<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration Number 333-34545
PROSPECTUS SUPPLEMENT (Subject to Completion, Issued October 10, 1997)
(To Prospectus dated September 4, 1997)
$751,990,600
LOGO
1997-4 Pass Through Trusts
PASS THROUGH CERTIFICATES, SERIES 1997-4
------------------------
Each Pass Through Certificate (collectively, the "Certificates") will
represent a fractional undivided interest in one of the three Continental
Airlines 1997-4 Pass Through Trusts (the "Class A Trust", the "Class B Trust"
and the "Class C Trust", and, collectively, the "Trusts") to be formed pursuant
to a pass through trust agreement between Continental Airlines, Inc.
("Continental" or the "Company") and Wilmington Trust Company (the "Trustee"),
as trustee (the "Basic Agreement"), and three separate supplements thereto
(each, a "Trust Supplement" and, together with the Basic Agreement,
collectively, the "Pass Through Trust Agreements") relating to such Trusts
between the Company and the Trustee, as trustee under each Trust. Pursuant to
the Intercreditor Agreement (as defined herein), (i) the Certificates of the
Class B Trust will be subordinated in right of payment to the Certificates of
the Class A Trust and (ii) the Certificates of the Class C Trust will be
subordinated in right of payment to the Certificates of the Class B Trust.
Payments of interest on the Certificates to be issued by each Trust will be
supported by two separate liquidity facilities for the benefit of the holders of
such Certificates, such facilities to be provided initially by ABN AMRO Bank
N.V., acting through its Chicago branch, and Westdeutsche Landesbank, acting
through its New York branch, in an amount sufficient to pay interest thereon at
the applicable interest rate for such Certificates on up to three successive
semiannual distribution dates (except that the liquidity facilities will not
cover interest payable on the Deposits (as defined herein) by the Depositary (as
defined herein)).
The Trusts have been established for the purpose of acquiring equipment
notes (the "Equipment Notes") expected to be issued in connection with the
financing of a portion of the purchase price of three Boeing 777-200 aircraft,
five Boeing 737-524 aircraft, six Boeing 737-724 aircraft and ten Boeing 737-824
aircraft (collectively, the "Aircraft"), which are scheduled for delivery during
the period April 1998 through November 1998, with the final delivery for
purposes of purchase by the Trusts no later than December 31, 1998 (or May 31,
1999 or later under certain circumstances) (the "Delivery Period"). The
Equipment Notes will be issued, at Continental's election, either (i) on a
non-recourse basis by the trustees of separate owner trusts (each, an "Owner
Trustee") in connection with separate leveraged lease transactions, in which
case the applicable Aircraft will be leased to Continental (collectively, the
"Leased Aircraft"), or (ii) on a recourse basis by Continental in connection
with separate secured loan transactions, in which case the applicable Aircraft
will be owned by Continental (collectively, the "Owned Aircraft").
The cash proceeds of the offering of Certificates by each Trust will be paid
to First Security Bank, N.A., as escrow agent (the "Escrow Agent"), under an
Escrow and Paying Agent Agreement for the benefit of the holders of Certificates
issued by such Trust (each, an "Escrow Agreement"). The Escrow Agent will cause
such cash proceeds to be deposited (each, a "Deposit") with Credit Suisse First
Boston, New York branch (the "Depositary"), in accordance with the Deposit
Agreement relating to such Trust (each, a "Deposit Agreement"). Pursuant to each
Deposit Agreement, the Depositary will pay for distribution to the holders of
Certificates issued by each Trust on each semiannual distribution date an amount
equal to interest accrued on the Deposits relating to such Trust during the
applicable interest period at a rate per annum equal to the interest rate
applicable to the Certificates issued by such Trust. Upon each delivery of an
Aircraft during the Delivery Period, the Trustee for the Class A Trust, the
Class B Trust and the Class C Trust will cause to be withdrawn from the Deposits
relating to such Trust funds sufficient to purchase the Equipment Note of the
series applicable to such Trust issued with respect to such Aircraft.
(Continued on the following page.)
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE S-32 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
Final Expected
Pass Through Principal Interest Distribution Public Offering
Certificates Amount* Rate Date* Price(1)(2)
- ------------ ------------ ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
1997-4A $507,212,558 % January 2, 2018 100%
1997-4B 134,528,309 January 2, 2018 100
1997-4C 110,249,733 January 2, 2008 100
</TABLE>
- ------------
* The principal amounts and the final expected distribution dates are
indicative only and subject to change.
(1) Plus accrued interest, if any, from October , 1997.
(2) The underwriting commission varies by Trust and aggregates $ , which
constitutes % of the principal amount of the Certificates offered hereby.
The underwriting commissions, fees and certain other expenses estimated at
approximately $ , will be paid by Continental. The proceeds of the
Certificates will be deposited by the Escrow Agent with the Depositary and
thereafter used by the Trusts to purchase the Equipment Notes during the
Delivery Period.
------------------------
The Certificates offered hereby are offered by the Underwriters (as defined
herein), 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 October , 1997 through the facilities of The
Depository Trust Company, against payment therefor in immediately available
funds.
------------------------
MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON
CHASE SECURITIES INC. SALOMON BROTHERS INC
October , 1997
INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT
TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS
TO BUY BE ACCEPTED PRIOR TO THE TIME A
FINAL PROSPECTUS SUPPLEMENT IS DELIVERED. THIS PRELIMINARY PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 2
(Continued from the cover page.)
If any funds remain as Deposits relating to any Trust at the end of the
Delivery Period or, if earlier, upon the acquisition by the Trusts of the
Equipment Notes with respect to all of the Aircraft (the "Delivery Period
Termination Date"), such funds will be withdrawn by the Escrow Agent for such
Trust and distributed, with accrued and unpaid interest thereon, to the
Certificateholders (as defined herein) of such Trust after at least 15 days'
prior notice. If such remaining Deposits with respect to all of the Trusts
exceed $15 million (the "Par Redemption Amount"), such distribution will include
a premium payable by Continental equal to the Deposit Make-Whole Premium (as
defined herein) with respect to the remaining Deposits applicable to such Trust
in excess of such Trust's proportionate share of the Par Redemption Amount.
Since the maximum principal amount of Equipment Notes may not be issued with
respect to an Aircraft and, in any such case, the Equipment Notes to be acquired
by the Class C Trust are more likely not to be issued in the maximum principal
amount as compared to the other Equipment Notes, it is more likely that a
distribution of unused Deposits will be made with respect to the Certificates
issued by the Class C Trust as compared to the other Certificates. In addition,
notwithstanding the Par Redemption Amount limitation, if any Aircraft is not
delivered by the manufacturer prior to the Delivery Period Termination Date due
to any reason not occasioned by Continental's fault or negligence and no
Substitute Aircraft (as defined herein) is provided in lieu of such Aircraft, no
Deposit Make-Whole Premium will be paid with respect to the unused Deposits to
be distributed as a result of such failure to deliver in an amount equal to the
maximum principal amount of Equipment Notes that could have been issued and
acquired by such Trust with respect to such Aircraft in accordance with the
Mandatory Economic Terms (as defined herein) and such unused Deposits shall not
be included in the calculation of the Par Redemption Amount.
The Equipment Notes in respect of each Aircraft will be issued in three
series (the "Series A Equipment Notes", the "Series B Equipment Notes" and the
"Series C Equipment Notes"). In addition, Continental may elect to issue a
fourth series of Equipment Notes (the "Series D Equipment Notes") in connection
with the financing of Owned Aircraft, but Series D Equipment Notes will not be
purchased by the Class A Trust, the Class B Trust or the Class C Trust and will
be funded from other sources. The Class A Trust, the Class B Trust and the Class
C Trust will purchase the series of Equipment Notes issued with respect to each
Aircraft that has 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 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, in the case of each Leased Aircraft, by
an assignment of the lease relating thereto, including the right to receive
rentals payable with respect to such Leased Aircraft by Continental. Although
neither the Certificates nor the Equipment Notes issued with respect to the
Leased Aircraft will be direct obligations of, or guaranteed by, Continental,
the amounts unconditionally payable by Continental for lease of the Leased
Aircraft will be sufficient to pay in full when due all amounts required to be
paid on the Equipment Notes issued with respect to the Leased Aircraft. The
Equipment Notes issued with respect to the Owned Aircraft will be direct
obligations of Continental.
All of the Equipment Notes held in each Trust will accrue interest at the
applicable rate per annum for the Certificates issued by such Trust, payable on
January 2 and July 2 of each year, commencing on January 2, 1998 or, if later,
the first such date to occur after initial issuance thereof. The Deposits
relating to each Trust will accrue interest at the applicable rate per annum for
the Certificates issued by such Trust, payable on January 2 and July 2 of each
year, commencing on January 2, 1998, until the Deposits have been fully
withdrawn. The scheduled payments of interest on the Equipment Notes and on the
Deposits with respect to each Trust, taken together, will be sufficient to pay
an amount equal to accrued interest on the outstanding Certificates issued by
such Trust at the rate per annum applicable thereto. Such interest will be
distributed to Certificateholders of such Trust on each such date, subject, in
the case of interest payments made pursuant to the Equipment Notes, to the
Intercreditor Agreement. See "Description of the Certificates -- General" and
" -- 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 and
July 2 in certain years, commencing on July 2, 1999, in the case of Series A
Equipment Notes, January 2, 2000, in the case of Series B Equipment Notes and
July 2, 1999, in the case of Series C Equipment Notes. Such payments will be
made, subject to certain adjustments, in accordance with the principal repayment
schedule set forth below under "Description of the Certificates -- Pool
Factors", in each case subject to the Intercreditor Agreement.
On the earlier of (i) the first Business Day (as defined herein) after
December 31, 1998 or, if later, the fifth Business Day after the Delivery Period
Termination Date and (ii) the fifth Business Day after the occurrence of a
Triggering Event (as defined herein) (such Business Day, the "Transfer Date"),
each of the Trusts established at the time of the original issuance of the
Certificates (the "Original Trusts") will transfer
S-2
<PAGE> 3
and assign all of its assets and rights to a newly-created successor trust with
substantially identical terms (each, a "Successor Trust"). The institution
acting as Trustee of each of the Original Trusts (each, an "Original Trustee")
will also act as Trustee of the corresponding Successor Trust (each, a "New
Trustee"), and each New Trustee will assume the obligations of the related
Original Trustee under each transaction document to which such Original Trustee
was a party. Upon the effectiveness of such transfer, assignment and assumption,
each of the Original Trusts will be liquidated and each of the Certificates will
represent the same percentage interest in the Successor Trust as it represented
in the Original Trust immediately prior to such transfer, assignment and
assumption. Unless the context otherwise requires, all references in this
Prospectus Supplement to the Trusts, the Trustees, the Pass Through Trust
Agreements and similar terms shall apply to the Original Trusts until the
effectiveness of such transfer, assignment and assumption and, thereafter shall
apply to the Successor Trusts.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS
PROSPECTUS SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CONTINENTAL
OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF CONTINENTAL SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Prospectus Supplement Summary................................................. S-5
Risk Factors.................................................................. S-32
Use of Proceeds............................................................... S-41
The Company................................................................... S-42
Description of the Certificates............................................... S-46
Description of the Deposit Agreements......................................... S-60
Description of the Escrow Agreements.......................................... S-63
Description of the Liquidity Facilities....................................... S-63
Description of the Intercreditor Agreement.................................... S-68
Description of the Aircraft and the Appraisals................................ S-72
Description of the Equipment Notes............................................ S-75
Certain U.S. Federal Income Tax Consequences.................................. S-92
Certain Delaware Taxes........................................................ S-96
ERISA Considerations.......................................................... S-96
Plan of Distribution.......................................................... S-99
Legal Matters................................................................. S-100
Experts....................................................................... S-100
Index of Terms................................................................ Appendix I
Appraisal Letters............................................................. Appendix II
</TABLE>
S-3
<PAGE> 4
PROSPECTUS
<TABLE>
<S> <C>
Available Information......................................................... 2
Incorporation of Certain Documents by Reference............................... 2
The Company................................................................... 3
Use of Proceeds............................................................... 3
Ratio of Earnings to Fixed Charges............................................ 3
General Outline of Trust Structure............................................ 4
Description of the Certificates............................................... 4
Description of the Equipment Notes............................................ 14
Certain United States Federal Income Tax Consequences......................... 20
ERISA Considerations.......................................................... 22
Plan of Distribution.......................................................... 22
Legal Opinions................................................................ 23
Experts....................................................................... 24
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PASS THROUGH
CERTIFICATES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING, AND MAY BID FOR AND PURCHASE THE PASS THROUGH CERTIFICATES IN THE
OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION".
S-4
<PAGE> 5
PROSPECTUS SUPPLEMENT SUMMARY
The following summary information 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 herein
are defined elsewhere in this Prospectus Supplement on the pages indicated in
the "Index of Terms" appearing as Appendix I to this Prospectus Supplement, and
all cross references herein refer to sections of this Prospectus Supplement
unless otherwise indicated.
SUMMARY OF TERMS OF CERTIFICATES*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
CERTIFICATES CERTIFICATES CERTIFICATES
---------------- ---------------- ----------------
<S> <C> <C> <C>
Aggregate Face Amount........................ $507,212,558 $134,528,309 $110,249,733
Ratings:
Moody's.................................... A1 A3 Baa2
Standard & Poor's.......................... AA+ A+ BBB+
Initial Loan to Aircraft Value
(cumulative)(1)............................ 43.1% 54.6% 63.9%
Expected Principal Distribution Window (in
years)..................................... 1.7 - 20.2 2.2 - 20.2 1.7 - 10.2
Initial Average Life (in years).............. 12.7 11.6 6.1
Regular Distribution Dates................... January 2 January 2 January 2
and July 2 and July 2 and July 2
Final Expected Regular Distribution Date..... January 2, 2018 January 2, 2018 January 2, 2008
Final Maturity Date.......................... July 2, 2019 July 2, 2019 July 2, 2009
Minimum Denomination......................... $1,000 $1,000 $1,000
Section 1110 Protection(2)................... Yes Yes Yes
Liquidity Facility Coverage(3)............... 3 semiannual 3 semiannual 3 semiannual
interest interest interest
payments payments payments
Liquidity Facility Amount at January 2,
1999(3).................................... $ $ $
</TABLE>
- ------------
* The aggregate face amount, the initial loan to Aircraft value, the expected
principal distribution window, the expected initial average life, the final
expected Regular Distribution Date and the Final Maturity Date for each
Class of Certificates are indicative only and subject to change.
(1) Determined as of January 2, 1999, the first Regular Distribution Date after
the scheduled Delivery Period Termination Date, assuming that all Aircraft
are delivered prior to such date, that the maximum principal amount of
Equipment Notes is issued with respect to all Aircraft and that the
aggregate appraised Aircraft value is $1,176,251,000. The appraised value is
only an estimate and reflects certain assumptions. See "Description of the
Aircraft and the Appraisals -- The Appraisals". The Mandatory Economic Terms
require that the initial loan to Aircraft value, based on the foregoing
appraisals, for each Aircraft as of its delivery date be not in excess of
43.7% in the case of the Series A Equipment Notes, 56.0% in the case of
Series B Equipment Notes and 68.0% in the case of the Series C Equipment
Notes.
(2) Following the delivery of each Aircraft, the benefits of Section 1110 of the
U.S. Bankruptcy Code will be available to the applicable Loan Trustee with
respect to such Aircraft.
(3) For each Class of Certificates, the initial amount of the Liquidity
Facilities, taken together, will cover three consecutive semiannual interest
payments (without regard to any future payments of principal on such
Certificates), except that the Liquidity Facilities with respect to each
Trust will not cover interest payable by the Depositary on the Deposits
relating to such Trust. The scheduled payments of interest on the Equipment
Notes held by a Trust and on the Deposits relating to such Trust, taken
together, will be sufficient to pay accrued interest on the outstanding
Certificates issued by such Trust at the rate per annum applicable thereto.
In aggregate for Class A, B and C Certificates, the amount of the Liquidity
Facilities at January 2, 1999, the first Regular Distribution Date after the
scheduled Delivery Period Termination Date, assuming that Equipment Notes in
the maximum principal amount with respect to all Aircraft are acquired by
the Trusts and that all interest and principal due on or prior to January 2,
1999, is paid, will be $ .
S-5
<PAGE> 6
EQUIPMENT NOTES AND THE AIRCRAFT*
Set forth below is certain information about the Equipment Notes expected
to be held in the Trusts and the Aircraft expected to secure such Equipment
Notes:
<TABLE>
<CAPTION>
MAXIMUM
PRINCIPAL
AIRCRAFT AMOUNT OF
TAIL MANUFACTURER'S AIRCRAFT EQUIPMENT APPRAISED
AIRCRAFT TYPE NUMBER SERIAL NUMBER DELIVERY MONTH(1) NOTES(2) VALUE(3)
- --------------- -------- -------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Boeing 737-524 656 28917 April 1998 $19,210,000 $ 28,250,000
Boeing 737-524 657 28918 May 1998 19,210,000 28,250,000
Boeing 737-524 658 28919 June 1998 19,210,000 28,250,000
Boeing 737-524 659 28920 July 1998 19,210,000 28,250,000
Boeing 737-524 660 28921 August 1998 19,210,000 28,250,000
Boeing 737-724 705 28766 April 1998 25,876,040 38,053,000
Boeing 737-724 706 28767 April 1998 25,876,040 38,053,000
Boeing 737-724 707 28768 April 1998 25,876,040 38,053,000
Boeing 737-724 708 28769 April 1998 25,876,040 38,053,000
Boeing 737-724 709 28780 August 1998 25,980,760 38,207,000
Boeing 737-724 710 28781 August 1998 25,980,760 38,207,000
Boeing 737-824 201 28770 May 1998 30,001,600 44,120,000
Boeing 737-824 202 28771 May 1998 30,001,600 44,120,000
Boeing 737-824 203 28772 May 1998 30,001,600 44,120,000
Boeing 737-824 204 28773 June 1998 30,062,800 44,210,000
Boeing 737-824 205 28774 June 1998 30,062,800 44,210,000
Boeing 737-824 206 28775 June 1998 30,062,800 44,210,000
Boeing 737-824 207 28776 July 1998 30,124,000 44,300,000
Boeing 737-824 208 28777 July 1998 30,124,000 44,300,000
Boeing 737-824 209 28778 July 1998 30,124,000 44,300,000
Boeing 737-824 210 28779 August 1998 30,185,200 44,390,000
Boeing 777-200 001 27577 September 1998 82,361,600 121,120,000
Boeing 777-200 002 27578 October 1998 82,528,200 121,365,000
Boeing 777-200 003 27579 November 1998 82,694,800 121,610,000
Total $1,176,251,000(4)
</TABLE>
- ------------
* The principal amounts are indicative only and subject to change.
(1) Reflects the scheduled delivery months under Continental's purchase
agreement with the Aircraft manufacturer. The actual delivery date for any
Aircraft may be subject to delay or acceleration. See "Description of the
Aircraft and the Appraisals -- Deliveries of Aircraft". Continental has the
option to substitute other Boeing 777-200, 737-524, 737-724 or 737-824 aircraft
in the event that the delivery of any Aircraft is expected to be delayed for
more than 30 days after the month scheduled for delivery or beyond the Delivery
Period Termination Date. See "Description of the Aircraft and the
Appraisals -- Substitute Aircraft".
(2) Reflects the initial maximum principal amount as of the date of original
issuance of the Equipment Notes, which principal amount may be less with respect
to an Aircraft depending on the circumstances of the financing of such Aircraft.
The Mandatory Economic Terms require that the maximum aggregate principal amount
of the Equipment Notes issued with respect to all Boeing 777-200 Aircraft not
exceed $247,584,600, all Boeing 737-524 not exceed $96,050,000, all Boeing
737-724 Aircraft not exceed $155,465,680 and all Boeing 737-824 not exceed
$300,750,400. The aggregate principal amount of all of the Equipment Notes will
not exceed the aggregate face amount of the Certificates.
(3) The appraised value of each Aircraft set forth above is based upon varying
assumptions and methodologies and reflects the lesser of the average and median
values of such Aircraft as appraised by three independent appraisal and
consulting firms: Aircraft Information Services, Inc. ("AISI"), BK Associates,
Inc. ("BK") and Morten Beyer and Agnew, Inc. ("MBA") (collectively, the
"Appraisers"), each determined as of October 6, 1997, and projected as of the
scheduled delivery month of each Aircraft. An appraisal is only an estimate of
value and should not be relied upon as a measure of realizable value. See "Risk
Factors -- Risk Factors Relating to the Certificates and the
Offering -- Appraisals and Realizable Value of Aircraft" and "Description of the
Aircraft and the Appraisals".
(4) The total of the appraised values of all of the Aircraft reflects the sum of
the initial appraised value of each Aircraft as of its scheduled delivery month.
However, since the Aircraft will be delivered at different times during the
Delivery Period and may depreciate in value after initial delivery, such total
does not reflect the aggregate appraised value of the Aircraft subject to the
security interest of the Equipment Notes at any time. See "Description of the
Equipment Notes -- Loan to Value Ratios of Equipment Notes".
S-6
<PAGE> 7
LOAN TO AIRCRAFT VALUE RATIOS*
The following table sets forth loan to Aircraft value ratios ("LTVs") for
each Class of Certificates as of January 2, 1999 (the first Regular Distribution
Date that occurs after the scheduled Delivery Period Termination Date) and each
July 2 Regular Distribution Date thereafter assuming that Equipment Notes of
each series in the maximum principal amount for all of the Aircraft are acquired
by the Trusts prior to the Delivery Period Termination Date. The LTVs for any
Class of Certificates as of dates prior to the Delivery Period Termination Date
are not meaningful, since the Trust Property will not include during such period
all of the Equipment Notes expected to be acquired by the Trusts. See
"Description of Certificates -- General". The LTVs for each Class of
Certificates were obtained for each such Regular Distribution Date by dividing
(i) the expected Pool Balance of such Class of Certificates together in each
case with the expected Pool Balance of all other Classes of Certificates senior
in right of payment to such Class of Certificates under the Intercreditor
Agreement determined immediately after giving effect to the distributions
expected to be made on such Regular Distribution Date, by (ii) the assumed value
of all of the Aircraft (the "Assumed Aggregate Aircraft Value") on such Regular
Distribution Date based on the assumptions set forth below. The Pool Balances
and resulting LTVs are subject to change if, among other things, the aggregate
principal amount of the Equipment Notes acquired by the Trusts is less than the
maximum permitted by the Mandatory Economic Terms, Equipment Notes with respect
to any Aircraft are purchased by the Trusts in other than the month currently
scheduled for delivery of such Aircraft or the amortization of the Equipment
Notes differs from the Assumed Amortization Schedule. See "Description of the
Certificates -- Pool Factors".
The following table is based on the assumption that the value of each
Aircraft included in the Assumed Aggregate Aircraft Value opposite the initial
Regular Distribution Date included in the table depreciates by approximately 2%
of the initial appraised value per year until the fifteenth year after the year
of delivery of such Aircraft and by approximately 4% of the initial appraised
value per year thereafter. Other rates or methods of depreciation would result
in materially different LTVs, and no assurance can be given (i) that the
depreciation rates and method assumed for the purpose of the table are the ones
most likely to occur or (ii) as to the actual future value of any Aircraft.
Thus, the table should not be considered a forecast or prediction of expected or
likely LTVs but simply a mathematical calculation based on one set of
assumptions. In addition, the initial appraised value of each Aircraft was based
upon the lesser of the average and the median value of each Aircraft as
appraised by the Appraisers, as of the respective date of their appraisals and
projected as of the scheduled delivery month of each such Aircraft. No assurance
can be given that such value represents the realizable value of any Aircraft.
See "Risk Factors -- Risk Factors Relating to the Certificates and the
Offering -- Appraisal and Realizable Value of Aircraft" and "Description of the
Aircraft and the Appraisals -- The Appraisals".
The following table is compiled on an aggregate basis, and since the
Equipment Notes will not be cross-collateralized with respect to the Aircraft
(except in certain cases, if any, where the related Owner Participant and
Continental shall agree to cross-collateralization), the excess proceeds
realized from the disposition of any particular Aircraft would not be available
to offset shortfalls on the Equipment Notes relating to any other Aircraft.
Therefore, upon the occurrence of an Indenture Default, even if the Aircraft as
a group could be sold for more than the total amounts payable in respect of all
of the outstanding Equipment Notes, if certain Aircraft were sold for less than
the total amount payable in respect of the related Equipment Notes, there would
not be sufficient proceeds to pay all Classes of Certificates in full. See
"Description of the Equipment Notes -- Loan to Value Ratios of Equipment Notes"
for examples of LTVs for the Equipment Notes issued in respect of individual
Aircraft, which may be more relevant in a default situation than the aggregate
values shown in the following table.
- ------------
* The information relating to periodic Pool Balances and resulting LTVs is
indicative only and subject to change.
S-7
<PAGE> 8
<TABLE>
<CAPTION>
ASSUMED CLASS A CLASS B CLASS C
AGGREGATE CERTIFICATES CLASS A CERTIFICATES CLASS B CERTIFICATES CLASS C
AIRCRAFT POOL CERTIFICATES POOL CERTIFICATES POOL CERTIFICATES
DATE VALUE BALANCE LTV BALANCE LTV BALANCE LTV
- --------------- -------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 2, 1999 $1,176,251,000 $507,212,558 43.1% $134,528,309 54.6% $110,249,733 63.9%
July 2, 1999 1,152,725,980 501,256,397 43.5 134,528,309 55.2 109,801,358 64.7
July 2, 2000 1,129,200,960 486,304,634 43.1 134,278,868 55.0 103,126,086 64.1
July 2, 2001 1,105,675,940 466,371,774 42.2 134,131,799 54.3 99,586,685 63.3
July 2, 2002 1,082,150,920 450,531,180 41.6 130,913,667 53.7 87,750,110 61.8
July 2, 2003 1,058,625,900 436,635,070 41.2 117,517,113 52.3 66,904,585 58.7
July 2, 2004 1,035,100,880 423,838,750 40.9 116,855,494 52.2 46,212,799 56.7
July 2, 2005 1,011,575,860 411,701,152 40.7 116,701,126 52.2 23,289,761 54.5
July 2, 2006 988,050,840 399,820,707 40.5 109,649,471 51.6 4,545,963 54.5
July 2, 2007 964,525,820 386,860,221 40.1 89,938,839 49.4 1,042,731 48.0
July 2, 2008 941,000,800 368,547,675 39.2 67,358,057 46.3 0 NA
July 2, 2009 917,475,780 341,373,448 37.2 57,393,543 43.5 0 NA
July 2, 2010 893,950,760 308,782,836 34.5 52,498,500 40.4 0 NA
July 2, 2011 870,425,740 274,588,443 31.5 44,772,502 36.7 0 NA
July 2, 2012 846,900,720 225,950,741 26.7 40,293,243 31.4 0 NA
July 2, 2013 823,375,700 172,483,385 20.9 29,912,781 24.6 0 NA
July 2, 2014 776,325,660 107,738,821 13.9 23,212,372 15.2 0 NA
July 2, 2015 418,065,380 52,629,067 12.6 833,347 10.4 0 NA
July 2, 2016 211,175,100 29,441,853 13.9 453,699 14.0 0 NA
July 2, 2017 196,611,300 4,988,266 2.5 453,699 2.6 0 NA
</TABLE>
S-8
<PAGE> 9
CASH FLOW STRUCTURE
Set forth below is a diagram illustrating the structure for the offering of
the Certificates and certain cash flows.
[Diagram omitted, which shows that Continental will pay to the Loan Trustees for
Leased Aircraft and Owned Aircraft (i) the Lease Rental Payments, which are
assigned by the Owner Trustees, on Leased Aircraft and (ii) the Mortgage
Payments on Owned Aircraft. From such Lease Rental Payments and Mortgage
Payments, the Loan Trustees will make Equipment Note Payments on the Series A
Equipment Notes, the Series B Equipment Notes and the Series C Equipment Notes
with respect to all Aircraft to the Subordination Agent. Excess Rental Payments
will be paid by the Loan Trustees to the Lessors for Leased Aircraft. From such
Equipment Note Payments, the Subordination Agent will pay Principal, Premium,
if any, and Interest Distributions to the Pass Through Trustee for the Class A
Trust, the Pass Through Trustee for the Class B Trust and the Pass Through
Trustee for the Class C Trust, who will pay such Principal, Premium, if any,
and Interest Distributions to the Holders of Class A Certificates, the Holders
of Class B Certificates and Holders of Class C Certificates, respectively. The
Subordination Agent may also receive Advances, if any, and pay Reimbursements,
if any, to the Liquidity Providers. The Depositary will make Interest Payments
on the Deposits to the Escrow Agent. From such Interest Payments, the Escrow
Agent will make payments to the Holders of Class A Certificates, the Holders of
Class B Certificates and the Holders of Class C Certificates.]
- ------------
(1) Each Leased Aircraft will be subject to a separate Lease and a related
Indenture; each Owned Aircraft will be subject to a separate Indenture.
(2) Funds held as Deposits relating to each Trust will be withdrawn to purchase
Equipment Notes on behalf of such Trust from time to time during the
Delivery Period as each Aircraft is delivered. If any funds remain as
Deposits with respect to any Trust at the Delivery Period Termination Date,
such funds will be withdrawn by the Escrow Agent and distributed to the
holders of the Certificates issued by such Trust, together with accrued and
unpaid interest thereon and, if such remaining Deposits with respect to all
of the Trusts exceed the Par Redemption Amount, a Deposit Make-Whole Premium
payable by Continental with respect to the remaining Deposits applicable to
such Trust in excess of such Trust's proportionate share of the Par
Redemption Amount, provided that no premium shall be paid with respect to
unused Deposits attributable to the failure of an Aircraft to be delivered
prior to the Delivery Period Termination Date due to any reason not
occasioned by Continental's fault or negligence. No interest will accrue
with respect to the Deposits after they have been fully withdrawn.
(3) The initial amount of the Liquidity Facilities for each Trust, taken
together, will cover three consecutive semiannual interest payments with
respect to the Certificates issued by such Trust, except that the Liquidity
Facilities will not cover interest payable by the Depositary on the Deposits
relating to such Trust. The scheduled payments of interest on the Equipment
Notes and on the Deposits relating to a Trust, taken together, will be
sufficient to pay an amount equal to accrued interest on the outstanding
Certificates of such Trust at the rate per annum applicable thereto.
S-9
<PAGE> 10
THE OFFERING
Trusts: ................... The Original Trusts are to be formed pursuant to
the Basic Agreement and three separate Trust
Supplements to be entered into between the
Company and Wilmington Trust Company as trustee
under each Original Trust. Each Original Trust
will be a separate entity. On the Transfer Date,
each of the Original Trusts will transfer and
assign all of its assets and rights to a
substantially identical Successor Trust, and the
New Trustee thereof will assume the obligations
of the related Original Trustee under each
transaction document to which such Original
Trustee was a party. Upon effectiveness of such
transfer, assignment and assumption, each of the
Original Trusts will be liquidated and each of
the Certificates will represent the same
percentage interest in the Successor Trust as it
represented in the Original Trust immediately
prior to such transfer, assignment and
assumption.
Certificates Offered: ..... Pass Through Certificates to be issued by each
Trust, representing fractional undivided
interests in such Trust. The Certificates to be
issued by the Class A Trust, the Class B Trust
and the Class C Trust in the offering
contemplated hereby (the "Offering") are referred
to herein as the "Class A Certificates", the
"Class B Certificates" and the "Class C
Certificates", respectively.
Use of Proceeds: .......... The proceeds from the sale of the Certificates
offered hereby will be used by the Trustees to
purchase Equipment Notes during the Delivery
Period issued, at Continental's election, either
(i) by each Owner Trustee to finance a portion of
the purchase price of the Leased Aircraft or (ii)
by Continental to finance a portion of the
purchase price of the Owned Aircraft. Prior to
utilization of such proceeds to purchase
Equipment Notes, the proceeds from the sale of
the Certificates of each Trust will be deposited
with the Depositary on behalf of the Escrow Agent
for the benefit of the Certificateholders of such
Trust.
Escrow Receipts: .......... The holders of the Certificates are entitled to
certain rights with respect to the Deposits. Such
rights are evidenced by escrow receipts ("Escrow
Receipts") which are affixed to each Certificate.
Any transfer of a Certificate will have the
effect of transferring the corresponding rights
in the affixed Escrow Receipt. All payments to
the holders of Certificates in respect of the
Deposits and the Escrow Receipts relating to a
Trust (i) will not constitute Trust Property of
such Trust and (ii) will be deemed for all
purposes of this Prospectus Supplement to be
payments to such holders of Certificates in their
capacity as holders of Escrow Receipts.
Subordination Agent,
Trustee, Paying Agent and
Loan Trustee: ........... Wilmington Trust Company will act (i) as
subordination agent under the Intercreditor
Agreement (the "Subordination Agent"), (ii) as
Trustee, paying agent and registrar for the
Certificates of each Trust, (iii) as paying agent
on behalf of the Escrow Agent in respect of each
Trust (the "Paying Agent") and (iv) as Loan
Trustee, paying agent and registrar for each
series of Equipment Notes.
S-10
<PAGE> 11
Escrow Agent: ............. First Security Bank, National Association, will act
as Escrow Agent under each Escrow Agreement.
Depositary: ............... Credit Suisse First Boston, New York branch, will
act as Depositary under each Deposit Agreement.
Liquidity Providers: ...... ABN AMRO Bank N.V., acting through its Chicago
branch ("ABN AMRO"), and Westdeutsche Landesbank,
acting through its New York branch ("West LB"
and, together with ABN AMRO, the "Liquidity
Providers"), will each provide a separate
liquidity facility for the benefit of the holders
of each Class of Certificates.
Trust Property: ........... The property of each Trust (the "Trust Property")
will include (i) subject to the Intercreditor
Agreement, Equipment Notes issued, at
Continental's election in connection with the
delivery of each Aircraft during the Delivery
Period, either (a) on a nonrecourse basis by an
Owner Trustee in each separate leveraged lease
transaction with respect to each Leased Aircraft
to finance a portion of the purchase price of
such Leased Aircraft by the Owner Trustee, in
which case the applicable Leased Aircraft will be
leased to Continental, or (b) on a recourse basis
by Continental in connection with each separate
secured loan transaction with respect to each
Owned Aircraft to finance a portion of the
purchase price of such Owned Aircraft by
Continental, (ii) the rights of such Trust to
acquire Equipment Notes under the Note Purchase
Agreement, (iii) the rights of such Trust under
the related Escrow Agreement to request the
Escrow Agent to withdraw from the Depositary
funds sufficient to enable such Trust to purchase
Equipment Notes on the delivery of each Aircraft
during the Delivery Period, (iv) the rights of
such Trust under the Intercreditor Agreement
(including all monies receivable in respect of
such rights), (v) all monies receivable under the
Liquidity Facilities for such Trust and (vi)
funds from time to time deposited with the
Trustee in accounts relating to such Trust.
Rights with respect to Deposits or under the
Escrow Agreement relating to a Trust, except for
the right to request withdrawals for the purchase
of Equipment Notes, will not constitute Trust
Property of such Trust. The Equipment Notes with
respect to each Leased Aircraft will be issued in
three series under an indenture (each, a "Leased
Aircraft Indenture") between the applicable Owner
Trustee and the indenture trustee thereunder (the
"Leased Aircraft Trustee"). The Equipment Notes
with respect to each Owned Aircraft will be
issued in three series (or, at Continental's
election, four series) under an indenture (the
"Owned Aircraft Indenture" and, together with the
other Owned Aircraft Indentures and the Leased
Aircraft Indentures, the "Indentures") between
Continental and the indenture trustee thereunder
(the "Owned Aircraft Trustee" and, together with
the other Owned Aircraft Trustees and the Leased
Aircraft Trustees, the "Loan Trustees"). The
Class A Trust, the Class B Trust and the Class C
Trust each will acquire, pursuant to a certain
Note Purchase Agreement (the "Note Purchase
Agreement"), the series of Equipment Notes issued
with respect to each of the Aircraft having an
interest rate equal to the interest rate
applicable to the Certificates to be issued by
such Trust. If Continental elects to issue Series
D Equipment Notes in connection with the
financing of an Owned Aircraft, such Notes will
not be
S-11
<PAGE> 12
purchased by any of the Trusts and will be funded
from other sources. The maturity dates of the
Equipment Notes acquired by each Trust will occur
on or before the final expected Regular
Distribution Date applicable to the Certificates
to be issued by such Trust.
Certificates;
Denominations: ............ The Certificates of each Trust will be issued in a
minimum denomination of $1,000 and in integral
multiples thereof. See "Description of the
Certificates -- General".
Regular Distribution
Dates: .................... January 2 and July 2, commencing on January 2,
1998.
Special Distribution
Dates: .................... Any Business Day on which a Special Payment is to
be distributed.
Record Dates: ............. The fifteenth day preceding a Regular Distribution
Date or a Special Distribution Date.
Distributions: ............ All payments of principal, premium (if any) and
interest received by the Trustee on the Equipment
Notes held in each Trust and all payments of
interest and Deposit Make-Whole Premium (if any)
on the Deposits relating to each Trust will be
distributed by the Trustee (in the case of the
Equipment Notes and Deposit Make-Whole Premium)
or by the Paying Agent (in the case of interest
on the Deposits) to the holders of the
Certificates (the "Certificateholders") of such
Trust, subject in the case of payments on the
Equipment Notes to the provisions of the
Intercreditor Agreement. Such payments of
interest are scheduled to be received by the
Trustee of each Trust on January 2 and July 2 of
each year, commencing on January 2, 1998.
Payments of principal of the Equipment Notes are
scheduled to be received on January 2 and July 2
in certain years, commencing on July 2, 1999, in
the case of Series A Equipment Notes, January 2,
2000, in the case of Series B Equipment Notes and
July 2, 1999, in the case of Series C Equipment
Notes. Payments of principal, premium (if any)
and interest resulting from the early redemption
or purchase (if any) of the Equipment Notes held
in any Trust will be distributed to the
Certificateholders of such Trust on a Special
Distribution Date after not less than 15 days'
notice to such Certificateholders, subject to the
provisions of the Intercreditor Agreement.
Payments in respect of Deposits will not be
subject to the Intercreditor Agreement. For a
discussion of distributions with respect to
unused Deposits upon the occurrence of a
Triggering Event, see "Description of the Deposit
Agreements -- Distribution Upon Occurrence of
Triggering Event", and for a discussion of
distributions by the Trusts upon an Indenture
Default, see "Description of the Certificates --
Indenture Defaults and Certain Rights Upon an
Indenture Default".
Possible Issuance of Class
D Certificates: ........... Subject to certain conditions, Continental may
elect to issue Series D Equipment Notes in
connection with the financing of Owned Aircraft,
but Series D Equipment Notes will not be
purchased by the Class A Trust, the Class B Trust
or the Class C Trust and will be funded from
sources other than this Offering. Continental may
elect to fund the sale of the Series D Equipment
Notes through the sale of Pass Through
Certificates (the "Class D Certificates") issued
by a Class D
S-12
<PAGE> 13
Continental Airlines 1997-4 Pass Through Trust
(the "Class D Trust").
Purchase Rights of
Certificateholders: ..... Upon the occurrence and during the continuation of
a Triggering Event, (i) the Class B
Certificateholders shall have the right to
purchase all, but not less than all, of the Class
A Certificates, (ii) the Class C
Certificateholders shall have the right to
purchase all, but not less than all, of the Class
A Certificates and the Class B Certificates and
(iii) if the Class D Certificates are issued, the
Class D Certificateholders shall have the right
to purchase all, but not less than all, of the
Class A Certificates, the Class B Certificates
and the Class C Certificates, in each case at a
purchase price equal to the Pool Balance of the
relevant Class or Classes of Certificates plus
accrued and unpaid interest thereon to the date
of purchase without premium but including any
other amounts due to the Certificateholders of
such Class or Classes.
"Triggering Event" means (x) the occurrence of an
Indenture Default under all Indentures resulting
in a PTC Event of Default with respect to the
most senior Class of Certificates then
outstanding, (y) the acceleration of all of the
outstanding Equipment Notes (provided that during
the Delivery Period the aggregate principal
amount thereof exceeds $300 million) or (z)
certain bankruptcy or insolvency events involving
Continental.
"PTC Event of Default" under each Pass Through
Trust Agreement means the failure to pay: (i) the
outstanding Pool Balance of the applicable Class
of Certificates within 10 Business Days of the
Final Maturity Date for such Class or (ii)
interest due on such Class of Certificates within
10 Business Days of any Distribution Date (unless
the Subordination Agent shall have made Interest
Drawings, or withdrawals from the Cash Collateral
Accounts for such Class of Certificates, with
respect thereto in an amount sufficient to pay
such interest and shall have distributed such
amount to the Trustee entitled thereto). The
Final Maturity Date for the Class A, B and C
Certificates is ,
and , respectively. Any failure to
make expected principal distributions with
respect to any Class of Certificates on any
Regular Distribution Date (other than the Final
Maturity Date) will not constitute a PTC Event of
Default with respect to such Certificates.
Successor Trusts: ......... On the Transfer Date, each of the Original Trusts
will transfer and assign all of its assets and
rights to a newly-created, substantially
identical Successor Trust, except that (i) the
Successor Trusts will not have the right to
purchase new Equipment Notes and (ii) Delaware
law will govern the Original Trusts and New York
law will govern the Successor Trusts. The
institution acting as Original Trustee for an
Original Trust will also act as the New Trustee
of the corresponding Successor Trust, and the New
Trustee of each Successor Trust will assume the
obligations of the related Original Trustee under
each transaction document to which such Original
Trustee was a party. Upon effectiveness of such
transfer, assignment and assumption, each of the
Original Trusts will be liquidated and each of
the Certificates will represent the same interest
in the Successor Trust as it
S-13
<PAGE> 14
represented in the Original Trust immediately
prior to such transfer and assignment.
Escrow Agreements: ........ Each Escrow Agent, each Paying Agent, each Trustee
and the Underwriters will enter into a separate
Escrow Agreement for the benefit of the
Certificateholders of each Trust. The cash
proceeds of the offering of Certificates of each
Trust will be deposited on behalf of the Escrow
Agent for the benefit of the holders of such
Certificates, with the Depositary as Deposits
relating to such Trust. The Escrow Agent of each
Trust will be given irrevocable instructions (i)
to permit the Trustee of such Trust to cause
funds to be withdrawn from such Deposits on or
prior to the Delivery Period Termination Date for
the purpose of enabling such Trustee to purchase
Equipment Notes on and subject to the terms and
conditions of the Note Purchase Agreement and
(ii) to direct the Depositary to pay interest on
the Deposits accrued in accordance with the
Deposit Agreement to the Paying Agent for
distribution to the Certificateholders of such
Trust. See "Description of the Escrow
Agreements".
Deposit Agreements and the
Depositary: ............. The Escrow Agent with respect to each Trust will
enter into a separate Deposit Agreement with the
Depositary relating to such Trust pursuant to
which the Depositary will establish one or more
separate accounts into which the proceeds of the
Offering of the Certificates of such Trust will
be deposited, from which the Escrow Agent, upon
request from the Trustee of such Trust, will make
withdrawals and into which such Trustee will make
re-deposits during the Delivery Period. Pursuant
to the Deposit Agreement with respect to each
Trust, on each Regular Distribution Date the
Depositary will pay to the Paying Agent on behalf
of the applicable Escrow Agent, for distribution
to the Certificateholders of such Trust, an
amount equal to interest accrued on the Deposits
relating to such Trust during the relevant
interest period at a rate per annum equal to the
interest rate applicable to the Certificates
issued by such Trust. Upon each delivery of an
Aircraft during the Delivery Period, the Trustees
for the Class A Trust, the Class B Trust and the
Class C Trust will request the Escrow Agent
relating to such Trust to withdraw from the
Deposits relating to such Trust funds sufficient
to enable the Trustee of such Trust to purchase
the Equipment Note of the series applicable to
such Trust issued with respect to such Aircraft.
Accrued but unpaid interest on all such Deposits
withdrawn to purchase Equipment Notes will be
paid on the next Regular Distribution Date. Any
portion of any withdrawn Deposit which is not
used to purchase such Equipment Note will be
re-deposited with the Depositary. The Deposits
relating to each Trust and interest paid thereon
will not be subject to the subordination
provisions of the Intercreditor Agreement and
will not be available to pay any other amount in
respect of the Certificates.
The Depositary will be Credit Suisse First Boston,
New York branch. Credit Suisse First Boston is a
Swiss bank and is one of the largest banking
institutions in the world, with total
consolidated assets of approximately Sfr 422
billion ($291 billion) and total consolidated
shareholders' equity of approximately Sfr 10.9
billion ($7.5 billion) in each case as of June
30, 1997. Credit Suisse First Boston has long-
S-14
<PAGE> 15
term unsecured debt ratings of Aa3 from Moody's
and AA from Standard & Poor's and short-term
unsecured debt ratings of P-1 from Moody's and
A-1+ from Standard & Poor's. See "Description of
the Deposit Agreement -- Depositary".
