<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997
REGISTRATION NO. 333-38407
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
CONTINENTAL AIRLINES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4512 74-2099724
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
2929 ALLEN PARKWAY, SUITE 2010
HOUSTON, TEXAS 77019
(713) 834-2950
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JEFFERY A. SMISEK, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
CONTINENTAL AIRLINES, INC.
2929 ALLEN PARKWAY, SUITE 2010
HOUSTON, TEXAS 77019
(713) 834-2950
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF CORRESPONDENCE TO:
JOHN K. HOYNS, ESQ.
HUGHES HUBBARD & REED LLP
ONE BATTERY PARK PLAZA
NEW YORK, NEW YORK 10004-1482
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) CERTIFICATE(2) PRICE(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pass Through Certificates, Series
1997-2A................................ $74,862,000 100% $74,862,000
Pass Through Certificates, Series
1997-2B................................ $25,563,000 100% $25,563,000 $46,970(3)
Pass Through Certificates, Series
1997-2C................................ $27,206,000 100% $27,206,000
Pass Through Certificates, Series
1997-2D................................ $27,369,000 100% $27,369,000
====================================================================================================================
</TABLE>
(1) Equals the aggregate principal amount of the securities being registered.
(2) Pursuant to Rule 457(f)(2), the registration fee has been calculated using
the book value of the securities being registered.
(3) Paid on October 21, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS 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.
SUBJECT TO COMPLETION -- DATED NOVEMBER 7, 1997
PROSPECTUS
CONTINENTAL AIRLINES, INC.
OFFER TO EXCHANGE PASS THROUGH CERTIFICATES, SERIES 1997-2,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING PASS THROUGH CERTIFICATES, SERIES 1997-2
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 12,
1997, UNLESS EXTENDED.
Pass Through Certificates, Series 1997-2 (the "New Certificates"), which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which this Prospectus
is a part, are hereby offered, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal (the "Letter
of Transmittal" and, together with this Prospectus, the "Exchange Offer"), in
exchange for an equal principal amount of outstanding Pass Through Certificates,
Series 1997-2 (the "Old Certificates"), of which $155,000,000 aggregate
principal amount is outstanding as of the date hereof. The New Certificates and
the Old Certificates are collectively referred to herein as the "Certificates".
Any and all Old Certificates that are validly tendered and not withdrawn on
or prior to 5:00 P.M., New York City time, on the date the Exchange Offer
expires, which will be December 12, 1997 (30 calendar days following the
commencement of the Exchange Offer) unless the Exchange Offer is extended (such
date, including as extended, the "Expiration Date") will be accepted for
exchange. Tenders of Old Certificates may be withdrawn at any time prior to 5:00
P.M., New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Certificates being tendered
for exchange. However, the Exchange Offer is subject to certain customary
conditions which may be waived by the Company and to the terms of the
Registration Rights Agreement (as defined herein). Old Certificates may be
tendered only in integral multiples of $1,000. See "The Exchange Offer".
The New Certificates will be entitled to the benefits of the same Pass
Through Trust Agreements (as defined herein) which govern the Old Certificates
and will govern the New Certificates. The New Certificates will have terms
identical in all material respects to the Old Certificates except that the New
Certificates will not contain terms with respect to transfer restrictions or
interest rate increases as described herein and the New Certificates will be
available only in book-entry form. See "The Exchange Offer" and "Description of
New Certificates".
Each Certificate represents a fractional undivided interest in one of the
four Continental Airlines 1997-2 Pass Through Trusts (the "Class A Trust", the
"Class B Trust", the "Class C Trust" and the "Class D Trust", and collectively,
the "Trusts") formed pursuant to four separate pass through trust agreements
(the "Pass Through Trust Agreements") between Continental Airlines, Inc.
("Continental" or the "Company") and Wilmington Trust Company (the "Trustee"),
as trustee under each Trust. Pursuant to an intercreditor agreement, (i) the
Certificates of the Class B Trust are subordinated in right of payment to the
Certificates of the Class A Trust, (ii) the Certificates of the Class C Trust
are subordinated in right of payment to the Certificates of the Class B Trust
and (iii) the Certificates of the Class D Trust are subordinated in right of
payment to the Certificates of the Class C Trust. Payments of interest on the
Certificates issued by each Trust (other than the Class D Trust) are supported
by a separate liquidity facility for the benefit of the holders of such
Certificates, each such facility provided initially by Kredietbank N.V., 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.
(Continued on the following page.)
------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PARTICIPANTS IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 28 OF
THIS PROSPECTUS.
<TABLE>
<CAPTION>
PASS THROUGH FINAL EXPECTED
CERTIFICATES PRINCIPAL AMOUNT INTEREST RATE DISTRIBUTION DATE
- ---------------------------------------------------------- ---------------- ------------- -----------------
<S> <C> <C> <C>
1997-2A................................................... $ 74,862,000 7.148% June 30, 2007
1997-2B................................................... $ 25,563,000 7.149% June 30, 2005
1997-2C................................................... $ 27,206,000 7.206% June 30, 2004
1997-2D................................................... $ 27,369,000 7.522% June 30, 2001
------------
Total........................................... $155,000,000
============
</TABLE>
------------------------
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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is November , 1997
<PAGE> 3
(Continued from the cover page.)
The property of the Trusts includes, among other things, equipment notes
(the "Equipment Notes") issued on a recourse basis by Continental in connection
with its purchase of six Boeing 737-3T0 aircraft and four McDonnell Douglas
MD-82 aircraft (collectively, the "Aircraft") which were previously leased by
Continental. The Equipment Notes in respect of each Aircraft have been issued in
four series (the "Series A Equipment Notes", the "Series B Equipment Notes", the
"Series C Equipment Notes" and the "Series D Equipment Notes"). The Class A
Trust, the Class B Trust, the Class C Trust and the Class D Trust have purchased
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 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 are secured by a first priority security interest in such Aircraft
and by a second priority security interest in each of the other Aircraft. The
Equipment Notes issued with respect to the Aircraft are direct obligations of
Continental.
All of the Equipment Notes held in each Trust accrue interest at the
applicable rate per annum for the Certificates issued by such Trust, payable on
June 30 and December 30 of each year, commencing on December 30, 1997. Such
interest will be distributed to Certificateholders of such Trust on each such
date, subject to the Intercreditor Agreement (as defined herein). See
"Description of the New Certificates -- General" and "-- Payments and
Distributions". The New Certificates will accrue interest at the applicable per
annum rate for such Trust, from the date on which the Old Certificates were
originally issued. See "The Exchange Offer -- Interest on New Certificates".
Scheduled principal payments on the Equipment Notes held in each Trust will
be passed through to the Certificateholders of each such Trust on June 30 of
each year, commencing on June 30, 1998. Such payments will be made in accordance
with the principal repayment schedule set forth below under "Description of the
New Certificates -- Pool Factors", in each case subject to the Intercreditor
Agreement.
Each Class of New Certificates will be represented by one or more permanent
global Certificates in fully registered form, which will be deposited with the
Trustee as custodian for and registered in the name of a nominee of DTC.
Beneficial interests in the permanent global Certificates will be shown on, and
transfers thereof will be effected through, records maintained by DTC and its
participants.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission"), as set forth in no-action letters issued to third
parties, including Exxon Capital Holdings Corporation, SEC No-Action Letter
(available April 13, 1989) (the "Exxon Capital Letter"), Morgan Stanley & Co.
Incorporated, SEC No-Action Letter (available June 5, 1991) (the "Morgan Stanley
Letter") and Shearman & Sterling, SEC No-Action Letter (available July 2, 1993)
(the "Shearman & Sterling Letter") (collectively, the "Exchange Offer No-Action
Letters"), the Company believes that the New Certificates issued pursuant to the
Exchange Offer may be offered for resale, resold or otherwise transferred by
holders thereof (other than a broker-dealer who acquires such New Certificates
directly from the Trustee for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act or any holder that
is an "affiliate" of the Company as defined under Rule 405 of the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Certificates are
acquired in the ordinary course of such holders' business and such holders are
not engaged in, and do not intend to engage in, a distribution of such New
Certificates and have no arrangement with any person to participate in a
distribution of such New Certificates. By tendering the Old Certificates in
exchange for New Certificates, each holder, other than a broker-dealer, will
represent to the Company that: (i) it is not an affiliate of the Company (as
defined under Rule 405 of the Securities Act) nor a broker-dealer tendering Old
Certificates acquired directly from the Company for its own account; (ii) any
New Certificates to be received by it will be acquired in the ordinary course of
its business; and (iii) it is not engaged in, and does not intend to engage in,
a distribution of such New Certificates and has no arrangement or understanding
to participate in a distribution of the New Certificates. If a holder of Old
Certificates is engaged in or intends to engage in a distribution of the New
Certificates or has any arrangement or understanding with respect to the
distribution of the New Certificates to be acquired pursuant to the Exchange
Offer, such holder may not rely
2
<PAGE> 4
on the applicable interpretations of the staff of the Commission and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any secondary resale transaction. Each broker-dealer that
receives New Certificates for its own account pursuant to the Exchange Offer (a
"Participating Broker-Dealer") must acknowledge that it will deliver a
prospectus in connection with any resale of such New Certificates. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Certificates received in
exchange for Old Certificates where such Old Certificates were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities. Pursuant to the Registration Rights Agreement, the Company
has agreed that starting on the Expiration Date it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any such
resale. See "Plan of Distribution."
The Company will not receive any proceeds from this offering. The Company
has agreed to pay the expenses of the Exchange Offer. No underwriter is being
utilized in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD CERTIFICATES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION. THE COMPANY IS NOT
AWARE OF ANY JURISDICTION WITHIN THE UNITED STATES IN WHICH THE EXCHANGE OFFER
OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH SUCH LAWS.
Prior to the Exchange Offer, there has been no public market for the New
Certificates. If such market were to develop, the New Certificates could trade
at prices that may be higher or lower than their principal amount. Neither
Continental nor any Trust has applied or intends to apply for listing of the New
Certificates on any national securities exchange or otherwise. One or more of
Credit Suisse First Boston and Morgan Stanley & Co. Incorporated (the "Initial
Purchasers") have previously made a market in the Old Certificates and
Continental has been advised that both of the Initial Purchasers presently
intend to make a market in the New Certificates, as permitted by applicable laws
and regulations, after consummation of the Exchange Offer. None of the Initial
Purchasers is obligated, however, to make a market in the Certificates, and any
such market making activity by an Initial Purchaser may be discontinued at any
time without notice at the sole discretion of such Initial Purchaser. There an
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 prices and
liquidity of the Certificates may be adversely affected. See "Risk
Factors -- Risk Factors Relating to the Certificates and the Offering -- Absence
of an Established Market."
AVAILABLE INFORMATION
Continental is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; Seven World Trade Center, 13th Floor, New York, New York 10007; and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed rates. Such material may also
be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov. In addition, reports, proxy statements and other
information concerning Continental may be inspected and copied at the offices of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
3
<PAGE> 5
Continental is the successor to Continental Airlines Holdings, Inc.
("Holdings"), which merged with and into Continental on April 27, 1993. Holdings
had also been subject to the informational requirements of the Exchange Act.
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments and exhibits, the "Registration Statement") filed
by Continental with the Commission, through the Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR"), under the Securities Act, with respect
to the New Certificates offered hereby. This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement for further information with respect to
Continental and the securities offered hereby. Although statements concerning
and summaries of certain documents are included herein, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. These documents may be inspected without
charge at the office of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies may be obtained at fees and charges
prescribed by the Commission.
REPORTS TO CERTIFICATEHOLDERS
Wilmington Trust Company, in its capacity as Pass Through Trustee under
each of the Trusts, will provide the Certificateholders of each Trust certain
periodic reports concerning the distributions made from such Trust. See
"Description of New Certificates -- Reports to Certificateholders".
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-9781) are
hereby incorporated by reference in this Prospectus: (i) Continental's Annual
Report on Form 10-K for the year ended December 31, 1996 (filed February 24,
1997), (ii) Continental's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1997 (filed April 28, 1997), June 30, 1997 (filed August
14, 1997) and September 30, 1997 (filed October 29, 1997) and (iii)
Continental's Current Reports on Form 8-K filed on January 6, March 21, April
18, May 28, June 10, June 25, 1997, October 6, 1997, October 14 1997 and
November 7, 1997.
All reports and any definitive proxy or information statements filed by
Continental pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of the securities offered hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated herein by reference, or contained in this Prospectus, shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE TO
ANY PERSON TO WHOM A PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF
SUCH PERSON, FROM CONTINENTAL AIRLINES, INC., 2929 ALLEN PARKWAY, SUITE 2010,
HOUSTON, TEXAS 77019, ATTENTION: SECRETARY, TELEPHONE (713) 834-2950. IN ORDER
TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
DECEMBER 5, 1997.
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary information does not purport to be complete and is
qualified in its entirety by the detailed information and financial statements
(including the notes thereto) appearing elsewhere in, or incorporated by
reference in, this Prospectus. Certain capitalized terms used herein are defined
elsewhere in this Prospectus on the pages indicated in the "Index of Terms".
THE COMPANY
Continental Airlines, Inc. 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 nine months of 1997) and, together with its wholly owned subsidiary,
Continental Express, Inc. ("Express"), and its wholly owned subsidiary,
Continental Micronesia, Inc. ("CMI"), each a Delaware corporation, serves 198
airports worldwide as of September 30, 1997.
The Company operates its route system primarily through domestic hubs at
Newark, George Bush Intercontinental in Houston and Cleveland Hopkins
("Cleveland"), and a hub on the Pacific island of Guam. Each of Continental's
three domestic hubs is located in a large business and population center,
contributing to a high volume of "origin and destination" traffic. The Guam hub
is strategically located to provide service from Japanese and other Asian cities
to popular resort destinations in the western Pacific. Continental is the
primary carrier at each of these hubs, accounting for 57%, 79%, 54% and 70% of
average daily jet departures, respectively.
Continental directly serves 133 U.S. cities, with additional cities
(principally in the western and southwestern United States) connected to
Continental's route system under agreements with America West Airlines, Inc.
("America West"). Internationally, Continental flies to 65 destinations and
offers additional connecting service through alliances with foreign carriers.
