Southwest Airlines 2011 Annual Report Download - page 98

effect at the commencement of each semi-annual or three-month period, as applicable. As of December 31, 2011,
the weighted average interest rate is 1.91 percent. Principal and interest under the notes are payable semi-
annually or every three months as applicable. As of December 31, 2011, the remaining debt outstanding may be
prepaid without penalty under all aircraft loans provided under such facilities with the exception of two aircraft
loans. Under the aircraft loans for such two aircraft, the right to prepay without penalty commences on the
second anniversary or third anniversary of the date such loans were made, or March 2012 and January 2013,
respectively. The notes mature in years 2016 to 2020. As discussed further in Note 10, a portion of the above
floating-rate debt has been effectively converted to a fixed rate via interest rate swap agreements which expire
between 2016 and 2020.
As of December 31, 2011, three Boeing 737 aircraft were financed under a fixed-rate facility. Each note is
secured by a first mortgage on the aircraft to which it relates. As of December 31, 2011, the weighted average
interest rate is 7.02 percent. Payments of principal and interest under the notes are due semi-annually. The
remaining debt outstanding may be prepaid without penalty. The notes mature in years 2016 to 2018.
As of December 31, 2011, eight Boeing 717 aircraft were pledged as collateral for the obligations related to
enhanced equipment trust certificates (EETCs). Principal and interest payments on the EETCs are due semi-
annually through April 2017. The EETCs bear interest at a fixed rate of 10.38 percent.
In October 2009, AirTran Holdings completed a public offering of $115 million of convertible senior notes
due in 2016. Such notes bear interest at 5.25 percent payable semi-annually, in arrears, on May 1 and
November 1. As a result of the acquisition and subsequent dividends declared by the Company, the convertible
senior notes are convertible into AirTran conversion units of 164.2233 per $1,000 in principal amount of such
notes. Based on the terms of the merger agreement, the holders of these notes would receive shares of the
Company’s common stock at a conversion rate of 52.7157 shares and $615.16 in cash per $1,000 in principal
amount of such notes. This conversion rate is subject to adjustment under certain circumstances such as: granting
of stock and cash dividends, a make-whole fundamental change of ownership provision, the issuance of rights or
warrants, and/or a distribution of capital stock. Subsequent to the acquisition, holders of $5 million in principal
amount elected to convert their notes. Remaining holders may convert their 5.25% convertible senior notes into
cash and shares of common stock at their option at any time. As such, the Company has classified $68 million,
which is the cash portion the Company would be required to pay upon conversion, as current maturities in the
Consolidated Balance Sheet. The 5.25% convertible senior notes are not redeemable at the Company’s option
prior to maturity. The holders of the 5.25% convertible senior notes may require the Company to repurchase such
notes, in whole or in part, for cash upon the occurrence of a fundamental change, as defined in the governing
supplemental indenture, at a repurchase price of 100 percent of the principal amount plus any accrued and unpaid
interest.
As a result of triggering the fundamental change of ownership provision in the 5.25% convertible senior
notes and as a result of the acquisition, an embedded conversion option is deemed to exist. In accordance with
applicable accounting guidance, the embedded conversion option was effectively separated and accounted for as
a free-standing derivative. A fair value calculation, utilizing similar market yields and the Company’s common
stock price, was performed for the debt with and without the equity to measure the equity component. The value
allocated to the conversion option of $35 million is classified as permanent equity. The estimated premium
associated with the notes excluding the equity feature was $10 million, and is being amortized to interest expense
over the remaining life of the notes. The dilutive effect of the shares that would be issued if the convertible notes
were converted is considered in the Company’s net income per share calculations, unless such conversion would
be considered antidilutive. See Note 12.
Other Company Long-Term Debt
On July 1, 2009, the Company entered into a term loan agreement providing for loans to the Company
aggregating up to $124 million, to be secured by mortgages on five of the Company’s 737-700 aircraft. The
92