Unused Deposits: .......... The Trustees' obligations to purchase the Equipment
Notes issued with respect to each Aircraft are
subject to satisfaction of certain conditions,
and no assurance can be given that all such
conditions will be satisfied. See "Description of
the Certificates -- Obligation to Purchase
Equipment Notes". All of the Aircraft are
scheduled to be delivered by November 1998,
although the delivery of any Aircraft may be
subject to delay or acceleration. See
"Description of the Aircraft and the
Appraisals -- Deliveries of Aircraft". The
Delivery Period expires on December 31, 1998 (or
May 31, 1999 or later under certain circumstances
discussed in "Description of the Aircraft and the
Appraisals -- Deliveries of Aircraft"). In
addition, depending on the circumstances of the
financing of each Aircraft, the maximum aggregate
principal amount of Equipment Notes may not be
issued. If any funds remain as Deposits with
respect to any Trust at the Delivery Period
Termination Date, they will be withdrawn by the
Escrow Agent for such Trust and distributed, with
accrued and unpaid interest thereon, to the
Certificateholders of such Trust after at least
15 days' prior written notice. In addition, if
such remaining Deposits exceed the Par Redemption
Amount with respect to all of the Trusts, such
distribution will include a premium payable by
Continental equal to the Deposit Make-Whole
Premium with respect to such Trust's remaining
Deposits in excess of such Trust's proportionate
share of the Par Redemption Amount, provided that
no premium shall be paid with respect to unused
Deposits attributable to the failure of an
Aircraft to be delivered prior to the Delivery
Period Termination Date due to any reason not
occasioned by Continental's fault or negligence.
See "Description of the Deposit
Agreements -- Unused Deposits".
Obligation to Purchase
Equipment Notes: ........ The Trustees will be obligated to purchase the
Equipment Notes issued with respect to each
Aircraft during the Delivery Period, subject to
the terms and conditions of the Note Purchase
Agreement. Under the Note Purchase Agreement,
Continental will have the option of entering into
a leverage lease financing or a secured debt
financing with respect to each Aircraft. The Note
Purchase Agreement will provide for the relevant
parties to enter into (i) with respect to each
Leased Aircraft, a Participation Agreement, a
Lease and a Leased Aircraft Indenture relating to
the financing of such Leased Aircraft and (ii)
with respect to each Owned Aircraft, a
Participation Agreement and an Owned Aircraft
Indenture relating to the financing of such Owned
Aircraft (any such Participation Agreement, a
"Participation Agreement"). The description of
such agreements in this Prospectus Supplement is
based on the forms of such agreements
contemplated by the Note Purchase Agreement. In
the case of a Leased Aircraft, the terms of the
agreements actually entered into may differ from
the forms of such agreements and, consequently,
may differ from the description of such
agreements contained in this Prospectus
Supplement. However, under the Note Purchase
Agreement, the terms of such agreements are
required to (i) contain
S-15
<PAGE> 16
the Mandatory Document Terms and (ii) not vary
the Mandatory Economic Terms. In addition,
Continental is obligated (i) to certify to the
Trustees that any such modifications do not
materially and adversely affect the
Certificateholders and (ii) to obtain written
confirmation from each Rating Agency that the use
of versions of such agreements modified in any
material respect will not result in a withdrawal,
suspension or downgrading of the rating of any
Class of Certificates. Further, under the Note
Purchase Agreement, it is a condition precedent
to the obligation of each Trustee to purchase the
Equipment Notes related to the financing of an
Aircraft that no Triggering Event shall have
occurred. The Trustees will have no right or
obligation to purchase Equipment Notes after the
Delivery Period Termination Date. See
"Description of the Certificates -- Obligation to
Purchase Equipment Notes".
Equipment Notes
(a) Interest: ........... The Equipment Notes held in each Trust will accrue
interest at the applicable rate per annum for the
Certificates issued by such Trust set forth on
the cover page of this Prospectus Supplement,
payable on January 2 and July 2 of each year,
commencing on January 2, 1998, or, if later, the
first such date to occur after initial issuance
thereof, and such interest payments will be
passed through to Certificateholders of such
Trust on each such date until the final
distribution date for such Certificates, in each
case, subject to the Intercreditor Agreement.
Interest is calculated on the basis of a 360-day
year consisting of twelve 30-day months. See
"Description of the Equipment Notes -- Principal
and Interest Payments".
(b) Principal: .......... 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 and July 2 in certain years, commencing on July
2, 1999, in the case of Series A Equipment Notes,
January 2, 2000, in the case of Series B
Equipment Notes and July 2, 1999, in the case of
Series C Equipment Notes, in each case, subject
to the Intercreditor Agreement. See "Description
of the Certificates -- Pool Factors" and
"Description of the Equipment Notes -- Principal
and Interest Payments".
(c) Redemption and
Purchase: (i) The Equipment Notes issued with respect to an
Aircraft will be redeemed in whole upon the
occurrence of an Event of Loss with respect to
such Aircraft if such Aircraft is not replaced by
Continental under the related Lease (in the case
of a Leased Aircraft) or under the related Owned
Aircraft Indenture (in the case of an Owned
Aircraft), in each case at a price equal to the
aggregate unpaid principal thereof, together with
accrued interest thereon to, but not including,
the date of redemption, but without any premium.
(ii) All of the Equipment Notes issued with respect
to any Aircraft may be redeemed prior to maturity
at a price equal to the aggregate unpaid
principal thereof, together with accrued interest
thereon to, but not including, the date of
redemption, plus a Make-Whole Premium if
S-16
<PAGE> 17
such redemption is made prior to the applicable
date set forth below (with respect to any such
Series, its "Premium Termination Date"):
<TABLE>
<CAPTION>
PREMIUM
TERMINATION
SERIES DATE
----------------- -----------
<S> <C>
Series A
Series B
Series C
</TABLE>
See "Description of the Equipment
Notes -- Redemption" for a description of the
manner of computing such Make-Whole Premium and
the circumstances under which the Equipment Notes
may be so redeemed.
(iii) If, with respect to a Leased Aircraft, (x)
one or more Lease Events of Default shall have
occurred and is continuing, (y) in the event of a
bankruptcy proceeding involving Continental, (A)
during the Section 1110 Period, the trustee in
such proceeding or Continental refuses to assume
or agree to perform its obligations under the
related Lease or (B) at any time after assuming
or agreeing to perform such obligations, such
trustee or Continental ceases to perform such
obligations such that the stay period applicable
under the U.S. Bankruptcy Code comes to an end or
(z) the Equipment Notes with respect to such
Aircraft have been accelerated or the Leased
Aircraft Trustee with respect to such Equipment
Notes takes action or notifies the applicable
Owner Trustee that it intends to take action to
foreclose the lien of the related Leased Aircraft
Indenture or otherwise commence the exercise of
any significant remedy under such Indenture or
the related Lease, then in each case all, but not
less than all, of the Equipment Notes issued with
respect to such Leased Aircraft may be purchased
by the related Owner Trustee or Owner Participant
on the applicable purchase date at a price equal
to the aggregate unpaid principal amount thereof,
together with accrued interest thereon to, but
not including, the purchase date, but without any
premium (provided that a Make-Whole Premium shall
be payable if such Equipment Notes are to be
purchased prior to the Premium Termination Date
pursuant to clause (x) above when a Lease Event
of Default shall have occurred and is continuing
for less than 180 days). Continental, as owner of
the Owned Aircraft, will have no comparable right
under any Owned Aircraft Indenture to purchase
the Equipment Notes under such circumstances.
(d) Security: ........... The Equipment Notes issued with respect to each
Aircraft will be secured by a security interest
in such Aircraft and, in the case of each Leased
Aircraft, by an assignment to the related Leased
Aircraft Trustee of certain of the related Owner
Trustee's rights under the Lease with respect to
such Aircraft, including the right to receive
payments of rent thereunder, with certain
exceptions. The Equipment Notes will not be
cross-collateralized (except in certain cases, if
any, where the related Owner Participant and
Continental shall agree to
cross-collateralization) and, consequently, the
Equipment Notes issued in respect of any one
Aircraft are not secured by any of the other
Aircraft or the Leases related thereto. There
will not be cross-default provisions in the
Indentures or in the Leases (unless otherwise
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<PAGE> 18
agreed between an Owner Participant and
Continental). Consequently, events resulting in
an Indenture Default under any particular
Indenture may or may not result in an Indenture
Default occurring under any other Indenture, and
a Lease Event of Default under any particular
Lease may or may not constitute a Lease Event of
Default under any other Lease. If the Equipment
Notes issued with respect to one or more Aircraft
are in default and the Equipment Notes issued
with respect to the remaining Aircraft are not in
default, no remedies will be exercisable under
the Indentures with respect to such remaining
Aircraft. See "Description of the Equipment
Notes -- Security" and "-- Indenture Defaults,
Notice and Waiver".
Although the Equipment Notes issued in respect of
the Leased Aircraft are not obligations of, or
guaranteed by, Continental, the amounts
unconditionally payable by Continental for lease
of the Leased Aircraft will be sufficient to pay
in full when due all scheduled amounts required
to be paid on the Equipment Notes issued in
respect of the Leased Aircraft. The Equipment
Notes issued in respect of the Owned Aircraft
will be direct obligations of Continental. See
"Description of the Equipment Notes -- General".
(e) Section 1110
Protection: ............... It is a condition to the Trustees' obligation to
purchase Equipment Notes with respect to each
Aircraft that outside counsel to Continental,
which is expected to be Hughes Hubbard & Reed
LLP, provide its opinion to the Trustees that (i)
if such Aircraft is a Leased Aircraft, the Owner
Trustee, as lessor under the Lease for such
Aircraft, and the related Leased Aircraft
Trustee, as assignee of such Owner Trustee's
rights under such Lease pursuant to the related
Leased Aircraft Indenture, will be entitled to
the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to the airframe and
engines comprising such Aircraft or (ii) if such
Aircraft is an Owned Aircraft, the Owned Aircraft
Trustee will be entitled to the benefits of
Section 1110 of the U.S. Bankruptcy Code with
respect to the airframe and engines comprising
such Aircraft. See "Description of the Equipment
Notes -- Remedies" for a description of such
required opinion and certain assumptions and
qualifications permitted to be contained therein.
(f) Ranking: ............ Series B Equipment Notes issued in respect of any
Aircraft will be subordinated in right of payment
to Series A Equipment Notes issued in respect of
such Aircraft; Series C Equipment Notes issued in
respect of such Aircraft will be subordinated in
right of payment to such Series B Equipment
Notes; and, if Continental elects to issue Series
D Equipment Notes with respect to an Owned
Aircraft, they will be subordinated in right of
payment to the Series C Equipment Notes issued
with respect to such Owned Aircraft. On each
Distribution Date, (i) payments of interest and
principal due on Series A Equipment Notes issued
in respect of any Aircraft will be made prior to
payments of interest and principal due on Series
B Equipment Notes issued in respect of such
Aircraft; (ii) payments of interest and principal
due on such Series B Equipment Notes will be made
prior to payments of interest and principal due
on Series C Equipment Notes issued in respect of
such Aircraft; and (iii) if Continental elects to
issue Series D Equipment Notes with respect to an
Owned Aircraft,
S-18
<PAGE> 19
payments of interest and principal due on such
Series C Equipment Notes will be made prior to
payments of interest and principal due on Series
D Equipment Notes issued in respect of such
Aircraft.
(g) Owner
Participant: .............. Continental has obtained the commitment of one
company to act as the owner participant ("Owner
Participant") with respect to leveraged leases
for certain of the Aircraft and plans to seek
such commitments from others for the remaining
Aircraft. The existing commitment is subject to
satisfaction of certain conditions, and
Continental may elect to terminate such
commitment. Accordingly, Continental may select
one or more other Owner Participants for some or
all of the Aircraft or finance such Aircraft as
Owned Aircraft rather than Leased Aircraft. Each
Owner Participant will have the right to sell,
assign or otherwise transfer its interests as
Owner Participant in any of such leveraged
leases, subject to the terms and conditions of
the relevant Participation Agreement and related
documents. See "Risk Factors -- Risk Factors
Relating to the Certificates and the
Offering -- Owner Participant; Revisions to
Agreements".
Liquidity Facilities: ..... Each Liquidity Provider and the Subordination Agent
will enter into a separate revolving credit
agreement (each, a "Liquidity Facility") with
respect to each of the Trusts. Under the
Liquidity Facilities with respect to any Trust,
the Liquidity Providers will, if necessary, make
advances ("Interest Drawings") in an aggregate
amount (the "Required Amount") sufficient to pay
interest on the Certificates of such Trust on up
to three successive semiannual Regular
Distribution Dates (without regard to any future
payments of principal on such Certificates) at
the respective interest rates shown on the cover
page of this Prospectus Supplement for such
Certificates (the "Stated Interest Rates"). Each
of the two Liquidity Facilities with respect to
each Trust will cover 50% (the "Stated Portion")
of the Required Amount for such Trust. The
initial Required Amount under the Liquidity
Facilities on January 2, 1999, the first Regular
Distribution Date after the scheduled Delivery
Period Termination Date, for the Class A
Certificates, the Class B Certificates and the
Class C Certificates, assuming that Equipment
Notes in the maximum principal amount with
respect to all of the Aircraft are acquired by
the Trusts and that all interest and principal
due on or prior to January 2, 1999 is paid, will
be $ , $ and $ ,
respectively. Interest Drawings under the
relevant Liquidity Facilities will be made
promptly after any Regular Distribution Date if,
after giving effect to the subordination
provisions of the Intercreditor Agreement, there
are insufficient funds available to the
Subordination Agent to pay interest on any Class
A, B or C Certificates; provided, however, that
on any date the maximum amount available under a
Liquidity Facility with respect to any Trust to
fund any shortfall in interest due on the
Certificates of such Trust will not exceed the
Maximum Available Commitment under such Liquidity
Facility. The "Maximum Available Commitment" at
any time under each Liquidity Facility is an
amount equal to the Stated Portion of the then
Required Amount of such Liquidity Facility less
the aggregate amount of each Interest Drawing
outstanding under such Liquidity Facility at such
time, provided that following a Downgrade
Drawing, a Final Drawing or a Non-Extension
Drawing under a Liquidity Facility, the Maximum
S-19
<PAGE> 20
Available Commitment under such Liquidity
Facility shall be zero. The Liquidity Facilities
for any Class of Certificates do not provide for
drawings thereunder to pay for principal of or
premium on the Certificates of such Class, any
interest on the Certificates of such Class in
excess of the Stated Interest Rates, more than
three semiannual installments of interest
thereon, any amounts payable with respect to the
Deposits or principal of or interest or premium
on the Certificates of any other Class.
Upon each Interest Drawing under any Liquidity
Facility, the Subordination Agent will be
obligated to reimburse (to the extent that the
Subordination Agent has available funds therefor)
the Liquidity Provider for the amount of such
drawing. Such reimbursement obligation and all
interest, fees and other amounts owing to the
Liquidity Provider under each Liquidity Facility
or certain other agreements (the "Liquidity
Obligations") will rank pari passu with the
Liquidity Obligations relating to all other
Liquidity Facilities and will rank senior to the
Certificates in right of payment. Upon
reimbursement in full of the Interest Drawings,
together with any accrued interest thereon, under
any Liquidity Facility, the Maximum Available
Commitment under such Liquidity Facility will be
reinstated to the Stated Portion of the then
Required Amount of such Liquidity Facility;
provided that the amount will not be so
reinstated if (i) a Liquidity Event of Default
shall have occurred and is continuing and (ii)
less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are
Performing Equipment Notes.
"Performing Equipment Note" means an Equipment Note
with respect to which no payment default has
occurred and is continuing (without giving effect
to any acceleration); provided that in the event
of a bankruptcy proceeding involving Continental
under the U.S. Bankruptcy Code, (i) any payment
default existing during the 60-day period under
Section 1110(a)(1)(A) of the U.S. Bankruptcy Code
(or such longer period as may apply under Section
1110(b) of the U.S. Bankruptcy Code) (the
"Section 1110 Period") shall not be taken into
consideration, unless during the Section 1110
Period the trustee in such proceeding or
Continental refuses to assume or agree to perform
its obligations under the Lease related to such
Equipment Note (in the case of a Leased Aircraft)
or under the Owned Aircraft Indenture related to
such Equipment Note (in the case of an Owned
Aircraft), and (ii) any payment default occurring
after the date of the order of relief in such
proceeding shall not be taken into consideration
if such payment default is cured under Section
1110(a)(1)(B) of the U.S. Bankruptcy Code before
the later of 30 days after the date of such
default or the expiration of the Section 1110
Period.
If at any time the short-term unsecured debt rating
of any Liquidity Provider issued by either Rating
Agency is lower than the Threshold Rating, each
Liquidity Facility provided by such Liquidity
Provider may be replaced by a financial
institution having such short term unsecured debt
ratings issued by both Rating Agencies that are
equal to or higher than the Threshold Rating. If
any such Liquidity Facility is not replaced
within 10 days after notice of the downgrading,
such Liquidity Facility will be drawn in full up
to the then Maximum
S-20
<PAGE> 21
Available Commitment under such Liquidity
Facility (the "Downgrade Drawing") and the
proceeds will be deposited into a cash collateral
account (the "Cash Collateral Account") for the
related Class of Certificates and used for the
same purposes and under the same circumstances
and subject to the same conditions as cash
payments of Interest Drawings under such
Liquidity Facility would be used. In addition,
the Intercreditor Agreement will provide for the
replacement or extension of either Liquidity
Facility for any Class of Certificates if it is
scheduled to expire prior to the date that is
fifteen days after the Final Maturity Date for
such Class. If such Liquidity Facility cannot be
so replaced or extended by the date that is 25
days prior to the then scheduled expiration date
of such Liquidity Facility, such Liquidity
Facility will be drawn in full up to the then
Maximum Available Commitment thereunder (the
"Non-Extension Drawing") and the proceeds will be
deposited in the Cash Collateral Account for the
related Class of Certificates and used for the
same purposes and under the same circumstances
and subject to the same conditions as cash
payments of Interest Drawings under such
Liquidity Facility would be used. Each Liquidity
Facility is scheduled to expire 364 days after
the initial issuance date of the Certificates
(the "Issuance Date"), from and including the
Issuance Date, subject to annual extensions by
mutual agreement of the relevant Liquidity
Provider and the Subordination Agent.
Upon receipt by the Subordination Agent of a
Termination Notice with respect to any Liquidity
Facility from the applicable Liquidity Provider
(given as described in "Description of the
Liquidity Facilities -- Liquidity Events of
Default"), the Subordination Agent shall request
a final drawing (the "Final Drawing") under such
Liquidity Facility in an amount equal to the then
Maximum Available Commitment thereunder and shall
hold the proceeds thereof in the Cash Collateral
Account for the related Trust to be used for the
same purposes and under the same circumstances,
and subject to the same conditions, as cash
payments of Interest Drawings under such
Liquidity Facility would be used. All amounts
with respect to any Liquidity Facility on deposit
in the Cash Collateral Account for the related
Trust that are in excess of the Stated Portion,
of the applicable Liquidity Provider, of the
Required Amount will be paid to such Liquidity
Provider.
Subject to certain limitations, Continental may, at
its option, arrange for a Replacement Facility to
replace either Liquidity Facility (or any prior
Replacement Facility) for any Trust. If such
Replacement Facility is provided at any time
after a Downgrade Drawing or Non-Extension
Drawing under such Liquidity Facility (or prior
Replacement Facility), the funds on deposit with
respect to such Liquidity Facility (or prior
Replacement Facility) in the Cash Collateral
Account for such Trust will be returned to the
liquidity provider being replaced. The provider
of any Replacement Facility will have the same
rights (including, without limitation, priority
distribution rights and rights as "Controlling
Party") under the Intercreditor Agreement as the
replaced initial Liquidity Provider.
S-21
<PAGE> 22
Notwithstanding the subordination provisions of the
Intercreditor Agreement, the holders of the
Certificates to be issued by each Trust will be
entitled to receive and retain the proceeds of
drawings under the Liquidity Facilities for such
Trust. See "Description of the Liquidity
Facilities".
Intercreditor Agreement
(a) Subordination: ...... The Trustees, the Liquidity Providers, the
Subordination Agent and any holder of Class D
Equipment Notes, if issued, will enter into an
agreement (the "Intercreditor Agreement") which
will provide as follows:
(i) All payments made in respect of the
Equipment Notes and certain other payments
will be made to the Subordination Agent,
which will distribute such payments in
accordance with the provisions of paragraphs
(ii) and (iii) below.
(ii) On any Regular Distribution Date or Special
Distribution Date (each, a "Distribution
Date"), so long as no Triggering Event
shall have occurred (whether or not
continuing), all payments received by the
Subordination Agent in respect of the
Equipment Notes and certain other payments
under the related Indenture shall be
distributed in the following order: (1) to
the Liquidity Providers to the extent
required to pay certain Liquidity
Obligations; (2) to the Trustee for the
Class A Trust (the "Class A Trustee") to
the extent required to pay Expected
Distributions on the Class A Certificates;
(3) to the Trustee for the Class B Trust
(the "Class B Trustee") to the extent
required to pay Expected Distributions on
the Class B Certificates; (4) to the
Trustee for the Class C Trust (the "Class C
Trustee") to the extent required to pay
Expected Distributions on the Class C
Certificates; (5) if Class D Certificates
have been issued, to the Trustee for the
Class D Trust (the "Class D Trustee") to
the extent required to pay "Expected
Distributions" (to be defined in a manner
equivalent to the definition below for
other Classes of Certificates) on the Class
D Certificates; and (6) to the
Subordination Agent and each Trustee for
the payment of certain fees and expenses.
"Expected Distributions" means, with respect
to the Certificates of any Trust on any
Distribution Date (the "Current Distribution
Date"), the sum of (x) accrued and unpaid
interest on such Certificates (excluding
interest, if any, payable with respect to
the Deposits relating to such Trust) and (y)
the difference between (A) the Pool Balance
of such Certificates as of the immediately
preceding Distribution Date (or, if the
Current Distribution Date is the first
Distribution Date, the original aggregate
face amount of the Certificates of such
Trust), and (B) the Pool Balance of such
Certificates as of the Current Distribution
Date calculated on the basis that (i) the
principal of the Equipment Notes held in
such Trust has been paid when due (whether
at stated maturity, upon redemption,
prepayment, purchase or acceleration or
otherwise) and such payments have been
distributed to the holders of such
Certificates and (ii) the
S-22
<PAGE> 23
principal of any Equipment Notes formerly
held in such Trust that have been sold
pursuant to the Intercreditor Agreement has
been paid in full and such payments have been
distributed to the holders of such
Certificates, but without giving effect to
any reduction in the Pool Balance as a result
of any distribution attributable to Deposits
occurring after the immediately preceding
Distribution Date (or, if the Current
Distribution Date is the first Distribution
Date, occurring after the initial issuance of
the Certificates of such Trust). For purposes
of determining the priority of distributions
on account of the redemption, purchase or
prepayment of all of the Equipment Notes
issued pursuant to an Indenture, clause (x)
of the definition of Expected Distributions
shall be deemed to read as follows: "(x)
accrued, due and unpaid interest on such
Certificates (excluding interest, if any,
payable with respect to the Deposits relating
to such Trust) together with (without
duplication) accrued and unpaid interest on a
portion of such Certificates equal to the
outstanding principal amount of the Equipment
Notes being redeemed, purchased or prepaid
(immediately prior to such redemption,
purchase, or prepayment)".
(iii) Upon the occurrence of a Triggering Event
and at all times thereafter, all payments
received by the Subordination Agent in
respect of the Equipment Notes and certain
other payments shall be distributed in the
following order: (1) to the Subordination
Agent, each Trustee and certain other
parties in payment of the Administration
Expenses and to the Liquidity Providers in
payment of the Liquidity Obligations; (2) to
the Subordination Agent, each Trustee and
each Certificateholder for certain fees,
taxes, charges and other amounts payable to
the Subordination Agent, any Trustee or any
Certificateholder; (3) to the Class A
Trustee to the extent required to pay
Adjusted Expected Distributions on the Class
A Certificates; (4) to the Class B Trustee
to the extent required to pay Adjusted
Expected Distributions on the Class B
Certificates; (5) to the Class C Trustee to
the extent required to pay Adjusted Expected
Distributions on the Class C Certificates;
and (6) if Class D Certificates have been
issued, to the Class D Trustee to the extent
required to pay "Adjusted Expected
Distributions" (to be defined in a manner
equivalent to the definition below for other
Classes of Certificates) on the Class D
Certificates.
"Adjusted Expected Distributions" means, with
respect to the Certificates of any Trust on any
Current Distribution Date, the sum of (1) accrued
and unpaid interest on such Certificates
(excluding interest, if any, payable with respect
to the Deposits relating to such Trust) and (2)
the greater of:
(A) the difference between (x) the Pool Balance
of such Certificates as of the immediately
preceding Distribution Date (or, if the
Current Distribution Date is the first
Distribution Date, the original aggregate
face amount of the Certificates of such
Trust) and (y) the Pool Balance of such
Certificates as of the Current Distribution
Date calculated on the basis that (i) the
principal of
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<PAGE> 24
the Equipment Notes other than Performing
Equipment Notes (the "Non-Performing
Equipment Notes") held in such Trust has been
paid in full and such payments have been
distributed to the holders of such
Certificates, (ii) the principal of the
Performing Equipment Notes held in such Trust
has been paid when due (but without giving
effect to any acceleration of Performing
Equipment Notes) and such payments have been
distributed to the holders of such
Certificates and (iii) the principal of any
Equipment Notes formerly held in such Trust
that have been sold pursuant to the
Intercreditor Agreement has been paid in full
and such payments have been distributed to
the holders of such Certificates, but without
giving effect to any reduction in the Pool
Balance as a result of any distribution
attributable to Deposits occurring after the
immediately preceding Distribution Date (or,
if the Current Distribution Date is the first
Distribution Date, occurring after the
initial issuance of the Certificates of such
Trust), and
(B) the amount of the excess, if any, of (i) the
Pool Balance of such Class of Certificates as
of the immediately preceding Distribution
Date (or, if the Current Distribution Date is
the first Distribution Date, the original
aggregate face amount of the Certificates of
such Trust), less the amount of the Deposits
for such Class of Certificates as of such
preceding Distribution Date (or, if the
Current Distribution Date is the first
Distribution Date, the original aggregate
amount of the Deposits for such Class of
Certificates) other than any portion of such
Deposits thereafter used to acquire Equipment
Notes pursuant to the Note Purchase
Agreement, over (ii) the Aggregate LTV
Collateral Amount for such Class of
Certificates for the Current Distribution
Date;
provided that, until the date of the initial LTV
Appraisals, clause (B) shall not apply.
For purposes of calculating Expected Distributions
or Adjusted Expected Distributions with respect
to the Certificates of any Trust, any premium
paid on the Equipment Notes held in such Trust
that has not been distributed to the
Certificateholders of such Trust (other than such
premium or a portion thereof applied to the
payment of interest on the Certificates of such
Trust or the reduction of the Pool Balance of
such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected
Distributions.
"Aggregate LTV Collateral Amount" for any Class of
Certificates for any Distribution Date means (i)
the sum of the applicable LTV Collateral Amounts
for each Aircraft, minus (ii) the Pool Balance
for each Class of Certificates, if any, senior to
such Class, after giving effect to any
distribution of principal on such Distribution
Date with respect to such senior Class or
Classes.
"LTV Collateral Amount" of any Aircraft for any
Class of Certificates means, as of any
Distribution Date, the lesser of (i) the LTV
Ratio for such Class of Certificates multiplied
by the Appraised Current Market Value of such
Aircraft (or with respect to any such Aircraft
which has suffered an Event of Loss under and as
defined in the relevant Lease,
S-24
<PAGE> 25
in the case of a Leased Aircraft, or relevant
Indenture, in the case of an Owned Aircraft, the
amount of the insurance proceeds paid to the
related Loan Trustee in respect thereof to the
extent then held by such Loan Trustee (and/or on
deposit in the Special Payments Account) or
payable to such Loan Trustee in respect thereof)
and (ii) the outstanding principal amount of the
Equipment Notes secured by such Aircraft after
giving effect to any principal payments of such
Equipment Notes on or before such Distribution
Date.
"LTV Ratio" means for the Class A Certificates
43.7%, for the Class B Certificates 56.0% and for
the Class C Certificates 68.0%.
"Appraised Current Market Value" of any Aircraft
means the lower of the average and the median of
the most recent three LTV Appraisals of such
Aircraft. After a Triggering Event occurs and any
Equipment Note becomes a Non-Performing Equipment
Note, the Subordination Agent shall obtain LTV
Appraisals for the Aircraft as soon as
practicable and additional LTV Appraisals on or
prior to each anniversary of the date of such
initial LTV Appraisals; provided that if the
Controlling Party reasonably objects to the
appraised value of the Aircraft shown in such LTV
Appraisals, the Controlling Party shall have the
right to obtain or cause to be obtained
substitute LTV Appraisals (including LTV
Appraisals based upon physical inspection of such
Aircraft).
"LTV Appraisal" means a current fair market value
appraisal (which may be a "desk-top" appraisal)
performed by any Appraiser or any other
nationally recognized appraiser on the basis of
an arm's-length transaction between an informed
and willing purchaser under no compulsion to buy
and an informed and willing seller under no
compulsion to sell and both having knowledge of
all relevant facts.
(b) Deposits: ........... Payments in respect of the Deposits will not be
subject to the subordination provisions of the
Intercreditor Agreement.
(c) Intercreditor
Rights: ................... Pursuant to the Intercreditor Agreement, the
Trustees and the Liquidity Providers will agree
that, with respect to any Indenture at any given
time, the relevant Loan Trustee will be directed
(a) in taking, or refraining from taking, any
action thereunder or with respect to the
Equipment Notes issued thereunder, by the holders
of at least a majority of the outstanding
principal amount of such Equipment Notes as long
as no Indenture Default has occurred and is
continuing thereunder and (b) subject to certain
conditions, in taking, or refraining from taking,
any action under such Indenture (including
exercising remedies thereunder, such as
acceleration of such Equipment Notes or
foreclosing the lien on the Aircraft securing
such Equipment Notes), by the Controlling Party
if an Indenture Default under such Indenture has
occurred and is continuing.
"Controlling Party" with respect to any Indenture
means: (x) the Class A Trustee; (y) upon payment
of Final Distributions to the holders of Class A
Certificates, the Class B Trustee; and (z) upon
payment of Final Distributions to the holders of
Class B Certificates, the Class C Trustee. See
"Description of the Certificates -- Indenture
Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the
Certificateholders of each Trust to direct the
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<PAGE> 26
respective Trustees. Notwithstanding the
foregoing, at any time after 18 months from the
earlier to occur of (x) the date on which the
entire available amount under any Liquidity
Facility shall have been drawn (for any reason
other than a Downgrade Drawing or a Non-Extension
Drawing) and remain unreimbursed and (y) the date
on which all Equipment Notes shall have been
accelerated (provided that if such acceleration
occurs prior to the Delivery Period Termination
Date, the aggregate principal amount thereof
exceeds $300 million), the Liquidity Provider
with at least two-thirds of unreimbursed
Liquidity Obligations shall have the right to
become the Controlling Party with respect to such
Indenture. For purposes of giving effect to the
foregoing, the Trustees (other than the
Controlling Party) shall irrevocably agree (and
the Certificateholders (other than the
Certificateholders represented by the Controlling
Party) shall be deemed to agree by virtue of
their purchase of Certificates) to exercise their
voting rights as directed by the Controlling
Party. For a description of certain limitations
on the Controlling Party's rights to exercise
remedies, see "Description of the Equipment
Notes -- Remedies".
"Final Distributions" means, with respect to the
Certificates of any Trust on any Distribution
Date, the sum of (x) the aggregate amount of all
accrued and unpaid interest on such Certificates
(excluding interest payable on the Deposits
relating to such Trust) and (y) the Pool Balance
of such Certificates as of the immediately
preceding Distribution Date (less the amount of
the Deposits for such Class of Certificates as of
such preceding Distribution Date other than any
portion of such Deposits thereafter used to
acquire Equipment Notes pursuant to the Note
Purchase Agreement).
(i) Upon the occurrence and during the
continuation of any Indenture Default under
any Indenture, the Controlling Party may
accelerate and sell all (but not less than
all) of the Equipment Notes issued under
such Indenture to any person, subject to the
provisions of paragraph (ii) below. The
proceeds of such sale will be distributed
pursuant to the provisions of the
Intercreditor Agreement.
(ii) So long as any Certificates are outstanding,
during nine months after the earlier of (x)
the acceleration of the Equipment Notes
under any Indenture or (y) the bankruptcy or
insolvency of Continental, without the
consent of each Trustee, (a) no Aircraft
subject to the lien of such Indenture or
such Equipment Notes may be sold, if the net
proceeds from such sale would be less than
the Minimum Sale Price for such Aircraft or
such Equipment Notes, and (b) with respect
to any Leased Aircraft, the amount and
payment dates of rentals payable by
Continental under the Lease for such Leased
Aircraft may not be adjusted, if, as a
result of such adjustment, the discounted
present value of all such rentals would be
less than 75% of the discounted present
value of the rentals payable by Continental
under such Lease before giving effect to
such adjustment, in each case, using the
weighted average interest rate of the
Equipment Notes outstanding under such
Indenture as the discount rate.
S-26
<PAGE> 27
"Minimum Sale Price" means, with respect to any
Aircraft or the Equipment Notes issued in respect
of such Aircraft, at any time, the lesser of (1)
75% of the Appraised Current Market Value of such
Aircraft and (2) the aggregate outstanding
principal amount of such Equipment Notes, plus
accrued and unpaid interest thereon.
Federal Income Tax
Consequences: ........... Each Original Trust should be classified as a
grantor trust for federal income tax purposes
and, if not so classified, will be classified as
a partnership. Each Successor Trust will be
classified as a grantor trust. Each Certificate
Owner generally should report on its federal
income tax return its pro rata share of income
from the relevant Deposits and income from the
Equipment Notes and other property held by the
relevant Trust. See "Certain U.S. Federal Income
Tax Consequences".
ERISA Considerations: ..... In general, employee benefit plans subject to Title
I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as amended
(the "Code") (or entities which may be deemed to
hold the assets of any such Plan) will be
eligible to purchase the Certificates, subject to
certain conditions and the circumstances
applicable to such Plans. Each Plan fiduciary
(and each fiduciary for a governmental or church
plan subject to rules similar to those imposed on
Plans under ERISA) should consult with its legal
advisor concerning an investment in any of the
Certificates.
Each person who acquires or accepts a Certificate
or an interest therein, will be deemed by such
acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have
been used to purchase such Certificate or an
interest therein or (ii) the purchase and holding
of such Certificate or interest therein are
exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to
one or more prohibited transaction statutory or
administrative exemptions. See "ERISA
Considerations".
Rating of the
Certificates: ............. It is a condition to the issuance of the
Certificates that the Certificates and the
related Escrow Receipts be rated by Moody's
Investors Service, Inc. ("Moody's") and Standard
& Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's",
and together with Moody's, the "Rating
Agencies"), as set forth below. Continental's
ability to pay any premium due upon distribution
of Deposits not used to acquire Equipment Notes
during the Delivery Period has not been rated by
either of the Rating Agencies. Standard & Poor's
has indicated that its rating applies to a unit
consisting of Certificates representing the Trust
Property and Escrow Receipts initially
representing undivided interests in certain
rights to $ of Deposits. Amounts
deposited under the Escrow Agreements are not
property of Continental and are not entitled to
the benefits of Section 1110 of the U.S.
Bankruptcy Code. Neither the Certificates nor the
Escrow Receipts may be separately assigned or
transferred.
S-27
<PAGE> 28
<TABLE>
<CAPTION>
STANDARD
CERTIFICATES MOODY'S & POOR'S
------------ ------ --------
<S> <C> <C>
Class A A1 AA+
Class B A3 A+
Class C Baa2 BBB+
</TABLE>
A rating is not a recommendation to purchase, hold
or sell Certificates, inasmuch as such rating
does not address market price or suitability for
a particular investor. There can be no assurance
that such ratings will not be lowered or
withdrawn by a Rating Agency if, in the opinion
of such Rating Agency, circumstances (including
the downgrading of Continental, the Depositary or
a Liquidity Provider) so warrant. See "Risk
Factors -- Risk Factors Relating to the
Certificates and the Offering -- Ratings of the
Certificates".
<TABLE>
<CAPTION>
STANDARD
MOODY'S & POOR'S
------- --------
<S> <C> <C> <C>
Rating of the Depositary:........ Short Term P-1 A-1+
Rating of the Liquidity
Providers:..................... Short Term
ABN AMRO P-1 A-1+
West LB P-1 A-1+
Threshold Rating:................ Short Term
Class A Liquidity Provider P-1 A-1+
Class B Liquidity Provider P-1 A-1
Class C Liquidity Provider P-1 A-1
</TABLE>
S-28
<PAGE> 29
SUMMARY FINANCIAL AND OPERATING DATA
The following tables summarize certain consolidated financial data and
certain operating data with respect to the Company. The following selected
consolidated financial data for the years ended December 31, 1996, 1995 and 1994
is derived from the audited consolidated financial statements of the Company
incorporated by reference in the Prospectus of the Company and should be read in
conjunction therewith. The consolidated financial data of the Company for the
three and six months ended June 30, 1997 and 1996 is derived from its unaudited
consolidated financial statements of the Company incorporated by reference in
the Prospectus of the Company, which include all adjustments (consisting solely
of normal recurring accruals) that the Company considers necessary for the fair
presentation of the financial position and results of operations for these
periods. Operating results for the three and six months ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. The Company's selected consolidated financial data
should be read in conjunction with, and are qualified in their entirety by
reference to, the consolidated financial statements, including the notes
thereto.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ----------------- -------------------------------
1997 1996 1997 1996 1996 1995 1994
------ ------ ------ ------ ------ ------ -------
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA -- OPERATIONS:
Operating Revenue................ $1,786 $1,639 $3,484 $3,128 $6,360 $5,825 $ 5,670
Operating Expenses............... 1,555 1,410 3,107 2,779 5,835(1) 5,440(2) 5,681
------ ------ ------ ------ ------ ------ -------
Operating Income (Loss).......... 231 229 377 349 525 385 (11)
Nonoperating Expense, net........ (23) (23) (45) (48) (97) (75)(3) (640)(4)
------ ------ ------ ------ ------ ------ -------
Income (Loss) before Income
Taxes, Minority Interest and
Extraordinary Loss............. 208 206 332 301 428 310 (651)
Net Income (Loss)................ $128... $ 167 $ 202 $ 255 $ 319 $ 224 $ (613)
====== ====== ====== ====== ====== ====== =======
Earnings (Loss) per Common and
Common Equivalent Share(5)..... $2.01.. $ 2.53 $ 3.13 $ 3.90 $ 4.87 $ 3.60 $(11.88)
====== ====== ====== ====== ====== ====== =======
Earnings (Loss) per Common Share
Assuming Full Dilution(5)...... $ 1.64 $ 2.04 $ 2.58 $ 3.25 $ 4.11 $ 3.15 $(11.88)
====== ====== ====== ====== ====== ====== =======
Ratio of Earnings to Fixed
Charges(6)..................... 2.48 2.57 2.18 2.13 1.81 1.53 --
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ----------------- ------------------------------
1997 1996 1997 1996 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA (JET OPERATIONS
ONLY):(7)
Revenue passenger miles
(millions)(8)..................... 11,922 10,527 22,813 20,279 41,914 40,023 41,588
Available seat miles
(millions)(9)..................... 16,486 15,152 32,318 29,703 61,515 61,006 65,861
Passenger load factor(10)........... 72.3% 69.5% 70.6% 68.3% 68.1% 65.6% 63.1%
Breakeven passenger load
factor(11)........................ 62.4% 59.4% 62.3% 60.2% 60.7%(14) 60.8% 62.9%
Passenger revenue per available seat
mile (cents)(12).................. 9.31 9.35 9.30 9.13 8.93 8.20 7.22
Operating cost per available seat
mile (cents)(13).................. 8.90 8.81 9.08 8.86 8.77(14) 8.36 7.86
Average yield per revenue passenger
mile (cents)(15).................. 12.87 13.46 13.17 13.37 13.10 12.51 11.44
Average length of aircraft flight
(miles)........................... 944 888 935 882 896 836 727
</TABLE>
(See footnotes on the following page.)
S-29
<PAGE> 30
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
FINANCIAL DATA -- BALANCE SHEET:
Assets:
Cash and Cash Equivalents, including restricted cash and cash
equivalents of $74 and $76, respectively(16)....................... $ 994 $1,061
Other Current Assets................................................. 685 573
Total Property and Equipment, Net.................................... 1,885 1,596
Routes, Gates and Slots, Net......................................... 1,454 1,473
Other Assets, Net.................................................... 498 503
------ ------
Total Assets............................................... $5,516 $5,206
====== ======
Liabilities and Stockholders' Equity:
Current Liabilities.................................................. $2,324 $2,104
Long-Term Debt and Capital Leases.................................... 1,581 1,624
Deferred Credits and Other Long-Term Liabilities..................... 655 594
Minority Interest(17)................................................ 15 15
Continental-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Convertible Subordinated
Debentures(18)..................................................... 242 242
Redeemable Preferred Stock........................................... -- 46
Common Stockholders' Equity.......................................... 699 581
------ ------
Total Liabilities and Stockholders' Equity................. $5,516 $5,206
====== ======
</TABLE>
- ---------------
(1) Includes a $128 million fleet disposition charge recorded in 1996
associated primarily with the Company's decision to accelerate the
replacement of its DC-9-30, DC-10-10, 727-200, 737-100, and 737-200
aircraft. In connection with its decision to accelerate the replacement of
such aircraft, the Company wrote down its Stage 2 aircraft inventory that
is not expected to be consumed through operations to its estimated fair
value and recorded a provision for costs associated with the return of
leased aircraft at the end of their respective lease terms.
(2) Includes a $20 million cash payment in 1995 by the Company in connection
with a 24-month collective bargaining agreement entered into by the Company
and the Independent Association of Continental Pilots.
(3) Includes a pre-tax gain of $108 million ($30 million after tax) on the
series of transactions by which the Company and its subsidiary, Continental
CRS Interests, Inc., transferred certain assets and liabilities relating to
the computerized reservation business of such subsidiary to a newly-formed
limited liability company and the remaining assets and liabilities were
sold.
(4) Includes a provision of $447 million recorded in 1994 associated with the
planned early retirement of certain aircraft and closed or underutilized
airport and maintenance facilities and other assets.
(5) In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 -- "Earnings per Share" ("SFAS
128") which specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). SFAS 128 replaces the
presentation of primary and fully diluted EPS pursuant to Accounting
Principles Board Opinion No. 15 -- "Earnings per Share" ("APB 15") with the
presentation of basic and diluted EPS. The Company is required to adopt
SFAS 128 with its December 31, 1997 financial statements and restate all
prior period EPS data. The Company will continue to account for EPS
pursuant to APB 15 until that time.
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<PAGE> 31
Under SFAS 128, the Company's basic and diluted EPS were:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, FOR THE YEARS ENDED
--------------- --------------- ---------------------------
1997 1996 1997 1996 1996 1995 1994
----- ----- ----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Basic EPS............. $2.22 $3.05 $3.50 $4.65 $5.75 $4.07 $(11.88)
Diluted EPS........... $1.63 $2.09 $2.58 $3.31 $4.17 $3.37 $(11.88)
</TABLE>
(6) For purposes of calculating this ratio, earnings consist of earnings before
taxes, minority interest and extraordinary loss plus interest expense (net
of capitalized interest), the portion of rental expense representative of
interest expense and amortization on previously capitalized interest. Fixed
charges consist of interest expense and the portion of rental expense
representative of interest expense. For the year ended December 31, 1994,
earnings were inadequate to cover fixed charges and the coverage deficiency
was $667 million.
(7) Includes operating data for CMI, but does not include operating data for
Express' regional jet operations or turboprop operations.
(8) The number of scheduled miles flown by revenue passengers.
(9) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(10) Revenue passenger miles divided by available seat miles.
(11) The percentage of seats that must be occupied by revenue passengers in
order for the airline to break even on an income before income taxes basis,
excluding nonoperating items.
(12) Passenger revenue divided by available seat miles.
(13) Operating expenses divided by available seat miles.
(14) Excludes a $128 million fleet disposition charge. See Note (1) for
description of the fleet disposition charge.
(15) The average revenue received for each mile a revenue passenger is carried.
(16) Restricted cash and cash equivalents agreements relate primarily to
workers' compensation claims and the terms of certain other agreements.
(17) In July 1997, the Company purchased the minority interest holder's 9%
interest in Air Micronesia, Inc., the parent of CMI. See "Risk
Factors -- Risk Factors Relating to the Company".
(18) The sole assets of such Trust are convertible subordinated debentures, with
an aggregate principal amount of $250 million, which bear interest at the
rate of 8 1/2% per annum and mature on December 1, 2020. Upon repayment,
the Continental-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust will be mandatorily redeemed.
S-31
<PAGE> 32
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE CERTIFICATES SHOULD CAREFULLY REVIEW THE
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS AND SHOULD PARTICULARLY CONSIDER THE FOLLOWING MATTERS:
RISK FACTORS RELATING TO THE COMPANY
Leverage and Liquidity
Continental is more leveraged and has significantly less liquidity than
certain of its competitors, several of whom have substantial available lines of
credit and/or significant unencumbered assets. Accordingly, Continental may be
less able than certain of its competitors to withstand a prolonged recession in
the airline industry and may not have as much flexibility to respond to changing
economic conditions or to exploit new business opportunities.