Continental operates 104 weekly departures to 10 European cities and markets
service to six other cities through code-sharing agreements. Continental
commenced service from Newark to Dusseldorf, Germany on March 19, 1997, to
Lisbon, Portugal on May 1, 1997, to Vancouver, British Columbia on June 12,
1997, to Birmingham, England on July 1, 1997, to Sao Paulo and Rio de Janeiro,
Brazil on July 10, 1997 and from Houston to Caracas, Venezuela on October 1,
1997. Continental has implemented international code-sharing agreements with
Alitalia Airlines ("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 and EVA Airways Corporation ("EVA"), an airline based
in Taiwan. 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.
In addition, the Company has also entered into joint marketing agreements
with other airlines, all of which (except for the agreement with Virgin Atlantic
Airways ("Virgin")) are currently subject to government approval, which will
involve block-space arrangements which 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.
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 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.
5
<PAGE> 7
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.
Continental is one of the leading airlines providing service to Mexico and
Central America, serving more destinations there than any other United States
airline. In addition, Continental flies to four cities in South America. Through
its Guam hub, Continental provides extensive service in the western Pacific,
including service to more Japanese cities than any other United States carrier.
The Company is a Delaware corporation. Its executive offices are located at
2929 Allen Parkway, Suite 2010, Houston, Texas 77019, and its telephone number
is (713) 834-2950.
6
<PAGE> 8
THE EXCHANGE OFFER
Registration Rights
Agreement.................. The Old Certificates were issued on June 25, 1997
(the "Issuance Date") to the Initial Purchasers.
The Initial Purchasers placed the Old Certificates
with institutional investors. In connection
therewith, the Company, the Trustee under each of
the Trusts, and the Initial Purchasers entered into
the Registration Rights Agreement providing, among
other things, for the Exchange Offer. See "The
Exchange Offer".
The Exchange Offer......... New Certificates are being offered in exchange for
an equal principal amount of Old Certificates. As
of the date hereof, $155,000,000 aggregate
principal amount of Old Certificates are
outstanding. Old Certificates may be tendered only
in integral multiples of $1,000.
Resale of New
Certificates............... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties, including the Exchange
Offer No-Action Letters (as defined on page 2 of
this Prospectus), the Company believes that the New
Certificates issued pursuant to the Exchange Offer
may be offered for resale, resold or otherwise
transferred by holders thereof (other than a
broker-dealer who acquires such New Certificates
directly from the Trustee for resale pursuant to
Rule 144A under the Securities Act or any other
available exemption under the Securities Act or any
holder that is an "affiliate" of the Company as
defined under Rule 405 of the Securities Act),
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such New Certificates are
acquired in the ordinary course of such holders'
business and such holders are not engaged in, and
do not intend to engage in, a distribution of such
New Certificates and have no arrangement with any
person to participate in a distribution of such New
Certificates. By tendering the Old Certificates in
exchange for New Certificates, each holder, other
than a broker-dealer, will represent to the Company
that: (i) it is not an affiliate of the Company (as
defined under Rule 405 of the Securities Act) nor a
broker-dealer tendering Old Certificates acquired
directly from the Trustee for its own account; (ii)
any New Certificates to be received by it were
acquired in the ordinary course of its business;
and (iii) it is not engaged in, and does not intend
to engage in, a distribution of such New
Certificates and has no arrangement or
understanding to participate in a distribution of
the New Certificates. If a holder of Old
Certificates is engaged in or intends to engage in
a distribution of the New Certificates or has any
arrangement or understanding with respect to the
distribution of the New Certificates to be acquired
pursuant to the Exchange Offer, such holder may not
rely on the applicable interpretations of the staff
of the Commission and must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
secondary resale transaction. Each Participating
Broker-Dealer that receives New Certificates for
its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such New
Certificates. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus,
a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer
in connection with resales of New Certificates
received in exchange for Old
7
<PAGE> 9
Certificates where such Old Certificates were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading
activities. The Company has agreed that, starting
on the Expiration Date and ending on the close of
business 180 days after the Expiration Date, it
will make this Prospectus available to any
Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for
sale or register the New Certificates prior to
offering or selling such New Certificates. The
Company has agreed, pursuant to the Registration
Rights Agreement and subject to certain specified
limitations therein, to register or qualify the New
Certificates for offer or sale under the securities
or "blue sky" laws of such jurisdictions as may be
necessary to permit the holders of New Certificates
to trade the New Certificates without any
restrictions or limitations under the securities
laws of the several states of the United States.
Consequences of Failure to
Exchange Old
Certificates............. Upon consummation of the Exchange Offer, subject to
certain exceptions, holders of Old Certificates who
do not exchange their Old Certificates for New
Certificates in the Exchange Offer will no longer
be entitled to registration rights and will not be
able to offer or sell their Old Certificates,
unless such Old Certificates are subsequently
registered under the Securities Act (which, subject
to certain limited exceptions, the Company will
have no obligation to do), except pursuant to an
exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities
laws. See "Risk Factors -- Risk Factors Relating to
the Certificates and the Offering Consequences of
Failure to Exchange" and "The Exchange
Offer -- Terms of the Exchange Offer".
Expiration Date............ 5:00 p.m., New York City time, on December 12, 1997
(30 calendar days following the commencement of the
Exchange Offer), unless the Exchange Offer is
extended, in which case the term "Expiration Date"
means the latest date and time to which the
Exchange Offer is extended.
Interest on the New
Certificates............... The New Certificates will accrue interest at the
applicable per annum rate for such New Certificates
set forth on the cover page of this Prospectus,
from the date on which the Old Certificates were
originally issued.
Conditions to the Exchange
Offer...................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Certificates being
tendered for exchange. However, the Exchange Offer
is subject to certain customary conditions, which
may be waived by the Company. See "The Exchange
Offer -- Conditions". Except for the requirements
of applicable federal and state securities laws,
there are no federal or state regulatory
requirements to be complied with or obtained by the
Company in connection with the Exchange Offer.
Procedures for Tendering
Old Certificates........... Each holder of Old Certificates wishing to accept
the Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein,
8
<PAGE> 10
and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the
Old Certificates to be exchanged and any other
required documentation to the Exchange Agent at the
address set forth herein or effect a tender of Old
Certificates pursuant to the procedures for
book-entry transfer as provided for herein. See
"The Exchange Offer -- Procedures for Tendering"
and "-- Book Entry Transfer".
Guaranteed Delivery
Procedures................. Holders of Old Certificates who wish to tender
their Old Certificates and whose Old Certificates
are not immediately available or who cannot deliver
their Old Certificates and a properly completed
Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date may
tender their Old Certificates according to the
guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures".
Withdrawal Rights.......... Tenders of Old Certificates may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Old
Certificates, a written or facsimile transmission
notice of withdrawal must be received by the
Exchange Agent at its address set forth herein
under "The Exchange Offer -- Exchange Agent" prior
to 5:00 p.m., New York City time, on the Expiration
Date.
Acceptance of Old
Certificates and Delivery
of New Certificates...... Subject to certain conditions, any and all Old
Certificates which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date will be accepted for
exchange. The New Certificates issued pursuant to
the Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer".
Certain Tax
Considerations............. The exchange of New Certificates for Old
Certificates will not be a sale or exchange or
otherwise a taxable event for Federal income tax
purposes. See "Certain Federal Income Tax
Considerations".
Exchange Agent............. Wilmington Trust Company is serving as exchange
agent (the "Exchange Agent") in connection with the
Exchange Offer.
Fees and Expenses.......... All expenses incident to the Company's consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne by the
Company. See "The Exchange Offer -- Fees and
Expenses".
Use of Proceeds............ There will be no cash proceeds payable to
Continental from the issuance of the New
Certificates pursuant to the Exchange Offer. The
proceeds from the sale of the Old Certificates
issued by each Trust were used to purchase
Equipment Notes issued by Continental to finance
the purchase of the Aircraft.
9
<PAGE> 11
TERMS OF CERTIFICATES
The Exchange Offer relates to the exchange of up to $155,000,000 aggregate
principal amount of Old Certificates for up to an equal aggregate principal
amount of New Certificates. The New Certificates will be entitled to the
benefits of and will be governed by the same Pass Through Trust Agreements that
govern the Old Certificates. The form and terms of the New Certificates are the
same in all material respects as the form and terms of the Old Certificates,
except that the New Certificates do not provide for interest rate increases
relating to failure to implement the Exchange Offer and will not bear legends
restricting transfer. See "Description of New Certificates".
Trusts..................... Each of the Continental Airlines 1997-2A Pass
Through Trust, the Continental Airlines 1997-2B
Pass Through Trust, the Continental Airlines
1997-2C Pass Through Trust and the Continental
Airlines 1997-2D Pass Through Trust has been formed
pursuant to one of the four separate Pass Through
Trust Agreements that were entered into between the
Company and Wilmington Trust Company, as trustee
under each Trust. Each Trust is a separate entity.
Certificates Offered....... Pass Through Certificates issued by each Trust,
representing fractional undivided interests in such
Trust. The New Certificates issued by the Class A
Trust, the Class B Trust, the Class C Trust and the
Class D Trust are referred to herein as the "Class
A Certificates", the "Class B Certificates", the
"Class C Certificates", and the "Class D
Certificates", respectively.
Subordination Agent,
Trustee, Loan Trustee and
Second Mortgagee......... Wilmington Trust Company acts (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 Loan Trustee, paying agent and
registrar for each series of Equipment Notes, and
(iv) as mortgagee (the "Second Mortgagee") under
the Second Indenture.
Liquidity Provider......... Kredietbank N.V., acting through its New York
branch, (the "Liquidity Provider") has provided a
separate liquidity facility for the benefit of the
holders of Class A Certificates, Class B
Certificates and Class C Certificates.
Trust Property............. The property of each Trust (the "Trust Property")
includes (i) subject to the Intercreditor
Agreement, Equipment Notes issued on a recourse
basis by Continental in connection with each
separate secured loan transaction with respect to
each Aircraft to finance the purchase of the
Aircraft by Continental, (ii) the rights of such
Trust under the Intercreditor Agreement (including
all monies receivable in respect of such rights),
(iii) except for the Class D Trust, all monies
receivable under the Liquidity Facility for such
Trust and (iv) funds from time to time deposited
with the Trustee in accounts relating to such
Trust. The Equipment Notes with respect to each
Aircraft have been issued in four series under an
Indenture (the "Indenture") between Continental and
the mortgagee thereunder (the "Loan Trustee"), and
are entitled to a first priority security interest
in such Aircraft pursuant to such Indenture and to
a second priority security interest in each of the
other Aircraft pursuant to the Second Indenture
(the "Second Indenture") between Continental and
the Second Mortgagee. The Class A Trust, the Class
B Trust, the Class C Trust and the Class D Trust
each have acquired,
10
<PAGE> 12
pursuant to a Participation Agreement with respect
to each Aircraft (the "Participation 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 issued by such Trust. 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. The aggregate original
principal amount of the Equipment Notes held in
each Trust is the same as the aggregate original
face amount of the Certificates issued by such
Trust.
SUMMARY OF TERMS OF CERTIFICATES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Aggregate Face Amount....... $74,862,000 $25,563,000 $27,206,000 $27,369,000
Loan to Aircraft Value
(cumulative)(1)........... 41.00% 55.00% 69.90% 84.89%
Expected Principal
Distribution Window (in
years).................... 1.00-10.00 1.00-8.00 1.00-7.00 1.00-4.00
Expected Initial Average
Life (in years)........... 8.01 6.70 5.07 2.60
Regular Distribution
Dates..................... June 30 & December June 30 & December June 30 & December June 30 & December
30 30 30 30
Final Expected Regular
Distribution Date......... June 30, 2007 June 30, 2005 June 30, 2004 June 30, 2001
Final Maturity Date......... December 30, 2008 December 30, 2006 December 30, 2005 June 30, 2001
Minimum Denomination........ $1,000 $1,000 $1,000 $1,000
Section 1110
Protection(2)............. Yes Yes Yes Yes
Liquidity Facility
Coverage(3)............... 3 semiannual 3 semiannual 3 semiannual None
interest payments interest payments interest payments
Liquidity Facility
Amount(3)................. $8,101,025 $2,766,630 $2,967,925 None
</TABLE>
- ---------------
(1) Assumes an aggregate appraised Aircraft value of $182,590,000. The appraised
value is only an estimate and reflects certain assumptions. See "Description
of the Aircraft and the Appraisals -- The Appraisals".
(2) The Loan Trustee with respect to each Indenture has received a reasoned
opinion of Milbank, Tweed, Hadley & McCloy, counsel to the Initial
Purchasers, with respect to the application of Section 1110 of the U.S.
Bankruptcy Code to the lien of such Indenture. The benefit of Section 1110
would not be applicable to the lien on the other Aircraft created under the
Second Indenture. See "Description of Equipment Notes -- Remedies".
(3) For each Class of Certificates, other than the Class D Certificates, the
initial amount of the Liquidity Facility covers three consecutive semiannual
interest payments (without regard to any future payments of principal on
such Certificates). In aggregate for Class A, B and C Certificates, the
initial amount of the Liquidity Facilities is $13,835,580.
11
<PAGE> 13
EQUIPMENT NOTES AND THE AIRCRAFT
Set forth below is certain information about the Equipment Notes held in
the Trusts and the Aircraft that (under the related Indenture) secure such
Equipment Notes:
<TABLE>
<CAPTION>
ORIGINAL
PRINCIPAL
AMOUNT OF
AIRCRAFT LATEST EQUIPMENT APPRAISED
REGISTRATION YEAR OF EQUIPMENT NOTE NOTES VALUE (IN
AIRCRAFT TYPE NUMBER MANUFACTURE MATURITY DATE (IN MILLIONS) MILLIONS)(1)
- ---------------------------------- ------------ ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Boeing 737-3T0.................... N12322 1986 June 30, 2007 $ 16.11 $ 18.98
Boeing 737-3T0.................... N10323 1986 June 30, 2007 16.11 18.98
Boeing 737-3T0.................... N14324 1986 June 30, 2007 16.11 18.98
Boeing 737-3T0.................... N69333 1986 June 30, 2007 16.13 19.00
Boeing 737-3T0.................... N14334 1986 June 30, 2007 16.13 19.00
Boeing 737-3T0.................... N14335 1986 June 30, 2007 16.13 19.00
McDonnell Douglas MD-82........... N12811 1985 June 30, 2007 13.20 15.55
McDonnell Douglas MD-82........... N15820 1986 June 30, 2007 14.43 17.00
McDonnell Douglas MD-82........... N18833 1987 June 30, 2007 15.32 18.05
McDonnell Douglas MD-82........... N10834 1987 June 30, 2007 15.32 18.05
</TABLE>
- ---------------
(1) 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"), determined as of May 20, May 16 and June
6, 1997, respectively. An appraisal is only an estimate of value and should
not be relied upon as a measure of realizable value. See "Risk
Factors -- Appraisals and Realizable Value of Aircraft" and "Description of
the Aircraft and the Appraisals".
