Item 1.01. Entry into a Material Definitive Agreement
The information included pursuant to Item 2.03 is incorporated by reference into
this Item 1.01.
Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant
On January 15, 2021, Southwest Airlines Co. (the "Company") entered into
definitive documentation with the United States Department of Treasury
("Treasury") with respect to funding support pursuant to Subtitle A of Title IV
of Division N of the Consolidated Appropriations Act, 2021 (the "PSP Extension
Law"). Funds received under the PSP Extension Law must be used to pay qualifying
Employee salaries, wages and benefits through at least March 31, 2021. The
Company's expected aggregate receipts under the program total $1,727,370,400,
for which the Company expects to provide Treasury consideration in the form of a
promissory note in an amount equal to $488,211,120 and of warrants to purchase
up to an aggregate of 1,054,907 shares of the Company's common stock, subject to
adjustments by Treasury pursuant to the terms of the PSP Extension Law in each
case. Funds are expected to be disbursed to the Company in multiple
installments.
On January 15, 2021, the Company entered into a payroll support program
extension agreement (the "PSP Extension Agreement") with Treasury, pursuant to
which the Company will receive payroll support funding ("Payroll Support") under
the PSP Extension Law. On January 15, 2021, the Company received $863,685,200,
or 50 percent, of the total expected Payroll Support (the "Initial Payroll
Support") pursuant to the PSP Extension Agreement. Pursuant to the PSP Extension
Agreement and the PSP Extension Law, in connection with the receipt of Payroll
Support, the Company is subject to certain restrictions, including prohibitions
against involuntary furloughs and reductions in employee pay rates and benefits
from the date of the PSP Extension Agreement through March 31, 2021; the
elimination of share repurchases and dividends through March 31, 2022; and
limits on executive compensation until October 1, 2022.
As consideration for the Payroll Support, on January 15, 2021, the Company
issued a promissory note (the "Note") in favor of Treasury and entered into a
warrant agreement with Treasury (the "Warrant Agreement" and together with the
PSP Extension Agreement and the Note, the "Payroll Support Documents"), pursuant
to which the Company agreed to issue warrants (each, a "Warrant") to purchase
common stock of the Company to Treasury. In connection with the disbursement of
the Initial Payroll Support on January 15, 2021, the Note was issued in an
initial amount of $229,105,560, and the Company issued a Warrant to purchase up
to 495,042 shares of common stock. Upon each subsequent disbursement of Payroll
Support to the Company under the PSP Extension Agreement after January 15, 2021,
(i) the principal amount of the Note will automatically be increased in an
amount equal to 30 percent of any such disbursement and (ii) the Company will
issue an additional Warrant to Treasury in an amount equal to 10 percent of the
principal amount of the increase to the Note in connection with such
disbursement of Payroll Support, divided by the strike price of $46.28 (which
was the closing price of the Company's common stock on December 24, 2020).
The Note matures in full on January 15, 2031, and is subject to mandatory
prepayment requirements in connection with certain change of control triggering
events that may occur prior to its maturity. The Company has an option to prepay
the Note at any time without premium or penalty. Amounts outstanding under the
Note bear interest at a rate of 1.00 percent before January 15, 2026 and,
afterwards, at a rate equal to Secured Overnight Financing Rate (SOFR) or other
benchmark replacement rate consistent with customary market conventions plus
margin of 2.00 percent. The Note contains customary representations and
warranties and events of default.
The Warrant Agreement sets out the Company's obligations to issue Warrants in
connection with disbursements of Payroll Support and to file or designate a
resale shelf registration statement for the Warrants and the underlying shares
of common stock. The Company has also granted Treasury certain demand
underwritten offering and piggyback registration rights with respect to the
Warrants and the underlying common stock. Each Warrant is exercisable at a
strike price of $46.28 per share of common stock and will expire on the fifth
anniversary of the issue date of such Warrant. Warrants will be settled through
net share settlement or net cash settlement, at the Company's option. The
Warrants include adjustments for below market issuances, payment of dividends
and other customary anti-dilution provisions. The Warrants do not have voting
rights.
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The description of the Payroll Support Documents in this Item 2.03 is qualified
in its entirety by reference to the full text of each of the Payroll Support
Documents, copies of which are filed as exhibits to this Current Report on Form
8-K.
The Payroll Support Documents are not intended to be a source of factual,
business, or operational information about the Company or its subsidiaries. The
representations and warranties and covenants contained in the Payroll Support
Documents were made only for purposes of such agreements and as of specific
dates, were solely for the benefit of the parties to such agreements, and may be
subject to limitations agreed upon by the parties, including being qualified by
disclosures for the purpose of allocating contractual risk between the parties
instead of establishing matters as facts; and may be subject to standards of
materiality applicable to the contracting parties that differ from those
applicable to investors or security holders. Accordingly, investors should not
rely on the representations, warranties, and covenants or any descriptions
thereof as characterizations of the actual state of facts or condition of the
Company.
Cautionary Statement Regarding Forward-Looking Statements
This Current Report on Form 8-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Specific forward-looking statements include,
without limitation, statements related to the Company's expectations about
future disbursements pursuant to the Payroll Support Documents. These
forward-looking statements are based on the Company's current intent and
expectations and are not guarantees of future events. Forward-looking statements
involve risks, uncertainties, assumptions, and other factors that are difficult
to predict and that could cause actual results to vary materially from those
expressed in or indicated by them. Factors include, among others, (i) Treasury's
right pursuant to the Payroll Support Documents to amend the documents or
require new or additional conditions of the Payroll Support in ways that may be
materially adverse to the Company and (ii) the enactment or adoption of future
laws, statutes, and regulations and interpretation or enforcement of current and
future laws, statutes, and regulations that affect the terms or application of
the Payroll Support Documents and that may have a material adverse effect on the
Company. These factors are not necessarily all of the important factors that
could cause actual results to differ materially from those expressed in any of
the forward-looking statements contained herein. Other unknown or unpredictable
factors could also have material adverse effects on the Company's expectations
described herein.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
Exhibit
Number Description
10.1 Payroll Support Program Extension Agreement by and between Southwest
Airlines Co. and the United States Department of the Treasury, dated
January 15, 2021.
10.2 Warrant Agreement by and between Southwest Airlines Co. and the
United States Department of the Treasury, dated January 15, 2021.
10.3 Promissory Note, from Southwest Airlines Co. to the United States
Department of the Treasury, January 15, 2021.
104 Cover Page Interactive Data File (embedded within the Inline XBRL
document).
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