During the first and second quarters of 1995, in connection with
negotiations with various lenders and lessors, Continental ceased or reduced
contractually required payments under various agreements, which produced a
significant number of events of default under debt, capital lease and operating
lease agreements. Through agreements reached with the various lenders and
lessors, Continental cured all of these events of default. The last such
agreement was put in place during the fourth quarter of 1995.
As of June 30, 1997, Continental had approximately $1.9 billion (including
current maturities) of long-term debt and capital lease obligations and had
approximately $1.0 billion of minority interest, Continental-obligated
mandatorily redeemable preferred securities of subsidiary trust and common
stockholders' equity. Common stockholders' equity reflects the adjustment of the
Company's balance sheet and the recording of assets and liabilities at fair
market value as of April 27, 1993 in accordance with the American Institute of
Certified Public Accountants' Statement of Position 90-7 -- "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
As of June 30, 1997, Continental had $920 million in cash and cash
equivalents (excluding restricted cash and cash equivalents of $74 million).
Continental has significant encumbered assets.
For 1997, Continental expects to incur cash expenditures under operating
leases relating to aircraft of approximately $631 million, compared to $568
million for 1996, and approximately $232 million relating to facilities and
other rentals, compared to $210 million in 1996. In addition, Continental has
capital requirements relating to compliance with regulations that are discussed
below. See "-- Risk Factors Relating to the Airline Industry -- Regulatory
Matters".
As of September 18, 1997, the Company had firm commitments with The Boeing
Company ("Boeing") to take delivery of a total of 122 principally narrowbody jet
aircraft during the years 1997 through 2003 with options for an additional 85
aircraft (exercisable subject to certain conditions). These aircraft will
replace older, less efficient Stage 2 aircraft and allow for growth of
operations. In addition, the Company recently signed an agreement with Boeing to
purchase 35 new widebody jet aircraft. This new order consists of five firm
Boeing 777-200 aircraft and 30 firm Boeing 767-400ER aircraft, with options for
additional 777 and 767 aircraft to be negotiated by the parties. The new
widebody aircraft will replace Continental's fleet of DC10-10 and DC10-30
aircraft, which will be retired as the new Boeing aircraft are delivered, and
will also be used to expand Continental's international and transcontinental
service. The ten firm delivery 777 aircraft (including five aircraft the Company
already had on order, the deliveries of which will be accelerated) will be
delivered in September 1998 through May 1999, and the thirty firm delivery 767
aircraft will be delivered starting in mid-2000 through the end of 2005. In
connection with this new order, the Company will obtain the flexibility to
substitute certain aircraft on order with Boeing and will obtain other benefits.
The Company currently anticipates substituting 777 aircraft for certain of the
767 aircraft. The Company's agreement with Boeing provides that the Company will
purchase from Boeing the carrier's requirements for new jet aircraft (other than
regional jets) over the next twenty years, subject to certain conditions.
However, Boeing has agreed with the European Commission not to enforce such
provision. The Company requested a business offer from
S-32
<PAGE> 33
Boeing which would include the requirements commitment in order to obtain more
favorable terms and flexibility.
The estimated aggregate cost of the Company's firm commitments for the 122
Boeing aircraft previously ordered and the 35 widebody aircraft included in the
recent Boeing agreement is approximately $7 billion. The Company has completed
or has third party commitments for a total of approximately $548 million in
financing for its future narrowbody Boeing deliveries, and has commitments or
letters of intent from various sources for backstop financing for approximately
one-fourth of the anticipated acquisition cost of its future narrowbody and
widebody Boeing deliveries. The Company currently plans on financing the new
Boeing aircraft with enhanced equipment trust certificates or similar financing
and lease equity, subject to availability and market conditions. However,
further financing will be needed to satisfy the Company's capital commitments
for other aircraft and aircraft-related expenditures such as engines, spare
parts, simulators and related items. There can be no assurance that sufficient
financing will be available for all aircraft and other capital expenditures not
covered by firm financing commitments. Deliveries of new Boeing aircraft are
expected to increase aircraft rental, depreciation and interest costs while
generating cost savings in the areas of maintenance, fuel and pilot training.
In September 1996, Express placed an order for 25 firm EMB-145ER regional
jets, with options for an additional 175 aircraft. In June 1997, Express
exercised its option to order 25 of such option aircraft. Express now has
options for an additional 150 regional jets exercisable at the election of the
Company over the next 12 years. Neither Express nor Continental will have any
obligation to take such aircraft that are not financed by a third party and
leased to the Company. Express has taken delivery of 12 of the firm aircraft
through September 18, 1997 and will take delivery of the remaining 38 firm
aircraft through the third quarter of 1999. The Company expects to account for
all of these aircraft as operating leases.
In July 1997, Continental entered into a $575 million credit facility (the
"Credit Facility"), including a $275 million five-year term loan. The proceeds
of the term loan were loaned by Continental to its wholly owned subsidiary Air
Micronesia, Inc. ("AMI"), the parent of CMI, reloaned to CMI and used by CMI to
prepay its existing secured term loan. In connection with this prepayment,
Continental recorded a $4 million after-tax extraordinary charge to consolidated
earnings in the third quarter of 1997. The Credit Facility also includes a $225
million revolving credit facility and a $75 million seven-year term loan for
general corporate purposes.
The Credit Facility is secured by substantially all of CMI's assets (other
than aircraft subject to other financing arrangements) but does not contain any
financial covenants relating to CMI other than covenants restricting CMI's
incurrence of certain indebtedness and pledge or sale of assets. AMI's rights
with respect to its loan to CMI and Continental's rights with respect to its
loan to AMI (as well as Continental's stock in AMI and AMI's stock in CMI) are
pledged as collateral for loans to Continental under the Credit Facility. CMI
and AMI have guaranteed Continental's obligations under the Credit Facility. In
addition, the Credit Facility contains certain financial covenants applicable to
Continental comparable to those contained in the Facility discussed below and
prohibits Continental from granting a security interest on certain of its
international route authorities and domestic slots.
In July 1997, the Company purchased the rights of United Micronesia
Development Association, Inc. ("UMDA") to receive future payments under a
services agreement between UMDA and CMI (pursuant to which CMI was to pay UMDA
approximately 1% of the gross revenues of CMI, as defined, through January 1,
2012, which payment by CMI to UMDA totaled $6 million in 1996) and UMDA's 9%
interest in AMI, terminated the Company's obligations to UMDA under a settlement
agreement entered into in 1987, and terminated substantially all of the other
contractual arrangements between the Company, AMI and CMI, on the one hand, and
UMDA on the other hand, for an aggregate consideration of $73 million.
In April 1997, Continental entered into a $160 million secured revolving
credit facility (the "Facility"). The revolving loans made under the Facility
will be used for the purpose of making certain predelivery payments to Boeing
for new Boeing aircraft to be delivered through December 1999. The Facility
contains certain financial covenants, including maintenance of a minimum fixed
charge ratio, a minimum net worth and
S-33
<PAGE> 34
a minimum unrestricted cash balance. Continental is also restricted from paying
cash dividends and making certain other payments.
In March 1997, Continental completed an offering of $707 million of pass
through certificates. The pass through certificates are not direct obligations
of, or guaranteed by, Continental and are therefore not included in the
consolidated financial statements incorporated by reference herein. The cash
proceeds from the transaction were deposited with an escrow agent and will be
used to finance (through either leveraged leases or secured debt financings) the
debt portion of the acquisition cost of up to 30 new aircraft from Boeing
scheduled to be delivered to Continental through February 1998. In connection
therewith, owner participants have committed to approximately $184 million of
equity financing to be used in leveraged leases of 27 of such aircraft. If any
funds remain as deposits with the escrow agent for such pass through
certificates at the end of the delivery period (which may be extended to June
1998), such funds will be distributed back to the certificate holders. Such
distribution will include a make-whole premium payable by Continental.
Management believes that the likelihood that the Company would be required to
pay a material make-whole premium is remote.
In June 1997, the Company acquired 10 aircraft previously leased by it. The
debt financing for the acquisition of the six Boeing 737-300 aircraft and the
four McDonnell Douglas MD-82 aircraft was funded by the private placement of
$155 million of pass through certificates. The pass through certificates were
issued by separate pass through trusts that acquired equipment trust notes
issued on a recourse basis by Continental.
The Company has announced plans to expand its facilities at its Hopkins
International Airport hub in Cleveland, which expansion is expected to be
completed in the first quarter of 1999. The expansion, which will include a new
jet concourse for the new regional jet service offered by Express, as well as
other facility improvements, is expected to cost approximately $120 million,
which the Company expects will be funded principally by the issuance of a
combination of tax-exempt special facilities revenue bonds and general airport
revenue bonds by the City of Cleveland. In connection therewith, the Company
expects to enter into long-term leases with the City of Cleveland under which
rental payments will be sufficient to service the related bonds.
In April 1997, the City of Houston (the "City") completed the offering of
$190 million aggregate principal amount of tax-exempt special facilities revenue
bonds (the "IAH Bonds") payable solely from rentals paid by Continental under
long-term lease agreements with the City. The IAH Bonds are unconditionally
guaranteed by the Company. The proceeds from the IAH Bonds are being used to
finance the acquisition, construction and installation of certain terminal and
other airport facilities located at Continental's hub at George Bush
Intercontinental Airport in Houston, including a new automated people mover
system linking Terminals B and C and 20 aircraft gates in Terminal B into which
Continental intends to expand its operations. The expansion project is expected
to be completed by the summer of 1999.
Continental's History of Operating Losses
Although Continental recorded net income of $202 million for the six months
ended June 30, 1997, $319 million in 1996 and $224 million in 1995, it had
experienced significant operating losses in the previous eight years. In the
long term, Continental's viability depends on its ability to sustain profitable
results of operations.
Aircraft Fuel
Since fuel costs constitute a significant portion of Continental's
operating costs (approximately 14.1% for the six months ended June 30, 1997 and
13.3% for the year ended December 31, 1996), significant changes in fuel costs
would materially affect the Company's operating results. Fuel prices continue to
be susceptible to international events, and the Company cannot predict near or
longer-term fuel prices. The Company enters into petroleum option contracts to
provide some short-term protection (generally three to six months) against a
sharp increase in jet fuel prices. In the event of a fuel supply shortage
resulting from a disruption of oil imports or otherwise, higher fuel prices or
curtailment of scheduled service could result.
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<PAGE> 35
Labor Matters
In April 1997, the Company began collective bargaining agreement
negotiations with its Continental Airlines pilots, whose contract became
amendable in July 1997, and Express pilots, whose contract became amendable in
October 1997. Negotiations are in progress to amend these contracts. The Company
believes that mutually acceptable agreements can be reached with such employees,
although the ultimate outcome of the negotiations is unknown at this time. The
Company's mechanics and related employees recently voted to be represented by
the International Brotherhood of Teamsters (the "Teamsters"). The Company does
not believe that the Teamsters' union representation will be material to the
Company. In September 1997, the Company announced that it intends to bring all
employees to industry standard wages (the average of the top ten air carriers as
ranked by the Department of Transportation, excluding Continental) within the
next 36 months. The Company stated that it would phase in wage increases over
the 36-month period as its revenue, interest rates and rental rates reached
industry standards. The Company estimates that the increased wages will
aggregate approximately $500 million over the 36-month period.
Certain Tax Matters
At December 31, 1996 the Company had estimated net operating loss
carryforwards ("NOLs") of $2.3 billion for federal income tax purposes that will
expire through 2009 and federal investment tax credit carryforwards of $45
million that will expire through 2001.
The Company had, as of December 31, 1996, deferred tax assets aggregating
$1.3 billion, including $804 million of NOLs. The Company recorded a valuation
allowance of $694 million against such assets as of December 31, 1996. The
Company has consummated several built-in-gain transactions, which resulted in
the realization of tax benefits related to NOLs and investment tax credit
carryforwards attributable to the Company's predecessor that were previously
recorded. To the extent the Company consummates additional built-in-gain
transactions, such benefits will reduce the valuation allowance and
reorganization value in excess of amounts allocable to identifiable assets. If
such reorganization value is exhausted, reductions in the valuation allowance
would decrease other intangibles.
As a result of NOLs, the Company will not pay United States federal income
taxes (other than alternative minimum tax) until it has recorded approximately
an additional $1.1 billion of taxable income following December 31, 1996.
Section 382 of the Internal Revenue Code ("Section 382") imposes limitations on
a corporation's ability to utilize NOLs if it experiences an "ownership change."
In general terms, an ownership change may result from transactions increasing
the ownership of certain stockholders in the stock of a corporation by more than
50 percentage points over a three-year period. In the event that an ownership
change should occur, utilization of Continental's NOLs would be subject to an
annual limitation under Section 382 determined by multiplying the value of the
Company's stock at the time of the ownership change by the applicable long-term
tax-exempt rate (which is 5.33% for October 1997). Unused annual limitation may
be carried over to later years, and the amount of the limitation may under
certain circumstances be increased by the built-in gains in assets held by the
Company at the time of the change that are recognized in the five-year period
after the change. Under current conditions, if an ownership change were to
occur, Continental's annual NOL utilization would be limited to approximately
$130 million per year.
Continental Micronesia
Because the majority of CMI's traffic originates in Japan, its results of
operations are substantially affected by the Japanese economy and changes in the
value of the yen as compared to the dollar. Appreciation of the yen against the
dollar during 1994 and 1995 increased CMI's profitability while a decline of the
yen against the dollar in 1996 and 1997 to date have reduced CMI's
profitability. As a result of the recent weakness of the yen against the dollar
and increased fuel costs, CMI's operating earnings declined during the past four
quarters as compared to similar periods a year ago, and are not expected to
improve materially absent a stronger yen or reduced fuel costs.
To reduce the potential negative impact on CMI's dollar earnings, CMI, from
time to time, purchases average rate options as a hedge against a portion of its
expected net yen cash flow position. Such options
S-35
<PAGE> 36
historically have not had a material effect on the Company's results of
operations or financial condition. Any significant and sustained decrease in
traffic or yields (including due to the value of the yen) to and from Japan
could materially adversely affect Continental's consolidated profitability.
Principal Stockholder
As of September 18, 1997, Air Partners, L.P., a Texas limited partnership
and major stockholder of the Company ("Air Partners"), held approximately 9.4%
of the common equity interest and 40.8% of the general voting power of the
Company. If all the remaining warrants held by Air Partners had been exercised
on September 18, 1997, approximately 13.8% of the common equity interest and
51.7% of the general voting power of the Company would have been held by Air
Partners. Various provisions in the Company's Certificate of Incorporation and
Bylaws currently provide Air Partners with the right to elect one-third of the
directors in certain circumstances; these provisions could have the effect of
delaying, deferring or preventing a change in the control of the Company.
RISK FACTORS RELATING TO THE AIRLINE INDUSTRY
Industry Conditions and Competition
The airline industry is highly competitive and susceptible to price
discounting. The Company has in the past both responded to discounting actions
taken by other carriers and initiated significant discounting actions itself.
Continental's competitors include carriers with substantially greater financial
resources (and in certain cases, lower cost structures), as well as smaller
carriers with low cost structures. Airline profit levels are highly sensitive
to, and during recent years have been severely impacted by, changes in fuel
costs, fare levels (or "average yield") and passenger demand. Passenger demand
and yields have been affected by, among other things, the general state of the
economy, international events and actions taken by carriers with respect to
fares. From 1990 to 1993, these factors contributed to the domestic airline
industry's incurring unprecedented losses. Although fare levels have increased
subsequently, fuel costs have also increased significantly. In addition,
significant industry-wide discounts could be reimplemented at any time, and the
introduction of broadly available, deeply discounted fares by a major United
States airline would likely result in lower yields for the entire industry and
could have a material adverse effect on the Company's operating results.
The airline industry has consolidated in past years as a result of mergers
and liquidations and may further consolidate in the future. Among other effects,
such consolidation has allowed certain of Continental's major competitors to
expand (in particular) their international operations and increase their market
strength. Furthermore, the emergence in recent years of several new carriers,
typically with low cost structures, has further increased the competitive
pressures on the major United States airlines. In many cases, the new entrants
have initiated or triggered price discounting. Aircraft, skilled labor and gates
at most airports continue to be readily available to start-up carriers.
Competition with new carriers or other low cost competitors on Continental's
routes could negatively impact Continental's operating results.
Regulatory Matters
In the last several years, the United States Federal Aviation
Administration (the "FAA") has issued a number of maintenance directives and
other regulations relating to, among other things, retirement of older aircraft,
security measures, collision avoidance systems, airborne windshear avoidance
systems, noise abatement, commuter aircraft safety and increased inspections and
maintenance procedures to be conducted on older aircraft. The Company expects to
continue incurring expenses for the purpose of complying with the FAA's noise,
aging aircraft and other regulations. In addition, several airports have
recently sought to increase substantially the rates charged to airlines, and the
ability of airlines to contest such increases has been restricted by federal
legislation, Department of Transportation regulations and judicial decisions.
Management believes that the Company benefited significantly from the
expiration of the aviation trust fund tax (the "ticket tax") on December 31,
1995. The ticket tax was reinstated on August 27, 1996, expired on December 31,
1996 and was reinstated again on March 7, 1997. Congress recently passed tax
legislation
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reimposing and significantly modifying the ticket tax. The legislation includes
the imposition of new excise tax and segment fee tax formulas to be phased in
over a multi-year period, an increase in the international departure tax and the
imposition of a new arrivals tax, and the extension of the ticket tax to cover
items such as the sale of frequent flyer miles. Management believes that the
ticket tax has a negative impact on the Company, although neither the amount of
such negative impact directly resulting from the reimposition of the ticket tax,
nor the benefit previously realized by its expiration, can be precisely
determined.
Additional laws and regulations have been proposed from time to time that
could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations have
also been considered that would prohibit or restrict the ownership and/or
transfer of airline routes or takeoff and landing slots. Also, the availability
of international routes to United States carriers is regulated by treaties and
related agreements between the United States and foreign governments that are
amendable. Continental cannot predict what laws and regulations may be adopted
or their impact, but there can be no assurance that laws or regulations
currently proposed or enacted in the future will not adversely affect the
Company.
Seasonal Nature of Airline Business
Due to the greater demand for air travel during the summer months, revenue
in the airline industry in the third quarter of the year is generally
significantly greater than revenue in the first quarter of the year and
moderately greater than revenue in the second and fourth quarters of the year
for the majority of air carriers. Continental's results of operations generally
reflect this seasonality, but have also been impacted by numerous other factors
that are not necessarily seasonal, including the extent and nature of
competition from other airlines, fare wars, excise and similar taxes, changing
levels of operations, fuel prices, foreign currency exchange rates and general
economic conditions.
RISK FACTORS RELATING TO THE CERTIFICATES AND THE OFFERING
Appraisals and Realizable Value of Aircraft
Appraisals in respect of the Aircraft (without physical inspection thereof)
have been prepared by AISI, BK and MBA, and such appraisals are based on varying
assumptions and methodologies which differ among the Appraisers. The Appraisers
have delivered letters summarizing their respective reports, copies of which are
annexed to this Prospectus Supplement as Appendix II. See "Description of the
Aircraft and the Appraisals -- The Appraisals". The appraised value of each
Aircraft and, accordingly, the initial aggregate Aircraft value as referred to
herein, is based upon the lesser of the average and median value of such
Aircraft as appraised by the Appraisers and projected as of the scheduled
delivery month of such Aircraft. Such aggregate appraised values also assume
depreciation of approximately 2% of the initial appraised value for Aircraft
delivered more than one year prior to the scheduled Delivery Period Termination
Date (although no assurance can be given as to the actual market value rate of
depreciation, which may differ from 2% during such period). Appraisals that are
based on different assumptions and methodologies may result in valuations that
are materially different from those contained in the appraisals of the
Appraisers. An appraisal is only an estimate of value, is not indicative of the
price at which an Aircraft may be purchased from the Aircraft manufacturer and
should not in any event be relied upon as a measure of realizable value; the
proceeds realized upon a sale of any Aircraft may be less than the appraised
value thereof. In particular, the appraisals are estimates of values as of
future delivery dates. The value of the Aircraft in the event of the exercise of
remedies under the applicable Indenture will depend on market and economic
conditions, the supply of aircraft, the availability of buyers, the condition of
the Aircraft and other factors. Accordingly, there can be no assurance that the
proceeds realized upon any such exercise of remedies with respect to the
Equipment Notes and the Aircraft pursuant to the applicable Pass Through Trust
Agreement and the applicable Indenture would be sufficient to satisfy in full
payments due on the Certificates.
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Priority of Distributions; Subordination
Certain provisions of the Intercreditor Agreement, which provides for the
subordination of the Class B Certificates to the Class A Certificates and the
subordination of the Class C Certificates to the Class B Certificates, may
result in the holders of the subordinated Classes of Certificates receiving less
than the full amount due to them after the occurrence of a payment default under
any Equipment Note or a Triggering Event, even if all of the Equipment Notes
eventually are paid in full.
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity Providers will be parties, on each
Distribution Date, so long as no Triggering Event shall have occurred, all
payments in respect of Equipment Notes received by the Subordination Agent will
be distributed in the following order: (1) to the Liquidity Providers to the
extent required to pay certain Liquidity Obligations; (2) to the Class A Trustee
to the extent required to pay Expected Distributions on the Class A
Certificates; (3) to the Class B Trustee to the extent required to pay Expected
Distributions on the Class B Certificates; (4) to the Class C Trustee to the
extent required to pay Expected Distributions on the Class C Certificates; (5)
if Class D Certificates have been issued, to the Class D Trustee to the extent
required to pay "Expected Distributions" (to be defined in a manner equivalent
to the definition for other Classes of Certificates) on the Class D
Certificates; and (6) to the Subordination Agent and each Trustee for the
payment of certain fees and expenses.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order: (1) to the Subordination Agent, each Trustee and certain
other parties in payment of the Administration Expenses and to the Liquidity
Providers in payment of the Liquidity Obligations; (2) to the Subordination
Agent, each Trustee and each Certificateholder for certain fees, taxes, charges
and other amounts payable to the Subordination Agent, any Trustee or any
Certificateholder; (3) to the Class A Trustee to the extent required to pay
Adjusted Expected Distributions on the Class A Certificates; (4) to the Class B
Trustee to the extent required to pay Adjusted Expected Distributions on the
Class B Certificates; (5) to the Class C Trustee to the extent required to pay
Adjusted Expected Distributions on the Class C Certificates; and (6) if Class D
Certificates have been issued, to the Class D Trustee to the extent required to
pay "Adjusted Expected Distributions" (to be defined in a manner equivalent to
the definition for other Classes of Certificates) on the Class D Certificates.
Accordingly, the priority of distributions after a payment default under
any Equipment Note or a Triggering Event will have the effect in certain
circumstances of requiring the distribution to more senior Classes of
Certificates of payments received in respect of one or more junior series of
Equipment Notes. If this should occur, the interest accruing on the remaining
Equipment Notes would in the aggregate be less than the interest accruing on the
remaining Certificates because such Certificates include a relatively greater
proportion of junior Classes with relatively higher interest rates. As a result
of this possible interest shortfall, the holders of one or more junior Classes
of Certificates may not receive the full amount due to them after a payment
default under any Equipment Note even if all Equipment Notes are eventually paid
in full.
Payments in respect of the Deposits will not be subject to the
subordination provisions of the Intercreditor Agreement.
Control over Collateral; Sale of Collateral
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Providers will agree that, with respect to any Indenture at any given time, the
Loan Trustee will be directed (a) in taking, or refraining from taking, any
action thereunder, by the holders of at least a majority of the outstanding
principal amount of the Equipment Notes issued thereunder as long as no
Indenture Default has occurred and is continuing thereunder and (b) subject to
certain conditions, in exercising remedies under such Indenture (including
acceleration of such Equipment Notes or foreclosing the lien on the Aircraft
securing such Equipment Notes) insofar as an Indenture Default has occurred and
is continuing under such Indenture, by the Controlling Party. See "Description
of the Certificates -- Indenture Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the Certificateholders of each Trust
to direct the respective Trustee.
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Notwithstanding the foregoing, at any time after 18 months from the earlier to
occur of (x) the date on which the entire available amount under any Liquidity
Facility shall have been drawn (for any reason other than a Downgrade Drawing or
a Non-Extension Drawing) and remain unreimbursed and (y) the date on which all
Equipment Notes shall have been accelerated (provided that if such acceleration
occurs prior to the Delivery Period Termination Date, the aggregate principal
amount thereof exceeds $300 million), the Liquidity Providers with at least
two-thirds of the unreimbursed Liquidity Obligations will have the right to
elect to become the Controlling Party with respect to such Indenture. For
purposes of giving effect to the foregoing, the Trustees (other than the
Controlling Party) shall irrevocably agree, and the Certificateholders (other
than the Certificateholders represented by the Controlling Party) shall be
deemed to agree by virtue of their purchase of Certificates, to exercise their
voting rights as directed by the Controlling Party. For a description of certain
limitations on the Controlling Party's rights to exercise remedies, see
"Description of the Equipment Notes -- Remedies".
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions described in the last sentence of this paragraph, sell all (but not
less than all) of the Equipment Notes issued under such Indenture to any person.
The market for Equipment Notes at the time of the existence of any Indenture
Default may be very limited, and there can be no assurance as to the price at
which they could be sold. If the Controlling Party sells any such Equipment
Notes for less than their outstanding principal amount, certain
Certificateholders will receive a smaller amount of principal distributions than
anticipated and will not have any claim for the shortfall against Continental,
any Owner Trustee, any Owner Participant or any Trustee. So long as any
Certificates are outstanding, during nine months after the earlier of (x) the
acceleration of the Equipment Notes under any Indenture and (y) the bankruptcy
or insolvency of Continental, without the consent of each Trustee, (a) no
Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes, and (b) with respect to any
Leased Aircraft, the amount and payment dates of rentals payable by Continental
under the Lease for such Leased Aircraft may not be adjusted, if, as a result of
such adjustment, the discounted present value of all such rentals would be less
than 75% of the discounted present value of the rentals payable by Continental
under such Lease before giving effect to such adjustment, in each case, using
the weighted average interest rate of the Equipment Notes issued under such
Indenture as the discount rate.
The Equipment Notes will not be cross-collateralized (except in certain
cases, if any, where the related Owner Participant and Continental shall agree
to cross-collateralization) and, consequently, proceeds from the sale of an
Aircraft in excess of the amounts due on Equipment Notes related to such
Aircraft will not be available to cover losses, if any, on any other Equipment
Notes.
Owner Participant; Revisions to Agreements
Continental has obtained the commitment of one company to act as the Owner
Participant with respect to leveraged leases for certain of the Aircraft and
plans to seek such commitments from others for the remaining Aircraft. The
existing commitment is subject to satisfaction of certain conditions, and
Continental may elect to terminate such commitment. Accordingly, Continental may
select one or more other Owner Participants for some or all of the Aircraft or
finance such Aircraft as Owned Aircraft rather than Leased Aircraft. Such Owner
Participants may request revisions to the forms of the Participation Agreement,
the Lease and the Leased Aircraft Indenture that are contemplated by the Note
Purchase Agreement, so that the terms of such agreements applicable to any
particular Leased Aircraft may differ from the description of such agreements
contained in this Prospectus Supplement. However, under the Note Purchase
Agreement, the terms of such agreements are required to (i) contain the
Mandatory Document Terms and (ii) not vary the Mandatory Economic Terms. In
addition, Continental is obligated (i) to certify to the Trustee that any such
modifications do not materially and adversely affect the Certificateholders and
(ii) to obtain written confirmation from each Rating Agency that the use of
versions of such agreements modified in any material respect will not result in
a withdrawal, suspension or downgrading of the rating of any Class of
Certificates. See "Description of the Certificates -- Obligation to Purchase
Equipment Notes".
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Boeing and certain manufacturers of jet engines used by Continental may act
as Owner Participant with respect to Aircraft, directly or through affiliates.
Such manufacturers and their affiliates have various business relationships with
Continental, including as suppliers of certain equipment to Continental, and
such business relationships could influence the actions of such manufacturers or
their affiliates as Owner Participants.
Each Owner Participant will have the right to sell, assign or otherwise
transfer its interests as Owner Participant in any of such leveraged leases,
subject to the terms and conditions of the relevant Participation Agreement and
related documents.
Ratings of the Certificates
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated A1 by Moody's and AA+ by Standard & Poor's, the Class B
Certificates be rated A3 by Moody's and A+ by Standard & Poor's and the Class C
Certificates be rated Baa2 by Moody's and BBB+ by Standard & Poor's. A rating is
not a recommendation to purchase, hold or sell Certificates, inasmuch as such
rating does not address market price or suitability for a particular investor.
There is no assurance that a rating will remain for any given period of time or
that a rating will not be lowered or withdrawn entirely by a Rating Agency if in
its judgment circumstances in the future (including the downgrading of
Continental, the Depositary or a Liquidity Provider) so warrant. The rating of
the Certificates is based primarily on the default risk of the Equipment Notes
and the Depositary, the availability of the Liquidity Facility for the benefit
of holders of the Certificates, the collateral value provided by the Aircraft
relating to the Equipment Notes and the subordination in right of payment under
the Intercreditor Agreement of the Class B Certificates to the Class A
Certificates and of the Class C Certificates to the Class B Certificates.
Standard & Poor's has indicated that its rating applies to a unit consisting of
Certificates representing the Trust Property and Escrow Receipts initially
representing undivided interests in certain rights to $ of Deposits.
Amounts deposited under the Escrow Agreements are not property of Continental
and are not entitled to the benefits of Section 1110 of the U.S. Bankruptcy
Code. Neither the Certificates nor the Escrow Receipts may be separately
assigned or transferred.
Continental's ability to pay any premium due upon distribution of Deposits
not used to acquire Equipment Notes during the Delivery Period has not been
rated by either of the Rating Agencies.
Unused Deposits
The Trustees' obligations to purchase the Equipment Notes issued with
respect to each Aircraft are subject to satisfaction of certain conditions at
the time of delivery, as set forth in the Note Purchase Agreement. See
"Description of the Certificates -- Obligation to Purchase Equipment Notes".
Since the Aircraft are scheduled for delivery from time to time during the
Delivery Period, no assurance can be given that all such conditions will be
satisfied at the time of delivery for each Aircraft. Moreover, since the
Aircraft will be newly manufactured, their delivery as scheduled is subject to
delays in the manufacturing process and to Boeing's right to postpone deliveries
under its agreement with Continental. Boeing has recently announced that it is
experiencing delays in deliveries of Aircraft, and the delivery schedule for the
Aircraft described in this Prospectus Supplement reflects adjustments made by
Boeing as a result of such delays. See "Description of the Aircraft and
Appraisals -- Deliveries of Aircraft". Continental cannot predict whether
further adjustments in such schedule will be required. Depending on the
circumstances of the financing of each Aircraft, the maximum aggregate principal
amount of Equipment Notes may not be issued. In addition, Continental's
obligations under the predelivery deposit Facility are secured by Continental's
purchase agreement with Boeing relating to the Boeing 737-524, 737-724 and
737-824 Aircraft (but not the Boeing 777-200 Aircraft). Accordingly, if
Continental should breach its obligations secured thereby, the secured parties
could exercise remedies and prevent delivery of Aircraft to Continental. If any
funds remain as Deposits with respect to any Trust at the Delivery Period
Termination Date, they will be withdrawn by the Escrow Agent for such Trust and
distributed, with accrued and unpaid interest thereon, to the Certificateholders
of such Trust. In addition, if such remaining Deposits with respect to all of
the Trusts exceed the Par Redemption Amount, such distribution will include a
premium payable by Continental equal to the Deposit Make-Whole Premium with
respect to the remaining Deposits related to such Trust in excess of such
Trust's proportionate share of the Par Redemption Amount. Since the maximum
principal amount of
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Equipment Notes may not be issued with respect to an Aircraft and, in any such
case, the Series C Equipment Notes are more likely not to be issued in the
maximum principal amount as compared to the other Equipment Notes, it is more
likely that a distribution of unused Deposits will be made with respect to the
Class C Certificates as compared to the other Certificates. In addition,
notwithstanding the Par Redemption Amount limitation, if any Aircraft is not
delivered by the manufacturer prior to the Delivery Period Termination Date due
to any reason not occasioned by Continental's fault or negligence and no
Substitute Aircraft is provided in lieu of such Aircraft, no Deposit Make-Whole
Premium will be paid with respect to the unused Deposits to be distributed as a
result of such failure to deliver in an amount equal to the maximum principal
amount of Equipment Notes that could have been issued and acquired by such Trust
with respect to such Aircraft in accordance with the Mandatory Economic Terms
and such unused Deposits shall not be included in the calculation of the Par
Redemption Amount. See "Description of the Deposit Agreements -- Unused
Deposits".
Absence of a Public Market for the Certificates
Prior to the Offering of the Certificates, there has been no public market
for the Certificates and neither Continental nor any Trust intends to apply for
listing of the Certificates on any securities exchange or otherwise. Continental
has been advised by the Underwriters that each of them presently intends to make
a market in the Certificates, as permitted by applicable laws and regulations,
after consummation of the Offering. None of the Underwriters is obligated,
however, to make a market in the Certificates and any such market-making
activity may be discontinued at any time without notice at the sole discretion
of each Underwriter. There can be no assurance as to the liquidity of the public
market for the Certificates or that any active public market for the
Certificates will develop or continue. If an active public market does not
develop or continue, the market price and liquidity of the Certificates may be
adversely affected.
USE OF PROCEEDS
The proceeds from the sale of the Certificates being offered hereby will be
used to purchase Equipment Notes during the Delivery Period issued, at
Continental's election, either (i) by each Owner Trustee to finance a portion of
the purchase price of the Leased Aircraft or (ii) by Continental to finance a
portion of the purchase price of the Owned Aircraft. Prior to utilization of
such proceeds to purchase Equipment Notes, such proceeds from the sale of the
Certificates of each Trust will be deposited with the Depositary on behalf of
the applicable Escrow Agent for the benefit of the Certificateholders of such
Trust.
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THE COMPANY
Continental is a major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth largest United
States airline (as measured by revenue passenger miles in the first six months
of 1997) and, together with its wholly owned subsidiaries, Continental Express,
Inc. ("Express") and Continental Micronesia, Inc. ("CMI"), served 198 airports
worldwide as of September 18, 1997. Internationally, Continental flies to 65
destinations and offers additional connecting service through alliances with
foreign carriers. Continental is one of the leading airlines providing service
to Mexico and Central America, serving more destinations there than any other
United States airline. Through CMI, Continental provides extensive service in
the western Pacific, including service to more Japanese cities than any other
United States carrier.
DOMESTIC OPERATIONS
Continental operates its domestic route system primarily through its hubs
at Newark, George Bush Intercontinental in Houston and Cleveland. The Company's
hub system allows it to transport passengers between a large number of
destinations with substantially more frequent service than if each route were
served directly. The hub system also allows Continental to add service to a new
destination from a large number of cities using only one or a limited number of
aircraft. Each of Continental's hubs is located in a large business and
population center, contributing to a high volume of "origin and destination"
traffic.
Newark
As of September 18, 1997, Continental operated 57% (234 departures) of
average daily jet departures and, together with Express, accounted for 59% (361
departures) of all average daily departures (jet and turboprop) from Newark.
Considering the three major airports serving New York City (Newark, LaGuardia
and John F. Kennedy), the Company and Express accounted for 24% of all average
daily departures, while the next largest carrier, USAirways, and its commuter
affiliate accounted for 15% of all average daily departures.
Houston
As of September 18, 1997, Continental operated 79% (318 departures) of
average daily jet departures and, together with Express, accounted for 83% (449
departures) of all average daily departures from Houston's George Bush
Intercontinental Airport. Southwest also has a significant share of Houston
departures through Hobby Airport. Considering both Intercontinental and Hobby
Airports, Continental operated 56% and Southwest operated 26% of all average
daily jet departures from Houston.
Cleveland
As of September 18, 1997, Continental operated 54% (97 departures) of all
average daily jet departures and, together with Express, accounted for 67% (254
departures) of all average daily departures from Cleveland Hopkins International
Airport. The next largest carrier, USAirways, and its commuter affiliate
accounted for 5% of all average daily departures.
Continental Express
Continental's jet service at each of its domestic hub cities is coordinated
with Express, which operates under the name "Continental Express". Express
operates both advanced, new-generation turboprop aircraft that average
approximately five years of age and seat 64 passengers or less and regional jets
that are less than a year old and seat 50 passengers. Express began service with
these 50-seat regional jets initially in Cleveland in April 1997.
As of September 18, 1997, Express served 22 destinations from Newark (2 by
regional jet), 21 destinations from George Bush Intercontinental (1 by regional
jet) and 30 destinations from Cleveland (7 by regional jet). In addition,
commuter feed traffic is currently provided by other code-sharing partners. In
general, Express flights are less than 200 miles in length and less than 90
minutes in duration.
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Management believes Express's turboprop and regional jet operations
complement Continental's jet operations by allowing more frequent service to
small cities than could be provided economically with conventional jet aircraft
and by carrying traffic that connects onto Continental's jets. In many cases,
Express (and Continental) compete for such connecting traffic with commuter
airlines owned by or affiliated with other major airlines operating out of the
same or other cities. Management believes that Express's new EMB-145ER regional
jets will provide better customer acceptance and comfort than its turboprop
aircraft and will also allow Express to serve certain routes which cannot be
served by turboprop aircraft.
Domestic Carrier Alliances
Pursuant to the Company's Fly to Win initiative under the Go Forward Plan,
Continental has entered into and continues to develop alliances with domestic
carriers:
- Continental has entered into a series of agreements with America West,
including agreements related to code-sharing and ground handling, which
have created substantial benefits for both airlines. These code-sharing
agreements cover 75 city-pairs and allow Continental to link additional
destinations to its route network. The sharing of facilities and
employees by Continental and America West in their respective key markets
has resulted in significant cost savings.
- Currently, SkyWest, a commuter operator, provides Continental access to
six additional markets in California through Los Angeles.
- Continental has entered into a code-sharing arrangement with Gulfstream
International Airlines, Inc. ("Gulfstream") which commenced in April
1997. Gulfstream serves as a connection for Continental passengers
throughout Florida as well as five markets in the Bahamas.
- Continental has entered into a code-sharing arrangement with Colgan Air,
Inc. which commenced July 1, 1997 on flights connecting in five cities in
the eastern United States and offering connections for Continental
passengers to 12 cities in the Northeastern and mid-Atlantic regions of
the United States.
- In July 1997, Continental and CMI announced a cooperative marketing
agreement with Hawaiian Airlines beginning October 1, 1997 on flights
connecting in Honolulu.
INTERNATIONAL OPERATIONS
Continental serves destinations throughout Europe, Mexico, Central and
South America and the Caribbean and has extensive-operations in the western
Pacific conducted by CMI. As measured by 1996 available seat miles,
approximately 28.0% of Continental's jet operations were dedicated to
international traffic. As of September 18, 1997, the Company offered 105 weekly
departures to 10 European cities and marketed service to six other cities
through code-sharing agreements. Continental is one of the leading airlines
providing service to Mexico and Central America, serving more destinations there
than any other United States airline.
The Company's Newark hub is a significant international gateway. From
Newark, the Company serves London, Manchester, Paris, Frankfurt, Dusseldorf,
Madrid, Rome, Milan, Lisbon, Toronto and Montreal, and markets certain other
destinations in Canada, the United Kingdom, Amsterdam, Prague and certain other
points in Europe through code-sharing arrangements with other foreign carriers.
Continental recently commenced service from Newark to Birmingham, England, and
to Sao Paulo and Rio de Janeiro, Brazil.
The Company also has non-stop service to two Mexican cities, five Caribbean
destinations and four South American cities from Newark. In addition, the
Company offers one-stop service to two additional South American cities from
Newark.
The Company's Houston hub is the focus of its operations in Mexico and
Central America. Continental currently flies from Houston to 11 cities in
Mexico, every country in Central America and four cities in South America.
Continental recently announced service from Houston to Caracas, Venezuela
(scheduled to commence in the fourth quarter of 1997, subject to government
approval). Continental commenced service
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from Houston to Toronto on September 4, 1997. In addition, Continental flies
nonstop from Houston to London and Paris.
Continental Micronesia
CMI is a United States-certificated international air carrier engaged in
the business of transporting passengers, cargo and mail in the western Pacific,
which is one of the fastest growing areas for air travel in the world. From its
hub operations based on the island of Guam, CMI provides slot-controlled service
to six cities in Japan, more than any other United States carrier, as well as
other Pacific Rim destinations, including Taiwan, the Philippines, Hong Kong,
South Korea and Indonesia. Service to these Japanese cities and certain other
Pacific Rim destinations is subject to a variety of regulatory restrictions
limiting the ability of other carriers to service these markets.
Foreign Carrier Alliances
Over the last decade, major United States airlines have developed and
expanded alliances with foreign air carriers, generally involving adjacent
terminal operations, coordinated flights, code-sharing and other joint marketing
activities. Continental is the sole major United States carrier to operate a hub
in the New York City area, by virtue of its Newark operation. Consequently,
management believes the Company is uniquely situated to attract alliance
partners from Europe, the Far East and South America and intends to aggressively
pursue such alliances.
In addition, management believes that developing a network of international
alliance partners will better leverage the Company's hub assets by attracting
high-yield flow traffic and result in improved returns to the Company. Further,
Continental can enlarge its scope of service more rapidly and enter additional
markets with lower capital and start-up costs through formation of alliances
with partners as compared with entering markets independently of other carriers.
Management has a goal of developing alliance relationships that, together
with the Company's own flying, will permit expanded service through Newark and
Houston to major destinations in South America, Europe and Asia. Certain route
authorities that would be required for the Company's own service to certain of
these destinations are not currently available to the Company.
Continental has implemented international code-sharing agreements with
Alitalia, Air Canada, Transavia, CSA Czech Airlines, Business Air and China
Airlines (effective September 20, 1997). Upon receipt of government approval,
Continental will commence code-sharing arrangements with Aerolineas Centrales de
Colombia (ACES), Aeroflot Russian International Airline ("Aeroflot"), Air
France, EVA Airways Corporation ("EVA"), an airline based in Taiwan, and Virgin
Atlantic Airways ("Virgin").
Alitalia and Continental code-share between points in the United States and
Italy, with Alitalia placing its code on Continental flights between Newark and
Rome and Milan, and between Newark and seven U.S. cities and Mexico City.
Continental's agreement with Alitalia involves a block-space arrangement
pursuant to which the Company and Alitalia share capacity and bear economic risk
for blocks of seats on the code-shared trans-Atlantic flights.
Continental and Air Canada (and its subsidiaries) code-share on six
cross-border routes under agreements that expire on April 1998, where
Continental places its code on 24 Air Canada flights per day and Air Canada
places its code on six Continental flights per day. Continental and Air Canada
provide ground handling and other services for each other at certain locations
in the United States, Canada and elsewhere.
The Company's agreement with Virgin for a code-share arrangement containing
block-space commitments recently received government approvals. The Company
anticipates commencing the code-share arrangement, which involves the carriers'
Newark/New York-London routes and eight other routes flown by Virgin between the
United Kingdom and the United States, in the first quarter of 1998.
In addition, the Company has also entered into joint marketing agreements
with other airlines, all of which are currently subject to government approval,
which will involve block-space arrangements which
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management believes are important to Continental's ability to compete as an
international airline. In October 1996, Continental announced a block-space
agreement with Air France which contemplates a future code-share arrangement on
certain flights between Newark and Charles de Gaulle Airport ("CDG") and Houston
and CDG (expected to commence in the second quarter of 1998). In January 1997,
the Company announced a similar agreement with Aeroflot which management
anticipates will commence in the second quarter of 1998. Aeroflot will place its
code on one daily Continental flight to Moscow and will market the service
throughout the Commonwealth of Independent States. In August 1997, the Company
entered into a code-sharing agreement with EVA that entitles the Company to
place its code on that carrier's flights between Taipei and five cities in the
United States.
The Company anticipates entering into other code-sharing, joint marketing
and block-space agreements, which may include the Company undertaking the
financial commitment to purchase seats from other carriers.
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<PAGE> 46
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Basic Agreement and three
separate Trust Supplements. The following summary describes all material terms
of the Certificates and supplements (or, to the extent inconsistent therewith,
replaces) the description of the general terms and provisions of the
Certificates set forth in the Prospectus. The summary does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Basic Agreement, which was filed as an exhibit to the Company's Current
Report on Form 8-K dated October 6, 1997, and to all of the provisions of the
Certificates, the Trust Supplements, the Deposit Agreements, the Escrow
Agreements, the Intercreditor Agreement and the pass through trust agreements
applicable to the Successor Trusts, each of which will be filed as an exhibit to
a Current Report on Form 8-K to be filed by Continental with the Securities and
Exchange Commission (the "Commission").
Except as otherwise indicated, the following summary relates to each of the
Trusts and the Certificates issued by each Trust. The terms and conditions
governing each of the Trusts will be substantially the same, except as described
under "-- Subordination" below and except that the principal amount and
scheduled principal repayments of the Equipment Notes held by each Trust and the
interest rate and maturity date of the Equipment Notes held by each Trust will
differ. The references to Sections in parentheses in the following summary are
to the relevant Sections of the Basic Agreement unless otherwise indicated.