LOAN TO AIRCRAFT VALUE RATIOS
The following table sets forth loan to Aircraft value ratios ("LTVs") for
each Class of Certificates as of the Issuance Date and certain subsequent
Regular Distribution Dates. 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 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 varying amounts
per year, depending on aircraft model and year of manufacture. See "Description
of the Equipment Notes -- Loan to Value Ratios of Equipment Notes". 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. 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".
12
<PAGE> 14
The following table also assumes that no early redemption or default in
payment of principal of any Equipment Notes shall occur. The Equipment Notes
with respect to an Aircraft are subject to redemption if an Event of Loss occurs
with respect to such Aircraft or otherwise at Continental's election. See
"Description of the Equipment Notes -- Redemption".
The Equipment Notes issued with respect to each Aircraft are entitled to a
second priority security interest on each of the other Aircraft, and the
following table is compiled on an aggregate basis. However, it should be noted
that, since the second priority security interest would not be entitled to the
benefits of Section 1110 in a reorganization under the Bankruptcy Code of
Continental, the excess proceeds realized from the disposition of any particular
Aircraft might not immediately be available to offset shortfalls on the
Equipment Notes relating to any other Aircraft, but rather would be held as cash
collateral securing all of the Equipment Notes subject to the lien of the Second
Indenture. See "Description of the Equipment Notes -- Remedies". For the LTVs
for the Equipment Notes issued in respect of each individual Aircraft, see
"Description of the Equipment Notes -- Loan to Value Ratios of Equipment Notes".
<TABLE>
<CAPTION>
ASSUMED CLASS A CLASS B CLASS C CLASS D
AGGREGATE CERTIFICATES CLASS A CERTIFICATES CLASS B CERTIFICATES CLASS C CERTIFICATES
AIRCRAFT POOL CERTIFICATES POOL CERTIFICATES POOL CERTIFICATES POOL
DATE VALUE BALANCE LTV BALANCE LTV BALANCE LTV BALANCE
- ----------------- ------------ ----------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 25, 1997.... $182,590,000 $74,862,000 41.00% $25,563,000 55.00% $27,206,000 69.90% $27,369,000
June 30, 1998.... 177,535,510 72,789,660 41.00 24,855,370 55.00 26,005,070 69.65 21,100,424
June 30, 1999.... 172,481,020 70,717,320 41.00 24,147,744 55.00 23,680,240 68.73 14,716,780
June 30, 2000.... 167,426,530 68,644,877 41.00 23,439,713 55.00 20,504,611 67.25 7,569,162
June 30, 2001.... 162,029,940 66,432,273 41.00 22,684,190 55.00 16,879,034 65.42 0
June 30, 2002.... 153,444,850 62,890,431 40.99 20,610,168 54.42 15,368,504 64.43 0
June 30, 2003.... 144,137,760 58,376,498 40.50 18,475,201 53.32 7,889,264 58.79 0
June 30, 2004.... 134,830,670 52,689,000 39.08 11,076,977 47.29 0 NA 0
June 30, 2005.... 125,523,580 44,576,067 35.51 0 NA 0 NA 0
June 30, 2006.... 115,812,190 26,370,969 22.77 0 NA 0 NA 0
<CAPTION>
CLASS D
CERTIFICATES
DATE LTV
- ----------------- ------------
<S> <<C>
June 25, 1997.... 84.89%
June 30, 1998.... 81.53
June 30, 1999.... 77.26
June 30, 2000.... 71.77
June 30, 2001.... NA
June 30, 2002.... NA
June 30, 2003.... NA
June 30, 2004.... NA
June 30, 2005.... NA
June 30, 2006.... NA
</TABLE>
13
<PAGE> 15
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 the Payments on
Equipment Notes to the Loan Trustees. From such Payments on Equipment Notes,
the Loan Trustees will make Equipment Note Payments on the Series A Equipment
Notes, the Series B Equipment Notes, the Series C Equipment Notes and the
Series D Equipment Notes with respect to all Aircraft to the Subordination
Agent. 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,
the Pass Through Trustee for the Class C Trust and the Pass Through Trustee for
the Class D 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, the Holders of the Class C Certificates and the Holders of Class
D Certificates, respectively. The Subordination Agent may also receive
Advances, if any, and pay Reimbursements, if any, to the Liquidity Providers.]
- ---------------
(1) Each Aircraft is subject to a separate Indenture providing for a first
priority security interest in such Aircraft, and the Equipment Notes issued
with respect to each Aircraft are pursuant to the Second Indenture entitled
to a second priority security interest in each of the other Aircraft.
(2) For the Class A Certificates, the Class B Certificates and the Class C
Certificates, the initial amount of the Liquidity Facility for each such
Class covers three consecutive semiannual interest payments with respect to
such Class. There is no Liquidity Facility for the Class D Certificates.
14
<PAGE> 16
THE NEW CERTIFICATES
Certificates;
Denominations.............. The New Certificates of each Trust will be issued
in a minimum denomination of $1,000 and in integral
multiples thereof. See "Description of the New
Certificates -- General".
Regular Distribution
Dates...................... June 30 and December 30, commencing December 30,
1997.
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 will be distributed by the
Trustee to the holders of the Certificates (the
"Certificateholders") of such Trust, subject to the
provisions of the Intercreditor Agreement. Such
payments of interest are scheduled to be received
by the Trustee of each Trust on June 30 and
December 30 of each year, commencing on December
30, 1997. Payments of principal of the Equipment
Notes are scheduled to be received on June 30 of
each year, commencing on June 30, 1998. 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
20 days' notice to such Certificateholders of such
Trust, subject to the provisions of the
Intercreditor Agreement. For a discussion of
distributions by the Trusts upon an Indenture
Default, see "Description of the New
Certificates -- Indenture Defaults and Certain
Rights Upon an Indenture Default".
PTC Events of Default...... A "PTC Event of Default" under each Pass Through
Trust Agreement means the failure to pay within 10
Business Days of the due date thereof: (i) the
outstanding Pool Balance of the applicable Class of
Certificates on the Final Maturity Date for such
Class or (ii) interest due on such Certificates on
any distribution date (unless, in the case of the
Class A, B or C Certificates, the Subordination
Agent shall have made Interest Drawings 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 Certificates is December 30,
2008, for the Class B Certificates is December 30,
2006, for the Class C Certificates is December 30,
2005 and for the Class D Certificates is June 30,
2001. Any failure to make expected principal
distributions on 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.
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) 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
15
<PAGE> 17
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 or (z) certain bankruptcy or
insolvency events involving Continental.
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, payable on June 30
and December 30 of each year, commencing on
December 30, 1997, 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". The interest rates for the
Equipment Notes are subject to change under certain
circumstances described in "The Exchange
Offer -- Terms of the Exchange Offer -- General".
(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 June 30 of
each year, commencing on June 30, 1998, in each
case, subject to the Intercreditor Agreement. See
"Description of the New 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 Indenture and Second
Indenture, 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, if
such redemption is made prior to December 30, 2004
in the case of the Series A Equipment Notes,
December 30, 2003 in the case of the Series B
Equipment Notes, June 30, 2002 in the case of the
Series C Equipment Notes and June 30, 2000 in the
case of the Series D Equipment Notes (with respect
to any such Series, its "Premium Termination
Date"), a Make-Whole Premium. 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.
(d) Security............... The Equipment Notes issued with respect to each
Aircraft are secured by a first priority security
interest in such Aircraft and by a second priority
security interest in each of the other Aircraft.
The Indentures include cross-default provisions,
and if an Indenture Default has oc-
16
<PAGE> 18
curred for the Equipment Notes issued with respect
to one or more Aircraft, then an Indenture Default
will have occurred for the Equipment Notes issued
with respect to the remaining Aircraft, and
remedies will be exercisable under the Indentures
and the Second Indenture with respect to all
Aircraft. If the Equipment Notes issued under an
Indenture and other obligations secured thereunder
and then due have been paid in full, the applicable
Aircraft will be released from the lien of such
Indenture and, so long as no Indenture Default or
certain other defaults exist under any other
Indenture at such time, will be released from the
lien of the Second Indenture. See "Description of
the Equipment Notes -- Security" and "-- Indenture
Defaults, Notice and Waiver".
The Equipment Notes are direct obligations of
Continental. See "Description of the Equipment
Notes -- General".
(e) Section 1110
Protection................. The Loan Trustee with respect to each Indenture has
received a reasoned opinion of Milbank, Tweed,
Hadley & McCloy, counsel to the Initial Purchasers,
that, subject to the assumptions and qualifications
contained therein, such Loan Trustee would be
entitled to the benefits of Section 1110 of the
U.S. Bankruptcy Code with respect to the airframe
and engines comprising the Aircraft that is subject
to the lien of such Indenture were Continental to
become a debtor in a case under Chapter 11 of the
Bankruptcy Code. See "Description of the Equipment
Notes -- Remedies" for a description of such
opinion and certain assumptions and qualifications
contained therein. The benefits of Section 1110
would not be applicable to the lien on the other
Aircraft created under the Second Indenture.
(f) Ranking................ Series B Equipment Notes issued in respect of any
Aircraft are 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 are subordinated in right
of payment to such Series B Equipment Notes; and
Series D Equipment Notes issued in respect of such
Aircraft are subordinated in right of payment to
such Series C Equipment Notes. 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)
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.
Liquidity Facilities....... The Liquidity Provider and the Subordination Agent
have entered into a separate revolving credit
agreement (each, a "Liquidity Facility") with
respect to each of the Trusts (other than the Class
D Trust). Under the Liquidity Facility with respect
to any Trust (other than the Class D Trust), the
Liquidity Provider 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 (plus an
17
<PAGE> 19
additional margin specified by the Registration
Rights Agreement, if applicable) for such
Certificates (the "Stated Interest Rates"). The
initial Required Amount under the Liquidity
Facilities for the Class A Certificates, the Class
B Certificates, and the Class C Certificates is
$8,101,025, $2,766,630, and $2,967,925,
respectively. Interest Drawings under the relevant
Liquidity Facility 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 the Liquidity Facility with
respect to any Trust (other than the Class D 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 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 (defined below), a Final Drawing (defined
below) or (if applicable with respect to a
Replacement Facility (defined below)) a
Non-Extension Drawing (defined below) under a
Liquidity Facility, the Maximum Available
Commitment shall be zero. The Liquidity Facility
for any Class of Certificates does 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 principal
of or interest or premium on the Certificates of
any other Class.
Upon each Interest Drawing under any Liquidity
Facility, the Subordination Agent is 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 any other amounts
owing to the Liquidity Provider under each
Liquidity Facility or certain other agreements (the
"Liquidity Obligations") ranks pari passu with the
Liquidity Obligations relating to all other
Liquidity Facilities and ranks 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 be 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; 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
18
<PAGE> 20
obligations under the Indenture related to such
Equipment Note 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 the Liquidity Provider issued by either Rating
Agency is lower than the Threshold Rating, each
Liquidity Facility provided by such Liquidity
Provider will be required to be replaced by a
financial institution having such 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
30 days after notice of the downgrading, such
Liquidity Facility will be drawn in full up to the
then Maximum Available Commitment (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.
Under certain circumstances described in
"Description of the Liquidity
Facilities -- Liquidity Events of Default", the
Liquidity Provider may cause a final drawing (the
"Final Drawing") to be made under a Liquidity
Facility in an amount equal to the then Maximum
Available Commitment thereunder. The Subordination
Agent 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 on
deposit in the Cash Collateral Account for any
Trust that are in excess of the Required Amount
will be paid to the Liquidity Provider.
Continental may, at its option subject to certain
limitations, arrange for a Replacement Facility to
replace the Liquidity Facility (or any prior
Replacement Facility) for any Trust, subject to
certain conditions. If such Replacement Facility is
provided at any time after a Downgrade Drawing or
Non-Extension Drawing (defined below) 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 initial Liquidity Facility for each Class of
Certificates (other than the Class D Certificates)
is scheduled to expire on the fifteenth day after
the Final Maturity Date for such Class of
Certificates. A Replacement Facility may, however,
be scheduled to expire on an earlier date. If a
Replacement Facility for a Class of Certificates is
scheduled to expire prior to the date that is
fifteen days after the Final Maturity Date for such
Class, the Intercreditor Agreement provides for the
replacement or extension of such replacement
facility for 364 days. If such Replacement Facility
cannot be so replaced or extended by the date that
is 25 days prior to the then scheduled expiration
date of such Replacement Facility, such Replacement
Facility will be drawn in full up to the then
maximum
19
<PAGE> 21
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 Replacement Facility would be
used.
Notwithstanding the subordination provisions of the
Intercreditor Agreement, the holders of the
Certificates issued by each Trust (other than the
Class D Trust) will be entitled to receive and
retain the proceeds of drawings under the Liquidity
Facility (and any Replacement Facility) for such
Trust. See "Description of the Liquidity
Facilities".
Intercreditor Agreement
(a) Subordination........ The Trustees, the Liquidity Provider and the
Subordination Agent have entered into an agreement
(the "Intercreditor Agreement") which provides as
follows:
(i) All payments made in respect of the Equipment
Notes (whether under any Indenture or the Second
Indenture) 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 shall be
distributed in the following order: (1) payment of
certain Liquidity Obligations; (2) payment of
Expected Distributions to the holders of Class A
Certificates; (3) payment of Expected Distributions
to the holders of Class B Certificates; (4) payment
of Expected Distributions to the holders of Class C
Certificates; (5) payment of Expected Distributions
to the holders of Class D Certificates and (6)
payment of certain fees and expenses of the
Subordination Agent and the Trustees.
