A1 1996-A2
TRUST 7.67% TRUST 8.00%
AIRCRAFT EQUIPMENT EQUIPMENT 1996-A
NO. NOTES NOTES TRUST TOTAL
- -------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
1....................................... $ 19,469,000.00 $ 4,371,000.00 $ 23,840,000.00
2....................................... 19,890,000.00 4,768,500.00 24,658,500.00
3....................................... 19,890,000.00 4,768,500.00 24,658,500.00
4....................................... 15,987,000.00 8,362,000.00 24,349,000.00
5....................................... 18,950,000.00 5,394,500.00 24,344,500.00
6....................................... 18,950,000.00 5,394,500.00 24,344,500.00
--------------- -------------- ---------------
Total......................... $113,136,000.00 $33,059,000.00 $146,195,000.00
=============== ============== ===============
</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 2 and July
2 in each year, commencing January 2, 1997. Such interest will be computed on
the basis of a 360-day year of twelve 30-day months.
S-15
<PAGE> 16
The Scheduled Payments of principal of the Equipment Notes issued in
respect of each Aircraft and held in the 1996-A1 Trust and the 1996-A2 Trust
will be payable as set forth below:
1996-A1 TRUST
7.67% EQUIPMENT NOTES
<TABLE>
<CAPTION>
REGULAR
DISTRIBUTION AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AGGREGATE
DATE NO. 1 NO. 2 NO. 3 NO. 4 NO. 5 NO. 6 TOTAL
- ----------- -------------- -------------- -------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 2,
1997..... $ 105,649.00 $ 104,299.50 $ 104,299.50 $ 93,460.00 $ 102,948.00 $ 102,948.00 $ 613,604.00
January 2,
1998..... 374,825.00 370,068.50 370,068.50 334,789.00 368,740.50 368,740.50 2,187,232.00
January 2,
1999..... 402,604.00 397,495.50 397,495.50 359,602.00 406,177.00 406,177.00 2,369,551.00
January 2,
2000..... 440,146.00 1,837,912.00 1,837,912.00 1,462,946.00 1,816,749.00 1,816,749.00 9,212,414.00
January 2,
2001..... 1,862,505.00 592,680.00 592,680.00 809,287.00 589,086.00 589,086.00 5,035,324.00
January 2,
2002..... 634,350.00 638,836.00 638,836.00 583,792.00 636,070.50 636,070.50 3,767,955.00
January 2,
2003..... 689,270.00 694,270.00 694,270.00 633,398.00 689,796.50 689,796.50 4,090,801.00
January 2,
2004..... 737,017.00 740,681.00 740,681.00 680,670.00 738,826.50 738,826.50 4,376,702.00
January 2,
2005..... 797,283.00 735,518.00 735,518.00 732,164.00 581,016.50 581,016.50 4,162,516.00
January 2,
2006..... 862,294.00 848,981.50 848,981.50 658,850.00 692,741.50 692,741.50 4,604,590.00
January 2,
2007..... 931,070.00 930,616.50 930,616.50 514,208.00 865,560.00 865,560.00 5,037,631.00
January 2,
2008..... 1,333,026.00 1,341,357.00 1,341,357.00 538,757.00 1,087,375.00 1,087,375.00 6,729,247.00
January 2,
2009..... 1,622,031.00 1,635,944.00 1,635,944.00 1,051,244.00 1,576,851.50 1,576,851.50 9,098,866.00
January 2,
2010..... 1,751,403.00 1,766,424.00 1,766,424.00 1,072,138.00 1,702,619.50 1,702,619.50 9,761,628.00
January 2,
2011..... 1,891,092.00 1,907,314.00 1,907,314.00 972,267.00 1,838,418.50 1,838,418.50 10,354,824.00
January 2,
2012..... 2,041,923.00 2,059,438.00 2,059,438.00 1,690,351.00 1,985,048.00 1,985,048.00 11,821,246.00
January 2,
2013..... 2,204,784.00 2,223,696.00 2,223,696.00 1,825,172.00 2,143,373.00 2,143,373.00 12,764,094.00
January 2,
2014..... 787,728.00 1,064,468.50 1,064,468.50 1,973,905.00 1,128,602.50 1,128,602.50 7,147,775.00
-------------- -------------- -------------- -------------- -------------- -------------- ---------------
$19,469,000.00 $19,890,000.00 $19,890,000.00 $15,987,000.00 $18,950,000.00 $18,950,000.00 $113,136,000.00
============== ============== ============== ============== ============== ============== ===============
</TABLE>
1996-A2 TRUST
8.00% EQUIPMENT NOTES
<TABLE>
<CAPTION>
REGULAR AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AIRCRAFT AGGREGATE
DISTRIBUTION DATE NO. 1 NO. 2 NO. 3 NO. 4 NO. 5 NO. 6 TOTAL
- ----------------- ------------- ------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 2,
2014........... $1,295,403.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 1,295,403.00
January 2,
2016........... 0.00 0.00 0.00 2,076,445.00 10,295.00 10,295.00 2,097,035.00
January 2,
2017........... 0.00 475,154.50 475,154.50 2,216,286.00 0.00 0.00 3,166,595.00