GENERAL
The Certificates of each Trust will be issued in fully registered form only
and will be subject to the provisions described below under "-- Book Entry;
Delivery and Form". (Section 3.01) Each Certificate will represent a fractional
undivided interest in the Trust created by the Basic Agreement and the
applicable Trust Supplement pursuant to which such Certificate is issued.
(Section 2.01) The Trust Property of each Trust will consist of (i) subject to
the Intercreditor Agreement, Equipment Notes acquired under the Note Purchase
Agreement and issued, at Continental's election in connection with the delivery
of each Aircraft during the Delivery Period, either (a) on a nonrecourse basis
by an Owner Trustee in each separate leveraged lease transaction with respect to
each Leased Aircraft to finance a portion of the purchase price of such Leased
Aircraft by the Owner Trustee, in which case the applicable Leased Aircraft will
be leased to Continental, or (b) on a recourse basis by Continental in
connection with each separate secured loan transaction with respect to each
Owned Aircraft to finance a portion of the purchase price of such Owned Aircraft
by Continental, (ii) the rights of such Trust to acquire Equipment Notes under
the Note Purchase Agreement, (iii) the rights of such Trust under the applicable
Escrow Agreement to request the Escrow Agent to withdraw from the Depositary
funds sufficient to enable such Trust to purchase Equipment Notes on the
delivery of each Aircraft during the Delivery Period, (iv) the rights of such
Trust under the Intercreditor Agreement (including all monies receivable in
respect of such rights), (v) all monies receivable under the Liquidity Facility
for such Trust and (vi) funds from time to time deposited with the Trustee in
accounts relating to such Trust. Certificates will represent fractional
undivided interests in the related Trust and will be issued only in minimum
denominations of $1,000 and integral multiples thereof, except that one
Certificate of each Trust may be issued in a different denomination. (Section
3.01).
On the Transfer Date, each of the Original Trusts will transfer and assign
all of its assets and rights to a substantially identical Successor Trust, and
the New Trustee will assume the obligations of the related Original Trustee
under each transaction document to which such Original Trustee was a party. Upon
the effectiveness of such transfer, assignment and assumption, each of the
Original Trusts will be liquidated and each of the Certificates will represent
the same percentage interest in the Successor Trust as it represented in the
Original Trust immediately prior to such transfer, assignment and assumption.
Unless the context otherwise requires, all references in this Prospectus
Supplement to the Trusts, the Trustees, the Pass Through Trust Agreements and
similar terms shall be applicable to the Original Trusts until the effectiveness
of such transfer, assignment and assumption and thereafter shall be applicable
to the Successor Trusts. See
"-- Liquidation of Original Trusts".
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<PAGE> 47
The Certificates represent interests in the respective Trusts, and all
payments and distributions thereon will be made only from the Trust Property of
the related Trust. (Section 3.09) The Certificates do not represent an interest
in or obligation of Continental, the Trustees, any of the Loan Trustees or Owner
Trustees in their individual capacities, any Owner Participant or any affiliate
of any thereof.
Pursuant to the Escrow Agreement applicable to each Trust, the
Certificateholders of such Trust as holders of the Escrow Receipts affixed to
each Certificate are entitled to certain rights with respect to the Deposits
relating to such Trust. Accordingly, any transfer of a Certificate will have the
effect of transferring the corresponding rights with respect to the Deposits,
and rights with respect to the Deposits may not be separately transferred by
Certificateholders. Rights with respect to the Deposits and the Escrow Agreement
relating to a Trust, except for the right to request withdrawals for the
purchase of Equipment Notes, will not constitute Trust Property of such Trust.
SUBORDINATION
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity Providers will be parties, on each
Distribution Date, so long as no Triggering Event shall have occurred (whether
or not continuing), all payments received by the Subordination Agent in respect
of Equipment Notes and certain other payments under the related Indenture will
be distributed under the Intercreditor Agreement in the following order: (1) to
the Liquidity Providers to the extent required to pay certain Liquidity
Obligations; (2) to the Class A Trustee to the extent required to pay Expected
Distributions on the Class A Certificates; (3) to the Class B Trustee to the
extent required to pay Expected Distributions on the Class B Certificates; (4)
to the Class C Trustee to the extent required to pay Expected Distributions on
the Class C Certificates; (5) if Class D Certificates have been issued, to the
Class D Trustee to the extent required to pay "Expected Distributions" (to be
defined in a manner equivalent to the definition for other Classes of
Certificates) on the Class D Certificates; and (6) to the Subordination Agent
and each Trustee for the payment of certain fees and expenses.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order: (1) to the Subordination Agent, each Trustee and certain
other parties in payment of the Administration Expenses and to the Liquidity
Providers in payment of the Liquidity Obligations; (2) to the Subordination
Agent, each Trustee and each Certificateholder for certain fees, taxes, charges
and other amounts payable to the Subordination Agent, any Trustee or any
Certificateholder; (3) to the Class A Trustee to the extent required to pay
Adjusted Expected Distributions on the Class A Certificates; (4) to the Class B
Trustee to the extent required to pay Adjusted Expected Distributions on the
Class B Certificates; (5) to the Class C Trustee to the extent required to pay
Adjusted Expected Distributions on the Class C Certificates; and (6) if Class D
Certificates have been issued, to the Class D Trustee Certificates to the extent
required to pay "Adjusted Expected Distributions" (to be defined in a manner
equivalent to the definition for other Classes of Certificates) on the Class D
Certificates.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
The priority of distributions after a payment default under any Equipment
Note or a Triggering Event will have the effect in certain circumstances of
requiring the distribution to more senior Classes of Certificates of payments
received in respect of one or more junior series of Equipment Notes. If this
should occur, the interest accruing on the remaining Equipment Notes would in
the aggregate be less than the interest accruing on the remaining Certificates
because such Certificates include a relatively greater proportion of junior
Classes with relatively higher interest rates. As a result of this possible
interest shortfall, the holders of one or more junior Classes of Certificates
may not receive the full amount due to them after a Triggering Event even if all
Equipment Notes are eventually paid in full.
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<PAGE> 48
Payments in respect of the Deposits relating to a Trust will not be subject
to the subordination provisions of the Intercreditor Agreement.
PAYMENTS AND DISTRIBUTIONS
Payments of interest on the Deposits with respect to each Trust and
payments of principal, premium (if any) and interest on the Equipment Notes or
with respect to other Trust Property held in each Trust will be distributed by
the Paying Agent (in the case of the Deposits) or by the Trustee (in the case of
Trust Property of such Trust) to Certificateholders of such Trust on the date
receipt of such payment is confirmed, except in the case of certain types of
Special Payments.
The Deposits held with respect to each Trust and the Equipment Notes held
in each Trust will accrue interest at the applicable rate per annum for
Certificates to be issued by such Trust set forth on the cover page of this
Prospectus Supplement, payable on January 2 and July 2 of each year, commencing
on January 2, 1998 (or, in the case of Equipment Notes issued after such date,
commencing with the first such date to occur after initial issuance thereof).
Such interest payments will be distributed to Certificateholders of such Trust
on each such date until the final Distribution Date for such Trust, subject in
the case of payments on the Equipment Notes to the Intercreditor Agreement.
Interest is calculated on the basis of a 360-day year consisting of twelve
30-day months. Payments of interest applicable to the Certificates to be issued
by each of the Trusts will be supported by two separate Liquidity Facilities to
be provided by the Liquidity Providers for the benefit of the holders of such
Certificates in an aggregate amount sufficient to pay interest thereon at the
Stated Interest Rate for such Trust on up to three successive Regular
Distribution Dates (without regard to any future payments of principal on such
Certificates), except that the Liquidity Facilities with respect to such Trust
will not cover interest payable by the Depositary on the Deposits relating to
such Trust. The Liquidity Facilities for any Class of Certificates do not
provide for drawings thereunder to pay for principal of or premium on the
Certificates of such Class, any interest on the Certificates of such Class in
excess of the Stated Interest Rates, or, notwithstanding the subordination
provisions of the Intercreditor Agreement, principal of or interest or premium
on the Certificates of any other Class. Therefore, only the holders of the
Certificates to be issued by a particular Trust will be entitled to receive and
retain the proceeds of drawings under the Liquidity Facilities for such Trust.
See "Description of the Liquidity Facilities".
Payments of principal of the Equipment Notes held in each Trust are
scheduled to be received by the Trustee on January 2 and July 2 in certain years
depending upon the terms of the Equipment Notes held in such Trust, commencing
on July 2, 1999, in the case of Series A Equipment Notes, January 2, 2000, in
the case of Series B Equipment Notes and July 2, 1999, in the case of Series C
Equipment Notes. Scheduled payments of interest on the Deposits and of interest
or principal on the Equipment Notes are herein referred to as "Scheduled
Payments", and January 2 and July 2 of each year are herein referred to as
"Regular Distribution Dates". See "Description of the Equipment
Notes -- Principal and Interest Payments". The "Final Maturity Date" for the
Class A Certificates is , for the Class B Certificates
is and for the Class C Certificates is .
The Paying Agent with respect to each Escrow Agreement will distribute on
each Regular Distribution Date to the Certificateholders of the Trust to which
such Escrow Agreement relates all Scheduled Payments received in respect of the
related Deposits, the receipt of which is confirmed by the Paying Agent on such
Regular Distribution Date. The Trustee of each Trust will distribute, subject to
the Intercreditor Agreement, on each Regular Distribution Date to the
Certificateholders of such Trust all Scheduled Payments received in respect of
Equipment Notes held on behalf of such Trust, the receipt of which is confirmed
by the Trustee on such Regular Distribution Date. Each Certificateholder of each
Trust will be entitled to receive a pro rata share of any distribution in
respect of Scheduled Payments of interest on the Deposits relating to such Trust
and, subject to the Intercreditor Agreement, of principal or interest on
Equipment Notes held on behalf of such Trust. Each such distribution of
Scheduled Payments will be made by the applicable Paying Agent or Trustee to the
Certificateholders of record of the relevant Trust on the Record Date applicable
to such Scheduled Payment subject to certain exceptions. (Sections 4.01 and
4.02; Escrow Agreement, Section 2.03) If a Scheduled Payment is not received by
the applicable Paying Agent or 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
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<PAGE> 49
record. If it is received after such five-day period, it will be treated as a
Special Payment and distributed as described below.
Any payment in respect of, or any proceeds of, any Equipment Note or the
Trust Indenture Estate under (and as defined in) each Indenture other than a
Scheduled Payment (each, a "Special Payment") will be scheduled to be
distributed on, in the case of an early redemption or a purchase of any
Equipment Note, the date of such early redemption or purchase (which shall be a
Business Day), and otherwise on the Business Day specified for distribution of
such Special Payment pursuant to a notice delivered by each Trustee as soon as
practicable after the Trustee has received funds for such Special Payment (each
a "Special Distribution Date"), subject to the Intercreditor Agreement. Any
unused Deposits to be distributed after the Delivery Period Termination Date or
the occurrence of a Triggering Event, together with accrued and unpaid interest
thereon and any premium payable by Continental (each, also a "Special Payment"),
will be distributed on a date 35 days after the Paying Agent has received notice
of the event requiring such distribution (also a "Special Distribution Date")
unless such date is within 10 days before or after a Regular Distribution Date,
in which case such Special Payment shall be made on such Regular Distribution
Date. Each Paying Agent, in the case of the Deposits, and each Trustee, in the
case of Trust Property or any premium payable by Continental in connection with
certain distributions of unused Deposits, will mail a notice to the
Certificateholders of the applicable Trust stating the scheduled Special
Distribution Date, the related Record Date, the amount of the Special Payment
and the reason for the Special Payment. In the case of a redemption or purchase
of the Equipment Notes held in the related Trust or any distribution of unused
Deposits after the Delivery Period Termination Date or the occurrence of a
Triggering Event, such notice will be mailed not less than 15 days prior to the
date such Special Payment is scheduled to be distributed, and in the case of any
other Special Payment, such notice will be mailed as soon as practicable after
the Trustee has confirmed that it has received funds for such Special Payment.
(Section 4.02(c); Escrow Agreement, Section 2.03) Each distribution of a Special
Payment, other than a final distribution, on a Special Distribution Date for any
Trust will be made by the Paying Agent or the Trustee, as applicable, to the
Certificateholders of record of such Trust on the Record Date applicable to such
Special Payment. (Section 4.02(b); Section 2.03 of the Escrow Agreement) See
"-- Indenture Defaults and Certain Rights Upon an Indenture Default" and
"Description of the Equipment Notes -- Redemption".
Each Pass Through Trust Agreement requires that the Trustee establish and
maintain, for the related Trust and for the benefit of the Certificateholders of
such Trust, one or more non-interest bearing accounts (the "Certificate
Account") for the deposit of payments representing Scheduled Payments received
by such Trustee. Each Pass Through Trust Agreement requires that the Trustee
establish and maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more accounts (the "Special Payments
Account") for the deposit of payments representing Special Payments received by
such Trustee, which shall be non-interest bearing except in certain
circumstances where the Trustee may invest amounts in such account in certain
permitted investments. Pursuant to the terms of each Pass Through Trust
Agreement, the Trustee is required to deposit any Scheduled Payments relating to
the applicable Trust received by it in the Certificate Account of such Trust and
to deposit any Special Payments so received by it in the Special Payments
Account of such Trust. (Section 4.01) All amounts so deposited will be
distributed by the Trustee on a Regular Distribution Date or a Special
Distribution Date, as appropriate. (Section 4.02)
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the Receiptholders, one or more accounts (the
"Paying Agent Account"), which shall be non-interest bearing. Pursuant to the
terms of the Escrow Agreement, the Paying Agent is required to deposit interest
on Deposits relating to such Trust and any unused Deposits withdrawn by the
Escrow Agent in the Paying Agent Account. All amounts so deposited will be
distributed by the Paying Agent on a Regular Distribution Date or Special
Distribution Date, as appropriate.
The final distribution for each Trust will be made only upon presentation
and surrender of the Certificates for such Trust at the office or agency of the
Trustee specified in the notice given by the Trustee of such final distribution.
The Trustee will mail such notice of the final distribution to the
Certificateholders of such Trust, specifying the date set for such final
distribution and the amount of such distribution. (Section 11.01) See
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<PAGE> 50
"-- Termination of the Trusts" below. Distributions in respect of Certificates
issued in global form will be made as described in "-- Book Entry; Delivery and
Form" below.
If any Regular Distribution Date or Special Distribution Date is a
Saturday, Sunday or other day on which commercial banks are authorized or
required to close in New York, New York, Houston, Texas, Wilmington, Delaware,
or Salt Lake City, Utah (any other day being a "Business Day"), distributions
scheduled to be made on such Regular Distribution Date or Special Distribution
Date will be made on the next succeeding Business Day without additional
interest.
POOL FACTORS
The "Pool Balance" for each Trust or for the Certificates issued by any
Trust indicates, as of any date, the original aggregate face amount of the
Certificates of such Trust less the aggregate amount of all payments made in
respect of the Certificates of such Trust or in respect of Deposits relating to
such Trust other than payments made in respect of interest or premium or
reimbursement of any costs and expenses in connection therewith. The Pool
Balance for each Trust or for the Certificates issued by any Trust as of any
Regular Distribution Date or Special Distribution Date shall be computed after
giving effect to any special distribution with respect to unused Deposits,
payment of principal of the Equipment Notes or payment with respect to other
Trust Property held in such Trust and the distribution thereof to be made on
that date. (Trust Supplements, Section 1.01)
The "Pool Factor" for each Trust as of any Regular Distribution Date or
Special Distribution Date is the quotient (rounded to the seventh decimal place)
computed by dividing (i) the Pool Balance by (ii) the original aggregate face
amount of the Certificates of such Trust. The Pool Factor for each Trust or for
the Certificates issued by any Trust as of any Regular Distribution Date or
Special Distribution Date shall be computed after giving effect to any special
distribution with respect to unused Deposits, payment of principal of the
Equipment Notes or payment with respect to other Trust Property held in such
Trust and the distribution thereof to be made on that date. (Trust Supplements,
Section 1.01) The Pool Factor for each Trust will be 1.0000000 on the date of
issuance of the Certificates; thereafter, the Pool Factor for each Trust will
decline as described herein to reflect reductions in the Pool Balance of such
Trust. The amount of a Certificateholder's pro rata share of the Pool Balance of
a Trust can be determined by multiplying the par value of the holder's
Certificate of such Trust by the Pool Factor for such Trust as of the applicable
Regular Distribution Date or Special Distribution Date. Notice of the Pool
Factor and the Pool Balance for each Trust will be mailed to Certificateholders
of such Trust on each Regular Distribution Date and Special Distribution Date.
(Trust Supplements, Section 3.02)
The following table sets forth an illustrative aggregate principal
amortization schedule for the Equipment Notes held in each Trust (the "Assumed
Amortization Schedule") and resulting Pool Factors with respect to such Trust.
The actual aggregate principal amortization schedule applicable to a Trust and
the resulting Pool Factors with respect to such Trust may differ from those set
forth below, since the amortization schedule for the Equipment Notes issued with
respect to an Aircraft may vary from such illustrative amortization schedule so
long as it complies with the Mandatory Economic Terms. In addition, the table
set forth below assumes that each Aircraft is delivered in the month scheduled
for its delivery (see "Description of the Aircraft and the Appraisals -- The
Appraisals" for the delivery schedule), that Equipment Notes in the maximum
principal amount in respect of all of the Aircraft are purchased by the Trusts
and that no early redemption or purchase, or default in the payment of
principal, in respect of any Equipment Notes occurs. Actual circumstances may
vary from these assumptions, which would result in differences in the aggregate
principal amortization schedule applicable to a Trust and in the resulting Pool
Factors.
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<PAGE> 51
<TABLE>
<CAPTION>
1997-4A TRUST 1997-4B TRUST 1997-4C TRUST
EQUIPMENT 1997-4A EQUIPMENT 1997-4B EQUIPMENT 1997-4C
NOTES TRUST NOTES TRUST NOTES TRUST
SCHEDULED EXPECTED SCHEDULED EXPECTED SCHEDULED EXPECTED
PAYMENTS OF POOL PAYMENTS OF POOL PAYMENTS OF POOL
DATE PRINCIPAL FACTOR PRINCIPAL FACTOR PRINCIPAL FACTOR
- ---------------- ------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
July 2, 1999 $ 5,956,161 $ 0 $ 448,375
January 2, 2000 12,526,610 249,441 6,675,271
July 2, 2000 2,425,153 0 0
January 2, 2001 19,398,933 147,069 3,539,401
July 2, 2001 533,927 0 0
January 2, 2002 8,223,748 3,218,133 9,708,098
July 2, 2002 7,616,846 0 2,128,477
January 2, 2003 13,896,110 13,396,554 20,845,525
January 2, 2004 12,796,319 661,618 20,691,786
January 2, 2005 12,137,598 154,368 22,923,038
January 2, 2006 11,880,446 7,051,655 18,743,798
January 2, 2007 12,960,486 19,710,632 3,503,232
January 2, 2008 18,312,546 22,580,782 1,042,731
January 2, 2009 27,174,226 9,964,514 0
January 2, 2010 32,590,612 4,895,043 0
January 2, 2011 34,194,393 7,725,999 0
January 2, 2012 48,637,702 4,479,259 0
January 2, 2013 53,467,356 10,380,462 0
January 2, 2014 64,744,564 6,700,410 0
January 2, 2015 55,109,754 22,379,024 0
January 2, 2016 23,187,214 379,648 0
January 2, 2017 24,453,586 0 0
January 2, 2018 4,988,266 453,699 0
</TABLE>
The actual schedule of principal payments and the resulting schedule of
Pool Balances and Pool Factors may differ from that set forth above. In
addition, the Pool Factor and Pool Balance of each Trust will be recomputed if
there has been an early redemption, purchase, or default in the payment of
principal or interest in respect of one or more of the Equipment Notes held in a
Trust, as described in "-- Indenture Defaults and Certain Rights Upon an
Indenture Default" and "Description of the Equipment Notes -- Redemption", or a
special distribution attributable to unused Deposits after the Delivery Period
Termination Date or the occurrence of a Triggering Event, as described in
"Description of the Deposit Agreements". In the event of (i) any such change in
the scheduled repayments or (ii) any such redemption, purchase, default or
special distribution, the Pool Factors and the Pool Balances of each Trust so
affected will be recomputed after giving effect thereto and notice thereof will
be mailed to the Certificateholders of such Trust promptly after the Delivery
Period Termination Date in the case of clause (i) and promptly after the
occurrence of any event described in clause (ii).
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the applicable Paying Agent and Trustee will
include with each distribution by it of a Scheduled Payment or Special Payment
to Certificateholders of the related Trust a statement, giving effect to such
distribution to be made on such Distribution Date, setting forth the following
information (per $1,000 aggregate principal amount of Certificate for such
Trust, as to (ii), (iii), (iv) and (v) below):
(i) the aggregate amount of such funds distributed on such
Distribution Date under the Pass Through Trust Agreement and the Escrow
Agreement, indicating the amount allocable to each source;
(ii) the amount of such distribution under the Pass Through Trust
Agreement allocable to principal and the amount allocable to premium
(including any premium paid by Continental with respect to unused
Deposits), if any;
(iii) the amount of such distribution under the Pass Through Trust
Agreement allocable to interest;
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<PAGE> 52
(iv) the amount of such distribution under the Escrow Agreement
allocable to interest;
(v) the amount of such distribution under the Escrow Agreement
allocable to unused Deposits (if any); and
(vi) the Pool Balance and the Pool Factor for such Trust. (Trust
Supplements, Section 3.02)
So long as the Certificates are registered in the name of DTC or its
nominee, on the Record Date prior to each Distribution Date, the applicable
Trustee will request from DTC a securities position listing setting forth the
names of all DTC Participants reflected on DTC's books as holding interests in
the Certificates on such record date. On each Distribution Date, the applicable
Paying Agent and Trustee will mail to each such DTC Participant the statement
described above and will make available additional copies as requested by such
DTC Participant for forwarding to Certificate Owners. (Trust Supplements,
Section 3.02(a))
In addition, after the end of each calendar year, the applicable Trustee
and Paying Agent will furnish to each Certificateholder of each Trust at any
time during the preceding calendar year a report containing the sum of the
amounts determined pursuant to clauses (i), (ii), (iii), (iv) and (v) above with
respect to the Trust for such calendar year or, in the event such person was a
Certificateholder during only a portion of such calendar year, for the
applicable portion of such calendar year, and such other items as are readily
available to such Trustee and which a Certificateholder shall reasonably request
as necessary for the purpose of such Certificateholder's preparation of its U.S.
federal income tax returns. (Trust Supplements, Section 3.02(b)) Such report and
such other items shall be prepared on the basis of information supplied to the
applicable Trustee by the DTC Participants and shall be delivered by such
Trustee to such DTC Participants to be available for forwarding by such DTC
Participants to Certificate Owners in the manner described above. (Trust
Supplements, Section 3.02(b)) At such time, if any, as the Certificates are
issued in the form of definitive certificates, the applicable Paying Agent and
Trustee will prepare and deliver the information described above to each
Certificateholder of record of each Trust as the name and period of ownership of
such Certificateholder appears on the records of the registrar of the
Certificates.
INDENTURE DEFAULTS AND CERTAIN RIGHTS UPON AN INDENTURE DEFAULT
An event of default under an Indenture (an "Indenture Default") will, with
respect to the Leased Aircraft Indentures, include an event of default under the
related Lease (a "Lease Event of Default"). See "Description of Equipment
Notes -- Indenture Default; Notice and Waiver". Since the Equipment Notes issued
under an Indenture will be held in each Trust, a continuing Indenture Default
under such Indenture would affect the Equipment Notes held by each Trust. There
are no cross-default provisions in the Indentures or in the Leases (unless
otherwise agreed between an Owner Participant and Continental). Consequently,
events resulting in an Indenture Default under any particular Indenture may or
may not result in an Indenture Default under any other Indenture, and a Lease
Event of Default under any particular Lease may or may not constitute a Lease
Event of Default under any other Lease. If an Indenture Default occurs in fewer
than all of the Indentures, notwithstanding the treatment of Equipment Notes
issued under any Indenture under which an Indenture Default has occurred,
payments of principal and interest on the Equipment Notes issued pursuant to
Indentures with respect to which an Indenture Default has not occurred will
continue to be distributed to the holders of the Certificates as originally
scheduled, subject to the Intercreditor Agreement. See "Description of the
Intercreditor Agreement -- Priority of Distributions".
With respect to each Leased Aircraft, the applicable Owner Trustee and
Owner Participant will, under the related Leased Aircraft Indenture, have the
right under certain circumstances to cure Indenture Defaults that result from
the occurrence of a Lease Event of Default under the related Lease. If the Owner
Trustee or the Owner Participant exercises any such cure right, the Indenture
Default will be deemed to have been cured.
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential conflict of interest upon an
Indenture Default. In such event, each Trustee has indicated that it would
resign as Trustee of one or all such Trusts, and a successor trustee would be
appointed in accordance with the terms of the applicable Pass Through Trust
Agreement. Wilmington Trust Company will be the initial Trustee under each
Trust.
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<PAGE> 53
Upon the occurrence and continuation of an Indenture Default, the
Controlling Party will direct the Indenture Trustee under such Indenture in the
exercise of remedies thereunder and may accelerate and sell all (but not less
than all) of the Equipment Notes issued under such Indenture to any person,
subject to certain limitations. See "Description of Intercreditor
Agreement -- Sale of Equipment Notes and Aircraft". The proceeds of such sale
will be distributed pursuant to the provisions of the Intercreditor Agreement.
Any such proceeds so distributed to any Trustee upon any such sale shall be
deposited in the applicable Special Payments Account and shall be distributed to
the Certificateholders of the applicable Trust on a Special Distribution Date.
(Sections 4.01 and 4.02) The market for Equipment Notes at the time of the
existence of an Indenture Default may be very limited and there can be no
assurance as to the price at which they could be sold. If any such Equipment
Notes are sold for less than their outstanding principal amount, certain
Certificateholders will receive a smaller amount of principal distributions than
anticipated and will not have any claim for the shortfall against Continental,
any Liquidity Provider, any Owner Trustee, any Owner Participant or any Trustee.
Any amount, other than Scheduled Payments received on a Regular
Distribution Date or within five days thereafter, distributed to the Trustee of
any Trust by the Subordination Agent on account of any Equipment Note or Trust
Indenture Estate (as defined in each Indenture) held in such Trust following an
Indenture Default will be deposited in the Special Payments Account for such
Trust and will be distributed to the Certificateholders of such Trust on a
Special Distribution Date. (Sections 4.01 and 4.02) In addition, if, following
an Indenture Default under any Leased Aircraft Indenture, the applicable Owner
Participant or Owner Trustee exercises its option to redeem or purchase the
outstanding Equipment Notes issued under such Leased Aircraft Indenture, the
price paid by such Owner Participant or Owner Trustee for the Equipment Notes
issued under such Leased Aircraft Indenture and distributed to such Trust by the
Subordination Agent will be deposited in the Special Payments Account for such
Trust and will be distributed to the Certificateholders of such Trust on a
Special Distribution Date. (Sections 4.01 and 4.02)
Any funds representing payments received with respect to any defaulted
Equipment Notes, or the proceeds from the sale of any Equipment Notes, held by
the Trustee in the Special Payments Account for such Trust will, to the extent
practicable, be invested and reinvested by such Trustee in certain permitted
investments pending the distribution of such funds on a Special Distribution
Date. (Section 4.04) Such permitted investments are defined as obligations of
the United States or agencies or instrumentalities thereof for the payment of
which the full faith and credit of the United States is pledged and which mature
in not more than 60 days or such lesser time as is required for the distribution
of any such funds on a Special Distribution Date. (Section 1.01)
Each Pass Through Trust Agreement provides that the Trustee of the related
Trust will, within 90 days after the occurrence of any default known to the
Trustee, give to the Certificateholders of such Trust notice, transmitted by
mail, of all uncured or unwaived defaults with respect to such Trust known to
it, provided that, except in the case of default in a payment of principal,
premium, if any, or interest on any of the Equipment Notes held in such Trust,
the applicable Trustee will be protected in withholding such notice if it in
good faith determines that the withholding of such notice is in the interests of
such Certificateholders. (Section 7.02) The term "default" as used in this
paragraph only with respect to any Trust means the occurrence of an Indenture
Default under any Indenture pursuant to which Equipment Notes held by such Trust
were issued, as described above, except that in determining whether any such
Indenture Default has occurred, any grace period or notice in connection
therewith will be disregarded.
Each Pass Through Trust Agreement contains a provision entitling the
Trustee of the related Trust, subject to the duty of such Trustee during a
default to act with the required standard of care, to be offered reasonable
security or indemnity by the holders of the Certificates of such Trust before
proceeding to exercise any right or power under such Pass Through Trust
Agreement at the request of such Certificateholders. (Section 7.03(e))
Subject to certain qualifications set forth in each Pass Through Trust
Agreement and to the Intercreditor Agreement, the Certificateholders of each
Trust holding Certificates evidencing fractional undivided interests aggregating
not less than a majority in interest in such Trust shall have the right to
direct the time, method
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and place of conducting any proceeding for any remedy available to the Trustee
with respect to such Trust or pursuant to the terms of the Intercreditor
Agreement, or exercising any trust or power conferred on such Trustee under such
Pass Through Trust Agreement or the Intercreditor Agreement, including any right
of such Trustee as Controlling Party under the Intercreditor Agreement or as
holder of the Equipment Notes. (Section 6.04)
In certain cases, the holders of the Certificates of a Trust evidencing
fractional undivided interests aggregating not less than a majority in interest
of such Trust may on behalf of the holders of all the Certificates of such Trust
waive any past Indenture Default under any Indenture pursuant to which Equipment
Notes held by such Trust were issued or, if the Trustee of such Trust is the
Controlling Party, may direct the Trustee to instruct the applicable Loan
Trustee to waive any past Indenture Default and its consequences and thereby
annul any direction given by such holders or Trustee to such Loan Trustee with
respect thereto, except (i) a default in the deposit of any Scheduled Payment or
Special Payment or in the distribution thereof, (ii) a default in payment of the
principal, premium, if any, or interest with respect to any of the Equipment
Notes and (iii) a default in respect of any covenant or provision of the Pass
Through Trust Agreement that cannot be modified or amended without the consent
of each Certificateholder of such Trust affected thereby. (Section 6.05) Each
Indenture will provide that, with certain exceptions, the holders of the
majority in aggregate unpaid principal amount of the Equipment Notes issued
thereunder may on behalf of all such holders waive any past default or Indenture
Default thereunder. Notwithstanding such provisions of the Indentures, pursuant
to the Intercreditor Agreement only the Controlling Party will be entitled to
waive any such past default or Indenture Default.
PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event, with
ten days' written notice to the Trustee and each Certificateholder of the same
Class, (i) the Class B Certificateholders will have the right to purchase all,
but not less than all, of the Class A Certificates, (ii) the Class C
Certificateholders will have the right to purchase all, but not less than all,
of the Class A Certificates and the Class B Certificates and (iii) if the Class
D Certificates are issued, the Class D Certificateholders shall have the right
to purchase all, but not less than all, of the Class A Certificates, the Class B
Certificates and the Class C Certificates, in each case at a purchase price
equal to the Pool Balance of the relevant Class or Classes of Certificates plus
accrued and unpaid interest thereon to the date of purchase without premium but
including any other amounts due to the Certificateholders of such Class or
Classes. In each case, if prior to the end of the ten-day period, any other
Certificateholder of the same Class notifies the purchasing Certificateholder
that the other Certificateholder wants to participate in such purchase, then
such other Certificateholder may join with the purchasing Certificateholder to
purchase the Certificates pro rata based on the interest in the Trust held by
each Certificateholder. (Trust Supplements, Section 4.01)
PTC EVENT OF DEFAULT
A PTC Event of Default is defined under the Pass Through Trust Agreements
as the failure to pay: (i) the outstanding Pool Balance of the applicable Class
of Certificates within 10 Business Days of the Final Maturity Date for such
Class or (ii) interest due on such Class of Certificates within 10 Business Days
of any Distribution Date (unless the Subordination Agent shall have made
Interest Drawings, or withdrawals from the Cash Collateral Accounts for such
Class of Certificates, with respect thereto in an aggregate amount sufficient to
pay such interest and shall have distributed such amount to the Trustee entitled
thereto). Any failure to make expected principal distributions with respect to
any Class of Certificates on any Regular Distribution Date (other than the Final
Maturity Date) will not constitute a PTC Event of Default with respect to such
Certificates. A PTC Event of Default with respect to the most senior outstanding
Class of Certificates resulting from an Indenture Default under all Indentures
will constitute a Triggering Event. See "Description of the Intercreditor
Agreement -- Priority of Distributions" for a discussion of the consequences of
the occurrence of a Triggering Event.
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MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Continental will be prohibited from consolidating with or merging into any
other corporation or transferring substantially all of its assets as an entirety
to any other corporation unless (i) the surviving successor or transferee
corporation shall (a) be validly existing under the laws of the United States or
any state thereof, (b) be a "citizen of the United States" (as defined in Title
49 of the United States Code relating to aviation (the "Transportation Code"))
holding an air carrier operating certificate issued by the Secretary of
Transportation pursuant to Chapter 447 of Title 49, United States Code, if, and
so long as, such status is a condition of entitlement to the benefits of Section
1110 of the Bankruptcy Code, and (c) expressly assume all of the obligations of
Continental contained in the Basic Agreement and any Trust Supplement, the Note
Purchase Agreement, the Owned Aircraft Indentures, the Participation Agreements
and the Leases, and any other operative documents; and (ii) Continental shall
have delivered a certificate and an opinion or opinions of counsel indicating
that such transaction, in effect, complies with such conditions. In addition,
after giving effect to such transaction, no Lease Event of Default, in the case
of a Leased Aircraft, or Indenture Default, in the case of an Owned Aircraft,
shall have occurred and be continuing. (Section 5.01; Leases, Section 13.02;
Owned Aircraft Indenture, Section 4.09)
The Basic Agreement, the Trust Supplements, the Note Purchase Agreement,
the Indentures, the Participation Agreements and the Leases will not contain any
covenants or provisions which may afford the applicable Trustee or
Certificateholders protection in the event of a highly leveraged transaction,
including transactions effected by management or affiliates, which may or may
not result in a change in control of Continental.
MODIFICATIONS OF THE PASS THROUGH TRUST AGREEMENTS AND CERTAIN OTHER AGREEMENTS
Each Pass Through Trust Agreement contains provisions permitting, at the
request of the Company, the execution of amendments or supplements to such Pass
Through Trust Agreement or, if applicable, to the Deposit Agreements, the Escrow
Agreements, the Intercreditor Agreement, the Note Purchase Agreement or any
Liquidity Facility, without the consent of the holders of any of the
Certificates of such Trust, (i) to evidence the succession of another
corporation to Continental and the assumption by such corporation of
Continental's obligations under such Pass Through Trust Agreement or the Note
Purchase Agreement, (ii) to add to the covenants of Continental for the benefit
of holders of such Certificates or to surrender any right or power conferred
upon Continental in such Pass Through Trust Agreement, the Intercreditor
Agreement, the Note Purchase Agreement or any Liquidity Facility, (iii) to
correct or supplement any provision of such Pass Through Trust Agreement, the
Deposit Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility which may be defective or
inconsistent with any other provision in such Pass Through Trust Agreement, the
Intercreditor Agreement, or any Liquidity Facility, as applicable, or to cure
any ambiguity or to modify any other provision with respect to matters or
questions arising under such Pass Through Trust Agreement, the Deposit
Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility, provided that such action shall
not materially adversely affect the interests of the holders of such
Certificates; to correct any mistake in such Pass Through Trust Agreement, the
Intercreditor Agreement or any Liquidity Facility; or, as provided in the
Intercreditor Agreement, to give effect to or provide for a Replacement
Facility, (iv) to comply with any requirement of the Commission, any applicable
law, rules or regulations of any exchange or quotation system on which the
Certificates are listed, or any regulatory body, (v) to modify, eliminate or add
to the provisions of such Pass Through Trust Agreement, the Deposit Agreements,
the Escrow Agreements, the Intercreditor Agreement, the Note Purchase Agreement
or any Liquidity Facility to such extent as shall be necessary to continue the
qualification of such Pass Through Trust Agreement (including any supplemental
agreement) under the Trust Indenture Act, as amended (the "Trust Indenture
Act"), or any similar federal statute enacted after the execution of such Pass
Through Trust Agreement, and to add to such Pass Through Trust Agreement, the
Deposit Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility such other provisions as may be
expressly permitted by the Trust Indenture Act, and (vi) to evidence and provide
for the acceptance of appointment under such Pass Through Trust Agreement, the
Deposit Agreements, the Escrow Agreements, the Intercreditor Agreement,
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the Note Purchase Agreement or any Liquidity Facility by a successor Trustee and
to add to or change any of the provisions of such Pass Through Trust Agreement,
the Deposit Agreements, the Escrow Agreements, the Intercreditor Agreement, the
Note Purchase Agreement or any Liquidity Facility as shall be necessary to
provide for or facilitate the administration of the Trusts under the Basic
Agreement by more than one Trustee, provided that in each case, such
modification or supplement does not adversely affect the status of the Trust as
a grantor trust under Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle
A of the Code for U.S. federal income tax purposes. (Section 9.01; Trust
Supplements, Section 6.01)
Each Pass Through Trust Agreement also contains provisions permitting the
execution, with the consent of the holders of the Certificates of the related
Trust evidencing fractional undivided interests aggregating not less than a
majority in interest of such Trust, and with the consent of the applicable Owner
Trustee (such consent not to be unreasonably withheld), of amendments or
supplements adding any provisions to or changing or eliminating any of the
provisions of such Pass Through Trust Agreement, the Deposit Agreements, the
Escrow Agreements, the Intercreditor Agreement, the Note Purchase Agreement or
any Liquidity Facility to the extent applicable to such Certificateholders or of
modifying the rights and obligations of such Certificateholders under such Pass
Through Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement or any Liquidity Facility,
except that no such amendment or supplement may, without the consent of the
holder of each Certificate so affected thereby, (a) reduce in any manner the
amount of, or delay the timing of, any receipt by the Trustee (or, with respect
to the Deposits, the Receiptholders) of payments with respect to the Deposits,
the Equipment Notes held in such Trust or distributions in respect of any
Certificate related to such Trust, or change the date or place of any payment in
respect of any Certificate, or make distributions payable in coin or currency
other than that provided for in such Certificates, or impair the right of any
Certificateholder of such Trust to institute suit for the enforcement of any
such payment when due, (b) permit the disposition of any Equipment Note held in
such Trust, except as provided in such Pass Through Trust Agreement, or
otherwise deprive such Certificateholder of the benefit of the ownership of the
applicable Equipment Notes, (c) alter the priority of distributions specified in
the Intercreditor Agreement in a manner materially adverse to such
Certificateholders, (d) reduce the percentage of the aggregate fractional
undivided interests of the Trust provided for in such Pass Through Trust
Agreement, the consent of the holders of which is required for any such
supplemental trust agreement or for any waiver provided for in such Pass Through
Trust Agreement, (e) modify any of the provisions relating to the rights of the
Certificateholders in respect of the waiver of events of default or receipt of
payment or (f) adversely affect the status of any Trust as a grantor trust under
Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A of the Code for
U.S. federal income tax purposes. (Section 9.02; Trust Supplements, Section
6.02)
In the event that a Trustee, as holder (or beneficial owner through the
Subordination Agent) of any Equipment Note in trust for the benefit of the
Certificateholders of the relevant Trust or as Controlling Party under the
Intercreditor Agreement, receives (directly or indirectly through the
Subordination Agent) a request for a consent to any amendment, modification,
waiver or supplement under any Indenture, any Participation Agreement, any
Lease, any Equipment Note or any other related document, the Trustee shall
forthwith send a notice of such proposed amendment, modification, waiver or
supplement to each Certificateholder of the relevant Trust as of the date of
such notice. The Trustee shall request from the Certificateholders a direction
as to (a) whether or not to take or refrain from taking (or direct the
Subordination Agent to take or refrain from taking) any action which a holder of
such Equipment Note or the Controlling Party has the option to take, (b) whether
or not to give or execute (or direct the Subordination Agent to give or execute)
any waivers, consents, amendments, modifications or supplements as a holder of
such Equipment Note or as Controlling Party and (c) how to vote (or direct the
Subordination Agent to vote) any Equipment Note if a vote has been called for
with respect thereto. Provided such a request for Certificateholder direction
shall have been made, in directing any action or casting any vote or giving any
consent as the holder of any Equipment Note (or in directing the Subordination
Agent in any of the foregoing), (i) other than as Controlling Party, the Trustee
shall vote for or give consent to any such action with respect to such Equipment
Note in the same proportion as that of (x) the aggregate face amount of all
Certificates actually voted in favor of or for giving consent to such action by
such direction of Certificateholders to (y) the aggregate face amount of all
outstanding certificates of the relevant Trust and
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(ii) as the Controlling Party, the Trustee shall vote as directed in such
Certificateholder direction by the Certificateholders evidencing fractional
undivided interests aggregating not less than a majority in interest in the
relevant Trust. For purposes of the immediately preceding sentence, a
Certificate shall have been "actually voted" if the Certificateholder has
delivered to the Trustee an instrument evidencing such Certificateholder's
consent to such direction prior to two Business Days before the Trustee directs
such action or casts such vote or gives such consent. Notwithstanding the
foregoing, but subject to certain rights of the Certificateholders under the
relevant Pass Through Trust Agreement and subject to the Intercreditor
Agreement, the Trustee may, in its own discretion and at its own direction,
consent and notify the relevant Loan Trustee of such consent (or direct the
Subordination Agent to consent and notify the relevant Loan Trustee of such
consent) to any amendment, modification, waiver or supplement under the relevant
Indenture, Participation Agreement or Lease, any relevant Equipment Note or any
other related document, if an Indenture Default under any Indenture shall have
occurred and be continuing, or if such amendment, modification, waiver or
supplement will not materially adversely affect the interests of the
Certificateholders. (Section 10.01)
OBLIGATION TO PURCHASE EQUIPMENT NOTES
The Trustees will be obligated to purchase the Equipment Notes issued with
respect to the Aircraft during the Delivery Period, subject to the terms and
conditions of the Note Purchase Agreement. Under the Note Purchase Agreement,
Continental agrees to finance each Aircraft in the manner provided therein and
in connection therewith will have the option of entering into a leveraged lease
financing or a secured debt financing with respect to each Aircraft. The Note
Purchase Agreement will provide for the relevant parties to enter into (i) with
respect to each Leased Aircraft, a Participation Agreement, a Lease and a Leased
Aircraft Indenture relating to the financing of such Leased Aircraft and (ii)
with respect to each Owned Aircraft, a Participation Agreement and an Owned
Aircraft Indenture relating to the financing of such Owned Aircraft. The
description of such agreements in this Prospectus Supplement is based on the
forms of such agreements to be utilized pursuant to the Note Purchase Agreement.
In the case of a Leased Aircraft, the terms of the agreements actually entered
into may differ from the forms of such agreements and, consequently, may differ
from the description of such agreements contained in this Prospectus Supplement.
See "Risk Factors -- Risk Factors Relating to the Certificates and the
Offering -- Owner Participant; Revisions to Agreements". However, under the Note
Purchase Agreement, the terms of such agreements are required to (i) contain the
Mandatory Document Terms and (ii) not vary the Mandatory Economic Terms. In
addition, Continental is obligated (i) to certify to the Trustees that any such
modifications do not materially and adversely affect the Certificateholders and
(ii) to obtain written confirmation from each Rating Agency that the use of
versions of such agreements modified in any material respect will not result in
a withdrawal, suspension or downgrading of the rating of any Class of
Certificates. Further, under the Note Purchase Agreement, it is a condition
precedent to the obligation of each Trustee to purchase the Equipment Notes
related to the financing of an Aircraft that no Triggering Event shall have
occurred. The Trustees will have no right or obligation to purchase Equipment
Notes after the Delivery Period Termination Date.