"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
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 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.
(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, the Trustees and
20
<PAGE> 22
certain other parties in payment of the
Administration Expenses and to the Liquidity
Provider in payment of the Liquidity Obligations;
(2) to the holders of Class A Certificates in
payment of Adjusted Expected Distributions; (3) to
the holders of Class B Certificates in payment of
Adjusted Expected Distributions; (4) to the holders
of Class C Certificates in payment of Adjusted
Expected Distributions; and (5) to the holders of
Class D Certificates in payment of Adjusted
Expected Distributions.
"Adjusted Expected Distributions" means, with
respect to the Certificates of any Trust on any
Distribution Date, the sum of (1) accrued and
unpaid interest on such Certificates 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 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 unpaid 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, and
(B) the amount of the excess, if any, of (i) the
amount described in sub-clause (A)(x), 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 the
sum of the applicable LTV Collateral Amounts for
each Aircraft, minus the Pool Balance for each
Class of Certificates, if any, senior to such
Class, after giving effect to any distribution on
such Distribution Date of principal on 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
21
<PAGE> 23
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 Indenture, the
amount of the insurance proceeds paid to the
related Loan Trustee and/or the Second Mortgagee in
respect thereof to the extent then held by such
Loan Trustee and/or the Second Mortgagee (and/or on
deposit in the Special Payments Account) or payable
to such Loan Trustee and/or the Second Mortgagee 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
41.00%, for the Class B Certificates 55.00%, for
the Class C Certificates 69.90% and for the Class D
Certificates 84.89%.
"Appraised Current Market Value" of any Aircraft
means the lower of the average and the median of
the most recent three Appraisals of such Aircraft.
After a Triggering Event occurs and any Equipment
Note becomes a Non-Performing Equipment Note, the
Subordination Agent shall obtain Appraisals for the
Aircraft (the "LTV Appraisals") 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).
(b) Intercreditor Rights... Pursuant to the Intercreditor Agreement, the
Trustees and the Liquidity Provider have agreed
that, with respect to any Indenture and (in the
case of clause (b) below) the Second Indenture at
any given time, the Loan Trustee or the Second
Mortgagee, as the case may be, 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) or the Second
Indenture, by the Controlling Party insofar as an
Indenture Default under such Indenture has occurred
and is continuing.
"Controlling Party" with respect to any Indenture
and the Second Indenture means: (w) the Trustee for
the Class A Trust (the "Class A Trustee"); (x) upon
payment of Final Distributions to the holders of
Class A Certificates, the Trustee for the Class B
Trust (the "Class B Trustee"); (y) upon payment of
Final Distributions to the holders of Class B
Certificates, the Trustee for the Class C Trust
(the "Class C Trustee"); and (z) upon payment of
Final Distributions to the holders of Class C
Certificates, the Trustee for the Class D Trust
(the "Class D Trustee"). See "Description of the
New 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
22
<PAGE> 24
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 (with
respect to any Replacement Facility) a
Non-Extension Drawing) and remain unreimbursed and
(y) the date on which all Equipment Notes shall
have been accelerated, the Liquidity Provider 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) accrued and unpaid interest on such
Certificates and (y) the Pool Balance of such
Certificates as of the immediately preceding
Distribution Date.
(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,
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.
"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.
Certificates; Book-Entry
Registration............. The New Certificates of each Trust will be
represented by one or more permanent global
Certificates in definitive, fully registered form
and registered in the name of Cede & Co. ("Cede"),
as nominee of The Depository Trust Company ("DTC").
See "Description of the New Certificates -- Book
Entry; Delivery and Form".
Method of Distribution..... The persons in whose names the Certificates are
registered will be treated as the owners of such
Certificates for the purpose of receiving payments
of principal of and interest on such Certificates
and for all other purposes whatsoever. Therefore,
none of the Trustees, Continental, the Loan
Trustees, the Liquidity Provider or the
Subordination Agent has any direct responsibility
or liability for distributions or payments to
owners of beneficial interests in the Certificates
(the "Certificate Owners"). Distributions by the
Trustee in respect of Certificates registered in
23
<PAGE> 25
the name of Cede, as nominee of DTC, including the
final distribution of principal with respect to
such Certificates of any Trust, will be made in
same-day funds to DTC. DTC will in turn make
distributions in same-day funds to those
participants in DTC who are credited with ownership
of such Certificates ("DTC Participants") in
amounts proportionate to the amount of each such
DTC Participant's respective holdings of beneficial
interests in such Certificates. Corresponding
payments by the DTC Participants to beneficial
owners of such Certificates will be the
responsibility of such DTC Participants, and
Continental expects that they will be made in
accordance with customary industry practices. The
final distribution with respect to the Certificates
of any Trust will be made only upon surrender and
presentation thereof to the Trustee of such Trust.
See "Description of the New
Certificates -- Book-Entry; Delivery and Form".
Federal Income Tax
Consequences............. The exchange of New Certificates for Old
Certificates will not be a sale or exchange or
otherwise a taxable event for Federal income tax
purposes.
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 Class A Certificates, subject to the
circumstances applicable to such Plans. Plans will
not be eligible to purchase Class B, Class C or
Class D Certificates, except that such Certificates
may be acquired with the assets of an insurance
company general account that may be deemed to
constitute Plan assets if the conditions of
Prohibited Transaction Class Exemption ("PTCE")
95-60 are satisfied. By its acceptance of a Class
B, Class C or Class D Certificate, each
Certificateholder will be deemed to have
represented and warranted that either (i) no Plan
assets have been used to purchase such Certificate
or (ii) the purchase and holding of such
Certificate is exempt from the prohibited
transaction restrictions of ERISA and Section 4975
of the Code pursuant to PTCE 95-60. See "ERISA
Considerations". 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.
<TABLE>
<CAPTION>
STANDARD
MOODY'S & POOR'S
-------- ---------
<S> <C> <C> <C>
Rating of the Liquidity Provider.... Short Term.......................... P-1 A-1+
Threshold Rating.................... Short Term.......................... P-1 A-1
</TABLE>
24
<PAGE> 26
SELECTED FINANCIAL DATA
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 which is derived from the audited
consolidated financial statements incorporated by reference in the Prospectus.
The consolidated financial data of the Company for the three and nine months
ended September 30, 1997 and 1996 is derived from its unaudited consolidated
financial statements incorporated by reference in the Prospectus, 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
nine months ended September 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 NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 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.............. $ 1,890 $ 1,671 $ 5,374 $ 4,799 $ 6,360 $ 5,825 $ 5,670
Operating Expenses............. 1,683 1,594 4,790 4,373 5,835(1) 5,440(2) 5,681
------- ------- ------- ------- ------- ------- -------
Operating Income (Loss)........ 207 77 584 426 525 385 (11)
Nonoperating Income Expense,
net.......................... (21) (30) (66) (78) (97) (75)(3) (640)(4)
------- ------- ------- ------- ------- ------- -------
Income (Loss) before Income
Taxes, Minority Interest and
Extraordinary Loss........... 186 47 518 348 428 310 (651)
Net Income (Loss).............. $ 110 $ 18 $ 312 $ 272 $ 319 $ 224 $ (613)
======= ======= ======= ======= ======= ======= =======
Earnings (Loss) per Common and
Common Equivalent Share(5)... $ 1.77 $ 0.25 $ 4.90 $ 4.16 $ 4.87 $ 3.60 $(11.88)
======= ======= ======= ======= ======= ======= =======
Earnings (Loss) per Common
Share Assuming Full
Dilution(5).................. $ 1.45 $ 0.25 $ 4.02 $ 3.50 $ 4.11 $ 3.15 $(11.88)
======= ======= ======= ======= ======= ======= =======
Ratio of Earnings to Fixed
Charges(6)................... 2.24 1.36 2.20 1.88 1.81 1.53 --
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 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>
OPERATING DATA (JET OPERATIONS
ONLY):(7)
Revenue passenger miles
(millions)(8).................. 13,038 11,302 35,851 31,581 41,914 40,023 41,588
Available seat miles
(millions)(9).................. 17,686 16,117 50,004 45,820 61,515 61,006 65,861
Passenger load factor(10)........ 73.7% 70.1% 71.7% 68.9% 68.1% 65.6% 63.1%
Breakeven passenger load
factor(11)..................... 65.6% 61.0% 63.5% 60.5% 60.7%(14) 60.8% 62.9%
Passenger revenue per available
seat mile (cents)(12).......... 9.18 8.95 9.26 9.07 8.93 8.20 7.22
Operating cost per available seat
mile (cents)(13)............... 8.98 8.60 9.05 8.77 8.77(14) 8.36 7.86
Average yield per revenue
passenger mile (cents)(15)..... 12.45 12.77 12.91 13.16 13.10 12.51 11.44
Average length of aircraft flight
(miles)........................ 991 914 954 893 896 836 727
</TABLE>
(See footnotes on the following page.)
25
<PAGE> 27
<TABLE>
<CAPTION>
SEPTEMBER 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 $27 and $76, respectively(16)................ $ 988 $1,061
Other Current Assets............................................... 722 573
Total Property and Equipment, Net.................................. 2,104 1,596
Routes, Gates and Slots, Net....................................... 1,439 1,473
Other Assets, Net.................................................. 551 503
------ ------
Total Assets............................................. $ 5,804 $5,206
====== ======
Liabilities and Stockholders' Equity:
Current Liabilities................................................ $ 2,456 $2,104
Long-term Debt and Capital Leases.................................. 1,592 1,624
Deferred Credits and Other Long-term Liabilities................... 699 594
Minority Interest(17).............................................. -- 15
Continental-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Convertible Subordinated
Debentures(18)................................................... 242 242
Redeemable Preferred Stock(8)...................................... -- 46
Common Stockholders' Equity........................................ 815 581
------ ------
Total Liabilities and Stockholders' Equity............... $ 5,804 $5,206
====== ======
</TABLE>
- ---------------
(1) The $128 million fleet disposition charge recorded in 1996 is 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. Earnings per common and common
equivalent share, excluding extraordinary losses, were $1.83 and $0.35 for
the three months ended September 30, 1997 and 1996, respectively, $4.95 and
$4.26 for the nine months ended September 30, 1997 and 1996, respectively,
and $4.97 for the year ended December 31, 1996. Earnings per common share
assuming full dilution, excluding extraordinary losses, were $1.50 and
$0.34
26
<PAGE> 28
for the three months ended September 30, 1997 and 1996, respectively, $4.07
and $3.58 for the nine months ended September 30, 1997 and 1996,
respectively, and $4.19 for the year ended December 31, 1996. Extraordinary
losses were not recorded in the years ended December 31, 1995 and 1994.
UNDER SFAS 128, THE COMPANY'S BASIC AND DILUTED EPS WERE:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED FOR THE YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
--------------- --------------- ---------------------------
1997 1996 1997 1996 1996 1995(3) 1994(3)
----- ----- ----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Basic EPS (1).............. $1.97 $0.42 $5.47 $5.06 $5.87 $4.07 $(11.88)
Basic EPS (2).............. $1.90 $0.30 $5.40 $4.94 $5.75 $4.07 $(11.88)
Diluted EPS (1)............ $1.48 $0.34 $4.06 $3.63 $4.25 $3.37 $(11.88)
Diluted EPS (2)............ $1.44 $0.26 $4.02 $3.55 $4.17 $3.37 $(11.88)
</TABLE>
- ---------------
(1) Excluding extraordinary loss.
(2) Including extraordinary loss.
(3) No extraordinary losses were recorded in 1995 or 1994.
(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) Excluded 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.
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<PAGE> 29
RISK FACTORS
Holders of Old Certificates should carefully consider the following risk
factors, as well as other information set forth in this Prospectus, before
tendering their Old Certificates in the Exchange Offer. The risk factors set
forth below (other than "-- Risk Factors Relating to the Certificates and the
Offering -- Consequences of Failure to Exchange") are generally applicable to
the Old Certificates as well as the New Certificates.
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 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 the 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 September 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 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 September 30, 1997, Continental had $961 million in cash and cash
equivalents (excluding restricted cash and cash equivalents of $27 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 October 10, 1997, Continental had firm commitments with The Boeing
Company ("Boeing") to take delivery of a total of 114 narrowbody and 40 widebody
jet aircraft during the years 1997 through 2005 with options for an additional
91 aircraft (exercisable subject to certain conditions). The narrowbody aircraft
will replace older, less efficient Stage 2 aircraft and allow for growth of
operations. The new widebody aircraft will replace six DC-10-10 and 31 DC-10-30
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. In connection with this new order, the Company has obtained the
flexibility to substitute certain aircraft on order with Boeing and has obtained
other benefits. The Company currently plans to substitute 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 20 years, subject to certain
conditions. However, Boeing has agreed with the European Commission not to
enforce such provision.
The estimated aggregate cost of the Company's firm commitments for the 154
Boeing aircraft is approximately $7 billion. As of October 10, 1997, the Company
has completed or has third party commitments for a total of approximately $482
million in financing for its future Boeing deliveries, and has commitments or
letters of intent from various sources for backstop financing for approximately
one-third of the anticipated acquisition cost of its future narrowbody and
widebody Boeing deliveries. The Company
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<PAGE> 30
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 Continental'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 13 of the firm aircraft
through October 10, 1997 and will take delivery of the remaining 37 firm
aircraft through the third quarter of 1999. The Company expects to account for
all of these aircraft as operating leases.
In October 1997, the Company completed an offering of $752 million of pass
through certificates. The pass through certificates are not direct obligations
of, or guaranteed by, Continental and therefore are not included in
Continental's consolidated financial statements. 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 24 new Boeing aircraft scheduled to be delivered
to Continental from April 1998 through November 1998. 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 May 1999), such funds will be
distributed back to the certificate holders.
In September 1997, the Company, in cooperation with the airframe and engine
manufacturers, completed an offering of $89 million of pass through certificates
to enable certain owner trustees to finance the acquisition cost of nine Embraer
("EMB")-145ER regional jets previously delivered to and leased by Continental.
The pass through certificates are not direct obligations of, or guaranteed by,
Continental and therefore are not included in the accompanying consolidated
financial statements.
