Southwest Airlines 2013 Annual Report Download - page 102

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 53.3761 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 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 convertible senior notes are not redeemable at the Company’s option prior to
maturity. The holders of the 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 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 9.
Other Company Long-Term Debt
On April 29, 2009, the Company entered into a term loan agreement providing for loans to the Company
aggregating up to $332 million, to be secured by mortgages on 14 of the Company’s 737-700 aircraft. The
Company borrowed the full $332 million and secured the loan with the requisite 14 aircraft mortgages. The loan
matures on May 6, 2019, and is being repaid via quarterly installments of principal that began August 6, 2009.
The loan bears interest at the LIBO Rate (as defined in the term loan agreement) plus 3.30%, and interest is
payable quarterly, which payments began on August 6, 2009. Pursuant to the terms of the term loan agreement,
the Company entered into an interest rate swap agreement to convert the variable rate on the term loan to a fixed
6.315% until maturity.
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
Company has borrowed the full $124 million and secured this loan with the requisite five aircraft mortgages. The
loan matures on July 1, 2019, and is repayable semi-annually in installments of principal that began January 1,
2010. The loan bears interest at a fixed rate of 6.84%, and interest is payable semi-annually, which payments
began on January 1, 2010.
On May 6, 2008, the Company entered into a term loan agreement providing for loans to the Company
aggregating up to $600 million, to be secured by first-lien mortgages on 21 of the Company’s 737-700 aircraft.
On May 9, 2008, the Company borrowed the full $600 million and secured these loans with the requisite 21
aircraft mortgages. The loans mature on May 9, 2020, and are repayable quarterly in installments of principal,
with the first payment made on August 9, 2008. The loans bear interest at the LIBO Rate (as defined in the term
loan agreement) plus 0.95%, and interest is payable quarterly. Pursuant to the terms of the term loan agreement,
the Company entered into an interest rate swap agreement to convert the variable rate on the term loan to a fixed
5.223% until maturity.
On October 3, 2007, grantor trusts established by the Company issued $500 million Pass Through
Certificates consisting of $412 million 6.15% Series A certificates and $88 million 6.65% Series B certificates. A
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