The "Mandatory Economic Terms", as defined in the Note Purchase Agreement,
require, among other things, that:
(i) the maximum principal amount of all the Equipment Notes issued
with respect to an Aircraft not exceed the maximum principal amount of
Equipment Notes indicated for each such Aircraft as set forth in
"Prospectus Supplement Summary -- Equipment Notes and the Aircraft" under
the column "Maximum Principal Amount of Equipment Notes";
(ii) the initial loan to aircraft value with respect to an Aircraft
(with the value of any Aircraft for these purposes to equal the value for
such Aircraft set forth in "Prospectus Supplement Summary -- Equipment
Notes and the Aircraft" under the column "Appraised Value"), not exceed
43.7% in the case of Series A Equipment Notes, 56.0% in the case of Series
B Equipment Notes and 68.0% in the case of Series C Equipment Notes;
(iii) the initial average life of the Series A Equipment Notes not
extend beyond 14.4 years in the case of the 777-200 Aircraft, not extend
beyond 12.9 years in the case of the 737-524 Aircraft, not extend
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beyond 12.9 years in the case of the 737-724 Aircraft and not extend beyond
12.9 years in the case of the 737-824 Aircraft, of the Series B Equipment
Notes not extend beyond 13.3 years in the case of the 777-200 Aircraft, not
extend beyond 11.6 years in the case of the 737-524 Aircraft, not extend
beyond 11.5 years in the case of the 737-724 Aircraft and not extend beyond
11.7 years in the case of the 737-824 Aircraft and of the Series C
Equipment Notes not extend beyond 6.7 years in the case of the 777-200
Aircraft, not extend beyond 6.8 years in the case of the 737-524 Aircraft,
not extend beyond 6.8 years in the case of the 737-724 Aircraft and not
extend beyond 6.8 years in the case of the 737-824 Aircraft, in each case
from the Issuance Date;
(iv) as of the Delivery Period Termination Date (or if earlier, the
date of the occurrence of a Triggering Event), the average life of the
Class A Certificates, the Class B Certificates and the Class C Certificates
shall not extend beyond, respectively, 12.9 years, 11.8 years and 6.3 years
from the Issuance Date (computed without regard to the acceleration of any
Equipment Notes and after giving effect to any special distribution on the
Certificates thereafter required in respect of unused Deposits);
(v) the final maturity date of (a) the Series A Equipment Notes not be
in excess of 21.7 years after the Issuance Date, (b) the Series B Equipment
Notes not be in excess of 21.7 years after the Issuance Date and (c) the
Series C Equipment Notes not be in excess of 11.7 years after the Issuance
Date;
(vi) the original aggregate principal amount of all of the Equipment
Notes of each Series shall not exceed the original aggregate face amount of
the Certificates issued by the corresponding Trust;
(vii) the maximum aggregate principal amount of the Equipment Notes
issued with respect to all Boeing 777-200 Aircraft shall not exceed
$247,584,600, all Boeing 737-524 Aircraft shall not exceed $96,050,000, all
Boeing 737-724 Aircraft shall not exceed $155,465,680 and all Boeing
737-824 Aircraft shall not exceed $300,750,400;
(viii) the interest rate applicable to each Series of Equipment Notes
must be equal to the rate applicable to the Certificates issued by the
corresponding Trust;
(ix) the payment dates for the Equipment Notes and basic rent under
the Leases must be January 2 and July 2;
(x) basic rent, stipulated loss values and termination values under
the Leases must be sufficient to pay amounts due with respect to the
related Equipment Notes;
(xi) the amounts payable under the all-risk aircraft hull insurance
maintained with respect to each Aircraft must be sufficient to pay the
applicable stipulated loss value, subject to certain rights of self-
insurance; and
(xii) (a) the past due rate in the Indentures and the Leases, (b) the
Make-Whole Premium payable under the Indentures, (c) the provisions
relating to the redemption and purchase of Equipment Notes in the
Indentures, (d) the minimum liability insurance amount on Aircraft in the
Leases, (e) the interest rate payable with respect to stipulated loss value
in the Leases, and (f) the indemnification of the Loan Trustees,
Subordination Agent, Liquidity Providers, Trustees, Escrow Agents and
registered holders of the Equipment Notes (in such capacity, the "Note
Holders") with respect to certain taxes and expenses, in each case be
provided as set forth in the form of Participation Agreements, Lease and
Indentures (collectively, the "Aircraft Operative Agreements").
The "Mandatory Document Terms" prohibit modifications in any material
adverse respect to certain specified provisions of the Aircraft Operative
Agreements contemplated by the Note Purchase Agreement, as follows:
In the case of the Indentures, modifications are prohibited (i) to the
Granting Clause of the Indentures so as to deprive the Note Holders of a
first priority security interest in the Aircraft, certain of Continental's
rights under its purchase agreement with the Aircraft manufacturer and, in
the case of a Leased Aircraft, the Lease or to eliminate the obligations
intended to be secured thereby, (ii) to certain provisions relating to the
issuance, redemption, purchase, payments, and ranking of the Equipment
Notes
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(including the obligation to pay the Make-Whole Premium in certain
circumstances), (iii) to certain provisions regarding Indenture Defaults,
remedies relating thereto and rights of the Owner Trustee and Owner
Participant in such circumstances, (iv) to certain provisions relating to
any replaced airframe or engines with respect to an Aircraft and (v) to the
provision that New York law will govern the Indentures.
In the case of the Lease, modifications are prohibited to certain
provisions regarding the obligation of Continental (i) to pay basic rent,
stipulated loss value and termination value to the Leased Aircraft Trustee,
(ii) to record the Leased Aircraft Indenture with the Federal Aviation
Administration and to maintain such Indenture as a first-priority perfected
mortgage on the related Aircraft, (iii) to furnish certain opinions with
respect to a replacement airframe and (iv) to consent to the assignment of
the Lease by the Owner Trustee as collateral under the Leased Aircraft
Indenture, as well as modifications which would either alter the provision
that New York law will govern the Lease or would deprive the Loan Trustee
of rights expressly granted to it under the Leases.
In the case of the Participation Agreement, modifications are
prohibited (i) to certain conditions to the obligations of the Trustees to
purchase the Equipment Notes issued with respect to an Aircraft involving
good title to such Aircraft, obtaining a certificate of airworthiness with
respect to such Aircraft, entitlement to the benefits of Section 1110 with
respect to such Aircraft and filings of certain documents with the Federal
Aviation Administration, (ii) to the provisions restricting the Note
Holder's ability to transfer such Equipment Notes, (iii) to certain
provisions requiring the delivery of legal opinions and (iv) to the
provision that New York law will govern the Participation Agreement.
In the case of all of the Aircraft Operative Agreements, modifications
are prohibited in any material adverse respect as regards the interest of
the Note Holders, the Subordination Agent, the Liquidity Providers or the
Loan Trustee in the definition of "Make-Whole Premium". Notwithstanding the
foregoing, any such Mandatory Document Term may be modified to correct or
supplement any such provision which may be defective or to cure any
ambiguity or correct any mistake, provided that any such action shall not
materially adversely affect the interests of the Note Holders, the
Subordination Agent, the Liquidity Providers, the Mortgagee or the
Certificateholders.
POSSIBLE ISSUANCE OF CLASS D CERTIFICATES
Continental may elect to issue Series D Equipment Notes in connection with
the financing of Owned Aircraft, which will be funded from sources other than
this Offering. Continental may elect to fund the sale of the Series D Equipment
Notes through the sale of Class D Certificates. Continental will not issue any
Series D Equipment Notes at any time prior to the consummation of this Offering.
The Note Purchase Agreement provides that Continental's ability to issue any
Series D Equipment Notes is contingent upon its obtaining written confirmation
from each Rating Agency that the issuance of such Series D Equipment Notes will
not result in a withdrawal or downgrading of the rating of any Class of
Certificates. If the Class D Certificates are issued, the Trustee with respect
to such Certificates will become a party to the Intercreditor Agreement. See
"Description of the Intercreditor Agreement".
LIQUIDATION OF ORIGINAL TRUSTS
At the Transfer Date, each of the Original Trusts will transfer and assign
all of its assets and rights to a Successor Trust with substantially identical
terms, except that (i) the Successor Trusts will not have the right to purchase
new Equipment Notes and (ii) Delaware law will govern the Original Trusts and
New York law will govern the Successor Trusts. The Trustee of each of the
Original Trusts will also act as Trustee of the corresponding Successor Trust,
and each New Trustee will assume the obligations of the Original Trustee under
each transaction document to which such Original Trustee was a party. Upon
effectiveness of such transfer, assignment and assumption, each of the Original
Trusts will be liquidated and each of the Certificates will represent the same
interest in the Successor Trust as it represented in the Original Trust
immediately prior to such transfer and assignment. Unless the context otherwise
requires, all references in this Prospectus Supplement to the Trusts, the
Trustees, the Pass Through Trust Agreements and similar terms shall be
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applicable with respect to the Original Trusts until the effectiveness of such
transfer, assignment and assumption and thereafter shall be applicable with
respect to the Successor Trusts. If for any reason such transfer, assignment and
assumption cannot be effected to any Successor Trust, the related Original Trust
will continue in existence until it is effected. The Original Trusts may be
treated as partnerships for U.S. federal income tax purposes. The Successor
Trusts will, in the opinion of Tax Counsel, be treated as grantor trusts. See
"Certain U.S. Federal Income Tax Consequences".
TERMINATION OF THE TRUSTS
The obligations of Continental and the applicable Trustee with respect to a
Trust will terminate upon the distribution to Certificateholders of such Trust
of all amounts required to be distributed to them pursuant to the applicable
Pass Through Trust Agreement and the disposition of all property held in such
Trust. The applicable Trustee will send to each Certificateholder of such Trust
notice of the termination of such Trust, the amount of the proposed final
payment and the proposed date for the distribution of such final payment for
such Trust. The final distribution to any Certificateholder of such Trust will
be made only upon surrender of such Certificateholder's Certificates at the
office or agency of the applicable Trustee specified in such notice of
termination. (Section 11.01)
THE TRUSTEES
The Trustee for each Trust will be Wilmington Trust Company.
BOOK-ENTRY; DELIVERY AND FORM
Upon issuance, each Class of Certificates will be represented by one or
more fully registered global certificates. Each global certificate will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of Cede & Co. ("Cede"), the nominee of DTC. DTC was
created to hold securities for its participants ("DTC Participants") and
facilitate the clearance and settlement of securities transactions between DTC
Participants through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. See "Description
of the Certificates -- Book-Entry Registration" in the Prospectus for a
discussion of the book-entry procedures applicable to the Certificates and the
limited circumstances under which definitive certificates may be issued for the
Certificates.
So long as such book-entry procedures are applicable, no person acquiring
an interest in such Certificates ("Certificate Owner") will be entitled to
receive a certificate representing such person's interest in such Certificates.
Unless and until definitive certificates are issued under the limited
circumstances described in the Prospectus, all references to actions by
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants, and all references herein to distributions, notices, reports
and statements to Certificateholders shall refer, as the case may be, to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of such Certificates, or to DTC Participants for distribution to
Certificate Owners in accordance with DTC procedures.
DESCRIPTION OF THE DEPOSIT AGREEMENTS
The following summary describes all material terms of the Deposit
Agreements. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Deposit Agreements, each
of which will be filed as an exhibit to a Current Report on Form 8-K to be filed
by Continental with the Commission. The provisions of the Deposit Agreements are
substantially identical except as otherwise indicated.
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GENERAL
Under the Escrow Agreements, the Escrow Agent with respect to each Trust
will enter into a separate Deposit Agreement with the Depositary pursuant to
which the Depositary will establish separate accounts into which the proceeds of
the Offering attributable to Certificates of such Trust will be deposited on
behalf of such Escrow Agent, from which the Escrow Agent, upon request from the
Trustee of such Trust, will make withdrawals and into which such Trustee will
make re-deposits during the Delivery Period. Pursuant to the Deposit Agreement
with respect to each Trust, on each Regular Distribution Date the Depositary
will pay to the Paying Agent on behalf of the applicable Escrow Agent, for
distribution to the Certificateholders of such Trust, an amount equal to
interest accrued on the Deposits relating to such Trust during the relevant
interest period at a rate per annum equal to the interest rate applicable to the
Certificates issued by such Trust. Upon each delivery of an Aircraft during the
Delivery Period, the Trustee for each Trust will request the Escrow Agent
relating to such Trust to withdraw from the Deposits relating to such Trust
funds sufficient to enable the Trustee of such Trust to purchase the Equipment
Note of the series applicable to such Trust issued with respect to such
Aircraft. Accrued but unpaid interest on all such Deposits withdrawn will be
paid on the next Regular Distribution Date. Any portion of any Deposit withdrawn
which is not used to purchase such Equipment Note will be re-deposited by each
Trustee into an account relating to the applicable Trust. The Deposits relating
to each Trust and interest paid thereon will not be subject to the subordination
provisions of the Intercreditor Agreement and will not be available to pay any
other amount in respect of the Certificates.
UNUSED DEPOSITS
The Trustees' obligations to purchase the Equipment Notes issued with
respect to each Aircraft are subject to satisfaction of certain conditions at
the time of delivery, as set forth in the Note Purchase Agreement. See
"Description of the Certificates -- Obligation to Purchase Equipment Notes".
Since the Aircraft are scheduled for delivery from time to time during the
Delivery Period, no assurance can be given that all such conditions will be
satisfied at the time of delivery for each Aircraft. Moreover, since the
Aircraft will be newly manufactured, their delivery as scheduled is subject to
delays in the manufacturing process and to the Aircraft manufacturer's right to
postpone deliveries under its agreement with Continental. See "Description of
the Aircraft and Appraisals -- Deliveries of Aircraft". Depending on the
circumstances of the financing of each Aircraft, the maximum aggregate principal
amount of Equipment Notes may not be issued. In addition, Continental's
obligations under the predelivery deposit Facility are secured by Continental's
purchase agreement with Boeing relating to the Boeing 737-524, 737-724 and
737-824 Aircraft (but not to the Boeing 777-200 Aircraft). Accordingly, if
Continental should breach its obligations secured thereby, the secured parties
could exercise remedies and prevent delivery of Aircraft to Continental. If any
funds remain as Deposits with respect to any Trust at the Delivery Period
Termination Date, they will be withdrawn by the Escrow Agent and distributed,
with accrued and unpaid interest thereon to the Certificateholders of such Trust
after at least 15 days' prior written notice. In addition, if such remaining
Deposits exceed the Par Redemption Amount with respect to all of the Trusts,
such distribution will include a premium payable by Continental equal to the
Deposit Make-Whole Premium with respect to the remaining Deposits applicable to
such Trust in excess of such Trust's proportionate share of the Par Redemption
Amount. Since the maximum principal amount of Equipment Notes may not be issued
with respect to an Aircraft and, in any such case, the Series C Equipment Notes
are more likely not to be issued in the maximum principal amount as compared to
the other Equipment Notes, it is more likely that a distribution of unused
Deposits will be made with respect to the Class C Certificates as compared to
the other Certificates. In addition, notwithstanding the Par Redemption Amount
limitation, if any Aircraft is not delivered by the manufacturer prior to the
Delivery Period Termination Date due to any reason not occasioned by
Continental's fault or negligence and no Substitute Aircraft is provided in lieu
of such Aircraft, no Deposit Make-Whole Premium will be paid with respect to the
unused Deposits to be distributed as a result of such failure to deliver in an
amount equal to the maximum principal amount of Equipment Notes that could have
been issued and acquired by such Trust with respect to such Aircraft in
accordance with the Mandatory Economic Terms and such unused Deposits shall not
be included in the calculation of the Par Redemption Amount.
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"Deposit Make-Whole Premium" means, with respect to the distribution of
unused Deposits to holders of any Class of Certificates, as of any date of
determination, an amount equal to the excess, if any, of (a) the present value
of the excess of (i) the scheduled payment of principal and interest to maturity
of the Equipment Notes, assuming the maximum principal amount thereof (the
"Maximum Amount") minus such Class of Certificates' proportionate share (in the
same proportion that the amount of unused Deposits with respect to such Class of
Certificates bears to the unused Deposits with respect to all Classes of
Certificates) of the Par Redemption Amount were issued, on each remaining
Regular Distribution Date for such Class under the Assumed Amortization Schedule
over (ii) the scheduled payment of principal and interest to maturity of the
Equipment Notes actually acquired by the Trustee for such Class on each such
Regular Distribution Date, such present value computed by discounting such
excess on a semiannual basis on each Regular Distribution Date (assuming a
360-day year of twelve 30-day months) using a discount rate equal to the
Treasury Yield plus basis points in the case of the Class A Certificates,
basis points in the case of the Class B Certificates and
basis points in the case of the Class C Certificates, over (b) the amount of
such unused Deposits to be distributed to the holders of such Certificates,
minus such Class of Certificates' proportionate share of the Par Redemption
Amount, plus accrued and unpaid interest on such net amount to but excluding the
date of determination from and including the preceding Regular Distribution Date
(or if such date of determination precedes the first Regular Distribution Date,
the date of issuance of the Certificates).
DISTRIBUTION UPON OCCURRENCE OF TRIGGERING EVENT
If a Triggering Event shall occur prior to the Delivery Period Termination
Date, the Escrow Agent for each Trust will withdraw any funds then held as
Deposits with respect to such Trust and cause such funds, with accrued and
unpaid interest thereon but without any premium, to be distributed to the
Certificateholders of such Trust by the Paying Agent on behalf of the Escrow
Agent, after at least 15 days' prior written notice. Accordingly, if a
Triggering Event occurs prior to the Delivery Period Termination Date, the
Trusts will not acquire Equipment Notes issued with respect to Aircraft
delivered after the occurrence of such Triggering Event.
DEPOSITARY
Credit Suisse First Boston, New York branch, will act as Depositary. Credit
Suisse First Boston (or "CSFB") is a Swiss bank and is one of the largest
banking institutions in the world, with total consolidated assets of
approximately Sfr 422 billion ($291 billion) and total consolidated
shareholders' equity of approximately Sfr 10.9 billion ($7.5 billion), in each
case as of June 30, 1997. As a "universal bank" (engaged in both commercial and
investment banking activities) CSFB provides a wide range of financial services
from locations around the globe to corporate, institutional and public sector
clients. CSFB was founded in 1856 in Zurich and is the oldest of Switzerland's
three principal banks. Credit Suisse First Boston's registered head office is in
Zurich, Switzerland.
CSFB has been licensed by the Superintendent of Banks of the State of New
York to operate a branch (the "Branch") in New York since 1940. It is also
subject to review and supervision by the Federal Reserve Bank. The Branch
conducts an extensive banking practice, concentrating primarily on wholesale
banking transactions and servicing the needs of the CSFB's customer base in the
United States.
Credit Suisse First Boston is part of Credit Suisse Group, which also
includes Credit Suisse, a Swiss bank conducting Swiss domestic banking for
individual and corporate clients and global private banking. Credit Suisse Group
is a publicly-held corporation organized in Switzerland, and its securities are
listed on the Swiss Exchange as well as on the Frankfurt and Tokyo Stock
Exchanges.
On September 5, 1997, the shareholders of the Credit Suisse Group and
Winterthur Insurance Company ("Winterthur") approved the merger of the two
companies. Under the terms of the transaction, Winterthur shareholders will
receive 7.3 Credit Suisse Group shares for each Winterthur share. As a result of
the merger, the Credit Suisse Group will become the third largest asset manager
in the world with approximately Sfr 700 billion ($482.7 billion using the
exchange rate as of June 30, 1997) in assets under management. Upon
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completion of the merger, Winterthur will form a separate legal entity within
the Credit Suisse Group holding structure and will continue to operate
independently in the marketplace under its own name. The transaction is expected
to close by year-end 1997.
Credit Suisse First Boston has long-term unsecured debt ratings of Aa3 from
Moody's and AA from Standard & Poor's and short-term unsecured debt ratings of
P-1 from Moody's and A-1+ from Standard & Poor's.
Credit Suisse First Boston's New York branch has executive offices at
Eleven Madison Avenue, New York, New York 10010, (212)325-9000. A copy of the
Annual Report of CSFB for the year ended December 31, 1996 may be obtained from
Credit Suisse First Boston by delivery of a written request to its New York
branch, Attention: Corporate Affairs.
DESCRIPTION OF THE ESCROW AGREEMENTS
The following summary describes all material terms of the Escrow
Agreements. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Escrow Agreements, each of
which will be filed as an exhibit to a Current Report on Form 8-K to be filed by
Continental with the Commission. The provisions of the Escrow Agreements are
substantially identical except as otherwise indicated.
Each Escrow Agent, each Paying Agent, each Trustee and the Underwriters
will enter into a separate Escrow Agreement for the benefit of the
Certificateholders of each Trust as holders of the Escrow Receipts affixed
thereto (in such capacity, a "Receiptholder"). The cash proceeds of the offering
of Certificates of each Trust will be deposited on behalf of the Escrow Agent
(for the benefit of Receiptholders) with the Depositary as Deposits relating to
such Trust. The Escrow Agent of each Trust will be given irrevocable
instructions (i) to permit the Trustee of such Trust to cause funds to be
withdrawn from such Deposits on or prior to the Delivery Period Termination Date
for the purpose of enabling such Trustee to purchase Equipment Notes on and
subject to the terms and conditions of the Note Purchase Agreement and (ii) to
direct the Depositary to pay interest on the Deposits accrued in accordance with
the Deposit Agreement to the Paying Agent for distribution to the
Receiptholders.
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the related Receiptholders, one or more Paying
Agent Account(s), which shall be non-interest-bearing. Pursuant to the terms of
the Escrow Agreement, the Paying Agent is required to deposit interest on
Deposits relating to each Trust and any unused Deposits withdrawn by the Escrow
Agent in the Paying Agent Account. All amounts so deposited will be distributed
by the Paying Agent on a Regular Distribution Date or Special Distribution Date,
as appropriate.
Upon receipt by the Depositary on behalf of the Escrow Agent of the cash
proceeds from the offering of the Certificates as described above, the Escrow
Agent will issue one or more Escrow Receipts which will be affixed by the
relevant Trustee to each Certificate. Each Escrow Receipt evidences a fractional
undivided interest in amounts from time to time deposited into the Paying Agent
Account and is limited in recourse to amounts deposited into such Account. An
Escrow Receipt may not be assigned or transferred except in connection with the
assignment or transfer of the Certificate to which it is affixed. Each Escrow
Receipt will be registered by the Escrow Agent in the same name and manner as
the Certificate to which it is affixed.
DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes all material terms of the Liquidity
Facilities and certain provisions of the Intercreditor Agreement relating to the
Liquidity Facilities. The summary supplements (and, to the extent inconsistent
therewith, replaces) the description of the general terms and provisions
relating to the Liquidity Facilities and the Intercreditor Agreement set forth
in the Prospectus. The summary does not purport to be complete and is qualified
in its entirety by reference to all of the provisions of the Liquidity
Facilities and the Intercreditor Agreement, each of which will be filed as an
exhibit to a Current Report on Form 8-K to be filed
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by Continental with the Commission. The provisions of the Liquidity Facilities
are substantially identical except as otherwise indicated.
GENERAL
Each Liquidity Provider will enter into a separate Liquidity Facility with
the Subordination Agent with respect to the Certificates of each of the Trusts
pursuant to which the Liquidity Providers will make one or more advances to the
Subordination Agent to pay interest on such Certificates subject to certain
limitations. The Liquidity Facilities for each Trust are intended to enhance the
likelihood of timely receipt by the Certificateholders of such Trust of the
interest payable on the Certificates of such Trust at the Stated Interest Rate
therefor on up to three consecutive semiannual Regular Distribution Dates. If
interest payment defaults occur which exceed the amount covered by or available
under the Liquidity Facilities for any Trust, the Certificateholders of such
Trust will bear their allocable share of the deficiencies to the extent that
there are no other sources of funds. Although ABN AMRO and West LB are the
initial Liquidity Providers for each of the Trusts, ABN AMRO and West LB each
may be replaced by one or more other entities with respect to such Trusts under
certain circumstances. Therefore, the liquidity providers for each Trust may
differ.
DRAWINGS
The initial aggregate amount available under the Liquidity Facilities for
the Class A Trust, the Class B Trust and the Class C Trust at January 2, 1999,
the first Regular Distribution Date after the scheduled Delivery Period
Termination Date, assuming that Equipment Notes in the maximum principal amount
with respect to all Aircraft are acquired by the Trusts and that all interest
and principal due on or prior to January 2, 1999, is paid, will be $ ,
$ , and $ , respectively. Except as otherwise provided below,
the Liquidity Facilities for each Trust will enable the Subordination Agent to
make Interest Drawings thereunder promptly after any Regular Distribution Date
to pay interest then due and payable on the Certificates of such Trust at the
Stated Interest Rate for such Trust to the extent that the amount, if any,
available to the Subordination Agent on such Regular Distribution Date is not
sufficient to pay such interest; provided, however, that the maximum amount
available to be drawn under a Liquidity Facility with respect to any Trust on
any Regular Distribution Date to fund any shortfall of interest on Certificates
of such Trust will not exceed the then Maximum Available Commitment under such
Liquidity Facility. The Liquidity Facilities for any Class of Certificates do
not provide for drawings thereunder to pay for principal of or premium on the
Certificates of such Class or any interest on the Certificates of such Class in
excess of the Stated Interest Rate for such Class or more than three semiannual
installments of interest thereon or principal of or interest or premium on the
Certificates of any other Class. (Liquidity Facilities, Section 2.02;
Intercreditor Agreement, Section 3.6) In addition, the Liquidity Facilities with
respect to each Trust do not provide for drawings thereunder to pay any amounts
payable with respect to the Deposits relating to such Trust.
Each payment by the Liquidity Provider under each Liquidity Facility
reduces by the same amount the Maximum Available Commitment under such Liquidity
Facility, subject to reinstatement as hereinafter described. With respect to any
Interest Drawings under either Liquidity Facility for any Trust, upon
reimbursement of the relevant Liquidity Provider in full for the amount of such
Interest Drawings plus interest thereon, the Maximum Available Commitment under
such Liquidity Facility in respect of interest on the Certificates of such Trust
will be reinstated to an amount not to exceed the Stated Portion of the then
Required Amount of such Liquidity Facility; provided, however, that such
Liquidity Facility will not be so reinstated at any time if (i) a Liquidity
Event of Default shall have occurred and be continuing and (ii) less than 65% of
the then aggregate outstanding principal amount of all Equipment Notes are
Performing Equipment Notes. With respect to any other drawings under such
Liquidity Facility, amounts available to be drawn thereunder are not subject to
reinstatement. The Required Amount of the Liquidity Facilities for any Trust
will be automatically reduced from time to time to an amount equal to the next
three successive interest payments due on the Certificates of such Trust
(without regard to expected future payment of principal of such Certificates) at
the Stated Interest Rate for such Trust. (Liquidity Facilities, Section 2.04(a);
Intercreditor Agreement, Section 3.6(j))
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If at any time the short-term unsecured debt rating of a Liquidity Provider
for any Trust then issued by either Rating Agency is lower than the Threshold
Rating, each Liquidity Facility provided by such Liquidity Provider may be
replaced by a Replacement Facility. In the event that such Liquidity Facility is
not replaced with a Replacement Facility within 10 days after notice of the
downgrading and as otherwise provided in the Intercreditor Agreement, the
Subordination Agent will request the Downgrade Drawing in an amount equal to the
then Maximum Available Commitment thereunder and will hold the proceeds thereof
in the Cash Collateral Account for such Trust as cash collateral to be used for
the same purposes and under the same circumstances as cash payments of Interest
Drawings under such Liquidity Facility would be used. (Liquidity Facilities,
Section 2.02(c); Intercreditor Agreement, Section 3.6(c))
A "Replacement Facility" for any Liquidity Facility will mean an
irrevocable liquidity facility (or liquidity facilities) in substantially the
form of the replaced Liquidity Facility, including reinstatement provisions, or
in such other form (which may include a letter of credit) as shall permit the
Rating Agencies to confirm in writing their respective ratings then in effect
for the Certificates (before downgrading of such ratings, if any, as a result of
the downgrading of the applicable Liquidity Provider), in a face amount (or in
an aggregate face amount) equal to the Stated Portion of the amount of interest
payable on the Certificates of such Trust (at the Stated Interest Rate for such
Trust, and without regard to expected future principal payments) on the three
Regular Distribution Dates following the date of replacement of such Liquidity
Facility and issued by a person (or persons) having unsecured short-term debt
ratings issued by both Rating Agencies which are equal to or higher than the
Threshold Rating. (Intercreditor Agreement, Section 1.1) The provider of any
Replacement Facility will have the same rights (including, without limitation,
priority distribution rights and rights as "Controlling Party") under the
Intercreditor Agreement as the replaced initial liquidity provider.
"Threshold Rating" means the short-term unsecured debt rating of P-1 by
Moody's and A-1+ by Standard & Poor's, in the case of the Class A Liquidity
Provider, and the short-term unsecured debt rating of P-1 by Moody's and A-1 by
Standard & Poor's, in the case of the Class B Liquidity Provider and the Class C
Liquidity Provider.
Each Liquidity Facility for each Trust provides that the relevant Liquidity
Provider's obligations thereunder will expire on the earliest of (i) 364 days
after the Issuance Date (counting from, and including, the Issuance Date); (ii)
the date on which the Subordination Agent delivers to such Liquidity Provider a
certification that all of the Certificates of such Trust have been paid in full;
(iii) the date on which the Subordination Agent delivers to such Liquidity
Provider a certification that a Replacement Facility has been substituted for
such Liquidity Facility; (iv) the fifth Business Day following receipt by the
Subordination Agent of a Termination Notice from such Liquidity Provider (see
"-- Liquidity Events of Default"); and (v) the date on which no amount is or may
(by reason of reinstatement) become available for drawing under such Liquidity
Facility. Each Liquidity Facility provides that the scheduled expiration date
thereof may be extended for additional 364-day periods by mutual agreement.
The Intercreditor Agreement will provide for the replacement of any
Liquidity Facility for any Trust if it is scheduled to expire earlier than 15
days after the Final Maturity Date for the Certificates of such Trust) if such
Liquidity Facility is not extended at least 25 days prior to its then scheduled
expiration date. If such Liquidity Facility is not so extended or replaced by
the 25th day prior to its then scheduled expiration date, the Subordination
Agent shall request a Non-Extension Drawing in an amount equal to the then
Maximum Available Commitment thereunder and hold the proceeds thereof in the
Cash Collateral Account for such Trust as cash collateral to be used for the
same purposes and under the same circumstances, and subject to the same
conditions, as cash payments of Interest Drawings under such Liquidity Facility
would be used. (Liquidity Facilities, Section 2.02(b))
Subject to certain limitations, Continental may, at its option, arrange for
a Replacement Facility at any time to replace either liquidity facility for any
Trust (including without limitation any Replacement Facility described in the
following sentence). In addition, if any liquidity provider shall determine not
to extend any liquidity facility, then such liquidity provider may, at its
option, arrange for a Replacement Facility to replace such liquidity facility
during the period no earlier than 40 days and no later than 25 days prior to the
then
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scheduled expiration date of such liquidity facility. If any Replacement
Facility is provided at any time after a Downgrade Drawing or a Non-Extension
Drawing under any Liquidity Facility, the funds with respect to such liquidity
facility on deposit in the Cash Collateral Account for such Trust will be
returned to the liquidity provider being replaced. (Intercreditor Agreement,
Section 3.6(e))
The Intercreditor Agreement provides that, upon receipt by the
Subordination Agent of a Termination Notice with respect to any Liquidity
Facility from the applicable Liquidity Provider (given as described in
"-- Liquidity Events of Default"), the Subordination Agent shall request a Final
Drawing under such Liquidity Facility in an amount equal to the then Maximum
Available Commitment thereunder and will hold the proceeds thereof in the Cash
Collateral Account for the related Trust as cash collateral to be used for the
same purposes and under the same circumstances, and subject to the same
conditions, as cash payments of Interest Drawings under such Liquidity Facility
would be used. (Liquidity Facilities, Section 2.02(d); Intercreditor Agreement,
Section 3.6(i))
Drawings under any Liquidity Facility will be made by delivery by the
Subordination Agent of a certificate in the form required by such Liquidity
Facility. Upon receipt of such a certificate, the relevant Liquidity Provider is
obligated to make payment of the drawing requested thereby in immediately
available funds. Upon payment by any Liquidity Provider of the amount specified
in any drawing under any Liquidity Facility, such Liquidity Provider will be
fully discharged of its obligations under such Liquidity Facility with respect
to such drawing and will not thereafter be obligated to make any further
payments under such Liquidity Facility in respect of such drawing to the
Subordination Agent or any other person.
REIMBURSEMENT OF DRAWINGS
Amounts drawn under any Liquidity Facility by reason of an Interest Drawing
or the Final Drawing will be immediately due and payable, together with interest
on the amount of such drawing, with respect to the period from the date of its
borrowing to (but excluding) the third business day following the applicable
Liquidity Provider's receipt of the notice of such Interest Drawing, at the Base
Rate plus 1.75% per annum, and thereafter, at LIBOR for the applicable Interest
Period plus 1.75% per annum, provided that, in the case of a Final Drawing, the
Subordination Agent may convert the Final Drawing into a Drawing bearing
interest at the Base Rate plus 1.75% per annum on the last day of an Interest
Period for such Drawing; provided, further, that the Subordination Agent will be
obligated to reimburse such amounts only to the extent that the Subordination
Agent has funds available therefor.
"Base Rate" means a fluctuating interest rate per annum in effect from time
to time, which rate per annum shall at all times be equal to (a) the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or, if such day is not a business day, for the next preceding business day)
by the Federal Reserve Bank of New York, or if such rate is not so published for
any day that is a business day, the average of the quotations for such day for
such transactions received by the Liquidity Provider from three Federal funds
brokers of recognized standing selected by it, plus (b) one-quarter of one
percent ( 1/4 of 1%).
"LIBOR" means, with respect to any interest period, the average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the rates per annum at
which deposits in dollars are offered to major banks in the London interbank
market at approximately 11:00 A.M. (London time) two business days before the
first day of such interest period in an amount approximately equal to the
principal amount of the advance to which such interest period is to apply and
for a period of time comparable to such interest period.
The amount drawn under any Liquidity Facility for any Trust by reason of a
Downgrade Drawing or a Non-Extension Drawing will be treated as follows: (i)
such amount will be released on any Distribution Date to the relevant Liquidity
Provider to the extent that such amount exceeds the Stated Portion of the
Required Amount; (ii) any portion of such amount withdrawn from the Cash
Collateral Account for such Certificates to pay interest on such Certificates
will be treated in the same way as Interest Drawings; and (iii) the balance of
such amount will be invested in Eligible Investments. A Downgrade Drawing under
any of the Liquidity Facilities (other than any portion thereof applied to the
payment of interest on the Certificates) will bear interest (x) subject to
clause (z) below, during the period from the date of its borrowing to (but
excluding)
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the then scheduled expiration date of such Liquidity Facility, in an amount
equal to the investment earnings on amounts deposited in the Cash Collateral
Account attributable to such Liquidity Facility plus .325% per annum (until the
first anniversary of the Issuance Date) or .35% per annum (after the first
anniversary of the Issuance Date) on the outstanding amount from time to time of
such Downgrade Drawing (excluding any portion thereof applied to the payment of
interest on the Certificates), (y) subject to clause (z) below, from and after
the then scheduled expiration date of such Liquidity Facility, at a rate equal
to LIBOR for the applicable Interest Period plus .40% per annum on the
outstanding amount from time to time of such Downgrade Drawing, and (z) from and
after the date, if any, on which it is converted into a Final Drawing as
described below under "-- Liquidity Events of Default", at a rate equal to LIBOR
for the applicable Interest Period (or, as described in the third preceding
paragraph, the Base Rate) plus 1.75% per annum; provided that the Subordination
Agent will be obligated to pay such amount only to the extent that the
Subordination Agent has funds available therefor. A Non-Extension Drawing under
any of the Liquidity Facilities (other than any portion thereof applied to the
payment of interest on the Certificates) will bear interest (1) during the
period from the date of its borrowing to (but excluding) the date, if any, on
which it is converted into a Final Drawing as described below under
"-- Liquidity Events of Default", at a rate equal to LIBOR for the applicable
interest period plus .40% per annum on the outstanding amount from time to time
of such Non-Extension Drawing, and (2) thereafter, at a rate equal to LIBOR for
the applicable interest period (or, as described in the third preceding
paragraph, the Base Rate) plus 1.75% per annum; provided that the Subordination
Agent will be obligated to pay such amount only to the extent that the
Subordination Agent has funds available therefor. (Liquidity Facilities,
Sections 2.06 and 3.07)
LIQUIDITY EVENTS OF DEFAULT
Events of Default under each Liquidity Facility (each, a "Liquidity Event
of Default") will consist of: (i) the acceleration of all the Equipment Notes
(provided, that if such acceleration occurs during the Delivery Period, the
aggregate principal amount thereof exceeds $300 million) and (ii) certain
bankruptcy or similar events involving Continental. (Liquidity Facilities,
Section 1.01)
If (i) any Liquidity Event of Default under any Liquidity Facility has
occurred and is continuing and (ii) less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes, the
applicable Liquidity Provider may, in its discretion, give a notice of
termination of the related Liquidity Facility (a "Termination Notice") the
effect of which will be to cause (i) such Liquidity Facility to expire on the
fifth Business Day after the date on which such Termination Notice is received
by the Subordination Agent, (ii) the Subordination Agent to promptly request,
and the Liquidity Provider to make, a Final Drawing thereunder in an amount
equal to the then Maximum Available Commitment thereunder, (iii) any Drawing
remaining unreimbursed as of the date of termination to be automatically
converted into a Final Drawing under such Liquidity Facility, and (iv) all
amounts owing to such Liquidity Provider automatically to become accelerated.
Notwithstanding the foregoing, the Subordination Agent will be obligated to pay
amounts owing to the Liquidity Providers only to the extent of funds available
therefor after giving effect to the payments in accordance with the provisions
set forth under "Description of the Intercreditor Agreement -- Priority of
Distributions". (Liquidity Facilities, Section 6.01) Upon the circumstances
described below under "Description of the Intercreditor
Agreement -- Intercreditor Rights", a Liquidity Provider may become the
Controlling Party with respect to the exercise of remedies under the Indentures.
(Intercreditor Agreement, Section 2.6(c))
LIQUIDITY PROVIDERS
The initial Liquidity Providers for each Trust will be ABN AMRO Bank N.V.,
a bank organized under the laws of the Netherlands, acting through its Chicago
branch, and Westdeutsche Landesbank, a bank organized under the laws of Germany,
acting through its New York branch. Both ABN AMRO Bank N.V. and Westdeutsche
Landesbank have short term debt ratings of P-1 from Moody's and A-1+ from
Standard & Poor's.
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DESCRIPTION OF THE INTERCREDITOR AGREEMENT
The following summary describes all material provisions of the
Intercreditor Agreement. The summary supplements (and, to the extent
inconsistent therewith, replaces) the description of the general terms and
provisions relating to the Intercreditor Agreement set forth in the Prospectus.
The summary does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the Intercreditor Agreement, which will be
filed as an exhibit to a Current Report on Form 8-K to be filed by Continental
with the Commission.
INTERCREDITOR RIGHTS
Controlling Party
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Providers will agree that, with respect to any Indenture at any given time, the
Loan Trustee will be directed (a) in taking, or refraining from taking, any
action thereunder or with respect to the Equipment Notes issued under such
Indenture, by the holders of at least a majority of the outstanding principal
amount of the Equipment Notes issued under such Indenture (provided that, for so
long as the Subordination Agent is the registered holder of the Equipment Notes,
the Subordination Agent will act with respect to this clause (a) in accordance
with the directions of the Trustees (in the case of each such Trustee, with
respect to the Equipment Notes issued under such Indenture and held as Trust
Property of such Trust) constituting, in the aggregate, directions with respect
to such principal amount of Equipment Notes), so long as no Indenture Default
(which, with respect to Leased Aircraft, has not been cured by the applicable
Owner Trustee or Owner Participant) shall have occurred and be continuing
thereunder, and (b) after the occurrence and during the continuance of an
Indenture Default under such Indenture (which, with respect to Leased Aircraft,
has not been cured by the applicable Owner Trustee or Owner Participant), in
taking, or refraining from taking, any action thereunder or with respect to the
Equipment Notes issued under such Indenture, including exercising remedies
thereunder or with respect to such Equipment Notes (including acceleration of
such Equipment Notes or foreclosing the lien on the Aircraft securing such
Equipment Notes), by the Controlling Party, subject to the limitations described
below.
"Controlling Party" with respect to any Indenture means: (x) the Class A
Trustee; (y) upon payment of Final Distributions to the holders of Class A
Certificates, the Class B Trustee; and (z) upon payment of Final Distributions
to the holders of Class B Certificates, the Class C Trustee. See "Description of
the Certificates -- Indenture Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the Certificateholders of each Trust
to direct the respective Trustees. Notwithstanding the foregoing, at any time
after 18 months from the earlier to occur of (x) the date on which the entire
available amount under any Liquidity Facility shall have been drawn (for any
reason other than a Downgrade Drawing or a Non-Extension Drawing) and remain
unreimbursed and (y) the date on which all Equipment Notes shall have been
accelerated (provided that if such acceleration occurs prior to the Delivery
Period Termination Date, the aggregate principal amount thereof exceeds $300
million), the Liquidity Providers with at least two-thirds of unreimbursed
Liquidity Obligations shall have the right to become the Controlling Party with
respect to any Indenture. For purposes of giving effect to the foregoing, the
Trustees (other than the Controlling Party) shall irrevocably agree, and the
Certificateholders (other than the Certificateholders represented by the
Controlling Party) will be deemed to agree by virtue of their purchase of
Certificates, that the Subordination Agent, as record holder of the Equipment
Notes, shall exercise its voting rights in respect of the Equipment Notes as
directed by the Controlling Party. (Intercreditor Agreement, Section 2.6) For a
description of certain limitations on the Controlling Party's rights to exercise
remedies, see "Description of the Equipment Notes -- Remedies".
Sale of Equipment Notes or Aircraft
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the immediately following sentence, sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person. So long
as any
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Certificates are outstanding, during nine months after the earlier of (x) the
acceleration of the Equipment Notes under any Indenture and (y) the bankruptcy
or insolvency of Continental, without the consent of each Trustee, (a) no
Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes, and (b) with respect to any
Leased Aircraft, the amount and payment dates of rentals payable by Continental
under the Lease for such Leased Aircraft may not be adjusted, if, as a result of
such adjustment, the discounted present value of all such rentals would be less
than 75% of the discounted present value of the rentals payable by Continental
under such Lease before giving effect to such adjustment, in each case, using
the weighted average interest rate of the Equipment Notes outstanding under such
Indenture as the discount rate.
The Subordination Agent may from time to time during the continuance of an
Indenture Default (and before the occurrence of a Triggering Event) commission
LTV Appraisals with respect to an Aircraft at the request of the Controlling
Party. (Intercreditor Agreement, Section 4.1(a)(iii))
PRIORITY OF DISTRIBUTIONS
So long as no Triggering Event shall have occurred, the payments in respect
of the Equipment Notes and certain other payments received on any Distribution
Date will be promptly distributed by the Subordination Agent on such
Distribution Date in the following order of priority:
(i) to the Liquidity Providers to the extent required to pay the
Liquidity Obligations (other than any interest accrued thereon or the
principal amount of any Drawing) (the "Liquidity Expenses");
(ii) to the Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations;
(iii) to the Liquidity Providers to the extent required to pay or
reimburse the Liquidity Providers for the Liquidity Obligations (other than
amounts payable pursuant to clauses (i) and (ii) above) and/or, if
applicable, to replenish each Cash Collateral Account up to the Required
Amount;
(iv) to the Class A Trustee to the extent required to pay Expected
Distributions on the Class A Certificates;
(v) to the Class B Trustee to the extent required to pay Expected
Distributions on the Class B Certificates;
(vi) to the Class C Trustee to the extent required to pay Expected
Distributions on the Class C Certificates;
(vii) if Class D Certificates have been issued, to the Class D Trustee
to the extent required to pay "Expected Distributions" (to be defined in a
manner equivalent to the definition below for other Classes of
Certificates) on the Class D Certificates; and
(viii) to the Subordination Agent and each Trustee for the payment of
certain fees and expenses.
"Expected Distributions" means, with respect to the Certificates of any
Trust on any Current Distribution Date, the sum of (x) accrued and unpaid
interest on such Certificates (excluding interest, if any, payable with respect
to the Deposits relating to such Trust) and (y) the difference between (A) the
Pool Balance of such Certificates as of the immediately preceding Distribution
Date (or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), and (B) the
Pool Balance of such Certificates as of the Current Distribution Date calculated
on the basis that (i) the principal of the Equipment Notes held in such Trust
has been paid when due (whether at stated maturity, upon redemption, prepayment,
purchase or acceleration or otherwise) and such payments have been distributed
to the holders of such Certificates and (ii) the principal of any Equipment
Notes formerly held in such Trust that have been sold pursuant to the
Intercreditor Agreement has been paid in full and such payments have been
distributed to the holders of such Certificates, but without giving effect to
any reduction in the Pool Balance as a result of any distribution attributable
to Deposits occurring after the immediately preceding Distribution
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Date (or, if the Current Distribution Date is the first Distribution Date,
occurring after the initial issuance of the Certificates of such Trust). For
purposes of determining the priority of distributions on account of the
redemption, purchase or prepayment of all of the Equipment Notes issued pursuant
to an Indenture, clause (x) of the definition of Expected Distributions shall be
deemed to read as follows: "(x) accrued, due and unpaid interest on such
Certificates (excluding interest, if any, payable with respect to the Deposits
relating to such Trust) together with (without duplication) accrued and unpaid
interest on a portion of such Certificates equal to the outstanding principal
amount of the Equipment Notes being redeemed, purchased or prepaid (immediately
prior to such redemption, purchase or prepayment)".