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"), reloaned by AMI to its wholly owned subsidiary
Continental Micronesia, Inc. ("CMI"), and used by CMI to repay 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. In
addition, the Credit Facility contains certain financial covenants applicable to
Continental and prohibits Continental from granting a security interest on
certain of its international route authorities and domestic slots.
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 DC-9-82 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.
In April 1997, Continental consummated a $160 million floating rate (LIBOR
plus 1.125% or prime) 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
29
<PAGE> 31
charge ratio, a minimum net worth and a minimum unrestricted cash balance.
Continental is also restricted from making cash dividends and certain other
payments.
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.
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 equity financing to be used in
leveraged leases of all such aircraft. As of September 30, 1997, 13 of such
aircraft have been delivered. 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.
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.
Continental's History of Operating Losses
Although Continental recorded net income of $312 million for the nine
months ended September 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 13.8% for the nine months ended September 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.
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, and in
November 1997,
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<PAGE> 32
the Company and the Independent Association of Continental Pilots jointly
announced a tentative agreement on major economic issues in their negotiations,
including rates of pay, pension, duration and effective date. Although
significant issues remain at both the Company and Express, where there is not
yet agreement on major economic issues, the Company believes that mutually
acceptable agreements can be reached with such employees. 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 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 carry forwards of $45
million that will expire through 2001. As a result of the change in ownership of
the Company on April 27, 1993, the ultimate utilization of the Company's NOLs
and investment tax credits could be limited. Reflecting this possible
limitation, the Company has recorded a valuation allowance of $694 million at
December 31, 1996.
The Company had, as of December 31, 1996, deferred tax assets aggregating
$1.3 billion, including $804 million of NOLs. The Company 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. 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 were 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.
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<PAGE> 33
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 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 30, 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 30, 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
and aging aircraft 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, DOT 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
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<PAGE> 34
on December 31, 1996 and was reinstated again on March 7, 1997. Congress
recently passed tax legislation 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 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
Consequences of Failure to Exchange
Holders of Old Certificates who do not exchange their Old Certificates for
New Certificates pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Old Certificates as set forth in the legend
thereon as a consequence of the issuance of the Old Certificates pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Certificates may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register the Old
Certificates under the Securities Act. To the extent that Old Certificates are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Certificates could be adversely affected.
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 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. 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 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. The value of the Aircraft in the event of the exercise
of remedies under the applicable Indenture will depend on market and economic
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<PAGE> 35
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 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.
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, the
subordination of the Class C Certificates to the Class B Certificates and the
subordination of the Class D Certificates to the Class C Certificates, may
result in the holders of subordinated Classes of Certificates receiving less
than the full amount due to them after the occurrence of a Triggering Event even
if all of the Equipment Notes are paid in full.
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity Provider are 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) payment of certain Liquidity Obligations
to the Liquidity Provider; (2) payment of Expected Distributions to the holders
of Class A Certificates; (3) payment of Expected Distributions to the holders of
Class B Certificates; (4) payment of Expected Distributions to the holders of
Class C Certificates; (5) payment of Expected Distributions to the holders of
Class D Certificates; and (6) payment of certain fees and expenses of the
Subordination Agent and the Trustees.
In addition, 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,
the Trustee and certain other parties in payment of the Administration Expenses
and to the Liquidity Provider in payment of the Liquidity Obligations; (2) to
the holders of Class A Certificates in payment of Adjusted Expected
Distributions; (3) to the holders of Class B Certificates in payment of Adjusted
Expected Distributions; (4) to the holders of Class C Certificates in payment of
Adjusted Expected Distributions; and (5) to the holders of Class D Certificates
in payment of Adjusted Expected Distributions.
Accordingly, the priority of distributions after a payment default under
any Equipment Note 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 them after a payment default under any Equipment
Note even if all Equipment Notes are eventually paid in full.
Control over Collateral; Sale of Collateral
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Provider have agreed that, with respect to any Indenture or (in the case of
clause (b) below) the Second 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) and the Second Indenture insofar as an Indenture Default has occurred and
is continuing under such Indenture, by the Controlling Party. See "Description
of the New 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
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<PAGE> 36
have been accelerated, the Liquidity Provider 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 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, 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.
The Equipment Notes issued with respect to each Aircraft are entitled to a
second priority security interest on each of the other Aircraft as to which
Equipment Notes have been issued. However, since the second priority security
interest would not be entitled to the benefits of Section 1110 in a
reorganization under the Bankruptcy Code of Continental, the excess proceeds
realized from the disposition of any particular Aircraft might not immediately
be available to offset shortfalls on the Equipment Notes relating to any other
Aircraft, but rather would be held as cash collateral securing all of the
Equipment Notes subject to the lien of the Second Indenture. See "Description of
the Equipment Notes -- Remedies".
Absence of an Established Market
Prior to the Exchange Offer, 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 national securities exchange or otherwise. Certain of
the Initial Purchasers have previously made a market in the Old Certificates and
Continental has been advised by the Initial Purchasers that both of them
presently intend to make a market in the New Certificates, as permitted by
applicable laws and regulations, after consummation of the Exchange Offer. None
of the Initial Purchasers is obligated, however, to make a market in the Old
Certificates or the New Certificates, and any such market-making activity may be
discontinued at any time without notice at the sole discretion of each Initial
Purchaser. 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
There will be no cash proceeds payable to Continental from the issuance of
the New Certificates pursuant to the Exchange Offer. The proceeds from the sale
of the Old Certificates issued by each Trust were used to purchase Equipment
Notes issued by Continental to finance the purchase of the Aircraft.
RATIOS OF EARNINGS TO FIXED CHARGES
The following information for the year ended December 31, 1992 and for the
period January 1, 1993 through April 27, 1993 relates to Continental's
predecessor, Holdings. Information for the period April 28, 1993 through
December 31, 1993, for the years ended December 31, 1994, 1995 and 1996 and for
the nine months ended September 30, 1996 and 1997 relates to Continental. The
information as to Continental has not
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<PAGE> 37
been prepared on a consistent basis of accounting with the information as to
Holdings due to Continental's adoption, effective April 27, 1993, of fresh start
reporting 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").
For the year ended December 31, 1992, for the periods January 1, 1993
through April 27, 1993 and April 28, 1993 through December 31, 1993 and for the
year ended December 31, 1994, earnings were not sufficient to cover fixed
charges. Additional earnings of $131 million, $979 million, $60 million and $667
million, respectively, would have been required to achieve ratios of earnings to
fixed charges of 1.0. The ratio of earnings to fixed charges for the years ended
December 31, 1995 and December 31, 1996 was 1.53 and 1.81, respectively. The
ratio of earnings to fixed charges for the three months ended September 30, 1996
and 1997 was 1.36 and 2.24, and for the nine months ended September 30, 1996 and
1997 was 1.88 and 2.20, respectively. For purposes of calculating this ratio,
earnings consist of earnings before taxes, minority interest and extraordinary
items plus interest expense (net of capitalized interest), the portion of rental
expense representative of interest expense and amortization of previously
capitalized interest. Fixed charges consist of interest expense and the portion
of rental expense representative of interest expense.
THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement and a copy of which is available as set
forth under the heading "Available Information".
TERMS OF THE EXCHANGE OFFER
General
In connection with the issuance of the Old Certificates pursuant to a
Purchase Agreement dated as of June 17, 1997, between the Company and the
Initial Purchasers, the Initial Purchasers and their respective assignees became
entitled to the benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company is obligated to use
its best efforts to (i) file the Registration Statement of which this Prospectus
is a part for a registered exchange offer with respect to an issue of new
certificates identical in all material respects to the Old Certificates within
120 days after June 25, 1997, the Issuance Date, (ii) cause the Registration
Statement to become effective under the Securities Act within 180 days after the
Issuance Date, (iii) cause the Registration Statement to remain effective until
the closing of the Exchange Offer and (iv) consummate the Exchange Offer within
210 calendar days after the Issuance Date. The Company will keep the Exchange
Offer open for a period of not less than 30 days. The Exchange Offer being made
hereby, if commenced and consummated within the time periods described in this
paragraph, will satisfy those requirements under the Registration Rights
Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange Offer),
all Old Certificates validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date will be accepted for exchange. New
Certificates of the same class will be issued in exchange for an equal face
amount of outstanding Old Certificates accepted in the Exchange Offer. Old
Certificates may be tendered only in integral multiples of $1,000. This
Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders as of November 11, 1997. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Certificates being tendered
for exchange. However, the obligation to accept Old Certificates for exchange
pursuant to the Exchange Offer is subject to certain conditions as set forth
herein under "-- Conditions".
Old Certificates shall be deemed to have been accepted as validly tendered
when, as and if the Trustee has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Certificates for the purposes of receiving the New Certificates and
delivering New Certificates to such holders.
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<PAGE> 38
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, including the Exchange Offer
No-Action Letters (as defined on page 2 of this prospectus), the Company
believes that the New Certificates issued pursuant to the Exchange Offer in
exchange for Old Certificates may be offered for resale, resold or otherwise
transferred by holders thereof (other than a broker-dealer who acquired such Old
Certificates directly from the Trustee for resale pursuant to Rule 144A under
the Securities Act or any other available exemption under the Securities Act or
any holder that is an "affiliate" of the Company as defined under Rule 405 of
the Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Certificates
are acquired in the ordinary course of such holders' business and such holders
are not engaged in, and do not intend to engage in, a distribution of such New
Certificates and have no arrangement with any person participate in a
distribution of such New Certificates. By tendering the Old Certificates in
exchange for New Certificates, each holder, other than a broker-dealer, will
represent to the Company that: (i) it is not an affiliate of the Company (as
defined under Rule 405 of the Securities Act) nor a broker-dealer tendering Old
Certificates acquired directly from the Company for its own account; (ii) any
New Certificates to be received by it will be acquired in the ordinary course of
its business; and (iii) it is not engaged in, and does not intend to engage in,
a distribution of such New Certificates and has no arrangement or understanding
to participate in a distribution of the New Certificates. If a holder of Old
Certificates is engaged in or intends to engage in a distribution of the New
Certificates or has any arrangement or understanding with respect to the
distribution of the New Certificates to be acquired pursuant to the Exchange
Offer, such holder may not rely on the applicable interpretations of the staff
of the Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each Participating Broker-Dealer that receives New Certificates for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Certificates. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Certificates
received in exchange for Old Certificates where such Old Certificates were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Company has agreed that, starting on
the Expiration Date and ending on the close of business 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit Continental to effect the Exchange
Offer, if the Registration Statement is not declared effective within 180
calendar days after the Issuance Date under certain circumstances or the
Exchange Offer is not consummated within 210 days after the Issuance Date under
certain other circumstances, at the request of a holder not eligible to
participate in the Exchange Offer or under certain other circumstances described
in the Registration Rights Agreement, Continental will, in lieu of effecting the
registration of the New Certificates pursuant to the Registration Statement and
at no cost to the holders of Old Certificates, (a) as promptly as practicable
file with the Commission a shelf registration statement (the "Shelf Registration
Statement") covering resales of the Old Certificates, (b) use its best efforts
to cause the Shelf Registration Statement to be declared effective under the
Securities Act by the 180th calendar day after the Issuance Date and (c) use its
best efforts to keep effective the Shelf Registration Statement for a period of
two years after its effective date (or for such shorter period as shall end when
all of the Old Certificates covered by the Shelf Registration Statement have
been sold pursuant thereto or may be freely sold pursuant to Rule 144 under the
Securities Act).
In the event that neither the consummation of the Exchange Offer nor the
declaration by the Commission of the Shelf Registration Statement to be
effective (each a "Registration Event") occurs on or prior to the 210th calendar
day following the Issuance Date, the interest rate per annum borne by the
Equipment Notes shall be increased by 0.50% from and including such 210th day to
but excluding the earlier of (i) the date on which a Registration Event occurs
and (ii) the date on which all of the Certificates otherwise become transferable
by Certificateholders (other than affiliates or former affiliates of
Continental) without further registration under the Securities Act. In the event
that the Shelf Registration Statement
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ceases to be effective at any time during the period specified by the
Registration Rights Agreement for more than 60 days, whether or not consecutive,
during any 12-month period, the interest rate per annum borne by the Equipment
Notes shall be increased by 0.50% from the 61st day of the applicable 12-month
period such Shelf Registration Statement ceases to be effective until such time
as the Shelf Registration Statement again becomes effective (or, if earlier, the
end of such period specified by the Registration Rights Agreement).
Upon consummation of the Exchange Offer, subject to certain exceptions,
holders of Old Certificates who do not exchange their Old Certificates for New
Certificates in the Exchange Offer will no longer be entitled to registration
rights and will not be able to offer or sell their Old Certificates, unless such
Old Certificates are subsequently registered under the Securities Act (which,
subject to certain limited exceptions, the Company will have no obligation to
do), except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. See "Risk
Factors -- Risk Factors Relating to the Certificates -- Consequences of Failure
to Exchange".
Expiration Date; Extensions; Amendments; Termination
The term "Expiration Date" shall mean December 12, 1997 (30 calendar days
following the commencement of the Exchange Offer), unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended.
Notwithstanding any extension of the Exchange Offer, if the Exchange Offer is
not consummated by January 21, 1998, the interest rate borne by the Equipment
Notes is subject to increase. See "-- General".
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Certificates an announcement thereof, each prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay acceptance of any Old
Certificates, to extend the Exchange Offer or to terminate the Exchange Offer
and not permit acceptance of Old Certificates not previously accepted if any of
the conditions set forth herein under "-- Conditions" shall have occurred and
shall not have been waived by the Company, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (ii) to amend the
terms of the Exchange Offer in any manner deemed by it to be advantageous to the
holders of the Old Certificates. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the Exchange Agent. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment in a manner reasonably calculated
to inform the holders of the Old Certificates of such amendment.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE NEW CERTIFICATES
The New Certificates will accrue interest at the applicable per annum rate
for such Trust set forth on the cover page of this Prospectus, from the Issuance
Date. Interest on the New Certificates is payable on June 30 and December 30 of
each year commencing upon the consummation of the Exchange Offer, subject to the
terms of the Intercreditor Agreement.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to
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<PAGE> 40
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. In addition, either (i) certificates for such Old Certificates must be
received by the Exchange Agent along with the Letter of Transmittal, (ii) a
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
such Old Certificates, if such procedure is available, into the Exchange Agent's
account at The Depository Trust Company (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the holder
must comply with the guaranteed delivery procedures described below. THE METHOD
OF DELIVERY OF OLD CERTIFICATES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD CERTIFICATES SHOULD BE
SENT TO THE COMPANY. Delivery of all documents must be made to the Exchange
Agent at its address set forth below. Holders may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect such
tender for such holders.