July 2, 2017..... 0.00 0.00 0.00 84,714.00 0.00 0.00 84,714.00
January 2,
2018........... 1,070,467.00 2,223,942.50 2,223,942.50 1,250,200.00 2,137,582.00 2,137,582.00 11,043,716.00
July 2, 2018..... 0.00 0.00 0.00 138,110.00 117,635.00 117,635.00 373,380.00
January 2,
2019........... 1,020,448.00 1,052,963.00 1,052,963.00 2,364,079.00 2,371,036.00 2,371,036.00 10,232,525.00
July 2, 2019..... 984,682.00 1,016,440.00 1,016,440.00 225,615.00 217,182.00 217,182.00 3,677,541.00
January 2,
2020........... 0.00 0.00 0.00 0.00 540,770.00 540,770.00 1,081,540.00
January 2,
2021........... 0.00 0.00 0.00 6,551.00 0.00 0.00 6,551.00
------------- ------------- ------------- ------------- ------------- ------------- --------------
$4,371,000.00 $4,768,500.00 $4,768,500.00 $8,362,000.00 $5,394,500.00 $5,394,500.00 $33,059,000.00
============= ============= ============= ============= ============= ============= ==============
</TABLE>
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.
S-16
<PAGE> 17
REDEMPTION
Redemption with Premium. The Equipment Notes issued with respect to each
Aircraft will be 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
certain Regular Distribution Dates as specified in the related Lease (the
earliest of which is January 2, 2015) 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, 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 is made prior to September 18,
2007 in the case of Equipment Notes held in the 1996-A1 Trust and March 2, 2018
in the case of Equipment Notes held in the 1996-A2 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, 18.2(b) and 18.2(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)
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))
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))
S-17
<PAGE> 18
Redemption Without Premium. The Equipment Notes issued with respect to each
Aircraft will be 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 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 1996-A1 Trust or 1996-A2 Trust.
(Indentures, Sections 6.01, 6.02 and 8.02)
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will 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 will be 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 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 will provide 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)
S-18
<PAGE> 19
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 will be 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 will provide 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)
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
S-19
<PAGE> 20
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 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
S-20
<PAGE> 21
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. Notwithstanding 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
S-21
<PAGE> 22
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 will provide 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 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 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. It is also a condition to such assumption that
Southwest deliver to the Loan Trustee under such Indenture an opinion of counsel
to the effect that no Certificateholder will be required to recognize gain or
loss for tax purposes in connection with such assumption. (Indentures, Section
7.03)
S-22
<PAGE> 23
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 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, in the case of three of
the Aircraft the obligations of Southwest to the related Owner Trustee to pay
such installments will be secured by such Aircraft, 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) 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 will be 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 2 and July 2,
commencing January 2, 1997 (or, if such day is not a Business Day, on the next
succeeding Business Day), and will be 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). 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 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 will be a general obligation of Southwest. (Leases,
Section 3; Indentures, Article 3)
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.