Subject to the terms of the Intercreditor Agreement, upon the occurrence of
a Triggering Event and at all times thereafter, all funds received by the
Subordination Agent in respect of the Equipment Notes and certain other payments
will be promptly distributed by the Subordination Agent in the following order
of priority:
(i) to the Subordination Agent, any Trustee, any Certificateholder and
the Liquidity Providers to the extent required to pay certain out-of-pocket
costs and expenses actually incurred by the Subordination Agent or any
Trustee or to reimburse any Certificateholder or the Liquidity Providers in
respect of payments made to the Subordination Agent or any Trustee in
connection with the protection or realization of the value of the Equipment
Notes or any Trust Indenture Estate (collectively, the "Administration
Expenses");
(ii) to the Liquidity Providers to the extent required to pay the
Liquidity Expenses;
(iii) to the Liquidity Providers to the extent required to pay
interest accrued on the Liquidity Obligations;
(iv) to the Liquidity Providers to the extent required to pay the
outstanding amount of all Liquidity Obligations and/or, if applicable, with
respect to any particular Liquidity Facility, unless (x) less than 65% of
the aggregate outstanding principal amount of all Equipment Notes are
Performing Equipment Notes and a Liquidity Event of Default shall have
occurred and is continuing under such Liquidity Facility or (y) a Final
Drawing shall have occurred under such Liquidity Facility, to replenish the
Cash Collateral Account with respect to such Liquidity Facility up to the
Stated Portion of the Required Amount for the related Class of Certificates
(less the amount of any repayments of Interest Drawings under such
Liquidity Facility while sub-clause (x) of this clause (iv) is applicable);
(v) to the Subordination Agent, any Trustee or any Certificateholder
to the extent required to pay certain fees, taxes, charges and other
amounts payable;
(vi) to the Class A Trustee to the extent required to pay Adjusted
Expected Distributions on the Class A Certificates;
(vii) to the Class B Trustee to the extent required to pay Adjusted
Expected Distributions on the Class B Certificates;
(viii) to the Class C Trustee to the extent required to pay Adjusted
Expected Distributions on the Class C Certificates; and
(ix) if Class D Certificates have been issued, to the Class D Trustee
to the extent required to pay "Adjusted Expected Distributions" (to be
defined in a manner equivalent to the definition below for other Classes of
Certificates) on the Class D Certificates.
"Adjusted Expected Distributions" means, with respect to the Certificates
of any Trust on any Current Distribution Date, the sum of (1) accrued and unpaid
interest on such Certificates (excluding interest, if any, payable with respect
to the Deposits relating to such Trust) and (2) the greater of:
(A) the difference between (x) the Pool Balance of such Certificates
as of the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, the original aggregate
face amount of the Certificates of such Trust) and (y) the Pool Balance of
such Certificates as of the Current Distribution Date calculated on the
basis that (i) the principal of the Non-Performing Equipment Notes held in
such Trust has been paid in full and such payments have been
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<PAGE> 71
distributed to the holders of such Certificates, (ii) the principal of the
Performing Equipment Notes held in such Trust has been paid when due (but
without giving effect to any acceleration of Performing Equipment Notes)
and such payments have been distributed to the holders of such Certificates
and (iii) the principal of any Equipment Notes formerly held in such Trust
that have been sold pursuant to the Intercreditor Agreement has been paid
in full and such payments have been distributed to the holders of such
Certificates, but without giving effect to any reduction in the Pool
Balance as a result of any distribution attributable to Deposits occurring
after the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, occurring after the
initial issuance of the Certificates of such Trust), and
(B) the amount of the excess, if any, of (i) the Pool Balance of such
Class of Certificates as of the immediately preceding Distribution Date
(or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), less the
amount of the Deposits for such Class of Certificates as of such preceding
Distribution Date (or, if the Current Distribution Date is the first
Distribution Date, the original aggregate amount of the Deposits for such
Class of Certificates) other than any portion of such Deposits thereafter
used to acquire Equipment Notes pursuant to the Note Purchase Agreement,
over (ii) the Aggregate LTV Collateral Amount for such Class of
Certificates for the Current Distribution Date;
provided that, until the date of the initial LTV Appraisals, clause (B) shall
not apply.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
"Aggregate LTV Collateral Amount" for any Class of Certificates for any
Distribution Date means (i) the sum of the applicable LTV Collateral Amounts for
each Aircraft, minus (ii) the Pool Balance for each Class of Certificates, if
any, senior to such Class, after giving effect to any distribution of principal
on such Distribution Date with respect to such senior Class or Classes.
"LTV Collateral Amount" of any Aircraft for any Class of Certificates
means, as of any Distribution Date, the lesser of (i) the LTV Ratio for such
Class of Certificates multiplied by the Appraised Current Market Value of such
Aircraft (or with respect to any such Aircraft which has suffered an Event of
Loss under and as defined in the relevant Lease, in the case of a Leased
Aircraft, or relevant Indenture, in the case of an Owned Aircraft, the amount of
the insurance proceeds paid to the related Loan Trustee in respect thereof to
the extent then held by such Loan Trustee (and/or on deposit in the Special
Payments Account) or payable to such Loan Trustee in respect thereof) and (ii)
the outstanding principal amount of the Equipment Notes secured by such Aircraft
after giving effect to any principal payments of such Equipment Notes on or
before such Distribution Date.
"LTV Ratio" means for the Class A Certificates 43.7%, for the Class B
Certificates 56.0% and for the Class C Certificates 68.0%.
"Appraised Current Market Value" of any Aircraft means the lower of the
average and the median of the most recent three LTV Appraisals of such Aircraft.
After a Triggering Event occurs and any Equipment Note becomes a Non-Performing
Equipment Note, the Subordination Agent shall obtain LTV Appraisals of the
Aircraft securing such Equipment Note as soon as practicable and additional LTV
Appraisals on or prior to each anniversary of the date of such initial LTV
Appraisals; provided that if the Controlling Party reasonably objects to the
appraised value of the Aircraft shown in such LTV Appraisals, the Controlling
Party shall have the right to obtain or cause to be obtained substitute LTV
Appraisals (including LTV Appraisals based upon physical inspection of such
Aircraft).
"LTV Appraisal" means a current fair market value appraisal (which may be a
"desk-top" appraisal) performed by any Appraiser or any other nationally
recognized appraiser on the basis of an arm's-length
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transaction between an informed and willing purchaser under no compulsion to buy
and an informed and willing seller under no compulsion to sell and both having
knowledge of all relevant facts.
Interest Drawings under the Liquidity Facility and withdrawals from the
Cash Collateral Account, in each case in respect of interest on the Certificates
of any Trust, will be distributed to the Trustee for such Trust, notwithstanding
the priority of distributions set forth in the Intercreditor Agreement and
otherwise described herein. All amounts on deposit in the Cash Collateral
Account for any Trust that are in excess of the Stated Portion, of the
applicable Liquidity Provider, of the Required Amount will be paid to the
applicable Liquidity Provider.
VOTING OF EQUIPMENT NOTES
In the event that the Subordination Agent, as the registered holder of any
Equipment Note, receives a request for its consent to any amendment,
modification, consent or waiver under such Equipment Note or the related
Indenture (or, if applicable, the related Lease, the related Participation
Agreement or other related document), (i) if no Indenture Default shall have
occurred and be continuing with respect to such Indenture, the Subordination
Agent shall request instructions from the Trustee(s) and shall vote or consent
in accordance with the directions of such Trustee(s) and (ii) if any Indenture
Default shall have occurred and be continuing with respect to such Indenture,
the Subordination Agent will exercise its voting rights as directed by the
Controlling Party, subject to certain limitations; provided that no such
amendment, modification, consent or waiver shall, without the consent of each
Liquidity Provider, reduce the amount of rent, supplemental rent or stipulated
loss values payable by Continental under any Lease or reduce the amount of
principal or interest payable by Continental under any Equipment Note issued
under any Owned Aircraft Indenture. (Intercreditor Agreement, Section 9.1(b))
ADDITION OF TRUSTEE FOR CLASS D CERTIFICATES
If the Class D Certificates are issued, the Class D Trustee will become a
party to the Intercreditor Agreement.
THE SUBORDINATION AGENT
Wilmington Trust Company will be the Subordination Agent under the
Intercreditor Agreement. Continental and its affiliates may from time to time
enter into banking and trustee relationships with the Subordination Agent and
its affiliates. The Subordination Agent's address is Wilmington Trust Company,
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Corporate Trust Administration.
The Subordination Agent may resign at any time, in which event a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. The Controlling Party may remove the Subordination Agent for cause as
provided in the Intercreditor Agreement. In such circumstances, a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. Any resignation or removal of the Subordination Agent and appointment
of a successor Subordination Agent does not become effective until acceptance of
the appointment by the successor Subordination Agent. (Intercreditor Agreement,
Section 8.1)
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DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft consist of three Boeing 777-200 aircraft, five Boeing 737-524,
six Boeing 737-724 and ten Boeing 737-824 aircraft, all of which will be newly
delivered by the manufacturer at the time that the Equipment Notes relating
thereto are issued. The Aircraft have been designed to be in compliance with
Stage 3 noise level standards, which are the most restrictive regulatory
standards currently in effect in the United States for aircraft noise abatement.
Boeing 777-200 Aircraft
The Boeing 777-200 aircraft is a long-range aircraft with a seating
capacity of approximately 285 passengers. The engine type utilized on
Continental's 777-200 is anticipated to be the General Electric GE90.
Boeing 737-500 Aircraft
The Boeing 737-500 aircraft is a medium-range aircraft with a seating
capacity of approximately 104 passengers. The engine type utilized on
Continental's 737-524 is anticipated to be the CFM International, Inc.
CFM56-3-B2.
Boeing 737-700 Aircraft
The Boeing 737-700 aircraft is a medium-range aircraft with a seating
capacity of approximately 124 passengers. The Boeing 737-700 has not yet entered
commercial airline service, and the initial delivery of such model is scheduled
for October 1997. The engine type utilized on Continental's 737-724 aircraft is
anticipated to be the CFM International, Inc. CFM 56-7B24. Deliveries of the
Boeing 737-724 aircraft to Continental are subject to Boeing obtaining certain
approvals of the U.S. Federal Aviation Administration with respect to such
model. See "-- Deliveries of Aircraft".
Boeing 737-800 Aircraft
The Boeing 737-800 aircraft is a medium-range aircraft with a seating
capacity of approximately 155 passengers. The Boeing 737-800 has not yet entered
commercial airline service, and the initial delivery of such model is scheduled
for March 1998. The engine type utilized on Continental's 737-824 aircraft is
anticipated to be the CFM International, Inc. CFM 56-7B26. Deliveries of the
Boeing 737-824 aircraft to Continental are subject to Boeing obtaining certain
approvals of the U.S. Federal Aviation Administration with respect to such
model. See "-- Deliveries of Aircraft".
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THE APPRAISALS
The table below sets forth the appraised values and certain additional
information regarding the Aircraft.
<TABLE>
<CAPTION>
AIRCRAFT APPRAISED VALUE
AIRCRAFT ENGINE TAIL MANUFACTURER'S ---------------------------------
TYPE TYPE NUMBER SERIAL NUMBER DELIVERY MONTH* AISI BK
- --------------- ----------- ------ -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Boeing 737-524 CFM56-3B1 656 28917 April 1998 $ 33,660,000 $ 28,250,000
Boeing 737-524 CFM56-3B1 657 28918 May 1998 33,740,000 28,250,000
Boeing 737-524 CFM56-3B1 658 28919 June 1998 33,830,000 28,250,000
Boeing 737-524 CFM56-3B1 659 28920 July 1998 33,910,000 28,250,000
Boeing 737-524 CFM56-3B1 660 28921 August 1998 33,990,000 28,250,000
Boeing 737-724 CFM56-7B24 705 28766 April 1998 40,880,000 37,750,000
Boeing 737-724 CFM56-7B24 706 28767 April 1998 40,880,000 37,750,000
Boeing 737-724 CFM56-7B24 707 28768 April 1998 40,880,000 37,750,000
Boeing 737-724 CFM56-7B24 708 28769 April 1998 40,880,000 37,750,000
Boeing 737-724 CFM56-7B24 709 28780 August 1998 41,280,000 37,750,000
Boeing 737-724 CFM56-7B24 710 28781 August 1998 41,280,000 37,750,000
Boeing 737-824 CFM56-7B26 201 28770 May 1998 45,160,000 43,600,000
Boeing 737-824 CFM56-7B26 202 28771 May 1998 45,160,000 43,600,000
Boeing 737-824 CFM56-7B26 203 28772 May 1998 45,160,000 43,600,000
Boeing 737-824 CFM56-7B26 204 28773 June 1998 45,270,000 43,600,000
Boeing 737-824 CFM56-7B26 205 28774 June 1998 45,270,000 43,600,000
Boeing 737-824 CFM56-7B26 206 28775 June 1998 45,270,000 43,600,000
Boeing 737-824 CFM56-7B26 207 28776 July 1998 45,380,000 43,600,000
Boeing 737-824 CFM56-7B26 208 28777 July 1998 45,380,000 43,600,000
Boeing 737-824 CFM56-7B26 209 28778 July 1998 45,380,000 43,600,000
Boeing 737-824 CFM56-7B26 210 28779 August 1998 45,490,000 43,600,000
Boeing 777-200 GE90 001 27577 September 1998 138,670,000 120,000,000
Boeing 777-200 GE90 002 27578 October 1998 139,000,000 120,000,000
Boeing 777-200 GE90 003 27579 November 1998 139,330,000 120,000,000
-------------- --------------
Total $1,285,130,000 $1,163,750,000
============= =============
<CAPTION>
AIRCRAFT
TYPE MBA
- --------------- --------------
<S> <C>
Boeing 737-524 $ 26,590,000
Boeing 737-524 26,590,000
Boeing 737-524 26,697,000
Boeing 737-524 26,697,000
Boeing 737-524 26,750,000
Boeing 737-724 38,053,000
Boeing 737-724 38,053,000
Boeing 737-724 38,053,000
Boeing 737-724 38,053,000
Boeing 737-724 38,207,000
Boeing 737-724 38,207,000
Boeing 737-824 44,120,000
Boeing 737-824 44,120,000
Boeing 737-824 44,120,000
Boeing 737-824 44,210,000
Boeing 737-824 44,210,000
Boeing 737-824 44,210,000
Boeing 737-824 44,300,000
Boeing 737-824 44,300,000
Boeing 737-824 44,300,000
Boeing 737-824 44,390,000
Boeing 777-200 121,120,000
Boeing 777-200 121,365,000
Boeing 777-200 121,610,000
--------------
Total $1,168,325,000
=============
</TABLE>
- ------------
* Reflects the scheduled delivery month under Continental's purchase agreements
with Boeing. The actual delivery date for any Aircraft may be subject to delay
or acceleration. See "-- Deliveries of Aircraft".
The appraised values set forth in the foregoing chart were determined by
the following three independent aircraft appraisal and consulting firms: AISI,
BK and MBA. Each Appraiser was asked to provide its opinion as to the appraised
value of each Aircraft as of October 6, 1997, and projected as of the scheduled
delivery month of each such Aircraft. As part of this process, all three
Appraisers performed "desk-top" appraisals without any physical inspection of
the Aircraft. The appraisals are based on various assumptions and methodologies,
which vary among the appraisals. The Appraisers have delivered letters
summarizing their respective appraisals, copies of which are annexed to this
Prospectus Supplement as Appendix II. For a discussion of the assumptions and
methodologies used in each of the appraisals, reference is hereby made to such
summaries.
An appraisal is only an estimate of value, is not indicative of the price
at which an aircraft may be purchased from the manufacturer and should not be
relied upon as a measure of realizable value; the proceeds realized upon a sale
of any Aircraft may be less than the appraised value thereof. The value of the
Aircraft in the event of the exercise of remedies under the applicable Indenture
will depend on market and economic conditions, the availability of buyers, the
condition of the Aircraft and other similar factors. Accordingly, there can be
no assurance that the proceeds realized upon any such exercise with respect to
the Equipment Notes and the Aircraft pursuant to the applicable Indenture would
equal the appraised value of such Aircraft or be sufficient to satisfy in full
payments due on the Equipment Notes issued thereunder or the Certificates.
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DELIVERIES OF AIRCRAFT
The Aircraft are scheduled for delivery under Continental's purchase
agreements with Boeing from April 1998 through November 1998. See the table
under "-- The Appraisals" for the scheduled month of delivery of each Aircraft.
Under such purchase agreements, delivery of an Aircraft may be delayed due to
"Excusable Delay", which is defined to include, among other things, acts of God,
governmental acts or failures to act, strikes or other labor troubles, inability
to procure materials, or any other cause beyond Boeing's control or not
occasioned by Boeing's fault or negligence. Boeing has recently announced that
it is experiencing delays in deliveries of Aircraft, and the delivery schedule
for the Aircraft described above reflects adjustments made by Boeing as a result
of such delays. Continental cannot predict whether further adjustments in such
schedule will be required. In addition, the Boeing 737-700 and 737-800 aircraft
models have not yet received the necessary U.S. Federal Aviation Administration
approvals, which Boeing is required to obtain under its purchase agreement with
Continental. Boeing has advised Continental that it expects to receive such
approvals by no later than October 1997 for the Boeing 737-700 aircraft model
and March 1998 for the Boeing 737-800 aircraft model, although no assurance can
be given that this will occur. The first of the six Boeing 737-724 aircraft
included in the Aircraft is scheduled for delivery in April 1998. The first of
the ten Boeing 737-824 aircraft included in the Aircraft is scheduled for
delivery in May 1998.
The Note Purchase Agreement provides that the Delivery Period will expire
on December 31, 1998, subject to extension, if the Equipment Notes relating to
all of the Aircraft (or Substitute Aircraft in lieu thereof) have not been
purchased by the Trustees on or prior to such date due to any reason beyond the
control of Continental and not occasioned by Continental's fault or negligence,
to the earlier of (i) the date on which the Trustees purchase Equipment Notes
relating to the last Aircraft (or a Substitute Aircraft in lieu thereof) and
(ii) May 31, 1999. In addition, if a labor strike occurs at Boeing prior to the
scheduled expiration of the Delivery Period, the expiration date of the Delivery
Period will be extended by the number of days that such strike continued in
effect.
If delivery of any Aircraft is delayed by more than 30 days after the month
scheduled for delivery or beyond December 31, 1998, Continental has the right to
replace such Aircraft with a Substitute Aircraft, subject to certain conditions.
See "-- Substitute Aircraft". If delivery of any Aircraft is delayed beyond the
Delivery Period Termination Date and Continental does not exercise its right to
replace such Aircraft with a Substitute Aircraft, there will be unused Deposits
that will be distributed to Certificateholders together with accrued and unpaid
interest thereon and, if applicable, a premium. See "Description of the Deposit
Agreements -- Unused Deposits".
SUBSTITUTE AIRCRAFT
If the delivery date for any Aircraft is delayed (i) more than 30 days
after the month scheduled for delivery or (ii) beyond December 31, 1998,
Continental may identify for delivery a substitute aircraft (each, a "Substitute
Aircraft") therefor meeting the following conditions: (i) a Substitute Aircraft
must be a Boeing 777-200, 737-500, 737-700 or 737-800 aircraft manufactured
after the Issuance Date, (ii) one or more Substitute Aircraft of the same or
different types may be substituted for one or more Aircraft of the same or
different types so long as after giving effect thereto the maximum principal
amount of Equipment Notes of each Series issued in respect of the Substitute
Aircraft under the Mandatory Economic Terms would not exceed the maximum
principal amount of the Equipment Notes of each Series that could have been
issued under the Mandatory Economic Terms in respect of the replaced Aircraft
and (iii) Continental will be obligated to obtain written confirmation from each
Rating Agency that substituting such Substitute Aircraft for the replaced
Aircraft will not result in a withdrawal, suspension or downgrading of the
ratings of any Class of Certificates.
DESCRIPTION OF THE EQUIPMENT NOTES
The following summary describes all material terms of the Equipment Notes
and supplements (and, to the extent inconsistent therewith, replaces) the
description of the general terms and provisions relating to the Equipment Notes,
the Indentures, the Leases, the Participation Agreements, the trust agreements
under
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which the Owner Trustees act on behalf of the Owner Participants (the "Trust
Agreements") and the Note Purchase Agreement set forth in the Prospectus. The
summaries make use of terms defined in and are qualified in their entirety by
reference to all of the provisions of the Equipment Notes, the Indentures, the
Leases, the Participation Agreements, the Trust Agreements and the Note Purchase
Agreement, which will be filed as exhibits to a Current Report on Form 8-K to be
filed by Continental with the Commission. Except as otherwise indicated, the
following summaries relate to the Equipment Notes, the Indenture, the Lease, the
Participation Agreement and the Trust Agreement that may be applicable to each
Aircraft.
Under the Note Purchase Agreement, Continental will have the option of
entering into a leveraged lease financing or a debt financing with respect to
each Aircraft. The Note Purchase Agreement provides for the relevant parties to
enter into either (i) with respect to each Leased Aircraft, a Participation
Agreement, a Lease and an Indenture (among other documents) relating to the
financing of such Aircraft and (ii) with respect to each Owned Aircraft, a
Participation Agreement and an Owned Aircraft Indenture relating to the
financing of such Owned Aircraft. The description of such agreements in this
Prospectus Supplement is based on the forms of such agreements annexed to the
Note Purchase Agreement.
Continental has obtained the commitment of one company to act as the Owner
Participant with respect to leveraged leases for certain of the Aircraft and
plans to seek commitments from others for the remaining Aircraft. The existing
commitment is subject to satisfaction of certain conditions, and Continental may
elect to terminate such commitment. Accordingly, Continental may select one or
more other Owner Participants for some or all of the Aircraft or finance such
Aircraft as Owned Aircraft rather than Leased Aircraft. Such Owner Participants
may request revisions to the forms of the Participation Agreement, the Lease and
the Leased Aircraft Indenture that are contemplated by the Note Purchase
Agreement, so that the terms of such agreements applicable to any particular
Leased Aircraft may differ from the description of such agreements contained in
this Prospectus Supplement. However, under the Note Purchase Agreement, the
terms of such agreements are required to (i) contain the Mandatory Documents
Terms and (ii) not vary the Mandatory Economic Terms. In addition, Continental
will be obligated (i) to certify to the Trustees that any such modifications do
not materially and adversely affect the Certificateholders and (ii) to obtain
written confirmation from each Rating Agency that the use of versions of such
agreements modified in any material respect would not result in a withdrawal,
suspension or downgrading of the ratings of any Class of Certificates. See
"Description of the Certificates -- Obligation to Purchase Equipment Notes".
Each Owner Participant will be required to satisfy certain requirements,
including having a minimum combined capital and surplus or net worth.
GENERAL
The Equipment Notes will be issued in three series with respect to each
Aircraft, provided that Continental may elect to issue a fourth series with
respect to Owned Aircraft, which will be funded from sources other than this
Offering. See "Description of the Certificates -- Possible Issuance of Class D
Certificates". The Equipment Notes with respect to each Leased Aircraft will be
issued under a separate Leased Aircraft Indenture between First Security Bank,
National Association, as Owner Trustee of a trust for the benefit of the Owner
Participant who will be the beneficial owner of such Aircraft, and Wilmington
Trust Company, as Leased Aircraft Trustee. The Equipment Notes with respect to
each Owned Aircraft will be issued under a separate Owned Aircraft Indenture
between Continental and Wilmington Trust Company, as Owned Aircraft Trustee.
The related Owner Trustee will lease each Leased Aircraft to Continental
pursuant to a separate Lease between such Owner Trustee and Continental with
respect to such Leased Aircraft. Under each Lease, Continental will be obligated
to make or cause to be made rental and other payments to the related Leased
Aircraft Trustee on behalf of the related Owner Trustee, which rental and other
payments 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 Leased
Aircraft. The Equipment Notes issued with respect to the Leased Aircraft are
not, however, direct obligations of, or guaranteed by, Continental.
Continental's rental obligations under each Lease and Continental's obligations
under the Equipment Notes issued with respect to each Owned Aircraft will be
general obligations of Continental.
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SUBORDINATION
Series B Equipment Notes issued in respect of an Aircraft will be
subordinated in right of payment to Series A Equipment Notes issued in respect
of such Aircraft; Series C Equipment Notes issued in respect of such Aircraft
will be subordinated in right of payment to such Series B Equipment Notes and,
if Continental elects to issue Series D Equipment Notes with respect to an Owned
Aircraft, they will be subordinated in right of payment to the Series C
Equipment Notes issued with respect to such Owned Aircraft. On each Equipment
Note payment date, (i) payments of interest and principal due on Series A
Equipment Notes issued in respect of an Aircraft will be made prior to payments
of interest and principal due on Series B Equipment Notes issued in respect of
such Aircraft; (ii) payments of interest and principal due on Series B Equipment
Notes issued in respect of an Aircraft will be made prior to payments of
interest and principal due on Series C Equipment Notes issued in respect of such
Aircraft; and (iii) if Continental elects to issue Series D Equipment Notes with
respect to an Owned Aircraft, payments of interest and principal due on such
Series C Equipment Notes will be made prior to payments of interest and
principal due on Series D Equipment Notes issued in respect of such Aircraft.
PRINCIPAL AND INTEREST PAYMENTS
Subject to the provisions of the Intercreditor Agreement, interest paid on
the Equipment Notes held in each Trust will be passed through to the
Certificateholders of such Trust on the dates and at the rate per annum set
forth on the cover page of this Prospectus Supplement with respect to
Certificates issued by such Trust until the final expected Regular Distribution
Date for such Trust. Subject to the provisions of the Intercreditor Agreement,
principal paid on the Equipment Notes held in each Trust will be passed through
to the Certificateholders of such Trust in scheduled amounts on the dates set
forth herein until the final expected Regular Distribution Date for such Trust.
Interest will be payable on the unpaid principal amount of each Equipment
Note at the rate applicable to such Equipment Note on January 2, and July 2 of
each year, commencing on January 2, 1998 or, if later, the first such date to
occur after initial issuance thereof. Such interest will be computed on the
basis of a 360-day year of twelve 30-day months.
Scheduled principal payments on the Equipment Notes will be made on January
2 and July 2 in certain years, commencing July 2, 1999, in the case of Series A
Equipment Notes, January 2, 2000, in the case of Series B Equipment Notes and
July 2, 1999, in the case of Series C Equipment Notes. See "Description of the
Certificates -- Pool Factors" for a discussion of the scheduled payments of
principal of the Equipment Notes and possible revisions thereto.
If any date scheduled for a payment of principal, premium (if any) or
interest with respect to the Equipment Notes is not a Business Day, such payment
will be made on the next succeeding Business Day without any additional
interest.
REDEMPTION
If an Event of Loss occurs with respect to an Aircraft and such Aircraft is
not replaced by Continental under the related Lease (in the case of a Leased
Aircraft) or under the related Owned Aircraft Indenture (in the case of an Owned
Aircraft), the Equipment Notes issued with respect to such Aircraft will be
redeemed, in whole, in each case 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 a Special
Distribution Date. (Indentures, Section 2.10(a))
If Continental exercises its right to terminate a Lease under Section 9 of
such Lease, the Equipment Notes relating to the applicable Leased Aircraft will
be redeemed, in whole, on a 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, plus, in the case of any
series of Equipment Notes, if such redemption is made prior to the Premium
Termination Date applicable to such series, a Make-Whole Premium. (Leased
Aircraft Indentures, Section 2.10(b)) See "-- The Leases -- Lease Termination".
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All of the Equipment Notes issued with respect to a Leased Aircraft may be
redeemed prior to maturity as part of a refunding or refinancing thereof under
Section 11 of the applicable Participation Agreement, and all of the Equipment
Notes issued with respect to the Owned Aircraft may be redeemed prior to
maturity at any time at the option of Continental, in each case at a price equal
to the aggregate unpaid principal thereof, together with accrued interest
thereon to, but not including, the date of redemption, plus, in the case of any
series of Equipment Notes, if such redemption is made prior to the Premium
Termination Date applicable to such series, a Make-Whole Premium. (Indentures,
Section 2.11) If notice of such a redemption shall have been given in connection
with a refinancing of Equipment Notes with respect to a Leased Aircraft, such
notice may be revoked not later than three days prior to the proposed redemption
date. (Leased Aircraft Indentures, Section 2.12). The Premium Termination Date
with respect to each Series of Equipment Notes is set forth below:
<TABLE>
<CAPTION>
PREMIUM
TERMINATION
SERIES DATE
------------------------ -----------
<S> <C>
Series A
Series B
Series C
</TABLE>
If, with respect to a Leased Aircraft, (x) one or more Lease Events of
Default shall have occurred and are continuing, (y) in the event of a bankruptcy
proceeding involving Continental, (i) during the Section 1110 Period, the
trustee in such proceeding or Continental does not assume or agree to perform
its obligations under the related Lease or (ii) at any time after assuming or
agreeing to perform such obligations, such trustee or Continental ceases to
perform such obligations such that the stay period applicable under the U.S.
Bankruptcy Code comes to an end or (z) the Equipment Notes with respect to such
Aircraft have been accelerated or the Leased Aircraft Trustee with respect to
such Equipment Notes takes action or notifies the applicable Owner Trustee that
it intends to take action to foreclose the lien of the related Leased Aircraft
Indenture or otherwise commence the exercise of any significant remedy under
such Indenture or the related Lease, then in each case all, but not less than
all, of the Equipment Notes issued with respect to such Leased Aircraft may be
purchased by the related Owner Trustee or Owner Participant on the applicable
purchase date at a price equal to the aggregate unpaid principal thereof,
together with accrued and unpaid interest thereon to, but not including, the
date of purchase, but without any premium (provided that a Make-Whole Premium
shall be payable if such Equipment Notes are to be purchased prior to the
Premium Termination Date applicable thereto pursuant to clause (x) when a Lease
Event of Default shall have occurred and is continuing for less than 180 days).
(Leased Aircraft Indentures, Section 2.13) Continental as owner of the Owned
Aircraft has no comparable right under the Owned Aircraft Indentures to purchase
the Equipment Notes under such circumstances.
"Make-Whole Premium" means, with respect to any Equipment Note, an amount
(as determined by an independent investment banker of national standing) equal
to the excess, if any, of (a) the present value of the remaining scheduled
payments of principal and interest to maturity of such Equipment Note computed
by discounting such payments on a semiannual basis on each payment date under
the applicable Indenture (assuming a 360-day year of twelve 30-day months) using
a discount rate equal to the Treasury Yield over (b) the outstanding principal
amount of such Equipment Note plus accrued interest to the date of
determination.
For purposes of determining the Make-Whole Premium and the Deposit
Make-Whole Premium, "Treasury Yield" means, at the date of determination with
respect to any Equipment Note, the interest rate (expressed as a semiannual
decimal and, in the case of United States Treasury bills, converted to a bond
equivalent yield) determined to be the per annum rate equal to the semiannual
yield to maturity for United States Treasury securities maturing on the Average
Life Date of such Equipment Note and trading in the public securities markets
either as determined by interpolation between the most recent weekly average
yield to maturity for two series of United States Treasury securities trading in
the public securities markets, (A) one maturing as close as possible to, but
earlier than, the Average Life Date of such Equipment Note and (B) the other
maturing as close as possible to, but later than, the Average Life Date of such
Equipment Note,
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in each case as published in the most recent H.15(519) or, if a weekly average
yield to maturity for United States Treasury securities maturing on the Average
Life Date of such Equipment Note is reported in the most recent H.15(519), such
weekly average yield to maturity as published in such H.15(519). "H.15(519)"
means the weekly statistical release designated as such, or any successor
publication, published by the Board of Governors of the Federal Reserve System.
The date of determination of a Make-Whole Premium shall be the third Business
Day prior to the applicable payment or redemption date and the "most recent
H.15(519)" means the H.15(519) published prior to the close of business on the
third Business Day prior to the applicable payment or redemption date.
"Average Life Date" for any Equipment Note shall be the date which follows
the time of determination by a period equal to the Remaining Weighted Average
Life of such Equipment Note. "Remaining Weighted Average Life" on a given date
with respect to any Equipment Note shall be the number of days equal to the
quotient obtained by dividing (a) the sum of each of the products obtained by
multiplying (i) the amount of each then remaining scheduled payment of principal
of such Equipment Note by (ii) the number of days from and including such
determination date to but excluding the date on which such payment of principal
is scheduled to be made, by (b) the then outstanding principal amount of such
Equipment Note.
SECURITY
The Equipment Notes issued with respect to each Leased Aircraft will be
secured by (i) an assignment by the related Owner Trustee to the related Leased
Aircraft Trustee of such Owner Trustee's rights, except for certain limited
rights, under the Lease with respect to the related Aircraft, including the
right to receive payments of rent thereunder, (ii) a mortgage to such Leased
Aircraft Trustee of such Aircraft, subject to the rights of Continental under
such Lease, and (iii) an assignment to such Leased Aircraft Trustee of certain
of such Owner Trustee's rights under the purchase agreement between Continental
and the Aircraft manufacturer. Unless and until an Indenture Default with
respect to a Leased Aircraft has occurred and is continuing, the Leased Aircraft
Trustee may not exercise the rights of the Owner Trustee under the related
Lease, except the Owner Trustee's right to receive payments of rent due
thereunder. The assignment by the Owner Trustee to the Leased Aircraft Trustee
of its rights under the related Lease will exclude certain rights of such Owner
Trustee and the related Owner Participant, including the rights of the Owner
Trustee and the Owner Participant with respect to indemnification by Continental
for certain matters, insurance proceeds payable to such Owner Trustee in its
individual capacity or to such Owner Participant under public liability
insurance maintained by Continental under such Lease or by such Owner Trustee or
such Owner Participant, insurance proceeds payable to such Owner Trustee in its
individual capacity or to such Owner Participant under certain casualty
insurance maintained by such Owner Trustee or such Owner Participant under such
Lease and certain reimbursement payments made by Continental to such Owner
Trustee. (Leased Aircraft Indenture, Granting Clause) The Equipment Notes will
not be cross-collateralized (except in certain cases, if any, where the related
Owner Participant and Continental shall agree to cross-collateralization), and,
consequently, the Equipment Notes issued in respect of any one Aircraft will not
be secured by any of the other Aircraft or replacement aircraft therefor (as
described in "-- The Leases and Certain Provisions of the Owned Aircraft
Indentures -- Events of Loss") or the Leases related thereto.
The Equipment Notes issued with respect to each Owned Aircraft will be
secured by (i) a mortgage to the Owned Aircraft Trustee of such Aircraft and
(ii) an assignment to the Owned Aircraft Trustee of certain of Continental's
rights under its purchase agreement with the Aircraft manufacturer.
Funds, if any, held from time to time by the Loan Trustee with respect to
any Aircraft, including funds held as the result of an Event of Loss to such
Aircraft or, in the case of a Leased Aircraft, termination of the Lease, if any,
relating thereto, will be invested and reinvested by such Loan Trustee, at the
direction of the related Owner Trustee in the case of the Leased Aircraft or
Continental in the case of the Owned Aircraft (except in the case of certain
Indenture Defaults), in investments described in the related Indenture.
(Indentures, Section 5.09)
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LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The following tables set forth illustrative loan to Aircraft value ratios
for the Equipment Notes issued in respect of Aircraft as of the Regular
Distribution Dates that occur after the scheduled date of original issuance of
such Equipment Notes, assuming that the Equipment Notes in the maximum principal
amount are issued in respect of each such Aircraft. These examples were utilized
by Continental in preparing the Assumed Amortization Schedule, although the
amortization schedule for the Equipment Notes issued with respect to an Aircraft
may vary from such assumed schedule so long as it complies with the Mandatory
Economic Terms. Accordingly, the schedules set forth below may not be applicable
in the case of any particular Aircraft. See "Description of the
Certificates -- Pool Factors". The LTV was obtained by dividing (i) the
outstanding balance (assuming no payment default) of such Equipment Notes
determined immediately after giving effect to the payments scheduled to be made
on each such Regular Distribution Date by (ii) the assumed value (the "Assumed
Aircraft Value") of the Aircraft securing such Equipment Notes.
The following tables are based on the assumption that the value of each
Aircraft set forth opposite the initial Regular Distribution Date included in
each table depreciates by approximately 2% of the initial appraised value per
year until the fifteenth year after the year of delivery of such Aircraft and by
approximately 4% of the initial appraised value per year thereafter. Other rates
or methods of depreciation would result in materially different loan to Aircraft
value ratios, and no assurance can be given (i) that the depreciation rates and
method assumed for the purposes of the tables are the ones most likely to occur
or (ii) as to the actual future value of any Aircraft. Thus the tables should
not be considered a forecast or prediction of expected or likely loan to
Aircraft value ratios, but simply a mathematical calculation based on one set of
assumptions.
<TABLE>
<CAPTION>
BOEING 777-200 BOEING 737-524
------------------------------------ ------------------------------------
EQUIPMENT LOAN EQUIPMENT LOAN
NOTE ASSUMED TO NOTE ASSUMED TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO
- ---------------------- ----------- ---------- ----- ----------- ---------- -----
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
BOEING 737-724 BOEING 737-824
------------------------------------ ------------------------------------
EQUIPMENT LOAN EQUIPMENT LOAN
NOTE ASSUMED TO NOTE ASSUMED TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO
- ---------------------- ----------- ---------- ----- ----------- ---------- -----
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
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LIMITATION OF LIABILITY
The Equipment Notes issued with respect to the Leased Aircraft are not
direct obligations of, or guaranteed by, Continental, any Owner Participant or
the Leased Aircraft Trustees or the Owner Trustees in their individual
capacities. None of the Owner Trustees, the Owner Participants or the Leased
Aircraft Trustees, or any affiliates thereof, will be personally liable to any
holder of an Equipment Note or, in the case of the Owner Trustees and the Owner
Participants, to the Leased Aircraft Trustees for any amounts payable under the
Equipment Notes or, except as provided in each Leased Aircraft Indenture, for
any liability under such Leased Aircraft Indenture. All payments of principal
of, premium, if any, and interest on the Equipment Notes issued with respect to
any Leased Aircraft (other than payments made in connection with an optional
redemption or purchase of Equipment Notes issued with respect to a Leased
Aircraft by the related Owner Trustee or the related Owner Participant) will be
made only from the assets subject to the lien of the Indenture with respect to
such Leased Aircraft or the income and proceeds received by the related Leased
Aircraft Trustee therefrom (including rent payable by Continental under the
Lease with respect to such Leased Aircraft).
The Equipment Notes issued with respect to the Owned Aircraft will be
direct obligations of Continental.
Except as otherwise provided in the Indentures, each Owner Trustee and each
Loan Trustee, in its individual capacity, will not be answerable or accountable
under the Indentures or under the Equipment Notes under any circumstances
except, among other things, for its own willful misconduct or gross negligence.
None of the Owner Participants will have any duty or responsibility under any of
the Leased Aircraft Indentures or the Equipment Notes to the Leased Aircraft
Trustees or to any holder of any Equipment Note.
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will include: (a) in the case of a
Leased Aircraft Indenture, the occurrence of any Lease Event of Default under
the related Lease (other than the failure to make certain indemnity payments and
other payments to the related Owner Trustee or Owner Participant unless a notice
is given by such Owner Trustee that such failure shall constitute an Indenture
Default), (b) the failure by the related Owner Trustee (other than as a result
of a Lease Default or Lease Event of Default), in the case of a Leased Aircraft
Indenture, or Continental, in the case of an Owned Aircraft Indenture, to pay
any interest or principal or premium, if any, when due, under such Indenture or
under any Equipment Note issued thereunder that continues for more than 10
Business Days, in the case of principal, interest or Make-Whole Premium, and, in
all other cases, ten Business Days after the relevant Owner Trustee or Owner
Participant receives written demand from the related Loan Trustee or holder of
an Equipment Note, (c) the failure by the related Owner Participant or the
related Owner Trustee (in its individual capacity), in the case of a Leased
Aircraft Indenture, or Continental, in the case of an Owned Aircraft Indenture,
to discharge certain liens that continue after notice and specified cure
periods, (d) any representation or warranty made by the related Owner Trustee or
Owner Participant in such Indenture, the related Participation Agreement, or
certain related documents furnished to the Loan Trustee or any holder of an
Equipment Note pursuant thereto being false or incorrect in any material respect
when made that continues to be material and adverse to the interests of the Loan
Trustee or Note Holders and remains unremedied after notice and specified cure
periods, (e) failure by Continental or the related Owner Trustee or Owner
Participant to perform or observe any covenant or obligation for the benefit of
the Loan Trustee or holders of Equipment Notes under such Indenture or certain
related documents that continues after notice and specified cure periods, (f)
the registration of the related Aircraft ceasing to be effective as a result of
the Owner Participant (in the case of a Leased Aircraft) or Continental (in the
case of an Owned Aircraft) not being a citizen of the United States, as defined
in the Transportation Code (subject to a cure period), (g) with respect to the
Owned Aircraft, the lapse or cancellation of insurance required under the Owned
Aircraft Indenture or (h) the occurrence of certain events of bankruptcy,
reorganization or insolvency of the related Owner Trustee or Owner Participant
(in the case of a Leased Aircraft) or Continental (in the case of the Owned
Aircraft). (Leased Aircraft Indentures, Section 4.02; Owned Aircraft Indenture,
Section 5.01) There will not be cross-default provisions in the Indentures or in
the Leases (unless otherwise agreed between an Owner Participant and
Continental). Consequently, events resulting in an Indenture Default under any
particular Indenture may or may not result in an Indenture Default occurring
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under any other Indenture, and a Lease Event of Default under any particular
Lease may or may not constitute a Lease Event of Default under any other Lease.
If Continental fails to make any semiannual basic rental payment due under
any Lease, within a specified period after such failure the applicable Owner
Trustee may furnish to the Leased Aircraft Trustee the amount due on the
Equipment Notes issued with respect to the related Leased Aircraft, together
with any interest thereon on account of the delayed payment thereof, in which
event the Leased Aircraft 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 such Owner Trustee has previously cured three or more
immediately preceding semiannual basic rental payment defaults or, in total, six
or more previous semiannual basic rental payment defaults (or, in the case of
certain Owner Participants, six or more immediately preceding semiannual basic
rental payment defaults or, in total, eight or more previous semiannual basic
rental payment defaults). The applicable Owner Trustee also may cure any other
default by Continental in the performance of its obligations under any Lease
that can be cured with the payment of money. (Leased Aircraft Indentures,
Section 4.03)
The holders of a majority in principal amount of the outstanding Equipment
Notes issued with respect to any Aircraft, by notice to the Loan Trustee, may on
behalf of all the holders waive any existing default and its consequences under
the Indenture with respect to such Aircraft, except a default in the payment of
the principal of, or premium 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.
(Leased Aircraft Indentures, Section 4.08; Owned Aircraft Indenture, Section
5.06)
REMEDIES
If an Indenture Default occurs and is continuing under an Indenture, the
related Loan Trustee or the holders of a majority in principal amount of the
Equipment Notes outstanding under such Indenture may, subject to the applicable
Owner Participant's or Owner Trustee's right to cure, as discussed above,
declare the principal of all such Equipment Notes issued thereunder immediately
due and payable, together with all accrued but unpaid interest thereon, provided
that in the event of a reorganization proceeding involving Continental
instituted under Chapter 11 of the U.S. Bankruptcy Code, if no other Lease Event
of Default and no other Indenture Default (other than the failure to pay the
outstanding amount of the Equipment Notes which by such declaration shall have
become payable) exists at any time after the consummation of such proceeding,
such declaration will be automatically rescinded without any further action on
the part of any holder of Equipment Notes. The holders of a majority in
principal amount of Equipment Notes outstanding under an Indenture may rescind
any declaration of acceleration of such Equipment Notes at any time before the
judgment or decree for the payment of the money so due shall be entered if (i)
there has been paid to the related Loan Trustee an amount sufficient to pay all
principal, interest, and premium, if any, on any such Equipment Notes, to the
extent such amounts have become due otherwise than by such declaration of
acceleration and (ii) all other Indenture Defaults and incipient Indenture
Defaults with respect to any covenant or provision of such Indenture have been
cured. (Leased Aircraft Indentures, Section 4.04(b); Owned Aircraft Indenture,
Section 5.02(b))
Each Indenture provides that if an Indenture Default under such Indenture
has occurred and is continuing, the related Loan Trustee may exercise certain
rights or remedies available to it under such Indenture or under applicable law,
including (if, in the case of a Leased Aircraft, the corresponding Lease has
been declared in default) one or more of the remedies under such Indenture or,
in the case of a Leased Aircraft, such Lease with respect to the Aircraft
subject to such Lease. If an Indenture Default arises solely by reason of one or
more events or circumstances which constitute a Lease Event of Default, the
related Leased Aircraft Trustee's right to exercise remedies under a Leased
Aircraft Indenture is subject, with certain exceptions, to its having proceeded
to exercise one or more of the dispossessory remedies under the Lease with
respect to such Leased Aircraft; provided that the requirement to exercise one
or more of such remedies under such Lease shall not apply in circumstances where
such exercise has been involuntarily stayed or prohibited by applicable law or
court order for a continuous period in excess of 60 days or such period as may
be specified in Section 1110(a)(1)(A) of the U.S. Bankruptcy Code, plus an
additional period, if any, resulting from (i) the
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<PAGE> 83
trustee or debtor-in-possession in such proceeding agreeing to perform its
obligations under such Lease with the approval of the applicable court and its
continuous performance of such Lease under Section 1110(a)(1)(A-B) of the U.S.