The tender by a holder of Old Certificates will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Certificates may tender such Old Certificates in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means any
person in whose name Old Certificates are registered on the books of the Company
or any other person who has obtained a properly completed bond power from the
registered holder.
Any beneficial owner whose Old Certificates are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Certificates, either
make appropriate arrangements to register ownership of the Old Certificates in
such owner's name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Old
Certificates tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Certificates listed therein, such Old Certificates
must be endorsed or accompanied by bond powers and a proxy which authorizes such
person to tender the Old Certificates on behalf of the registered holder, in
each case as the name of the registered holder or holders appears on the Old
Certificates.
If the Letter of Transmittal or any Old Certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Certificates will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Certificates not properly tendered or any Old Certificates the acceptance of
which would, in the opinion of counsel for the
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<PAGE> 41
Company, be unlawful. The Company also reserves the absolute right to waive any
irregularities or conditions of tender as to particular Old Certificates. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Certificates must be cured within such time as
the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Certificates, nor shall any of
them incur any liability for failure to give such notification. Tenders of Old
Certificates will not be deemed to have been made until such irregularities have
been cured or waived. Any Old Certificates received by the Exchange Agent that
are not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned without cost to such holder by the
Exchange Agent to the tendering holders of Old Certificates, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Pass Through Trust Agreements, to (i) purchase or make
offers for any Old Certificates that remain outstanding subsequent to the
Expiration Date or, as set forth under "-- Conditions," to terminate the
Exchange Offer in accordance with the terms of the Registration Rights Agreement
and (ii) to the extent permitted by applicable law, purchase Old Certificates in
the open market, in privately negotiated transactions or otherwise. The terms of
any such purchases or offers could differ from the terms of the Exchange Offer.
ACCEPTANCE OF OLD CERTIFICATES FOR EXCHANGE; DELIVERY OF NEW CERTIFICATES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Certificates properly tendered will be accepted, promptly after the
Expiration Date, and the New Certificates will be issued promptly after
acceptance of the Old Certificates. See "-- Conditions" below. For purposes of
the Exchange Offer, Old Certificates shall be deemed to have been accepted for
exchange when, as and if the Company has given oral or written notice thereof to
the Exchange Agent.
In all cases, issuance of New Certificates for Old Certificates that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Certificates
or a timely Book-Entry Confirmation of such Old Certificates into the Exchange
Agent's account at the Book-Entry Transfer Facility, a properly completed and
duly executed Letter of Transmittal and all other required documents. If any
tendered Old Certificates are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Certificates are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Certificates will be returned without expense to the tendering
holder thereof (or, in the case of Old Certificates tendered by book-entry
transfer procedures described below, such nonexchanged Old Certificates will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Certificates at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Certificates by causing
the Book-Entry Transfer Facility to transfer such Old Certificates into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Certificates may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "-- Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
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GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Certificates desires to tender such Old
Certificates, and the Old Certificates are not immediately available, or time
will not permit such holder's Old Certificates or other required documents to
reach the Exchange Agent before the Expiration Date, or the procedures for book-
entry transfer cannot be completed on a timely basis, a tender may be effected
if (i) the tender is made through an Eligible Institution, (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Letter of Transmittal (or a facsimile
thereof) and Notice of Guaranteed Delivery, substantially in the form provided
by the Company (by facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Old Certificates and the amount of Old
Certificates tendered, stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Certificates, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the certificates for all
physically tendered Old Certificates, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within three NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Certificates may be withdrawn at any time prior to 5:00
p.m., New York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date at one of the addresses set forth below under "-- Exchange
Agent". Any such notice of withdrawal must specify the name of the person having
tendered the Old Certificates to be withdrawn, identify the Old Certificates to
be withdrawn (including the principal amount of such Old Certificates) and
(where certificates for Old Certificates have been transmitted) specify the name
in which such Old Certificates are registered, if different from that of the
withdrawing holder. If certificates for Old Certificates have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Certificates have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Old Certificates and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Certificates so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Certificates which have
been tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Certificates tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Certificates will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Certificates) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Certificates may be retendered by
following one of the procedures described under "-- Procedures for Tendering"
and "-- Book-Entry Transfer" above at any time on or prior to the Expiration
Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Old Certificates will
not be required to be accepted for exchange, nor will New Certificates be issued
in exchange for, any Old Certificates, and the Company may terminate or amend
the Exchange Offer as provided herein before the acceptance of such Old
Certificates, if because of any change in law, or applicable interpretations
thereof by the Commission, the
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Company determines that it is not permitted to effect the Exchange Offer, and
the Company has no obligation to, and will not knowingly, permit acceptance of
tenders of Old Certificates from affiliates of the Company (within the meaning
of Rule 405 under the Securities Act) or from any other holder or holders who
are not eligible to participate in the Exchange Offer under applicable law or
interpretations thereof by the Commission, or if the New Certificates to be
received by such holder or holders of Old Certificates in the Exchange Offer,
upon receipt, will not be tradable by such holder without restriction under the
Securities Act and the Exchange Act and without material restrictions under the
"blue sky" or securities laws of substantially all of the states of the United
States.
EXCHANGE AGENT
Wilmington Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail or Overnight Delivery: By Hand:
Wilmington Trust Company Wilmington Trust Company
1100 North Market Street 1105 North Market Street, 1st Floor
Wilmington, Delaware 19890-0001 Wilmington, Delaware 19890
Attention: Jill Rylee Attention: Corporate Trust Operations
</TABLE>
Facsimile Transmission:
(302) 651-1079
Confirm by Telephone:
(302) 651-8869
Jill Rylee
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy, electronic mail or in person by officers
and regular employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Certificates, and in handling or forwarding tenders for
exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Certificates pursuant to the Exchange Offer. If, however, certificates
representing New Certificates or Old Certificates for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Old Certificates tendered, or if tendered Old Certificates are registered
in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Certificates pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
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DESCRIPTION OF THE NEW CERTIFICATES
The New Certificates will be issued pursuant to four separate Pass Through
Trust Agreements. The following summary describes all material terms of the
Certificates and the Pass Through Trust Agreements. The summary does not purport
to be complete, and reference is made to all of the provisions of the New
Certificates, the Pass Through Trust Agreements and the Intercreditor Agreement,
which have been filed as exhibits to the Registration Statement and copies of
which are available as set forth under the heading "Available Information".
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 are 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 of the Class
A Trust, the Class B Trust, the Class C Trust and the Class D Trusts will
differ. The references to Sections in parentheses in the following summary are
to the relevant Sections of the Pass Through Trust Agreements unless otherwise
indicated.
GENERAL
The New 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 New Certificate will represent a
fractional undivided interest in the Trust created by the Pass Through Trust
Agreement pursuant to which such Certificate is issued. (Section 3.01) The Trust
Property of each Trust consists of (i) subject to the Intercreditor Agreement,
Equipment Notes issued on a recourse basis by Continental in connection with
each separate secured loan transaction with respect to each Aircraft to finance
the purchase of such Aircraft by Continental, (ii) the rights of such Trust
under the Intercreditor Agreement (including all monies receivable in respect of
such rights), (iii) except for the Class D Trust, all monies receivable under
the Liquidity Facility for such Trust and (iv) funds from time to time deposited
with the Trustee in accounts relating to such Trust. The New Certificates
represent pro rata shares of the Equipment Notes and other property held in the
related Trust and will be issued only in minimum denominations of $1,000 and
integral multiples thereof. (Section 3.01).
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 3.11) The Certificates do not represent an interest
in or obligation of Continental, the Trustees, any of the Loan Trustees or the
Second Mortgagee in their individual capacities, or any affiliate of any
thereof.
SUBORDINATION
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity Provider are 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 (whether under any Indenture or the Second Indenture) and
certain other payments will be distributed under the Intercreditor Agreement in
the following order: (1) payment of certain Liquidity Obligations to the
Liquidity Provider; (2) payment of Expected Distributions to the holders of
Class A Certificates; (3) payment of Expected Distributions to the holders of
Class B Certificates; (4) payment of Expected Distributions to the holders of
Class C Certificates; (5) payment of Expected Distributions to the holders of
Class D Certificates; and (6) payment of certain fees and expenses of the
Subordination Agent and the Trustees.
In addition, 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 (whether under any Indenture or the Second Indenture) and
certain other payments will be distributed under the Intercreditor Agreement in
the following order: (1) to reimburse the Subordination Agent, the Trustees and
certain other parties for the payment of the Administration Expenses and to the
Liquidity Provider in payment of the Liquidity Obligations; (2) to the holders
of Class A Certificates in payment of Adjusted Expected Distributions; (3) to
the holders of Class B Certificates in payment of Adjusted Expected
Distributions; (4) to the holders of Class C Certificates in
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<PAGE> 45
payment of Adjusted Expected Distributions; and (5) to the holders of Class D
Certificates in payment of Adjusted Expected Distributions.
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 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 such possible interest shortfalls, the holders of one or more junior Classes
of Certificates may not receive the full amount due them after a Triggering
Event even if all Equipment Notes are eventually paid in full.
PAYMENTS AND DISTRIBUTIONS
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 Trustee 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 Equipment Notes held in each Trust 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, payable on June 30 and December 30 of each year,
commencing on December 30, 1997. Such interest payments will be distributed to
Certificateholders of such Trust on each such date until the final Distribution
Date for such Trust, 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. The interest rates for the Equipment Notes are subject to change
under certain circumstances. See "The Exchange Offer -- Terms of the Exchange
Offer -- General". Payments of interest applicable to the Certificates issued by
each of the Trusts (other than the Class D Trust) are supported by a separate
Liquidity Facility provided by the Liquidity Provider 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). The Liquidity Facility for any Class of Certificates does
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 (other than the Class D Trust)
will be entitled to receive and retain the proceeds of drawings under the
Liquidity Facility 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 June 30 of each year, commencing on
June 30, 1998. Scheduled payments of interest or principal on the Equipment
Notes are herein referred to as "Scheduled Payments", and June 30 and December
30 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 December 30, 2008, for the
Class B Certificates is December 30, 2006, for the Class C Certificates is
December 30, 2005 and for the Class D Certificates is June 30, 2001.
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 principal of or interest on Equipment Notes held on
44
<PAGE> 46
behalf of such Trust, subject to the Intercreditor Agreement. Each such
distribution of Scheduled Payments will be made by the applicable 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) If a Scheduled Payment is not received by the applicable Trustee on a
Regular Distribution Date but is received within five days thereafter, it will
be distributed to such holders of record on the date received. 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
Collateral under (and as defined in) each Indenture and the Second 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 the
Equipment Notes relating to one or more Aircraft, 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. Each Trustee 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 the occurrence of a
Triggering Event, such notice will be mailed not less than 20 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)) Each distribution of a Special Payment, other than a final
distribution, on a Special Distribution Date for any Trust will be made by the
Trustee to the Certificateholders of record of such Trust on the Record Date
applicable to such Special Payment. (Section 4.02(b)) 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 accounts (the "Certificate Account") for the deposit of
payments representing Scheduled Payments received by such Trustee. Each Pass
Through Trust Agreement also 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)
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
"-- 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, or Wilmington, Delaware
(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
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<PAGE> 47
made in respect of the Certificates of 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 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. (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 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. (Section 1.01) The Pool Factor for each Trust was 1.0000000 on the
Issuance Date, and 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. (Section 4.03)
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<PAGE> 48
As of the Issuance Date, assuming that no early redemption or default in
the payment of principal of any Equipment Notes shall occur, the Scheduled
Payments of principal of the Equipment Notes held in each Trust, and the
resulting Pool Factors for each Trust after taking into account each such
Scheduled Payment, will be as set forth below:
<TABLE>
<CAPTION>
1997-2A 1997-2B 1997-2C 1997-2D
TRUST TRUST TRUST TRUST
EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
NOTES 1997-2A NOTES 1997-2B NOTES 1997-2C NOTES 1997-2D
SCHEDULED TRUST SCHEDULED TRUST SCHEDULED TRUST SCHEDULED TRUST
PAYMENTS OF EXPECTED PAYMENTS OF EXPECTED PAYMENTS OF EXPECTED PAYMENTS OF EXPECTED
DATE PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR
- --------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 25,
1997......... $ 0 1.0000000 $ 0 1.0000000 $ 0 1.0000000 $ 0 1.0000000
December 30,
1997......... 0 1.0000000 0 1.0000000 0 1.0000000 0 1.0000000
June 30,
1998......... 2,072,340 0.9723179 707,630 0.9723182 1,200,930 0.9558579 6,268,576 0.7709607
December 30,
1998......... 0 0.9723179 0 0.9723182 0 0.9558579 0 0.7709607
June 30,
1999......... 2,072,340 0.9446357 707,626 0.9446365 2,324,830 0.8704051 6,383,644 0.5377171
December 30,
1999......... 0 0.9446357 0 0.9446365 0 0.8704051 0 0.5377171
June 30,
2000......... 2,072,443 0.9169522 708,031 0.9169391 3,175,629 0.7536797 7,147,618 0.2765597
December 30,
2000......... 0 0.9169522 0 0.9169391 0 0.7536797 0 0.2765597
June 30,
2001......... 2,212,604 0.8873964 755,523 0.8873837 3,625,577 0.6204159 7,569,162 0.0000000
December 30,
2001......... 0 0.8873964 0 0.8873837 0 0.6204159 0 0.0000000
June 30,
2002......... 3,541,842 0.8400848 2,074,022 0.8062500 1,510,530 0.5648939 0 0.0000000
December 30,
2002......... 0 0.8400848 0 0.8062500 0 0.5648939 0 0.0000000
June 30,
2003......... 4,513,933 0.7797881 2,134,967 0.7227321 7,479,240 0.2899825 0 0.0000000
December 30,
2003......... 0 0.7797881 0 0.7227321 0 0.2899825 0 0.0000000
June 30,
2004......... 5,687,498 0.7038150 7,398,224 0.4333207 7,889,264 0.0000000 0 0.0000000
December 30,
2004......... 0 0.7038150 0 0.4333207 0 0.0000000 0 0.0000000
June 30,
2005......... 8,112,933 0.5954432 11,076,977 0.0000000 0 0.0000000 0 0.0000000
December 30,
2005......... 0 0.5954432 0 0.0000000 0 0.0000000 0 0.0000000
June 30,
2006......... 18,205,098 0.3522611 0 0.0000000 0 0.0000000 0 0.0000000
December 30,
2006......... 0 0.3522611 0 0.0000000 0 0.0000000 0 0.0000000
June 30,
2007......... 26,370,969 0.0000000 0 0.0000000 0 0.0000000 0 0.0000000
</TABLE>
The Pool Factor and Pool Balance of each Trust will be recomputed if there
has been an early redemption, purchase, or a default in the payment of principal
or interest in respect of one or more issues 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".