S-23
<PAGE> 24
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 will be registered in the name of the related
Owner Trustee under the laws of the United States; provided, however, that 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 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, three of the 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 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 three 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
S-24
<PAGE> 25
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 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
S-25
<PAGE> 26
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 certain specified dates, the earliest of which is
January 2, 2015. 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 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,
S-26
<PAGE> 27
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 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,
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 will be 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
S-27
<PAGE> 28
Owner Participant has represented and warranted that it is a U.S. Citizen. If an
Owner Participant 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, 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)
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. Such discussion does not reflect the impact of
the final Treasury Regulations issued under Section 1001 of the Code on June 25,
1996. Under the final Section 1001 Treasury Regulations, Southwest's assumption
of an Owner Trustee's obligations under the related Equipment Notes upon
Southwest's purchase of an Aircraft would be treated for federal income tax
purposes as a taxable exchange of such Equipment Notes for new Equipment Notes,
resulting in the recognition of taxable gain or loss equal to the difference
between the Certificate Owner's adjusted tax basis in such Equipment Notes and
the amount realized in the deemed exchange. Under each Indenture, it is a
condition to any such assumption by Southwest that Southwest deliver to the Loan
Trustee under such Indenture an opinion of counsel to the effect that no
Certificate Owner will be required to recognize gain or loss for tax purposes in
connection with such assumption. Thus, unless there is a change in law,
Southwest will not be permitted to assume an Owner Trustee's obligations under
the related Equipment Notes in connection with the purchase of an Aircraft. See
"Description of the Equipment Notes -- Assumption of Obligations by Southwest"
in this Prospectus Supplement.
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 Morgan Stanley
& Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Salomon Brothers Inc an administrative exemption (Prohibited Transaction
Exemption 90-24, Exemption Application No. D-8019, 55 Fed. Reg. 20548 (1990),
Prohibited Transaction Exemption 90-29, Exemption Application D-8012, 55 Fed.
Reg. 21459 (1990) and Prohibited Transaction Exemption 89-89, Exemption
Application No. D-6446, 54 Fed. Reg. 42,589 (1989), as amended, 55 Fed. Reg.
48,939 (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. In addition, there
are various other terms and conditions to the applicability of the Exemptions.
S-28
<PAGE> 29
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.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
with Southwest (the "Underwriting Agreement"), the underwriters named below
(collectively, the "Underwriters") have severally agreed to purchase from the
Trustee the respective aggregate principal amount of each series of the
Certificates, in each case as set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
1996-A1 1996-A2
UNDERWRITER CERTIFICATES CERTIFICATES
- --------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Morgan Stanley & Co. Incorporated.............................. $ 37,712,000 $ 11,021,000
Merrill Lynch, Pierce Fenner & Smith
Incorporated...................................... 37,712,000 11,019,000
Salomon Brothers Inc........................................... 37,712,000 11,019,000
------------ ------------
Total................................................ $113,136,000 $ 33,059,000
============ ============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Certificates are subject to
the approval of certain legal matters by their counsel and to 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.
The Underwriters initially propose to offer all or part of the Certificates
directly to the public at the public offering prices for each series set forth
on the cover page of this Prospectus Supplement and may offer a portion of the
Certificates to dealers at a price which represents a concession not in excess
of the amounts set forth below for the respective series of the Certificates.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of the amounts set forth below for the respective series of the
Certificates for certain dealers. After the initial public offering, the public
offering prices and such concessions may from time to time be varied by the
Underwriters.
<TABLE>
<CAPTION>
CONCESSION TO REALLOWANCE
SERIES DEALERS CONCESSION
------------------------------------ ------------- -----------
<S> <C> <C>
1996-A1............................. .40% .25%
1996-A2............................. .45 .25
</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. No Underwriter is obligated, however, to make a
market in the Certificates
S-29
<PAGE> 30
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.
It is expected that delivery of the Certificates will be made against
payment therefor on or about the date specified in the last paragraph of the
cover page of this Prospectus Supplement, which will be the tenth business day
following the date of pricing of the Certificates (such settlement cycle being
herein referred to as "T+10"). Under Rule 15c6-1 under the Exchange Act, trades
in the secondary market generally are required to settle in three business days,
unless the parties to any such trade expressly agree otherwise. Accordingly,
purchasers who wish to trade Certificates on the date of pricing or the next
succeeding business day will be required, by virtue of the fact that the
Certificates initially will settle in T+10, to specify an alternate settlement
cycle at the time of any such trade to prevent a failed settlement. Purchasers
of Certificates who wish to trade Certificates on the date of pricing or the
next succeeding business day should consult their own advisor.
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 14,200 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 both this Prospectus Supplement and the Prospectus
are based on the opinion of Vinson & Elkins L.L.P., Dallas, Texas. Members of
the firm of Vinson & Elkins L.L.P. having responsibility for the Company's legal
matters beneficially own approximately 5,500 shares of common stock of the
Company.
S-30
<PAGE> 31
[SOUTHWEST LOGO]