Bankruptcy Code or such Leased Aircraft Trustee's consent to an extension of
such period, (ii) such Leased Aircraft Trustee's failure to give any requisite
notice, or (iii) Continental's assumption of such Lease with the approval of the
relevant court and its continuous performance of the Lease as so assumed. See
"-- The Leases and Certain Provisions of the Owned Aircraft Indentures -- Events
of Default under the Leases". Such remedies may be exercised by the related
Leased Aircraft Trustee to the exclusion of the related Owner Trustee, subject
to certain conditions specified in such Indenture, and of Continental, subject
to the terms of such Lease. Any Aircraft sold in the exercise of such remedies
will be free and clear of any rights of those parties, including the rights of
Continental under the Lease with respect to such Aircraft; provided that no
exercise of any remedies by the related Leased Aircraft Trustee may affect the
rights of Continental under any Lease unless a Lease Event of Default has
occurred and is continuing. (Leased Aircraft Indentures, Section 4.04; Leases,
Section 15) The Owned Aircraft Indentures will not contain such limitations on
the Owned Aircraft Trustee's ability to exercise remedies upon an Indenture
Default under an Owned Aircraft Indenture.
If a bankruptcy proceeding involving Continental under the U.S. Bankruptcy
Code occurs, all of the rights of the Owner Trustee as lessor under a particular
Lease will be exercised by the Owner Trustee in accordance with the terms
thereof unless (i) during the Section 1110 Period the trustee in such proceeding
or Continental does not assume or agree to perform its obligations under such
Lease, (ii) at any time after assuming or agreeing to perform such obligations,
such trustee or Continental ceases to perform such obligations or (iii) the
related Loan Trustee takes action, or notifies the Owner Trustee that such Loan
Trustee intends to take action, to foreclose the lien of the related Leased
Aircraft Indenture or otherwise commence the exercise of any significant remedy
in accordance with the Leased Aircraft Indenture. The Owner Trustee's exercise
of such rights shall be subject to certain limitations and, in no event, reduce
the amount or change the time of any payment in respect of the Equipment Notes
or adversely affect the validity or enforceability of the lien under the related
Leased Aircraft Indenture.
If the Equipment Notes issued in respect of one Aircraft are in default,
the Equipment Notes issued in respect of the other Aircraft may not be in
default, and, if not, no remedies will be exercisable under the applicable
Indentures with respect to such other Aircraft.
Section 1110 of the U.S. Bankruptcy Code provides in relevant part that the
right of lessors, conditional vendors and holders of security interests with
respect to "equipment" (as defined in Section 1110 of the U.S. Bankruptcy Code)
to take possession of such equipment 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 U.S. Bankruptcy Code,
which provision enjoins repossessions by creditors for the duration of the
reorganization period, (b) the provision of the U.S. Bankruptcy Code allowing
the trustee in reorganization to use property of the debtor during the
reorganization period, (c) Section 1129 of the U.S. Bankruptcy Code (which
governs the confirmation of plans of reorganization in Chapter 11 cases) and (d)
any power of the bankruptcy court to enjoin a repossession. Section 1110
provides in relevant part, 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 (or such longer period consented to by the lessor, conditional vendor or
holder of a security interest), 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). "Equipment"
is defined in Section 1110 of the U.S. Bankruptcy Code, in part, as an aircraft,
aircraft engine, propeller, appliance, or spare part (as defined in Section
40102 of Title 49 of the U.S. Code) that is subject to a security interest
granted by, leased to, or conditionally sold to a debtor that is a citizen of
the United States (as defined in Section 40102 of Title 49 of the U.S. Code)
holding an air carrier operating certificate issued by the Secretary of
Transportation pursuant to chapter 447 of Title 49 of the U.S. Code for aircraft
capable of carrying 10 or more individuals or 6,000 pounds or more of cargo.
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It is a condition to the Trustee's obligation to purchase Equipment Notes
with respect to each Aircraft that outside counsel to Continental, which is
expected to be Hughes Hubbard & Reed LLP, provide its opinion to the Trustees
that (x) if such Aircraft is a Leased Aircraft, the Owner Trustee, as lessor
under the Lease for such Aircraft, and the Leased Aircraft Trustee, as assignee
of such Owner Trustee's rights under such Lease pursuant to the related Leased
Aircraft Indenture, will be entitled to the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to the airframe and engines comprising such
Aircraft or (y) if such Aircraft is an Owned Aircraft, the Owned Aircraft
Trustee will be entitled to the benefits of Section 1110 with respect to the
airframe and engines comprising such Owned Aircraft, in each case so long as
Continental continues to be a "citizen of the United States" as defined in
Section 40102 of Title 49 of the U.S. Code holding an air carrier operating
certificate issued by the Secretary of Transportation pursuant to chapter 447 of
Title 49 of the U.S. Code for aircraft capable of carrying 10 or more
individuals or 6,000 pounds or more of cargo. For a description of certain
limitations on the Loan Trustee's exercise of rights contained in the Indenture,
see "-- Indenture Defaults, Notice and Waiver".
The opinion of Hughes Hubbard & Reed LLP will 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 will be entitled
to Section 1110 benefits with respect to such replacement unless there is a
change in law or court interpretation that results in Section 1110 not being
available. See "-- The Leases and Certain Provisions of the Owned Aircraft
Indentures -- Events of Loss". The opinion of Hughes Hubbard & Reed LLP will
also not address the availability of Section 1110 with respect to any possible
sublessee of a Leased Aircraft subleased by Continental or to any possible
lessee of an Owned Aircraft if it is leased by Continental.
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, Section 3.03)
In the event of bankruptcy, insolvency, receivership or like proceedings
involving an Owner Participant, it is possible that, notwithstanding that the
applicable Leased Aircraft is owned by the related Owner Trustee in trust, such
Leased 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 Leased Aircraft
Trustee to exercise its remedies under the related Leased Aircraft Indenture
might be restricted, although such Leased Aircraft Trustee would retain its
status as a secured creditor in respect of the related Lease and the related
Leased Aircraft.
MODIFICATION OF INDENTURES AND LEASES
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 any related Lease, Participation Agreement or Trust Agreement may
not be amended or modified, except to the extent indicated below.
Subject to certain limitations, certain provisions of any Leased Aircraft
Indenture, and of the Lease, the Participation Agreement, and the Trust
Agreement related thereto, may be amended or 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 Leased Aircraft at the end of the term of such Lease (except to the
extent that such amendment would affect the rights or exercise of remedies under
the Lease) and (ii) the renewal of such Lease and the option of Continental at
the end of the term of such Lease to purchase the related Leased Aircraft so
long as the same would not adversely affect the Note Holders. (Leased Aircraft
Indentures, Section 9.01(a)) In addition, any Indenture may be amended without
the consent of the holders of Equipment Notes to, among other things, cure any
defect or inconsistency in such Indenture or the Equipment Notes issued
thereunder, provided that such change does not adversely affect the interests of
any such holder. (Leased Aircraft Indentures, Section 9.01(c); Owned Aircraft
Indenture, Section 10.01)
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Without the consent of each Liquidity Provider and the holder of each
Equipment Note outstanding under any Indenture affected thereby, no amendment or
modification of such Indenture may among other things (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, premium,
if any, or interest is due and payable, (b) permit the creation of any security
interest with respect to the property subject to the lien of such Indenture,
except as provided in such Indenture, or deprive any holder of an Equipment Note
issued under such Indenture of the benefit of the lien of such Indenture upon
the property subject thereto or (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. (Leased
Aircraft Indentures, Section 9.01(b); Owned Aircraft Indenture, Section
10.01(a))
OWNER PARTICIPANT'S RIGHT TO RESTRUCTURE
Certain Owner Participants will have the right, subject to certain
conditions, to restructure the applicable leveraged lease transaction using a
"cross-border lease", a tax lease or head-lease/sublease structure and any other
type of transaction. In no event, however, shall any such restructuring (i)
change the terms and conditions of the rights and obligations of any holder of
Equipment Notes under the relevant Aircraft Operative Agreements or any holder
of Certificates or (ii) expose any such holder to any additional risks. As a
precondition to any such restructuring, the Owner Participant will be obligated
to deliver to the Leased Aircraft Trustee an appropriate officer's certificate
as to the satisfaction of the foregoing conditions and to obtain a written
confirmation from the Rating Agencies prior to the implementation of such
restructuring to the effect that such restructuring will not adversely affect
the ratings of the Certificates.
INDEMNIFICATION
Continental will be required to indemnify each Loan Trustee, each Owner
Participant, each Owner Trustee, each Liquidity Provider, the Subordination
Agent, the Escrow Agent and each Trustee, but not the holders of Certificates,
for certain losses, claims and other matters. Continental will be 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 Leased Aircraft.
THE LEASES AND CERTAIN PROVISIONS OF THE OWNED AIRCRAFT INDENTURES
Each Leased Aircraft will be leased to Continental by the relevant Owner
Trustee under the relevant lease agreement (each, a "Lease"). Each Owned
Aircraft will be owned by Continental.
Lease Term Rentals and Payments
Each Leased Aircraft will be leased separately by the relevant Owner
Trustee to Continental for a term commencing on the date on which the Aircraft
is acquired by the Owner Trustee and expiring on a date not earlier than the
latest maturity date of the relevant Equipment Notes, unless terminated prior to
the originally scheduled expiration date as permitted by the applicable Lease.
The semiannual basic rent payment under each Lease is payable by Continental on
each related Lease Payment Date (or, if such day is not a Business Day, on the
next Business Day), and will be assigned by the Owner Trustee under the
corresponding Leased Aircraft Indenture to provide the funds necessary to make
scheduled payments of principal and interest due from the Owner Trustee on the
Equipment Notes issued under such Indenture. In certain cases, the semiannual
basic rent payments under the Leases may be adjusted, but each Lease provides
that under no circumstances will rent payments by Continental be less than the
scheduled payments on the related Equipment Notes. Any balance of each such
semiannual basic rent payment under each Lease, after payment of amounts due on
the Equipment Notes issued under the Indenture corresponding to such Lease, will
be paid over to the Owner Trustee. (Leases, Section 3; Leased Aircraft
Indentures, Section 3.01)
"Lease Payment Date" means, with respect to each Lease, January 2 or July 2
during the term of such Lease.
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Semiannual payments of interest on the Equipment Notes issued by
Continental under an Owned Aircraft Indenture are payable January 2 and July 2
of each year, commencing on January 2, 1998 or, if later, the first such date
after issuance thereof. Semiannual payments of principal under the Equipment
Notes issued by Continental under an Owned Aircraft Indenture are payable on
January 2 and July 2 in certain years, commencing on July 2, 1999, in the case
of Series A Equipment Notes, January 2, 2000, in the case of Series B Equipment
Notes and July 2, 1999, in the case of Series C Equipment Notes.
Net Lease; Maintenance
Under the terms of each Lease, Continental's obligations in respect of each
Leased Aircraft will be those of a lessee under a "net lease". Accordingly,
Continental is obligated under each Lease, among other things and at its
expense, to keep each Aircraft duly registered and insured, to pay all costs of
operating the Aircraft and to maintain, service, repair and overhaul the
Aircraft so as to keep it in as good an operating condition as when delivered to
Continental, ordinary wear and tear excepted, and in such condition as required
to maintain the airworthiness certificate for the Aircraft in good standing at
all times. (Leases, Sections 7.1, 8.1 and 11.1 and Annexes C and D) The Owned
Aircraft Indenture imposes comparable maintenance, service and repair
obligations on Continental with respect to the Owned Aircraft. (Owned Aircraft
Indenture, Section 4.02)
Possession, Sublease and Transfer
Each Aircraft may be operated by Continental or, subject to certain
restrictions, by certain other persons. Normal interchange and pooling
agreements customary in the commercial airline industry with respect to any
Engine are permitted. Subleases, in the case of Leased Aircraft, and leases, in
the case of Owned Aircraft, are also permitted to U.S. air carriers and foreign
air carriers that have their principal executive office in certain specified
countries, subject to a reasonably satisfactory legal opinion that, among other
things, such country would recognize (in the case of the Leased Aircraft) Owner
Trustee's title to, and the Loan Trustee's lien in respect of, the applicable
Aircraft. In addition, a sublessee or lessee may not be subject to insolvency or
similar proceedings at the commencement of such sublease or lease. (Leases,
Section 7, Owned Aircraft Indenture, Section 4.02) Permitted foreign air
carriers are not limited to those based in a country that is a party to the
Convention on the International Recognition of Rights in Aircraft (Geneva 1948)
(the "Convention"). It is uncertain to what extent the relevant Loan Trustee's
security interest would be recognized if an Aircraft is registered or located in
a jurisdiction not a party to the Convention. Moreover, in the case of an
Indenture Default, the ability of the related Loan Trustee to realize upon its
security interest in an Aircraft could be adversely affected as a legal or
practical matter if such Aircraft were registered or located outside the United
States.
Registration
Continental is required to keep each Aircraft duly registered under the
Transportation Code with the FAA, except (in the case of a Leased Aircraft) if
the relevant Owner Trustee or the relevant Owner Participant fails to meet the
applicable citizenship requirements, and to record each Lease (in the case of a
Leased Aircraft) and Indenture and certain other documents under the
Transportation Code. (Leases, Section 7; Owned Aircraft Indenture, Section
4.02(e)) Such recordation of the Indenture and other documents with respect to
each Aircraft will give the relevant Loan Trustee a first-priority, perfected
security interest in such Aircraft whenever it is located in the United States
or any of its territories and possessions. The Convention provides that such
security interest will also be recognized, with certain limited exceptions, in
those jurisdictions that have ratified or adhere to the Convention.
So long as no Lease Event of Default exists, Continental has the right to
register the Leased Aircraft subject to such Lease in a country other than the
United States at its own expense in connection with a permitted sublease of the
Aircraft to a permitted foreign air carrier, subject to certain conditions set
forth in the related Participation Agreement. These conditions include a
requirement that the lien of the applicable Indenture continue as a first
priority security interest in the applicable Aircraft. (Leases, Section 7.1.2;
Participation Agreements, Section 7.6.11) The Owned Aircraft Indentures contain
comparable provisions
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with respect to registration of the Owned Aircraft in connection with a
permitted lease of the Owned Aircraft. (Owned Aircraft Indenture, Section
4.02(e))
Liens
Continental is required to maintain each Aircraft free of any liens, other
than the rights of the relevant Loan Trustee, the holders of the related
Equipment Notes, Continental and, with respect to a Leased Aircraft, the Owner
Participant and Owner Trustee arising under the applicable Indenture, the Lease
(in the case of a Leased Aircraft) or the other operative documents related
thereto, and other than certain limited liens permitted under such documents,
including but not limited to (i) liens for taxes either not yet due or being
contested in good faith by appropriate proceedings; (ii) materialmen's,
mechanics' and other similar liens arising in the ordinary course of business
and securing obligations that either are not yet delinquent for more than 60
days or are being contested in good faith by appropriate proceedings; (iii)
judgment liens so long as such judgment is discharged or vacated within 60 days
or the execution of such judgment is stayed pending appeal or discharged,
vacated or reversed within 60 days after expiration of such stay; and (iv) any
other lien as to which Continental has provided a bond or other security
adequate in the reasonable opinion of the Owner Trustee; provided that in the
case of each of the liens described in the foregoing clauses (i), (ii) and
(iii), such liens and proceedings do not involve any material risk of the sale,
forfeiture or loss of such Aircraft or the interest of any Participant therein
or impair the lien of the relevant Indenture. (Leases, Section 6; Owned Aircraft
Indenture, Section 4.01)
Replacement of Parts; Alterations
Continental is obligated to replace all parts at its expense that may from
time to time be incorporated or installed in or attached to any Aircraft and
that may become lost, damaged beyond repair, worn out, stolen, seized,
confiscated or rendered permanently unfit for use. Continental or any permitted
sublessee has the right, at its own expense, to make such alterations,
modifications and additions with respect to each Aircraft as it deems desirable
in the proper conduct of its business and to remove parts which it deems to be
obsolete or no longer suitable or appropriate for use, so long as such
alteration, modification, addition or removal does not materially diminish the
fair market value, utility or useful life of the related Aircraft or Engine or
invalidate the Aircraft's airworthiness certificate. (Leases, Section 8.1 and
Annex C; Owned Aircraft Indenture, Section 4.04(d))
Insurance
Continental is required to maintain, at its expense (or at the expense of a
permitted lessee, in the case of the Owned Aircraft, or a permitted sublessee,
in the case of a Leased Aircraft), all-risk aircraft hull insurance covering
each Aircraft, at all times in an amount not less than the stipulated loss value
of such Aircraft (which will exceed the aggregate outstanding principal amount
of the Equipment Notes relating to such Aircraft, together with accrued interest
thereon). However, after giving effect to self-insurance permitted as described
below, the amount payable under such insurance may be less than such amounts
payable with respect to the Equipment Notes. In the event of a loss involving
insurance proceeds in excess of $3,500,000 per occurrence ($7,500,000 per
occurrence in the case of Boeing 777-200 aircraft), such proceeds up to the
stipulated loss value of the relevant Aircraft will be payable to the applicable
Loan Trustee, for so long as the relevant Indenture shall be in effect. In the
event of a loss involving insurance proceeds of up to $3,500,000 per occurrence
($7,500,000 per occurrence in the case of Boeing 777-200 aircraft) such proceeds
will be payable directly to Continental so long as an Indenture Event of Default
does not exist with respect to the Owned Aircraft Indenture or (in the case of a
Leased Aircraft) the Owner Trustee has not notified the insurance underwriters
that a Lease Event of Default exists. So long as the loss does not constitute an
Event of Loss, insurance proceeds will be applied to repair or replace the
property. (Leases, Sections 11 and Annex D; Owned Aircraft Indenture, Section
4.06)
In addition, Continental is obligated to maintain comprehensive airline
liability insurance at its expense (or at the expense of a permitted lessee, in
the case of an Owned Aircraft, or a permitted sublessee, in the case of a Leased
Aircraft), including, without limitation, passenger liability, baggage
liability, cargo and mail
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liability, hangarkeeper's liability and contractual liability insurance with
respect to each Aircraft. Such liability insurance must be underwritten by
insurers of nationally or internationally recognized responsibility. The amount
of such liability insurance coverage per occurrence may not be less than the
amount of comprehensive airline liability insurance from time to time applicable
to aircraft owned or leased and operated by Continental of the same type and
operating on similar routes as such Aircraft. (Leases, Section 11.1 and Annex D,
Owned Aircraft Indenture, Section 4.06)
Continental is also required to maintain war-risk, hijacking or allied
perils insurance if it (or any permitted sublessee or lessee) operates any
Aircraft, Airframe or Engine in any area of recognized hostilities or if
Continental (or any permitted sublessee or lessee) maintains such insurance with
respect to other aircraft operated on the same routes or areas on or in which
the Aircraft is operated. (Leases, Annex D, Owned Aircraft Indenture, Section
4.06)
Continental may self-insure under a program applicable to all aircraft in
its fleet, but the amount of such self-insurance in the aggregate may not exceed
50% of the largest replacement value of any single aircraft in Continental's
fleet or 1 -1/2% of the average aggregate insurable value (during the preceding
policy year) of all aircraft on which Continental carries insurance, whichever
is less, unless an insurance broker of national standing shall certify that the
standard among all other major U.S. airlines is a higher level of
self-insurance, in which case Continental may self-insure the Aircraft to such
higher level. In addition, Continental may self-insure to the extent of any
applicable deductible per Aircraft that does not exceed industry standards for
major U.S. airlines. (Leases, Section 11.1 and Annex D, Owned Aircraft
Indenture, Section 4.06(d))
In respect of each Aircraft, Continental is required to name as additional
insured parties the relevant Loan Trustee and holders of the Equipment Notes and
(in the case of the Leased Aircraft) the relevant Owner Participant and Owner
Trustee, in its individual capacity and as owner of such Aircraft, and in some
cases certain other parties under all liability, hull and property and war risk,
hijacking and allied perils insurance policies required with respect to such
Aircraft. In addition, the insurance policies will be required to provide that,
in respect of the interests of such additional insured persons, the insurance
shall not be invalidated or impaired by any act or omission of Continental, any
permitted sublessee or any other person. (Leases, Annex D, Owned Aircraft
Indenture, Section 4.06)
Lease Termination
Unless a Lease Event of Default shall have occurred and is continuing,
Continental may terminate any Lease on any Lease Payment Date occurring after
the fifth anniversary occurred of the date on which such Lease commenced, if it
makes a good faith determination that the Leased Aircraft subject to such Lease
is economically obsolete or surplus to its requirements. Continental is required
to give notice of its intention to exercise its right of termination described
in this paragraph at least 90 days prior to the proposed date of termination,
which notice may be withdrawn up to ten Business Days prior to such proposed
date; provided that Continental may give only five such termination notices. In
such a situation, unless the Owner Trustee elects to retain title to such
Aircraft, Continental is required to use commercially reasonable efforts to sell
such Aircraft as an agent for such Owner Trustee, and Owner Trustee will sell
such Aircraft on the date of termination to the highest cash bidder. If such
sale occurs, the Equipment Notes related thereto are required to be prepaid. If
the net proceeds to be received from such sale are less than the termination
value for such Aircraft (which is set forth in a schedule to each Lease),
Continental is required to pay to the applicable Owner Trustee an amount equal
to the excess, if any, of the applicable termination value for such Aircraft
over such net proceeds. Upon payment of termination value for such Aircraft and
an amount equal to the Make-Whole Premium, if any, payable on such date of
payment, together with certain additional amounts, the lien of the relevant
Indenture will be released, the relevant Lease will terminate, and the
obligation of Continental thereafter to make scheduled rent payments under such
Lease will cease. (Leases, Section 9; Leased Aircraft Indentures, Section
2.10(b))
The Owner Trustee has the option to retain title to the Leased Aircraft if
Continental has given a notice of termination under the Lease. In such event,
such Owner Trustee will pay to the applicable Loan Trustee an amount sufficient
to prepay the outstanding Equipment Notes issued with respect to such Aircraft
(including
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the Make-Whole Premiums), in which case the lien of the relevant Indenture will
be released, the relevant Lease will terminate and the obligation of Continental
thereafter to make scheduled rent payments under such Lease will cease. (Leases,
Section 9; Leased Aircraft Indentures, Sections 2.06 and 2.10(b))
Events of Loss
If an Event of Loss occurs with respect to the Airframe or the Airframe and
Engines of an Aircraft, Continental must elect within 45 days after such
occurrence either to make payment with respect to such Event of Loss or to
replace such Airframe and any such Engines. Not later than the first Business
Day following the earliest of (i) the 120th day following the date of occurrence
of such Event of Loss, and (ii) the fourth Business Day following the receipt of
the insurance proceeds in respect of such Event of Loss, Continental must either
(i) pay to the applicable Owner Trustee (in the case of a Leased Aircraft) or to
the Owned Aircraft Trustee (in the case of the Owned Aircraft) the stipulated
loss value of such Aircraft, together with certain additional amounts, but, in
any case, without any Make-Whole Premium or (ii) unless any Lease Event of
Default or failure to pay basic rent under the relevant Lease (in the case of a
Leased Aircraft), an Indenture Event of Default or failure to pay principal or
interest under the Owned Aircraft Indenture (in the case of the Owned Aircraft)
or certain bankruptcy defaults shall have occurred and is continuing, substitute
an airframe (or airframe and one or more engines, as the case may be) for the
Airframe, or Airframe and Engine(s), that suffered such Event of Loss. (Leases,
Sections 10.1.1 and 10.1.2; Leased Aircraft Indentures, Section 2.10(a); Owned
Aircraft Indenture, Sections 2.10 and 4.05(a))
If Continental elects to replace an Airframe (or Airframe and one or more
Engines, as the case may be) that suffered such Event of Loss, it shall, in the
case of a Leased Aircraft, convey to the related Owner Trustee title to an
airframe (or airframe and one or more engines, as the case may be) or, in the
case of an Owned Aircraft, subject such an airframe (or airframe and one or more
engines) to the lien of the Owned Aircraft Indenture, and such replacement
airframe or airframe and engines must be the same model as the Airframe or
Airframe and Engines to be replaced or an improved model, with a value, utility
and remaining useful life (without regard to hours or cycles remaining until the
next regular maintenance check) at least equal to the Airframe or Airframe and
Engines to be replaced, assuming that such Airframe and such Engines had been
maintained in accordance with the related Lease or Owned Aircraft Indenture, as
the case may be. Continental is also required to provide to the relevant Loan
Trustee and (in the case of a Leased Aircraft) the relevant Owner Trustee and
Owner Participant reasonably acceptable opinions of counsel to the effect, among
other things, that (i) certain specified documents have been duly filed under
the Transportation Code and (ii) such Owner Trustee and Leased Aircraft Trustee
(as assignee of lessor's rights and interests under the Lease), in the case of a
Leased Aircraft, or the Owned Aircraft Trustee, in the case of an Owned
Aircraft, will be entitled to receive the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to any such replacement airframe (unless, as a
result of a change in law or court interpretation, such benefits are not then
available). (Leases, Sections 10.1.3 and 10.3; Owned Aircraft Indenture, Section
4.05(c))
If Continental elects not to replace such Airframe, or Airframe and
Engine(s), then upon payment of the outstanding principal amount of the
Equipment Notes issued with respect to such Aircraft (in the case of an Owned
Aircraft) or the stipulated loss value for such Aircraft (in the case of a
Leased Aircraft), together with all additional amounts then due and unpaid with
respect to such Aircraft, which must be at least sufficient to pay in full as of
the date of payment thereof the aggregate unpaid principal amount under such
Equipment Notes together with accrued but unpaid interest thereon and all other
amounts due and owing in respect of such Equipment Notes, the lien of the
Indenture and (in the case of a Leased Aircraft) the Lease relating to such
Aircraft shall terminate with respect to such Aircraft, the obligation of
Continental thereafter to make the scheduled rent payments (in the case of a
Leased Aircraft) or interest and principal payments (in the case of an Owned
Aircraft) with respect thereto shall cease and (in the case of a Leased
Aircraft) the related Owner Trustee shall transfer all of its right, title and
interest in and to the related Aircraft to Continental. The stipulated loss
value and other payments made under the Leases or the Owned Aircraft Indenture,
as the case may be, by Continental shall be deposited with the applicable Loan
Trustee. Amounts in excess of the amounts due and owing under the Equipment
Notes issued with respect to such Aircraft will be distributed by such Loan
Trustee to the applicable Owner Trustee or to Continental, as the case may be.
(Leases, Section
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10.1.2; Leased Aircraft Indentures, Sections 2.06 and 3.02; Owned Aircraft
Indenture, Sections 2.10 and 4.05(a)(ii))
If an Event of Loss occurs with respect to an Engine alone, Continental
will be required to replace such Engine within 60 days after the occurrence of
such Event of Loss with another engine, free and clear of all liens (other than
certain permitted liens). Such replacement engine shall be the same make and
model as the Engine to be replaced, or an improved model, suitable for
installation and use on the Airframe, and having a value, utility and remaining
useful life (without regard to hours or cycles remaining until overhaul) at
least equal to the Engine to be replaced, assuming that such Engine had been
maintained in accordance with the relevant Lease or the Owned Aircraft
Indenture, as the case may be, immediately prior to the occurrence of the Event
of Loss. (Leases, Section 10.2; Owned Aircraft Indenture, Section 4.05(a)(i))
An Event of Loss with respect to an Aircraft, Airframe or any Engine means
any of the following events with respect to such property: (i) the destruction
of such property, damage to such property beyond economic repair or rendition of
such property permanently unfit for normal use; (ii) the actual or constructive
total loss of such property or any damage to such property or requisition of
title or use of such property which results in an insurance settlement with
respect to such property on the basis of a total loss or a constructive or
compromised total loss; (iii) any theft, hijacking or disappearance of such
property for a period of 180 consecutive days or more; (iv) any seizure,
condemnation, confiscation, taking or requisition of title to such property by
any governmental entity or purported governmental entity (other than a U.S.
government entity or an entity of the country of registration of the relevant
Aircraft) for a period exceeding 180 consecutive days or, if earlier, at the end
of the term of such Lease (in the case of a Leased Aircraft) or the final
maturity of the Equipment Notes (in the case of an Owned Aircraft); (v) in the
case of any Leased Aircraft, any seizure, condemnation, confiscation, taking or
requisition of use of such property by any U.S. government entity (or
governmental entity of the country of registration of the relevant Aircraft)
that continues until the 30th day after the last day of the term of the relevant
Lease (unless the Owner Trustee shall have elected not to treat such event as an
Event of Loss); (vi) as a result of any law, rule, regulation, order or other
action by the FAA or any governmental entity, the use of such property in the
normal course of Continental's business of passenger air transportation is
prohibited for 180 consecutive days, unless Continental, prior to the expiration
of such 180-day period, shall have undertaken and shall be diligently carrying
forward steps which are necessary or desirable to permit the normal use of such
property by Continental, but in any event if such use shall have been prohibited
for a period of two consecutive years, provided that no Event of Loss shall be
deemed to have occurred if such prohibition has been applicable to Continental's
entire U.S. registered fleet of similar property and Continental, prior to the
expiration of such two-year period, shall have conformed at least one unit of
such property in its fleet to the requirements of any such law, rule,
regulation, order or other action and commenced regular commercial use of the
same and shall be diligently carrying forward, in a manner which does not
discriminate against applicable property in so conforming such property, steps
which are necessary or desirable to permit the normal use of such property by
Continental, but in any event if such use shall have been prohibited for a
period of three years or, in the case of the Leased Aircraft, such use shall be
prohibited at the expiration of the term of the relevant Lease; or (vii) with
respect to any Engine, any divestiture of title to such Engine shall be treated
as an Event of Loss. (Leases, Section 7.2.6 and Annex A; Owned Aircraft
Indenture, Annex A)
Renewal and Purchase Options
At the end of the term of each Lease after final maturity of the related
Equipment Notes and subject to certain conditions, Continental will have certain
options to renew such Lease for additional limited periods. In addition,
Continental will have the right at the end of the term of each Lease to purchase
the Aircraft subject thereto for an amount to be calculated in accordance with
the terms of such Lease. (Leases, Section 17)
In addition, Continental may have the right to purchase an Aircraft from
the applicable Owner Trustee and assume, as direct obligations of Continental,
the Equipment Notes issued with respect to such Aircraft. In such case, the
Leased Aircraft Indenture relating to such Equipment Notes will be amended and
restated to be substantially the same as an Owned Aircraft Indenture. See
"Certain U.S. Federal Income Tax Consequences -- Taxation of Certificateholders
Generally -- Trusts Classified as Grantor Trusts" for a discussion of certain
tax consequences of such purchase and assumption.
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Events of Default under the Leases
Lease Events of Default under each Lease include, among other things, (i)
failure by Continental to make any payment of basic rent, stipulated loss value
or termination value under such Lease within ten Business Days after the same
shall have become due, or failure by Continental to pay any other amount due
under such Lease or under any other related operative document within ten
Business Days from and after the date of any written notice from the Owner
Trustee or Loan Trustee of the failure to make such payment when due; (ii)
failure by Continental to make any excluded payment (as defined) within ten
Business Days after written notice that such failure constitutes a Lease Event
of Default is given by the relevant Owner Participant to Continental and the
relevant Loan Trustee; (iii) failure by Continental to carry and maintain
insurance on and in respect of the Aircraft, Airframe and Engines, in accordance
with the provisions of such Lease; (iv) failure by Continental to perform or
observe any other covenant or agreement to be performed or observed by it under
such Lease or the related Participation Agreement or any other related operative
document (other than the related tax indemnity agreement between Continental and
the Owner Participant), and such failure shall continue unremedied for a period
of 30 days after written notice of such failure by the applicable Owner Trustee
or Loan Trustee unless such failure is capable of being corrected and
Continental shall be diligently proceeding to correct such failure, in which
case there shall be no Lease Event of Default unless and until such failure
shall continue unremedied for a period of 270 days after the receipt of such
notice; (v) any representation or warranty made by Continental in such Lease or
the related Participation Agreement or in any other related operative document
(other than in the related tax indemnity agreement between Continental and the
Owner Participant) shall prove to have been untrue or inaccurate in any material
respect at the time made, such representation or warranty is material at the
time in question and the same shall remain uncured (to the extent of the adverse
impact thereof) for more than 30 days after the date of written notice thereof
to Continental; and (vi) the occurrence of certain voluntary events of
bankruptcy, reorganization or insolvency of Continental or the occurrence of
involuntary events of bankruptcy, reorganization or insolvency which shall
continue undismissed, unvacated or unstayed for a period of 90 days. (Leases,
Section 14)
Indenture Events of Default under the Owned Aircraft Indenture are
discussed above under " -- Indenture Defaults, Notice and Waiver".
Remedies Exercisable upon Events of Default under the Lease
If a Lease Event of Default has occurred and is continuing, the applicable
Owner Trustee may (or, so long as the Indenture shall be in effect, the
applicable Loan Trustee may, subject to the terms of the Indenture) exercise one
or more of the remedies provided in such Lease with respect to the related
Aircraft. These remedies include the right to repossess and use or operate such
Aircraft, to rescind or terminate such Lease, to sell or re-lease such Aircraft
free and clear of Continental's rights, except as set forth in the Lease, and
retain the proceeds, and to require Continental to pay, as liquidated damages
any due and unpaid basic rent plus an amount equal to, at such Owner Trustee's
(or, subject to the terms of the relevant Leased Aircraft Indenture, the Leased
Aircraft Trustee's) option, either (i) the excess of the present value of all
unpaid rent during the remainder of the term of such Lease over the present
value of the fair market rental value of such Aircraft for the remainder of the
term of such Lease or, (ii) the excess of the stipulated loss value of such
Aircraft over the fair market sales value of such Aircraft or, if such Aircraft
has been sold, the net sales proceeds from the sale of such Aircraft. (Leases,
Section 15; Leased Aircraft Indentures, Section 4.04) If the Loan Trustee has
validly terminated such Lease, the Loan Trustee may not sell or lease or
otherwise afford the use of such Aircraft to Continental or any of its
affiliates. (Leased Aircraft Indentures, Sections 4.03 and 4.04(a))
Remedies under the Owned Aircraft Indentures are discussed above under
"-- Remedies".
Transfer of Owner Participant Interests
Subject to certain restrictions, each Owner Participant may transfer all or
any part of its interest in the related Leased Aircraft. (Participation
Agreements, Section 10.1.1)
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary describes all material generally applicable U.S.
federal income tax consequences to Certificateholders of the purchase, ownership
and disposition of the Certificates offered hereby and in the opinion of Hughes
Hubbard & Reed LLP, special tax counsel to Continental ("Tax Counsel"), is
accurate in all material respects with respect to the matters discussed therein.
This summary supplements (and, to the extent inconsistent therewith, replaces)
the summary of U.S. federal income tax consequences set forth in the Prospectus.
Except as otherwise specified, the summary is addressed to beneficial owners of
Certificates ("U.S. Certificateholders") that are citizens or residents of the
United States, corporations, partnerships or other entities created or organized
in or under the laws of the United States or any state therein, estates the
income of which is subject to U.S. federal income taxation regardless of its
source, or trusts that meet the following two tests: (a) a U.S. court is able to
exercise primary supervision over the administration of the trust and (b) one or
more U.S. fiduciaries have the authority to control all substantial decisions of
the trust ("U.S. Persons") that will hold the Certificates as capital assets.
This summary does not address the tax treatment of U.S. Certificateholders that
may be subject to special tax rules, such as banks, insurance companies, dealers
in securities or commodities, tax-exempt entities, holders that will hold
Certificates as part of a straddle or holders that have a "functional currency"
other than the U.S. Dollar, nor, except as specifically indicated, does it
address the tax treatment of U.S. Certificateholders that do not acquire
Certificates at the public offering price as part of the initial offering. The
summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a decision to purchase Certificates. This
summary does not describe any tax consequences arising under the laws of any
state, locality or taxing jurisdiction other than the United States.
The summary is based upon the tax laws and practice of the United States as
in effect on the date of this Prospectus Supplement, as well as judicial and
administrative interpretations thereof (in final or proposed form) available on
or before such date. All of the foregoing are subject to change, which change
could apply retroactively. Prospective investors should note that no rulings
have been sought from the U.S. Internal Revenue Service (the "IRS") with respect
to the tax consequences described below, and no assurance can be given that the
IRS will not take contrary positions. The Trusts are not indemnified for any
U.S. federal income taxes that may be imposed upon them, and the imposition of
any such taxes on a Trust could result in a reduction in the amounts available
for distribution to the Certificateholders of such Trust. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE CERTIFICATES.
TAX STATUS OF THE TRUSTS
In the opinion of Tax Counsel, while there is no authority addressing the
characterization of entities that are similar to the Trusts in all material
respects, each of the Original Trusts should be classified as a grantor trust
for U.S. federal income tax purposes. If, as may be the case, the Original
Trusts are not classified as grantor trusts, they will, in the opinion of Tax
Counsel, be classified as partnerships for U.S. federal income tax purposes and
will not be classified as publicly traded partnerships taxable as corporations
provided that at least 90% of each Original Trust's gross income for each
taxable year of its existence is "qualifying income" (which is defined to
include, among other things, interest income, gain from the sale or disposition
of capital assets held for the production of interest income, and income derived
with respect to a business of investing in securities). Tax Counsel believes
that income derived by the Original Trusts from the Note Purchase Agreement and
the Equipment Notes will constitute qualifying income and that the Original
Trusts therefore will meet the 90% test, assuming that the Original Trusts
operate in accordance with the terms of the Pass Through Trust Agreements and
other agreements to which they are parties. In the opinion of Tax Counsel, the
Successor Trusts will be classified as grantor trusts.
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TAXATION OF CERTIFICATEHOLDERS GENERALLY
Trusts Classified as Grantor Trusts
Assuming that a Trust is classified as a grantor trust, a U.S.
Certificateholder will be treated as owning its pro rata undivided interest in
the relevant Deposits and each of the Equipment Notes, the Trust's contractual
rights and obligations under the Note Purchase Agreement, and any other property
held by the Trust. Accordingly, each U.S. Certificateholder's share of interest
paid on Equipment Notes will be taxable as ordinary income, as it is paid or
accrued, in accordance with such U.S. Certificateholder's method of accounting
for U.S. federal income tax purposes, and a U.S. Certificateholder's share of
premium, if any, paid on redemption of an Equipment Note will be treated as
capital gain. Any Deposit Make-Whole Premium will be ordinary income. The
Deposits will likely be subject to the original issue discount and contingent
payment rules, with the result that a U.S. Certificateholder will be required to
include interest income from a Deposit using the accrual method of accounting
regardless of its normal method and with a possible slight deferral in the
timing of income recognition as compared to holding a single debt instrument
with terms comparable to a Certificate. Any amounts received by a Trust under a
Liquidity Facility in order to make interest payments will be treated for U.S.
federal income tax purposes as having the same characteristics as the payments
they replace. An Owner Participant's conveyance of its interest in an owner
trust should not constitute a taxable event to U.S. Certificateholders. However,
if Continental were to assume an Owner Trust's obligations under the related
Equipment Notes upon a purchase of a Leased Aircraft by Continental, such
assumption would be treated for federal income tax purposes as a taxable
exchange by U.S. Certificateholders of the Equipment Notes for "new" Equipment
Notes resulting in the recognition of taxable gain or loss equal to the
difference between the U.S. Certificateholder's adjusted basis in its interest
in the Equipment Note and the amount realized on such exchange (except to the
extent attributable to accrued interest, which would be taxable as interest
income if not previously included in income). For this purpose the amount
realized (and the issue price of the "new" Equipment Note) likely would be equal
to the fair market value of the U.S. Certificateholder's pro rata share of the
respective Equipment Note at such time.
In the case of a subsequent purchaser of a Certificate, the purchase price
for the Certificate should be allocated among the relevant Deposits and the
assets held by the relevant Trust (including the Equipment Notes and the rights
and obligations under the Note Purchase Agreement with respect to Equipment
Notes not theretofore issued) in accordance with their relative fair market
values at the time of purchase. Any portion of the purchase price allocable to
the right and obligation under the Note Purchase Agreement to acquire an
Equipment Note should be included in the purchaser's basis in its share of the
Equipment Note when issued. Although the matter is not entirely clear, in the
case of a purchaser after initial issuance of the Certificates but prior to the
Delivery Period Termination Date, if the purchase price reflects a "negative
value" associated with the obligation to acquire an Equipment Note pursuant to
the Note Purchase Agreement being burdensome under conditions existing at the
time of purchase (e.g., as a result of the interest rate on the unissued
Equipment Notes being below market at the time of purchase of a Certificate),
such negative value probably would be added to such purchaser's basis in its
interest in the Deposits and the remaining assets of the Trust and reduce such
purchaser's basis in its share of the Equipment Notes when issued. The preceding
two sentences do not apply to purchases of Certificates following the Delivery
Period Termination Date.
A U.S. Certificateholder who is treated as purchasing an interest in a
Deposit or an Equipment Note at a market discount (generally, at a cost less
than its remaining principal amount) that exceeds a statutorily defined de
minimis amount will be subject to the "market discount" rules of the Code. These
rules provide, in part, that gain on the sale or other disposition of a debt
instrument with a term of more than one year and partial principal payments
(including partial redemptions) on such a debt instrument are treated as
ordinary income to the extent of accrued but unrecognized market discount. The
market discount rules also provide for deferral of interest deductions with
respect to debt incurred to purchase or carry a debt instrument that has market
discount. A U.S. Certificateholder who purchases an interest in a Deposit or an
Equipment Note at a premium may elect to amortize the premium as an offset to
interest income on the Deposit or Equipment Note under rules prescribed by the
Code and Treasury regulations promulgated under the Code.
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Each U.S. Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding Trust as provided in Section 162 or 212 of the Code.
Certain fees and expenses, including fees paid to the Trustee and the Liquidity
Provider, will be borne by parties other than the Certificateholders. It is
possible that such fees and expenses will be treated as constructively received
by the Trust, in which event a U.S. Certificateholder will be required to
include in income and will be entitled to deduct its pro rata share of such fees
and expenses. If a U.S. Certificateholder is an individual, estate or trust, the
deduction for such holder's share of such fees or expenses will be allowed only
to the extent that all of such holder's miscellaneous itemized deductions,
including such holder's share of such fees and expenses, exceed 2% of such
holder's adjusted gross income. In addition, in the case of U.S.
Certificateholders who are individuals, certain otherwise allowable itemized
deductions will be subject generally to additional limitations on itemized
deductions under applicable provisions of the Code.
Original Trusts Classified as Partnerships
If an Original Trust is classified as a partnership (and not as a publicly
traded partnership taxable as a corporation) for U.S. federal income tax
purposes, income or loss with respect to the assets held by the Trust will be
calculated at the Trust level but the Trust itself will not be subject to U.S.
federal income tax. A U.S. Certificateholder would be required to report its
share of the Trust's items of income and deduction on its tax return for its
taxable year within which the Trust's taxable year (which should be a calendar
year) ends as well as income from its interest in the relevant Deposits. A U.S.
Certificateholder's basis in its interest in the Trust would be equal to its
purchase price therefor (including its share of any funds withdrawn from the
Depositary and used to purchase Equipment Notes), plus its share of the Trust's
net income, minus its share of any net losses of the Trust, and minus the amount
of any distributions from the Trust. In the case of an original purchaser of a
Certificate that is a calendar year taxpayer, income or loss generally should be
the same as it would be if the Trust were classified as a grantor trust, except
that income or loss would be reported on an accrual basis even if the U.S.
Certificateholder otherwise uses the cash method of accounting. A subsequent
purchaser, however, generally would be subject to tax on the same basis as an
original holder with respect to its interest in the Original Trust, and would
not be subject to the market discount rules or the bond premium rules during the
duration of the Original Trust.
EFFECT OF SUBORDINATION OF CLASS B AND CLASS C CERTIFICATEHOLDERS
In the event that the Class B Trust or the Class C Trust (such Trusts being
the "Subordinated Trusts" and the related Certificates being the "Subordinated
Certificates") receives less than the full amount of the receipts of interest,
principal or premium paid with respect to the Equipment Notes held by it (any
shortfall in such receipts being the "Shortfall Amounts") because of the
subordination of the Equipment Notes held by such Trust under the Intercreditor
Agreement, the corresponding owners of beneficial interests in the Subordinated
Certificates (the "Subordinated Certificateholders") would probably be treated
for federal income tax purposes as if they had (1) received as distributions
their full share of such receipts, (2) paid over to the relevant preferred class
of Certificateholders an amount equal to their share of such Shortfall Amount,
and (3) retained the right to reimbursement of such amounts to the extent of
future amounts payable to such Subordinated Certificateholders with respect to
such Shortfall Amount.
Under this analysis, (1) Subordinated Certificateholders incurring a
Shortfall Amount would be required to include as current income any interest or
other income of the corresponding Subordinated Trust that was a component of the
Shortfall Amount, even though such amount was in fact paid to the relevant
preferred class of Certificateholders, (2) a loss would only be allowed to such
Subordinated Certificateholders when their right to receive reimbursement of
such Shortfall Amount becomes worthless (i.e., when it becomes clear that funds
will not be available from any source to reimburse such loss), and (3)
reimbursement of such Shortfall Amount prior to such a claim of worthlessness
would not be taxable income to Subordinated Certificateholders because such
amount was previously included in income. These results should not significantly
affect the inclusion of income for Subordinated Certificateholders on the
accrual method of accounting, but could accelerate inclusion of income to
Subordinated Certificateholders on the cash method of accounting by, in effect,
placing them on the accrual method.