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the applicable 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 (i) and (ii) below):
(i) the amount of such distribution allocable to principal and the
amount allocable to premium, if any;
(ii) the amount of such distribution allocable to interest; and
(iii) the Pool Balance and the Pool Factor for such Trust. (Section
4.03)
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<PAGE> 49
With respect to the Certificates registered in the name of Cede, as nominee
for DTC, 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
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 holders of Certificates. (Section 4.03(a))
In addition, within a reasonable period of time after the end of each
calendar year, the applicable Trustee 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) and (ii) 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. (Section 4.03(b)) With respect to Certificates
registered in the name of Cede, as nominee for DTC, 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. (Section 4.03(b))
With respect to the Certificates issued in definitive form, the applicable
Trustee will prepare and deliver the information described above to each
Certificateholder of record of each Trust as the name of such Certificateholder
appears on the records of the registrar of the Certificates.
INDENTURE DEFAULTS AND CERTAIN RIGHTS UPON AN INDENTURE DEFAULT
Upon the occurrence and continuation of an event of default under an
Indenture (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 any 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 or any Trustee.
The Equipment Notes issued with respect to each Aircraft are entitled to a
second priority security interest on each of the other Aircraft. However, since
the second priority security interest would not be entitled to the benefits of
Section 1110 in a reorganization under the Bankruptcy Code of Continental, the
excess proceeds realized from the disposition of any particular Aircraft might
not immediately be available to offset shortfalls on the Equipment Notes
relating to any other Aircraft, but rather would be held as cash collateral
securing all of the Equipment Notes subject to the lien of the Second Indenture.
See "Description of Equipment Notes -- Remedies". All payments made under the
Second Indenture in respect of the Equipment Notes will be made to the
Subordination Agent which will distribute such payments as provided in the
Intercreditor Agreement. See "Description of the New Certificates -- Payments
and Distributions".
Any amount, other than Scheduled Payments received on a Regular
Distribution Date, 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 under any
Indenture 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)
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<PAGE> 50
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, 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.
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.
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 the Pass Through Trust
Agreements 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 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 "event of default" under such Trust (i.e., any Indenture Default
under any Indenture) and its consequences 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 or the
Second Mortgagee 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 related 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 provides 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.
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<PAGE> 51
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) 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. (Section 6.01(b))
PTC EVENT OF DEFAULT
A PTC Event of Default is defined under each Pass Through Trust Agreement
as the failure to pay within 10 Business Days of the due date thereof: (i) the
outstanding Pool Balance of the applicable Class of Certificates on the Final
Maturity Date for such Class or (ii) interest due on such Class of Certificates
on any Distribution Date (unless, in the case of the Class A, B or C
Certificates, the Subordination Agent shall have made Interest Drawings, or
drawings on the Cash Collateral Account 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 on 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.
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Continental is 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 a "citizen of the United States" as defined in Title 49
of the United States Code, as amended, relating to aviation (the "Transportation
Code"), (b) be a United States certificated air carrier and (c) expressly assume
all of the obligations of Continental contained in the Pass Through Trust
Agreements, the Participation Agreements, the Indentures and the Second
Indenture; and (ii) Continental shall have delivered a certificate and an
opinion or opinions of counsel indicating that such transaction complies with
such conditions. (Section 5.02) Additionally, after giving effect to such
transaction, no Indenture Event of Default shall have occurred and be
continuing. (Indenture, Section 4.09)
The Pass Through Trust Agreements, the Participation Agreements, the
Indentures and the Second Indenture do 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 Intercreditor Agreement, the
Registration Rights Agreement or the Liquidity Facility for such Trust, without
the consent of the holders of any of the Certificates of such Trust, (i) to
evidence the succession of another
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corporation to Continental and the assumption by such corporation of
Continental's obligations under such Pass Through Trust Agreement, the
Registration Rights Agreement or such Liquidity Facility, (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 Registration Rights Agreement or such Liquidity Facility,
(iii) to correct or supplement any provision of such Pass Through Trust
Agreement, the Intercreditor Agreement, the Registration Rights Agreement or
such Liquidity Facility which may be defective or inconsistent with any other
provision in such Pass Through Trust Agreement, the Intercreditor Agreement, the
Registration Rights Agreement or such Liquidity Facility, as applicable, or to
cure any ambiguity, correct any mistake or to modify any other provisions with
respect to matters or questions arising under such Pass Through Trust Agreement,
the Intercreditor Agreement, the Registration Rights Agreement or such Liquidity
Facility, provided such action shall not materially adversely affect the
interests of the holders of such Certificates, or (without limitation of the
foregoing) as provided in the Intercreditor Agreement to give effect to or
provide for Replacement Facilities, (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, any regulatory body or
the Registration Rights Agreement to effectuate the Exchange Offer, (v) to
modify, eliminate or add to such Pass Through Trust Agreement such other
provisions as may be expressly permitted by the Trust Indenture Act and (vi) to
evidence and provide for a successor Trustee or to add to or change any
provision of such Pass Through Trust Agreement as shall be necessary to
facilitate the administration of the Trust thereunder 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)
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, of amendments or supplements for the
purposes of adding any provisions to or changing or eliminating any of the
provisions of such Pass Through Trust Agreement, the Intercreditor Agreement,
the Registration Rights Agreement or the Liquidity Facility with respect to such
Trust or of modifying the rights and obligations of the Certificateholders,
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 of payments with
respect to the Equipment Notes or other Trust Property 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 any 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
adverse to the 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 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 9.02)
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 Equipment Note, the Second
Indenture, any Participation Agreement 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
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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 (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 and/or the
Second Mortgagee, as the case may be, of such consent (or direct the
Subordination Agent to consent and notify the relevant Loan Trustee and/or the
Second Mortgagee, as the case may be, of such consent) to any amendment,
modification, waiver or supplement under the relevant Indenture, any relevant
Equipment Note, the Second Indenture, any Participation Agreement 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)
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 is Wilmington Trust Company.
With certain exceptions, the Trustees make no representations as to the
validity or sufficiency of the Pass Through Trust Agreements, the Certificates,
the Intercreditor Agreement, the Equipment Notes, the Indentures, the
Participation Agreements or other related documents. (Sections 7.04 and 7.15)
The Trustee of any Trust shall not be liable, with respect to the Certificates
of such Trust, for any action taken or omitted to be taken by it in good faith
in accordance with the direction of the holders of Certificates of such Trust
evidencing fractional undivided interests aggregating not less than a majority
in interest of such Trust. Subject to certain provisions, the Trustees shall be
under no obligation to exercise any of their rights or powers under any Pass
Through Trust Agreement at the request of any holders of Certificates issued
thereunder unless there shall have been offered to the Trustees reasonable
security and indemnity. (Section 7.03(e)) Each Pass Through Trust Agreement
provides that the Trustees in their individual or any other capacity may acquire
and hold Certificates issued thereunder and, subject to certain conditions, may
otherwise deal with Continental or with any Loan Trustee with the same rights
they would have if they were not the Trustees. (Section 7.05)
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Any Trustee may resign with respect to any or all of the Trusts of which it
is the Trustee at any time, in which event Continental will be obligated to
appoint a successor trustee. If any Trustee ceases to be eligible to continue as
Trustee with respect to a Trust or becomes incapable of acting as Trustee or
becomes insolvent, Continental may remove such Trustee, or any holder of the
Certificates of such Trust for at least six months may, on behalf of such holder
and all others similarly situated, petition any court of competent jurisdiction
for the removal of such Trustee and the appointment of a successor trustee. Any
resignation or removal of the Trustee with respect to a Trust and appointment of
a successor trustee for such Trust does not become effective until acceptance of
the appointment by the successor trustee. (Sections 7.09 and 7.10) Pursuant to
such resignation and successor trustee provisions, it is possible that a
different trustee could be appointed to act as the successor trustee with
respect to each Trust. All references in this Prospectus to the Trustee should
be read to take into account the possibility that the Trusts could have
different successor trustees in the event of such a resignation or removal.
Each Pass Through Trust Agreement provides that Continental will pay or
cause to be paid the applicable Trustee's fees and expenses. (Section 7.07)
BOOK-ENTRY; DELIVERY AND FORM
The New Certificates of each Trust will be represented by one or more
permanent global Certificates, in definitive, fully registered form without
interest coupons (the "Global Certificates"), to be deposited with the Trustee
as custodian for DTC and registered in the name of Cede, as nominee for DTC.
DTC has advised Continental as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of Section 17A of the Exchange Act. DTC was created to hold securities
for its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. 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 ("indirect
participants").
Ownership of beneficial interests in Global Certificates is limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the Global
Certificates is shown on, and the transfer of that ownership is effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). The laws of some states require that certain
purchasers of securities take physical delivery of such securities. Such limits
and such laws may limit the market for beneficial interests in the Global
Certificates.
So long as DTC or its nominee is the registered owner or holder of the
Global Certificates, DTC or such nominee, as the case may be, will be considered
the sole record owner or holder of the Certificates represented by such Global
Certificates for all purposes under the related Pass Through Trust Agreements.
No beneficial owners of an interest in the Global Certificates will be able to
transfer that interest except in accordance with DTC's applicable procedures, in
addition to those provided for under the Pass Through Trust Agreements and, if
applicable, Euroclear or Cedel.
Payments of the principal of, premium, if any, and interest on the Global
Certificates will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither Continental, the Trustee, nor any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Certificates or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
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Continental expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Certificates
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial ownership interests in the principal amount of such
Global Certificates, as shown on the records of DTC or its nominee. Continental
also expects that payments by participants to owners of beneficial interests in
such Global Certificates held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Neither Continental nor the Trustee has any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Certificates and a successor depositary is not appointed by within 90
days, the Trusts will issue certificates in definitive, fully registered form in
exchange for the Global Certificates.
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 does not purport to be complete and reference
is made to all of the provisions of the Liquidity Facilities and certain
provisions of the Intercreditor Agreement, each of which has been filed as an
exhibit to the Registration Statement and copies of which are available as set
forth under the heading "Available Information". The provisions of the Liquidity
Facilities are substantially identical except as otherwise indicated.
GENERAL
The Liquidity Provider has entered into a separate Liquidity Facility with
the Subordination Agent with respect to the Certificates of each of the Trusts
(other than the Class D Trust) pursuant to which the Liquidity Provider will
make one or more advances to the Subordination Agent to pay interest on such
Certificates subject to certain limitations. The Liquidity Facility for each
Trust (other than the Class D Trust) is 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 Facility for any Trust (other than the Class D 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
Kredietbank N.V., acting through its New York branch, is the initial liquidity
provider for each of the Trusts (other than the Class D Trust), it may be
replaced by one or more other entities with respect to the Trusts under certain
circumstances. Therefore, the liquidity provider for each Trust may differ.
DRAWINGS
The initial amount available under the Liquidity Facilities for the Class A
Trust, the Class B Trust and the Class C Trust is $8,101,025, $2,766,630 and
$2,967,925, respectively. Except as otherwise provided below, the Liquidity
Facility for each of the Class A, Class B and Class C Trusts 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 the 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
Facility for each applicable Trust does not provide for drawings thereunder to
pay for principal of or premium on the Certificates of such Trust or any
interest on the Certificates of such Trust in excess of the
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Stated Interest Rate for such Trust or more than three semiannual installments
of interest thereon or principal of or interest or premium on the Certificates
of any other Trust. (Liquidity Facilities, Section 2.02; Intercreditor
Agreement, Section 3.6)
Each payment by the Liquidity Provider under each Liquidity Facility
reduces pro tanto the Maximum Available Commitment under such Liquidity
Facility, subject to reinstatement as hereinafter described. With respect to any
Interest Drawings under the Liquidity Facility for any Trust, upon reimbursement
of the 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 then Required Amount of such Liquidity Facility;
provided, however, that such Liquidity Facility will not be so reinstated at any
time after (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 Facility for any Trust will be automatically increased or 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))
If at any time the short-term unsecured debt rating of the Liquidity
Provider then issued by either Rating Agency is lower than the Threshold Rating,
each Liquidity Facility provided by the Liquidity Provider will be required to
be replaced by a Replacement Facility. In the event that such Liquidity Facility
is not replaced with a Replacement Facility within 30 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 means 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 Liquidity Provider), in a face amount (or in an aggregate
face amount) equal to 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. Without
limitation of the form that a Replacement Facility otherwise may have pursuant
to the preceding sentence, a Replacement Facility for any Class of Certificates
may have a stated expiration date earlier than 15 days after the Final Maturity
Date of such Class of Certificates so long as such Replacement Facility provides
for the Non-Extension Drawing described below. (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 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.
The Liquidity Facility for each applicable Trust provides that the
Liquidity Provider's obligations thereunder will expire on the earliest of (i)
15 days later than the Final Maturity Date for the Certificates of such Trust;
(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
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such Liquidity Facility; (iv) the date on which the Liquidity Provider makes a
Final Drawing thereunder (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.