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DISSOLUTION OF ORIGINAL TRUSTS AND FORMATION OF NEW TRUSTS
Assuming that the Original Trusts are classified as grantor trusts, the
dissolution of an Original Trust and distribution of interests in the related
Successor Trust will not be a taxable event to U.S. Certificateholders, who will
continue to be treated as owing their shares of the property transferred from
the Original Trust to the Successor Trust. If the Original Trusts are classified
as partnerships, a U.S. Certificateholder will be deemed to receive its share of
the Equipment Notes and any other property transferred by the Original Trust to
the Successor Trust in liquidation of its interest in the Original Trust in a
non-taxable transaction. In such case, the U.S. Certificateholder's basis in the
property so received will be equal to its basis in its interest in the Original
Trust, allocated among the various assets received in proportion to their bases
in the hands of the Original Trusts, and the U.S. Certificateholder's holding
period for the Equipment Notes and other property will include the Original
Trust's holding period.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of a Certificate, a U.S.
Certificateholder generally will recognize capital gain or loss (subject to the
possible recognition of ordinary income under the market discount rules) equal
to the difference between the amount realized on the disposition (other than any
amount attributable to accrued interest which will be taxable as ordinary
income) and the U.S. Certificateholder's adjusted tax basis in the Note Purchase
Agreement, Equipment Notes and any other property held by the corresponding
Trust. Any gain or loss will be long-term capital gain or loss to the extent
attributable to property held by the Trust for more than one year. In the case
of individuals, estates and trusts, the maximum rate of tax on net long-term
capital gains generally is 20%, except that a maximum rate of 28% applies to
property held for more than one year but not more than 18 months. Any gain with
respect to an interest in a Deposit likely will be treated as ordinary income.
Notwithstanding the foregoing, if the Original Trusts are classified as
partnerships, gain or loss with respect to an interest in an Original Trust will
be calculated and characterized by reference to the U.S. Certificateholder's
adjusted tax basis and holding period for its interest in the Original Trust.
FOREIGN CERTIFICATEHOLDERS
Subject to the discussion of backup withholding below, payments of
principal and interest on the Equipment Notes to, or on behalf of, any
beneficial owner of a Certificate that is not a U.S. Person (a "Non-U.S.
Certificateholder") will not be subject to U.S. federal withholding tax;
provided, in the case of interest, that (i) such Non-U.S. Certificateholder does
not actually or constructively own 10% or more of the total combined voting
power of all classes of Continental or any Owner Participant or any transferee
of such Owner Participant's interest in the relevant owner trust, (ii) such
Non-U.S. Certificateholder is not a controlled foreign corporation for U.S. tax
purposes that is related to Continental or any Owner Participant or any
transferee of such Owner Participant's interest in the relevant owner trust and
(iii) either (A) the Non-U.S. Certificateholder certifies, under penalties of
perjury, that it is not a U.S. Person and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the Certificate certifies, under penalties of
perjury, that such statement has been received from the Non-U.S.
Certificateholder by it or by another financial institution and furnishes the
payor with a copy thereof. The IRS issued final regulations on October 6, 1997
which modify the certification requirements described in clause (iii) with
respect to certain payments made after December 31, 1998.
Any capital gain realized upon the sale, exchange, retirement or other
disposition of a Certificate or upon receipt of premium paid on an Equipment
Note by a Non-U.S. Certificateholder will not be subject to U.S. federal income
or withholding taxes if (i) such gain is not effectively connected with a U.S.
trade or business of the holder and (ii) in the case of an individual, such
holder is not present in the United States for 183 days or more in the taxable
year of the sale, exchange, retirement or other disposition or receipt.
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BACKUP WITHHOLDING
Payments made on the Certificates and proceeds from the sale of
Certificates will not be subject to a backup withholding tax of 31% unless, in
general, the Certificateholder fails to comply with certain reporting procedures
or otherwise fails to establish an exemption from such tax under applicable
provisions of the Code.
CERTAIN DELAWARE TAXES
The Trustee is a Delaware banking corporation with its corporate trust
office in Delaware. In the opinion of Richards, Layton & Finger, Wilmington,
Delaware, counsel to the Trustee, under currently applicable law, assuming that
the Trusts will not be taxable as corporations, but, rather, will be classified
as grantor trusts under subpart E, Part I of Subchapter J of the Code or as
partnerships under Subchapter K of the Code, (i) the Trusts will not be subject
to any tax (including, without limitation, net or gross income, tangible or
intangible property, net worth, capital, franchise or doing business tax), fee
or other governmental charge under the laws of the State of Delaware or any
political subdivision thereof and (ii) Certificateholders that are not residents
of or otherwise subject to tax in Delaware will not be subject to any tax
(including, without limitation, net or gross income, tangible or intangible
property, net worth, capital, franchise or doing business tax), fee or other
governmental charge under the laws of the State of Delaware or any political
subdivision thereof as a result of purchasing, holding (including receiving
payments with respect to) or selling a Certificate.
Neither the Trusts nor the Certificateholders will be indemnified for any
state or local taxes imposed on them, and the imposition of any such taxes on a
Trust could result in a reduction in the amounts available for distribution to
the Certificateholders of such Trust. In general, should a Certificateholder or
any Trust be subject to any state or local tax which would not be imposed if the
Trustee were located in a different jurisdiction in the United States, the
Trustee will resign and a new Trustee in such other jurisdiction will be
appointed.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans subject to
Title I of ERISA ("ERISA Plans"), and on those persons who are fiduciaries with
respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA's
general fiduciary requirements, including, but not limited to, the requirement
of investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code, such
as individual retirement accounts (together with ERISA Plans, "Plans")) and
certain persons (referred to as "parties in interest" or "disqualified persons")
having certain relationships to such Plans, unless a statutory or administrative
exemption is applicable to the transaction. A party in interest or disqualified
person who engages in a prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code.
The Department of Labor has promulgated a regulation, 29 CFR Section
2510.3-101 (the "Plan Asset Regulation"), describing what constitutes the assets
of a Plan with respect to the Plan's investment in an entity for purposes of
ERISA and Section 4975 of the Code. Under the Plan Asset Regulation, if a Plan
invests (directly or indirectly) in a Certificate, the Plan's assets will
include both the Certificate and an undivided interest in each of the underlying
assets of the corresponding Trust, including the Equipment Notes held by such
Trust, unless it is established that equity participation in the Trust by
benefit plan investors (including but not limited to Plans and entities whose
underlying assets include Plan assets by reason of an employee benefit plan's
investment in the entity) is not "significant" within the meaning of the Plan
Asset Regulation. In this regard, the extent to which there is equity
participation in a particular Trust by, or on behalf of, employee benefit plans
will not be monitored. If the assets of a Trust are deemed to constitute the
assets of a Plan, transactions involving the assets of such Trust could be
subject to the prohibited transaction
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provisions of ERISA and Section 4975 of the Code unless a statutory or
administrative exemption is applicable to the transaction.
The fiduciary of a Plan that proposes to purchase and hold any Certificates
should consider, among other things, whether such purchase and holding may
involve (i) the direct or indirect extension of credit to a party in interest or
a disqualified person, (ii) the sale or exchange of any property between a Plan
and a party in interest or a disqualified person, and (iii) the transfer to, or
use by or for the benefit of, a party in interest or a disqualified person, of
any Plan assets. Such parties in interest or disqualified persons could include,
without limitation, Continental and its affiliates, the Owner Participants, the
Underwriters, the Trustees, the Escrow Agent, the Depositary, the Owner Trustees
and the Liquidity Provider. In addition, whether or not the assets of a Trust
are deemed to be Plan assets under the Plan Asset Regulation, if Certificates
are purchased by a Plan and Certificates of a subordinate Class are held by a
party in interest or a disqualified person with respect to such Plan, the
exercise by the holder of the subordinate Class of Certificates of its right to
purchase the senior Classes of Certificates upon the occurrence and during the
continuation of a Triggering Event could be considered to constitute a
prohibited transaction unless a statutory or administrative exemption were
applicable. Depending on the identity of the Plan fiduciary making the decision
to acquire or hold Certificates on behalf of a Plan, Prohibited Transaction
Class Exemption ("PTCE") 91-38 (relating to investments by bank collective
investment funds), PTCE 84-14 (relating to transactions effected by a "qualified
professional asset manager"), PTCE 95-60 (relating to investments by an
insurance company general account), PTCE 96-23 (relating to transactions
directed by an in-house professional asset manager) or PTCE 90-1 (relating to
investments by insurance company pooled separate accounts) (collectively, the
"Class Exemptions") could provide an exemption from the prohibited transaction
provisions of ERISA and Section 4975 of the Code. However, there can be no
assurance that any of these Class Exemptions or any other exemption will be
available with respect to any particular transaction involving the Certificates.
Governmental plans and certain church plans, while not subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of ERISA and Section 4975 of the Code, may nevertheless be subject to
state or other federal laws that are substantially similar to the foregoing
provisions of ERISA and the Code. Fiduciaries of any such plans should consult
with their counsel before purchasing any Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase any
Certificates should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 of the Code to such an investment, and to confirm that such
purchase and holding will not constitute or result in a non-exempt prohibited
transaction or any other violation of an applicable requirement of ERISA.
In addition to the Class Exemptions referred to above, an individual
exemption may apply to the purchase, holding and secondary market sale of Class
A Certificates by Plans, provided that certain specified conditions are met. In
particular, the Department of Labor has issued individual administrative
exemptions to the Underwriters which are substantially the same as the
administrative exemption issued to Morgan Stanley & Co. Incorporated, Prohibited
Transaction Exemption 90-24 et al. (55 Fed. Reg. 20,548 (1990)), as amended (the
"Underwriter Exemption"). The Underwriter Exemption generally exempts from the
application of certain, but not all, of the prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Code certain transactions relating
to the initial purchase, holding and subsequent secondary market sale of pass
through certificates which represent an interest in a trust that holds secured
credit instruments that bear interest or are purchased at a discount in
transactions by or between business entities (including equipment notes secured
by leases) and certain other assets, provided that certain conditions set forth
in the Underwriter Exemption are satisfied.
The Underwriter Exemption sets forth a number of general and specific
conditions which must be satisfied for a transaction involving the initial
purchase, holding or secondary market sale of certificates representing a
beneficial ownership interest in a trust to be eligible for exemptive relief
thereunder. In particular, the Underwriter Exemption requires that the
acquisition of certificates by a Plan be on terms that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an unrelated
party; the rights and interests evidenced by the certificates not be
subordinated to the rights and interests evidenced
S-97
<PAGE> 98
by other certificates of the same trust estate; the certificates at the time of
acquisition by the Plan be rated in one of the three highest generic rating
categories by Moody's, Standard & Poor's, Duff & Phelps Inc. or Fitch Investors
Service, Inc.; and the investing Plan be an accredited investor as defined in
Rule 501(a)(1) of Regulation D of the Commission under the Securities Act.
In addition, the trust corpus generally must be invested in qualifying
receivables, such as the Equipment Notes, but may not in general include a
pre-funding account (except for a limited amount of pre-funding which is
invested in qualifying receivables within a limited period of time following the
closing not to exceed three months).
With respect to the investment restrictions set forth in the Underwriter
Exemption, an investment in a Certificate will evidence both an interest in the
respective Original Trust as well as an interest in the Deposits held in escrow
by an Escrow Agent for the benefit of the Certificateholder. Under the terms of
the Escrow Agreement, the proceeds from the Offering of the Certificates of each
Class will be paid over by the Underwriters to the Depositary on behalf of the
Escrow Agent (for the benefit of such Certificateholders as the holders of the
Escrow Receipts) and will not constitute property of the Original Trusts. Under
the terms of each Escrow Agreement, the Escrow Agent will be irrevocably
instructed to enter into the Deposit Agreements with the Depositary and to
effect withdrawals upon the receipt of appropriate notice from the relevant
Trustee so as to enable such Trustee to purchase the identified Equipment Notes
on the terms and conditions set forth in the Note Purchase Agreement. Interest
on the Deposits relating to each Trust will be paid to the Certificateholders of
such Trust as Receiptholders through a Paying Agent appointed by the Escrow
Agent. Pending satisfaction of such conditions and withdrawal of such Deposits,
the Escrow Agent's rights with respect to the Deposits will remain plan assets
subject to the fiduciary responsibility and prohibited transaction provisions of
ERISA and Section 4975 of the Code.
There can be no assurance that the Department of Labor would agree that the
Underwriter Exemption will be applicable to Class A Certificates in these
circumstances. In particular, the Department of Labor might assert that the
escrow arrangement is tantamount to an impermissible pre-funding rendering the
Underwriter Exemption inapplicable. In addition, even if all of the conditions
of the Underwriter Exemption are satisfied with respect to the Class A
Certificates, no assurance can be given that the Exemption would apply with
respect to all transactions involving the Class A Certificates or the assets of
the Class A Trust. In particular, it appears that the Underwriter Exemption
would not apply to the purchase by Class B Certificateholders or Class C
Certificateholders of Class A Certificates in connection with the exercise of
their rights upon the occurrence and during the continuance of a Triggering
Event. Therefore, the fiduciary of a Plan considering the purchase of a Class A
Certificate should consider the availability of the exemptive relief provided by
the Exemption, as well as the availability of any other exemptions that may be
applicable.
The Underwriter Exemption does not apply to the Class B or Class C
Certificates.
Each person who acquires or accepts a Certificate or an interest therein,
will be deemed by such acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been used to purchase such
Certificate or an interest therein or (ii) the purchase and holding of such
Certificate or interest therein are exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
S-98
<PAGE> 99
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among Continental and the Underwriters listed
below (the "Underwriters") relating to the Certificates, Continental has agreed
to cause each Trust to sell to each of the Underwriters, and each of such
Underwriters has severally agreed to purchase the respective aggregate amounts
of Certificates set forth after their names below. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions precedent and that the Underwriters will be obligated to purchase all
of the Certificates if any Certificates are purchased thereunder.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A CLASS B CLASS C
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES
- --------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Morgan Stanley & Co. Incorporated........................
Credit Suisse First Boston Corporation...................
Chase Securities Inc. ...................................
Salomon Brothers Inc ....................................
-------- -------- --------
Total.......................................... $ $ $
======== ======== ========
</TABLE>
The Underwriters have advised Continental that the Underwriters propose
initially to offer the Certificates of each Class to the public at the public
offering price for such Class set forth on the cover page of this Prospectus
Supplement, and to certain dealers at such price less a concession not in excess
of the amounts for the respective Class set forth below. The Underwriters may
allow, and such dealers may reallow, a concession to certain other dealers not
in excess of the amounts for the respective Class set forth below. After the
initial public offering, the public offering prices and such concessions may be
changed.
<TABLE>
<CAPTION>
PASS THROUGH CONCESSION REALLOWANCE
CERTIFICATE DESIGNATION TO DEALERS CONCESSION
- --------------------------------------- ----------- ------------
<S> <C> <C> <C>
1997-4A...........................
1997-4B...........................
1997-4C...........................
</TABLE>
Continental does not intend to apply for the 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, 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 Underwriting Agreement provides that Continental will reimburse the
Underwriters for certain expenses and will indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act.
Credit Suisse First Boston, New York Branch, the Depositary, is an
affiliate of Credit Suisse First Boston Corporation. From time to time, several
of the Underwriters or their affiliates perform investment banking and advisory
services for, and provide general financing and banking services to, Continental
and its affiliates. In particular, The Chase Manhattan Bank, an affiliate of
Chase Securities Inc., is a lender to Continental under several loan agreements.
In order to facilitate the offering of the Certificates, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Certificates. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Certificates for
their own account. In addition, to cover over allotments or to stabilize the
price of the Certificates, the Underwriters may bid for, and purchase,
Certificates in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing
Certificates in the Offering, if the syndicate repurchases
S-99
<PAGE> 100
previously distributed Certificates in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Certificates above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
LEGAL MATTERS
The validity of the Certificates is being passed upon for Continental by
Hughes Hubbard & Reed LLP, New York, New York, and for the Underwriters by
Shearman & Sterling, New York, New York. Both Hughes Hubbard & Reed LLP and
Shearman & Sterling will rely on the opinion of Richards, Layton & Finger,
Wilmington, Delaware, counsel for Wilmington Trust Company, as Trustee, as to
matters of Delaware law relating to the Pass Through Trust Agreements. Shearman
& Sterling from time to time provides legal services to Continental.
EXPERTS
The consolidated financial statements (including financial statement
schedules) of Continental Airlines, Inc. appearing in Continental Airlines,
Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1996,
incorporated by reference in the Prospectus accompanying this Prospectus
Supplement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon. Such consolidated financial statements are
incorporated therein in reliance upon such reports of Ernst & Young LLP given
upon the authority of such firm as experts in accounting and auditing.
The references to AISI, BK and MBA, and to their respective appraisal
reports, each dated as of October 6, 1997, are included herein in reliance upon
the authority of each such firm as an expert with respect to the matters
contained in its appraisal report.
S-100
<PAGE> 101
APPENDIX I -- INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ABN AMRO.......................... S-11
Adjusted Expected Distributions... S-23
Administration Expenses........... S-70
Aeroflot.......................... S-44
Aggregate LTV Collateral Amount... S-24
Air Partners...................... S-36
Aircraft.......................... S-1
Aircraft Operative Agreements..... S-58
AISI.............................. S-6
AMI............................... S-33
APB 15............................ S-30
Appraised Current Market Value.... S-25
Appraisers........................ S-6
Assumed Aggregate Aircraft
Value........................... S-7
Assumed Aircraft Value............ S-80
Assumed Amortization Schedule..... S-50
Average Life Date................. S-79
Average Yield..................... S-36
Base Rate......................... S-66
Basic Agreement................... S-1
BK................................ S-6
Boeing............................ S-32
Branch............................ S-63
Business Day...................... S-50
Cash Collateral Account........... S-21
CDG............................... S-45
Cede.............................. S-60
Certificate Account............... S-49
Certificate Owner................. S-60
Certificateholders................ S-12
Certificates...................... S-1
City.............................. S-34
Class A Certificates.............. S-10
Class A Trust..................... S-1
Class A Trustee................... S-22
Class B Certificates.............. S-10
Class B Trust..................... S-1
Class B Trustee................... S-22
Class C Certificates.............. S-10
Class C Trust..................... S-1
Class C Trustee................... S-22
Class D Certificates.............. S-12
Class D Trust..................... S-13
Class D Trustee................... S-22
Class Exemptions.................. S-97
CMI............................... S-42
<CAPTION>
PAGE
---------
<S> <C>
Code.............................. S-27
Commission........................ S-46
Company........................... S-1
Continental....................... S-1
Controlling Party................. S-25
Convention........................ S-86
Credit Facility................... S-33
CSFB.............................. S-62
Current Distribution Date......... S-22
default........................... S-53
Delivery Period................... S-1
Delivery Period Termination
Date............................ S-2
Deposit........................... S-1
Deposit Agreement................. S-1
Deposit Make-Whole Premium........ S-62
Depositary........................ S-1
disqualified persons.............. S-96
Distribution Date................. S-22
Downgrade Drawing................. S-21
DTC............................... S-60
DTC Participants.................. S-60
EPS............................... S-30
Equipment......................... S-83
Equipment Notes................... S-1
ERISA............................. S-27
ERISA Plans....................... S-96
Escrow Agent...................... S-1
Escrow Agreement.................. S-1
Escrow Receipts................... S-10
EVA............................... S-44
Excusable Delay................... S-75
Expected Distributions............ S-22
Express........................... S-42
FAA............................... S-36
Facility.......................... S-33
Final Distributions............... S-26
Final Drawing..................... S-21
Final Maturity Date............... S-48
financial institution............. S-97
Gulfstream........................ S-43
H.15(519)......................... S-79
IAH Bonds......................... S-34
Indenture Default................. S-52
Indentures........................ S-11
Intercreditor Agreement........... S-22
Interest Drawings................. S-19
</TABLE>
I-1
<PAGE> 102
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
IRS............................... S-92
Issuance Date..................... S-21
Lease............................. S-85
Lease Event Of Default............ S-52
Lease Payment Date................ S-85
Leased Aircraft................... S-1
Leased Aircraft Indenture......... S-11
Leased Aircraft Trustee........... S-11
LIBOR............................. S-66
Liquidity Event Of Default........ S-67
Liquidity Expenses................ S-69
Liquidity Facility................ S-19
Liquidity Obligations............. S-20
Liquidity Providers............... S-11
Loan Trustees..................... S-11
LTV Appraisal..................... S-25
LTV Collateral Amount............. S-24
LTV Ratio......................... S-25
LTVs.............................. S-7
Make-Whole Premium................ S-78
Mandatory Document Terms.......... S-58
Mandatory Economic Terms.......... S-57
Maximum Amount.................... S-62
Maximum Available Commitment...... S-20
MBA............................... S-6
Minimum Sale Price................ S-27
Moody's........................... S-27
most recent H.15(519)............. S-79
New Trustee....................... S-3
NOLs.............................. S-35
Non-Extension Drawing............. S-21
Non-Performing Equipment Notes.... S-24
Non-U.S. Certificateholder........ S-95
Note Holders...................... S-58
Note Purchase Agreement........... S-11
Offering.......................... S-10
Original Trustee.................. S-3
Original Trusts................... S-2
Owned Aircraft.................... S-1
Owned Aircraft Indenture.......... S-11
Owned Aircraft Trustee............ S-11
Owner Participant................. S-19
Owner Trustee..................... S-1
Par Redemption Amount............. S-2
Participation Agreement........... S-15
parties in interest............... S-96
Pass Through Trust Agreements..... S-1
Paying Agent...................... S-10
PAGE
---------
Paying Agent Account.............. S-49
Performing Equipment Note......... S-20
Plan Asset Regulation............. S-96
Plans............................. S-96
Pool Balance...................... S-50
Pool Factor....................... S-50
Premium Termination Date.......... S-17
Prospectus........................ S-5
PTC Event Of Default.............. S-13
PTCE.............................. S-97
qualifying income................. S-92
Rating Agencies................... S-27
Receiptholder..................... S-63
Regular Distribution Dates........ S-48
Remaining Weighted Average Life... S-79
Replacement Facility.............. S-65
Required Amount................... S-19
Scheduled Payments................ S-48
Section 1110 Period............... S-20
Section 382....................... S-35
Series A Equipment Notes.......... S-2
Series B Equipment Notes.......... S-2
Series C Equipment Notes.......... S-2
Series D Equipment Notes.......... S-2
SFAS 128.......................... S-30
Shortfall Amounts................. S-94
SOP 90-7.......................... S-32
Special Distribution Date......... S-49
Special Payment................... S-49
Special Payments Account.......... S-49
Standard & Poor's................. S-27
Stated Interest Rates............. S-19
Stated Portion.................... S-19
Subordinated Certificateholders... S-94
Subordinated Certificates......... S-94
Subordinated Trusts............... S-94
Subordination Agent............... S-10
Substitute Aircraft............... S-75
Successor Trust................... S-3
Tax Counsel....................... S-92
Teamsters......................... S-35
Termination Notice................ S-67
Threshold Rating.................. S-65
Ticket Tax........................ S-36
Transfer Date..................... S-2
Transportation Code............... S-55
Treasury Yield.................... S-78
Triggering Event.................. S-13
</TABLE>
I-2
<PAGE> 103
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Trust Agreements.................. S-76
Trust Indenture Act............... S-55
Trust Property.................... S-11
Trust Supplement.................. S-1
Trustee........................... S-1
Trusts............................ S-1
U.S. Certificateholders........... S-94
U.S. Persons...................... S-94
PAGE
---------
UMDA.............................. S-33
Underwriter Exemption............. S-97
Underwriters...................... S-99
Underwriting Agreement............ S-99
Virgin............................ S-44
West LB........................... S-11
Winterthur........................ S-62
</TABLE>
I-3
<PAGE> 104
[AIRCRAFT INFORMATION SERVICES, INC. LOGO] Appendix II-Apraisal Letter
06 October 1997
Continental Airlines
2929 Allen Parkway
Houston, TX 77019
Subject: AISI Report No.: A7D098BVO
AISI Sight Unseen New Aircraft Base Value Appraisal, Five B737-500, Six
B737-700, Ten B737-800 and Three B777-200IGW Aircraft.
Dear Gentlemen:
In response to your request, Aircraft Information Services, Inc. (AISI) is
pleased to offer Continental Airlines our opinion of the sight unseen base
market value of various new aircraft scheduled to be delivered from the
manufacturer to Continental Airlines between April 1998 and November 1998 as
listed and defined in Table I.
1. Methodology and Definitions
The method used by AISI in its valuation of the Aircraft was based both on a
review of information and Aircraft specifications supplied by Continental
Airlines and also on a review of present and past market conditions, various
expert opinions (such as aircraft brokers and financiers) and information
contained in AISI's databases that help determine aircraft availability and
price data and thus arrive at the appraised base values for the new aircraft to
be delivered to Continental Airlines.
The historical standard term of reference for commercial aircraft value has been
'half-life fair market value' of an 'average' aircraft. However, 'fair market
value' could mean a fair value in the given market or a value in a hypothetical
'fair' or balanced market, and the two definitions are not equivalent. Recently,
the term 'base value' has been created to describe the theoretical balanced
market condition and to avoid the potentially misleading term 'fair market
value' which has now become synonymous with the term 'current market value' or a
'fair' value in the actual current market. AISI value definitions are consistent
with those of the International Society of Transport Aircraft Trading (ISTAT) of
01 January 1994; AISI is a member of that organization and employs an ISTAT
Certified Senior Aircraft Appraiser.
AISI defines a 'base value' as that of a transaction between equally willing and
informed buyer and seller, neither under compulsion to buy or sell, for a single
unit cash transaction with no hidden value or liability, and with supply and
demand of the sale item roughly in balance. Base
Headquarters, 23232 Peralta Drive, Suite 115, Laguna Hills, CA 92653
TEL: 714-830-0101 FAX: 714-830-1101
<PAGE> 105
[AISI LOGO]
06 October 1997
AISI File No. A7D098BVO
Page - 2 -
values are typically given for aircraft in 'new' condition, 'average half-life'
condition, or in a specifically described condition unique to a single aircraft
at a specific time. An 'average' aircraft is an operable airworthy aircraft in
average physical condition and with average accumulated flight hours and cycles,
with clear title and standard unrestricted certificate of airworthiness, and
registered in an authority which does not represent a penalty to aircraft value
or liquidity, with no damage history and with inventory configuration and level
of modification which is normal for its intended use and age. AISI assumes
average condition unless otherwise specified in this report. 'Half-life'
condition assumes that every component or maintenance service which has a
prescribed interval that determines its service life, overhaul interval or
interval between maintenance services, is at a condition which is one-half of
the total interval. It should be noted that AISI and ISTAT value definitions
apply to a transaction involving a single aircraft, and that transactions
involving more than one aircraft are often executed at considerable and highly
variable discounts to a single aircraft price, for a variety of reasons relating
to an individual buyer or seller.
AISI defines a 'current market value' or 'fair market value' as that value which
reflects the real market conditions, whether at, above or below the base value
conditions. Assumption of a single unit sale and definitions of aircraft
condition, buyer/seller qualifications and type of transaction remain unchanged
from that of base value. Current market value takes into consideration the
status of the economy in which the aircraft is used, the status of supply and
demand for the particular aircraft type, the value of recent transactions and
the opinions of informed buyers and sellers. Current market value assumes that
there is no short term time constraint to buy or sell.
AISI encourages the use of base values to consider historical trends, to
establish a consistent baseline for long term value comparisons and future value
considerations, or to consider how actual market values vary from theoretical
base values. Base values are less volatile than current market values and tend
to diminish regularly with time. Base values are normally inappropriate to
determine near term values. AISI encourages the use of current market values to
consider the probable near term value of an aircraft.
2. Valuation
Following is AISI's opinion of the base market value for the subject aircraft on
their respective scheduled delivery dates in current USDollars. Valuations are
presented in Table I subject to the assumptions, definitions and disclaimers
herein.
<PAGE> 106
[AISI LOGO]
06 October 1997
AISI File No. A7D098BVO
Page - 3 -
Unless otherwise agreed by Aircraft Information Services, Inc. (AISI) in
writing, this report shall be for the sole use of the client/addressee. This
report is offered as a fair and unbiased assessment of the subject aircraft.
AISI has no past, present, or anticipated future interest in the subject
aircraft. The conclusions and opinions expressed in this report are based on
published information, information provided by others, reasonable
interpretations and calculations thereof and are given in good faith. Such
conclusions and opinions are judgments that reflect conditions and values which
are current at the time of this report. The values and conditions reported upon
are subject to any subsequent change. AISI shall not be liable to any party for
damages arising out of reliance or alleged reliance on this report, or for any
parties action or failure to act as a result of reliance or alleged reliance on
this report.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
/s/ Fred E. Bearden
Fred E. Bearden
President
FB/JDM/jm
<PAGE> 107
[AISI LOGO]
Continental Airlines - AISI File # A7D098BVO
October 6, 1997
TABLE I
<TABLE>
<CAPTION>
Scheduled
Manufacturer's Tentative Aircraft Tail Current USDollars
Delivery Date Number Delivery Base Value
------------- ------ -------------------
<S> <C> <C>
B737-500, CFM56-3B1 ENGINES, 129,500LB MTOW
Apr-98 656 $ 33,660,000
May-98 657 $ 33,740,000
Jun-98 658 $ 33,830,000
Jul-98 659 $ 33,910,000
Aug-98 660 $ 33,990,000
B737-700, CFM56-7B24 ENGINES, 153,000LB MTOW
Apr-98 705 $ 40,880,000
Apr-98 706 $ 40,880,000
Apr-98 707 $ 40,880,000
Apr-98 708 $ 40,880,000
Aug-98 709 $ 41,280,000
Aug-98 710 $ 41,280,000
B737-800, CFM56-7B26 ENGINES, 172,500LB MTOW
May-98 201 $ 45,160,000
May-98 202 $ 45,160,000
May-98 203 $ 45,160,000
Jun-98 204 $ 45,270,000
Jun-98 205 $ 45,270,000
Jun-98 206 $ 45,270,000
Jul-98 207 $ 45,380,000
Jul-98 208 $ 45,380,000
Jul-98 209 $ 45,380,000
Aug-98 210 $ 45,490,000
B777-200IGW, GE90 ENGINES, 580,000LB MTOW
Sep-98 1001 $138,670,000
Oct-98 1002 $139,000,000
Nov-98 1003 $139,330,000
</TABLE>
<PAGE> 108
BK ASSOCIATES, INC.
1295 NORTHERN BOULEVARD
MANHASSET, NEW YORK 11030
(516) 365-6272 - FAX (516) 365-6287
October 6, 1997
CONTINENTAL AIRLINES
2929 Allen Parkway
Houston, TX 77019
Gentlemen:
In response to your request, BK Associates, Inc. is pleased to provide this
opinion on the base value (BV) as of October 1997 on each of five B737-524, six
B737-724, 10 B737-824 and three B777-200 aircraft (Aircraft), which are expected
to be delivered to Continental Airlines between April 1998 and November 1998.
The B777 aircraft are each powered by two General Electric GE90 series engines,
the B737-724 by CFM International CFM56-7B24, the B737-524 by CFM56-3B1, and the
B737-824 by CFM56-7B26 engines.
Set forth below is a summary of the methodology, considerations and assumptions
utilized in this appraisal.
CURRENT FAIR MARKET VALUE
According to the International Society of Transport Aircraft Trading's (ISTAT)
definition of fair market value, to which BK Associates subscribes, the quoted
fair market value is the Appraiser's opinion of the most likely trading price
that may be generated for an aircraft under the market circumstances that are
perceived to exist at the time in question. The fair market value assumes that
the aircraft is valued for its highest and best use, that the parties to the
hypothetical sale transaction are willing, able, prudent and knowledgeable, and
under no unusual pressure for a prompt sale, and that the transaction would be
negotiated in an open and unrestricted market on an arm's length basis, for cash
or equivalent consideration, and given an adequate amount of time for effective
exposure to prospective buyers, which BK Associates considers to be 12 to 18
months.
<PAGE> 109
BK ASSOCIATES, INC.
Continental Airlines, Inc.
October 6, 1997
Page 2
BASE VALUE
Base value is the Appraiser's opinion of the underlying economic value of an
aircraft in an open, unrestricted, stable market environment with a reasonable
balance of supply and demand, and assumes full consideration of its "highest and
best use". An aircraft's base value is founded in the historical trend of values
and in the projection of future value trends and presumes an arm's length, cash
transaction between willing, able and knowledgeable parties, acting prudently,
with an absence of duress and with a reasonable period of time available for
marketing.
VALUE METHODOLOGY
Fair market valuations are determined based upon one of three methods:
comparable recent sales, replacement cost or rate of return to investor. In this
appraisal, BK used the comparable sales method, which is the most common method,
in determining the base values of the Aircraft. This method uses industry data
to ascertain the prices realized in recent sales of comparable models. The fair
market value of the base Aircraft is based on BK's familiarity with the aircraft
type, its earnings potential in commercial service, its knowledge of its
capabilities and the uses to which it will be put worldwide, its knowledge of
the marketing of used aircraft, and the factors affecting the fair market value
of such aircraft, and on its knowledge of the asking, offered and transaction
prices for similar competitive, and alternative equipment, as well as
transactions and negotiations involving basically identical aircraft. These
realizations, however, which reflect the market supply and demand at the time of
sale, are subject to minor adjustments for other conditions existing at the time
of the appraisal. In this respect, we consider the market for the Aircraft to be
in reasonable balance at this time, and thus, the fair market value is equal to
the base value. In addition, values were adjusted for engine type and maximum
gross takeoff weights (MGTOW). In arriving at the base value, BK considered the
impact of many factors affecting the market for used aircraft, including: the
suitability and operating economies of the aircraft, regulatory factors, and
recent sales experience.
LIMITING CONDITIONS AND ASSUMPTIONS
BK has neither inspected the Aircraft nor their maintenance records but relied
upon information supplied by you and from BK's own database. In determining the
base market value of a used aircraft, the following assumptions apply to the
base aircraft:
<PAGE> 110
BK ASSOCIATES, INC.
Continental Airlines, Inc.
October 6, 1997
Page 3
1. Unless it is new, the aircraft has half-time remaining to its next major
overhauls or scheduled shop visit on its airframe, engines, landing gear and
auxiliary power unit.
2. The aircraft is in compliance under a Federal Aviation Administration
approved airline maintenance program, with all airworthiness directives,
mandatory modifications and applicable service bulletins currently up to
industry standard.
3. The interior of the aircraft is in a standard configuration for its specific
type, with the buyer furnished equipment and options of the types and models
generally accepted and utilized in the industry.
4. The aircraft is in current flight operations.
5. The aircraft is sold for cash without seller financing.
6. The Aircraft is in average or better condition.
7. There is no accident damage.
CONCLUSIONS
Based on the above methodology, considerations and assumptions, and since they
are all new and not yet in service, it is our opinion that the base value of
each aircraft as of its scheduled delivery date is as follows:
<TABLE>
<CAPTION>
Expected Tentative
Date of Registration Base
Model Delivery Number Value (Each)
----- -------- ------ ------------
<S> <C> <C> <C>
B737-500 04/98 656 28,250,000
B737-500 05/98 657 28,250,000
B737-500 06/98 658 28,250,000
B737-500 07/98 659 28,250,000
B737-500 08/98 660 28,250,000
</TABLE>
<PAGE> 111
BK ASSOCIATES, INC.
Continental Airlines, Inc.
October 6, 1997
Page 4
<TABLE>
<CAPTION>
Expected Tentative
Date of Registration Base
Model Delivery Number Value (Each)
----- -------- ------ ------------
<S> <C> <C> <C>
B737-700 04/98 705 37,750,000
B737-700 04/98 706 37,750,000
B737-700 04/98 707 37,750,000
B737-700 04/98 708 37,750,000
B737-700 08/98 709 37,750,000
B737-700 08/98 710 37,750,000
B737-800 05/98 201 43,600,000
B737-800 05/98 202 43,600,000
B737-800 05/98 203 43,600,000
B737-800 06/98 204 43,600,000
B737-800 06/98 205 43,600,000
B737-800 06/98 206 43,600,000
B737-800 07/98 207 43,600,000
B737-800 07/98 208 43,600,000
B737-800 07/98 209 43,600,000
B737-800 08/98 210 43,600,000
B777-200 09/98 1001 120,000,000
B777-200 10/98 1002 120,000,000
B777-200 11/98 1003 120,000,000
</TABLE>
BK Associates, Inc. has no present or contemplated future interest in the
Aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation and the time and budget constraints imposed by the client. It is
not given as a recommendation, or as an inducement, for any financial
transaction and further, BK Associates, Inc. assumes no responsibility or legal
liability for any action taken or not taken by the addressee, or any other
party, with regard to the appraised equipment. By accepting this appraisal, the
addressee agrees that BK
<PAGE> 112
BK ASSOCIATES, INC.
Continental Airlines, Inc.
October 6, 1997
Page 5
Associates, Inc. shall bear no such responsibility or legal liability. This
appraisal is prepared for the use of the addressee and shall not be provided to
other parties without the express consent of the addressee.
Sincerely yours,
BK ASSOCIATES, INC.
/s/ R. L. Britton
R. L. Britton
Vice President
ISTAT Certified Appraiser
RLB/kf
<PAGE> 113
MORTEN BEYER & AGNEW
[MBA LOGO] 8180 Greensboro Drive - Suite 1000 - McLean, VA 22102
October 6, 1997
Continental Airlines, Inc.
2929 Allen Parkway
Houston, TX 77019
Gentlemen:
Pursuant to your request, Morten Beyer & Associates (MBA) has set forth
its opinion regarding the Base Values of twenty-four aircraft (as described in
Schedule I herein) being delivered new from the manufacturer to Continental
Airlines during 1998. More specifically, our mandate is to render our opinion on
this date as to the value of the aircraft on their delivery dates.
There are several terms used to describe the "value" of an aircraft.
MBA uses the definitions of various value terms as promulgated by the
International Society of Transport Aircraft Trading (ISTAT), a not-for-profit
organization of some 500 members who have an interest in the commercial aviation
industry. The membership consists of management level personnel from banks,
leasing companies, airlines, appraisers, brokers, manufacturers, etc. ISTAT has
also established standards for appraisal practice and a code of ethics for those
members certified by the Society as appraisers. To attain certification members
must meet rigid educational and experience requirements and must successfully
complete written examinations. Both Morten Beyer and Robert Minnich of MBA are
ISTAT Certified Senior Appraisers.
ISTAT defines Current Market Value (CMV) as the most likely trading
price that may be generated for an aircraft under the market conditions that are
perceived to exist at the time in question. Market Value (MV) assumes that the
aircraft is valued for its highest, best use, that the parties to the
hypothetical sales transaction are willing, able,
Phone (703)847-6598 - Fax (703)734-1474 - Internet: [email protected])
<PAGE> 114
prudent and knowledgeable, and under no unusual pressure for a prompt sale, and
that the transactions would be negotiated in an open and unrestricted market on
an arm's length basis, for cash or equivalent consideration and given an
adequate amount of time for effective exposure to prospective buyers. Fair
Market Value is synonymous to MV and Current Fair Market Value is synonymous
with CMV because the criteria typically used in those documents that use the
term "fair" reflect the same criteria set forth in the above definition of
Market Value.
Base Value (BV) contains the same elements as MV except the market
conditions are always assumed to be in a reasonable state of equilibrium. Base
values are related to long term trends, and may or may not reflect the actual
value of the aircraft in question. Base values are founded in the historical
values of aircraft and are usually used for analysis of historic values or for
future value projections.
The values set forth herein are Base Values. Base Values are provided
for each aircraft, identified by aircraft type and tentative tail numbers taking
into account the expected month of delivery to Continental.
The expected delivery period for the aircraft that are the subject of
this report begins in April, 1998 and terminates in November, 1998. As of the
date of this report, we foresee no events that may cause us to revise
valuations. However, unforeseen circumstances can occur with little or no
warning, and if changed circumstances justify it, MBA would revise its
valuations accordingly.
All of the aircraft included in this appraisal are new aircraft with
scheduled delivery dates starting in April, 1998. The types of aircraft that are
the subject of this report are all considered to be effective competitors in the
industry for years to come, and they all meet or are lower than Stage III noise
level standards. The Boeing 737-500 was first built in 1989, and there are
currently 334 in service with 35 operators and another 49 on order. It is the
truncated version of the 737-300/400 series and offers a lower cost per aircraft
mile. Because of its smaller capacity, its unit costs as measured by the cost
per available seat mile are higher. Although we consider the aircraft to be a
competitive one, it suffers from the fact that aircraft that are smaller
versions of larger aircraft have historically not been as efficient as aircraft
that are originally designed as smaller machines.
[MBA LOGO]
2
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The Boeing 737-700 is Boeing's newest entry into the advanced
technology market to compete with Airbus A319/320/321 series machines. The
aircraft is scheduled to enter service in October, 1997 with the launch
customer, Southwest Airlines. There are 252 unfilled orders. We expect that this
aircraft will be very popular with the airlines and will have a long production
run.
The Boeing 737-800 is the largest member of the new (third) generation
of the 737 family, and the first aircraft is due to enter service with
Hapag-Lloyd in April, 1998. Designed to replace the -400, it is 108 inches
longer and has typical two-class seating of 160 and a high density seating if
189. There are 258 unfilled orders for the 737-800.
The Boeing 777-200 has been in service since May 15, 1995 with United
Airlines which is by far its largest operator. There are 82 in service with 14
operators (as of July 31, 1997), with another 191 aircraft on order.
All four of the aircraft types covered in this appraisal have higher
maximum take-off weights than MBA considers standard for the type. We have,
therefore, increased our normal Base Values by $50 per pound of higher take-off
weight. These increases were as follows:
<TABLE>
<CAPTION>
AIRCRAFT TYPE HIGHER MTOW INCREASED VALUE
------------- ----------- ---------------
(lbs.)
<S> <C> <C>
B-737-500 14,000 $ 700,000
B-737-700 20,000 1,000,000
B-737-800 17,000 850,000
B-777-200 35,000 1,750,000
</TABLE>
This report has been prepared for the exclusive use of Continental and
shall not be provided to other parties by MBA without the express consent of
Continental.
MBA certifies that this report has been independently prepared and that
it fully and accurately reflects MBA's opinion, as of the date of this report,
of the values set forth herein. MBA further certifies that it does not have, and
does not expect to have, any financial interest in the subject or similar
aircraft.
[MBA LOGO]
3
<PAGE> 116
This report represents MBA's opinion as to the subject aircraft, and is
intended to be advisory only, in nature. Therefore, MBA assumes no
responsibility or legal liability for any actions taken, or not taken, by
Continental or any other party with regard to the subject aircraft. By accepting
this report, all parties agree that MBA shall bear no such responsibility or
legal liability.
Sincerely,
/s/ Morten S. Beyer
Morten S. Beyer
Chairman & CEO
[MBA LOGO]
4
<PAGE> 117
BASE VALUE APPRAISAL OF LISTED AIRCRAFT
UPON DELIVERY DURING 1998 TO
CONTINENTAL AIRLINES, INC.
(US DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EXPECTED TENTATIVE MTOW BASE
AIRCRAFT TYPE ENGINE DELIVERY DATE TAIL NO. (LBS) VALUE
- ------------- ------ ------------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
B-737-500 CFM56-3B1 April 1998 656 129,500 $26,590
B-737-500 CFM56-3BI May 1998 657 129,500 26,590
B-737-500 CFM56-3BI June 1998 658 129,500 26,697
B-737-500 CFM56-3BI July 1998 659 129,500 26,697
B-737-500 CFM56-3BI August 1998 660 129,500 26,750
B-737-700 CFM56-7B24 April 1998 705 153,000 38,053
B-737-700 CFM56-7B24 April 1998 706 153,000 38,053
B-737-700 CFM56-7B24 April 1998 707 153,000 38,053
B-737-700 CFM56-7B24 April 1998 708 153,000 38,053
B-737-700 CFM56-7B24 August 1998 709 153,000 38,207
B-737-700 CFM56-7B24 August 1998 710 153,000 38,207
B-737-800 CFM56-7B26 May 1998 201 172,500 44,120
B-737-800 CFM56-7B26 May 1998 202 172,500 44,120
B-737-800 CFM56-7B26 May 1998 203 172,500 44,120
B-737-800 CFM56-7B26 June 1998 204 172,500 44,210
B-737-800 CFM56-7B26 June 1998 205 172,500 44,210
B-737-800 CFM56-7B26 June 1998 206 172,500 44,210
B-737-800 CFM56-7B26 July 1998 207 172,500 44,300
B-737-800 CFM56-7B26 July 1998 208 172,500 44,300
B-737-800 CFM56-7B26 July 1998 209 172,500 44,300
B-737-800 CFM56-7B26 August 1998 210 172,500 44,390
B-777-200 GE90 September 1998 1001 580,000 121,120
B-777-200 GE90 October 1998 1002 580,000 121,365
B-777-200 GE90 November 1998 1003 580,000 121,610
</TABLE>
[MBA LOGO] 5