The Intercreditor Agreement provides for the replacement of any Replacement
Facility for any applicable Trust (other than a Replacement Facility which
expires no earlier than 15 days later than the Final Maturity Date for the
Certificates of such Trust) in the event that such Replacement Facility is not
extended at least 25 days prior to its then scheduled expiration date. In the
event such Replacement Facility is not so extended or replaced by the 25th day
prior to its then scheduled expiration date, the Subordination Agent shall
request the 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 Replacement Facility would be
used. (Intercreditor Agreement, Section 3.6(d))
Continental may, subject to certain limitations, arrange for a Replacement
Facility at any time to replace the Liquidity Facility for any applicable Trust
(including without limitation any Replacement Facility described in the
following sentence). If any Replacement Facility is provided at any time after
the Downgrade Drawing (or a Non-Extension Drawing in the case of a Replacement
Facility) under such Liquidity Facility, the funds with respect to the relevant
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 Subordination Agent will hold the proceeds of a Final Drawing made in
accordance with the provisions set forth under "-- Liquidity Events of Default"
below 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(e))
Drawings under any Liquidity Facility (other than a Final Drawing) 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 the 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.
The amount drawn under any Liquidity Facility or any Replacement Facility
for any Trust by reason of a Downgrade Drawing (or a Non-Extension Drawing in
the case of a Replacement Facility) 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 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 initial Liquidity Facilities
(other than any portion thereof applied to the payment of interest on the
Certificates) will bear interest (i) during the period from the date of its
borrowing
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to (but excluding) the third business day following the Liquidity Provider's
receipt of the notice of such Downgrade Drawing, at the Base Rate plus .45% per
annum on the amount of such Downgrade Drawing and (ii) thereafter, at a rate
equal to LIBOR for the applicable Interest Period plus .45% 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, Section 2.06)
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
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
Liquidity Provider may, in its discretion, cause a Final Drawing thereunder in
an amount equal to the then Maximum Available Commitment thereunder. After such
Final Drawing, (i) the Liquidity Provider will have no further obligation to
make Drawings under the Liquidity Facility, (ii) any Drawing remaining
unreimbursed will automatically be converted into a Final Drawing under such
Liquidity Facility, and (iii) all amounts owing to the Liquidity Provider will
automatically be accelerated. Notwithstanding the foregoing, the Subordination
Agent will be obligated to pay amounts owing to the Liquidity Provider 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 PROVIDER
The initial Liquidity Provider for each Trust (other than the Class D
Trust) will be Kredietbank N.V., a bank organized under the laws of Belgium,
acting through its New York branch. Kredietbank N.V. has short term debt ratings
of P-1 from Moody's and A-1+ from Standard & Poor's.
DESCRIPTION OF THE INTERCREDITOR AGREEMENT
The following summary describes all material provisions of the
Intercreditor Agreement. The summary does not purport to be complete and
reference is made to all of the provisions of the Intercreditor Agreement, which
has been filed as an exhibit to the Registration Statement and is available as
set forth under the heading "Available Information".
INTERCREDITOR RIGHTS
Controlling Party
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Provider have agreed that, with respect to any Indenture and (in the case of
clause (b) below) the Second Indenture at any given time, the Loan Trustee or
the Second Mortgagee, as the case may be, 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 shall have occurred and be continuing
thereunder, and (b) after the occurrence and during the continuance of an
Indenture Default under such Indenture, in taking, or refraining from taking,
any action thereunder or with respect to the Equipment Notes
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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), or under
the Second Indenture, by the Controlling Party, subject to the limitations
described below. See "Description of the New 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, the Liquidity Provider will have
the right to elect 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) will 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 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, 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.
The Subordination Agent may from time to time during the continuance of an
Indenture Default (and before the occurrence of a Triggering Event) commission
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 (whether under any Indenture or the Second Indenture) 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 pay the Liquidity Obligations (other than any interest accrued
thereon or the principal amount of any Drawing) (the "Liquidity Expenses")
to the Liquidity Provider;
(ii) to pay interest accrued on the Liquidity Obligations to the
Liquidity Provider;
(iii) to pay or reimburse the Liquidity Provider 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 pay Expected Distributions to the holders of Class A
Certificates;
(v) to pay Expected Distributions to the holders of Class B
Certificates;
(vi) to pay Expected Distributions to the holders of Class C
Certificates;
(vii) to pay Expected Distributions to the holders of Class D
Certificates; and
(viii) to pay certain fees and expenses of the Subordination Agent and
the Trustees.
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<PAGE> 60
"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 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
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.
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 whether under any
Indenture or the Second Indenture and certain other payments will be promptly
distributed by the Subordination Agent in the following order of priority:
(i) 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 Provider 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 (the "Administration Expenses");
(ii) to the Liquidity Provider, to pay the Liquidity Expenses;
(iii) to the Liquidity Provider, to pay interest accrued on the
Liquidity Obligations;
(iv) to the Liquidity Provider, 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 be 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 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) is
applicable);
(v) to pay certain fees, taxes, charges and other amounts payable to
the Subordination Agent, any Trustee or any Certificateholder;
(vi) to pay Adjusted Expected Distributions to the holders of Class A
Certificates;
(vii) to pay Adjusted Expected Distributions to the holders of Class B
Certificates;
(viii) to pay Adjusted Expected Distributions to the holders of Class C
Certificates; and
(ix) to pay Adjusted Expected Distributions to the holders of 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 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 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 unpaid 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, and
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<PAGE> 61
(B) the amount of the excess, if any, of (i) the amount described in
subclause (A)(x), 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 the sum of the applicable LTV Collateral Amounts for
each Aircraft, minus the Pool Balance for each Class of Certificates, if any,
senior to such Class, after giving effect to any distribution on such
Distribution Date of principal of the Equipment Notes held by the Trust or
Trusts of 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 or
Loss under and as defined in the relevant Indenture, the amount of the insurance
proceeds paid to the related Loan Trustee and/or the Second Mortgagee in respect
thereof to the extent then held by such Loan Trustee and/or the Second Mortgagee
(and/or on deposit in the Special Payments Account) or payable to such Loan
Trustee and/or the Second Mortgagee 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 41.00%, for the Class B
Certificates 55.00%, for the Class C Certificates 69.90% and for the Class D
Certificates 84.89%.
"Appraised Current Market Value" of any Aircraft means the lower of the
average and the median of the most recent three 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).
"Appraisal" means a fair market value appraisal (which may be a "desktop"
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.
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 (other than the Class D 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 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, the related Indenture
or the Second Indenture (or, if applicable, the related Participation Agreement
or other related document), (i) if no Indenture Default shall have occurred and
be continuing with respect to such Indenture (or, in the case of the Second
Indenture, any Indenture), the Subordination Agent shall request instructions
from the Trustees and shall vote or consent in accordance with the directions of
the Trustees (in
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<PAGE> 62
the case of each such Trustee, with respect to the Equipment Notes held in such
Trust) constituting, in the aggregate, directions with respect to the requisite
principal amount of Equipment Notes under such Indenture (or, in the case of the
Second Indenture, with respect to the requisite aggregate principal amount of
Equipment Notes under all of the Indentures) and (ii) if any Indenture Default
shall have occurred and be continuing with respect to such Indenture (or, in the
case of the Second Indenture, any 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 the Liquidity Provider, reduce the amount
of principal or interest payable by Continental under any Equipment Note issued
under any Indenture or have any other effect which would require the consent of
the holder of each Equipment Note as described in "Description of the Equipment
Notes -- Modification of Indentures". (Intercreditor Agreement, Section 9.1)
THE SUBORDINATION AGENT
Wilmington Trust Company is 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)
DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft consist of six Boeing 737-3T0 aircraft manufactured in 1986
and four McDonnell Douglas MD-82 aircraft, one manufactured in 1985, one in 1986
and two in 1987. All of the Aircraft are currently leased by Continental. 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 737-3T0 Aircraft
The Boeing 737-3T0 aircraft is a medium range aircraft with a seating
capacity of approximately 128 passengers (2-class). The Boeing 737-3T0 Aircraft
are powered by two CFM International CFM56-3B1 engines. Approximately 982 Boeing
737-300 series aircraft have been delivered as of April 30, 1997 (as provided by
Boeing).
McDonnell Douglas MD-82 Aircraft
The McDonnell Douglas MD-82 aircraft is a medium range aircraft with a
seating capacity of approximately 141 passengers (2-class). The McDonnell
Douglas MD-82 Aircraft are powered by two Pratt & Whitney JT8D-217A engines.
Approximately 990 MD-80 series (MD-81, MD-82 and MD-83) aircraft have been
manufactured (as provided by the AISI appraisal letter dated May 20, 1997,
attached in Appendix II hereto).
THE APPRAISALS
The table below sets forth the appraised values and certain additional
information regarding the Aircraft.
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<PAGE> 63
<TABLE>
<CAPTION>
AIRCRAFT APPRAISED VALUE
REGISTRATION ------------------------
AIRCRAFT TYPE ENGINE TYPE NUMBER AISI BK MBA
- ---------------------------------------------- ----------- ------------ ------ ------ ------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Boeing 737-3T0................................ CFM56-3B1 N12322 $18.98 $18.25 $21.58
Boeing 737-3T0................................ CFM56-3B1 N10323 18.98 18.25 21.58
Boeing 737-3T0................................ CFM56-3B1 N14324 18.98 18.25 21.58
Boeing 737-3T0................................ CFM56-3B1 N69333 18.98 19.00 21.58
Boeing 737-3T0................................ CFM56-3B1 N14334 18.98 19.00 21.58
Boeing 737-3T0................................ CFM56-3B1 N14335 18.98 19.00 21.58
McDonnell Douglas MD-82....................... JT8D-217A N12811 15.30 15.55 19.71
McDonnell Douglas MD-82....................... JT8D-217A N15820 16.10 17.00 20.67
McDonnell Douglas MD-82....................... JT8D-217A N18833 16.90 18.05 21.62
McDonnell Douglas MD-82....................... JT8D-217A N10834 16.90 18.05 21.62
</TABLE>
The appraised values set forth in the foregoing chart were determined by
three independent aircraft appraisal and consulting firms, AISI, BK and MBA, as
of May 20, May 16 and June 6, 1997, respectively. 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 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 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 be as appraised or
sufficient to satisfy in full payments due on the Equipment Notes issued
thereunder or the Certificates.
DESCRIPTION OF THE EQUIPMENT NOTES
The statements under this caption are summaries and do not purport to be
complete. The summaries make use of terms defined in and reference is made to
all of the provisions of the Equipment Notes, the Indentures, the Second
Indenture and the Participation Agreements. Except as otherwise indicated, the
following summaries relate to the Equipment Notes, the Indenture, the Second
Indenture and the Participation Agreement that may be applicable to each
Aircraft, forms of which are filed as exhibits to the Registration Statement and
are available as set forth under the heading "Available Information".
GENERAL
The Equipment Notes have been issued in four series with respect to each
Aircraft under a separate Indenture between Continental and Wilmington Trust
Company, as Loan Trustee. Continental's obligations under the Equipment Notes
issued with respect to each Aircraft are general obligations of Continental.
SUBORDINATION
Series B Equipment Notes issued in respect of any Aircraft are 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 are
subordinated in right of payment to such Series B Equipment Notes and Series D
Equipment Notes issued in respect of such Aircraft are subordinated in right of
payment to such Series C Equipment Notes. On each Equipment Note payment 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
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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 any 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) payments of interest and principal due on Series C Equipment Notes issued
in respect of any Aircraft 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 with respect to Certificates issued
by such Trust (subject to change as provided in the Registration Rights
Agreement) 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.
The aggregate original principal amounts of the Equipment Notes issued with
respect to each Aircraft, as such Equipment Notes are held in each of the
Trusts, are as follows:
<TABLE>
<CAPTION>
AIRCRAFT TRUST 1997-2A TRUST 1997-2B TRUST 1997-2C TRUST 1997-2D
REGISTRATION EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
NUMBER NOTES NOTES NOTES NOTES TOTAL
- ------------------------------ ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
N12322........................ $ 7,781,810 $ 2,657,242 $ 2,828,029 $ 2,844,973 $ 16,112,054
N10323........................ 7,781,810 2,657,242 2,828,029 2,844,973 16,112,054
N14324........................ 7,781,810 2,657,242 2,828,029 2,844,973 16,112,054
N69333........................ 7,790,010 2,660,042 2,831,009 2,847,971 16,129,032
N14334........................ 7,790,010 2,660,042 2,831,009 2,847,971 16,129,032
N14335........................ 7,790,010 2,660,042 2,831,009 2,847,971 16,129,032
N12811........................ 6,375,511 2,177,034 2,316,960 2,330,840 13,200,345
N15820........................ 6,970,009 2,380,034 2,533,008 2,548,184 14,431,235
N18833........................ 7,400,510 2,527,040 2,689,459 2,705,572 15,322,581
N10834........................ 7,400,510 2,527,040 2,689,459 2,705,572 15,322,581
----------- ----------- ----------- ----------- ------------
Total.................... $ 74,862,000 $ 25,563,000 $27,206,000 $27,369,000 $155,000,000
</TABLE>
Interest will be payable on the unpaid principal amount of each Equipment
Note at the rate applicable to such Equipment Note on June 30 and December 30 of
each year, commencing on December 30, 1997. Such interest will be computed on
the basis of a 360-day year of twelve 30-day months. Under certain circumstances
described in "Exchange Offer; Registration Rights", the interest rates for the
Equipment Notes will be increased to the extent described therein.
The principal of the Equipment Notes purchased by each Trust will be
payable as set forth in Appendix IV.
If any date scheduled for any payment of principal, premium (if any) or
interest with respect to the Equipment Notes is not a Business Day, such payment
will be made on the next succeeding Business Day without any additional
interest.
REDEMPTION
If an Event of Loss occurs with respect to any Aircraft and such Aircraft
is not replaced by Continental under the related Indenture and Second Indenture,
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 2.09)
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All of the Equipment Notes issued with respect to the 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 2.10)
"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
(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, "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, 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 Aircraft are secured by a
first priority security interest in such Aircraft and by a second priority
security interest in each of the other Aircraft. If the Equipment Notes issued
under an Indenture and other obligations secured thereunder and then due have
been paid in full, the applicable Aircraft will be released from the lien of
such Indenture and, so long as no Indenture Default or certain other defaults
exist under any other Indenture at such time, will be released from the lien of
the Second Indenture.
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, if any, relating thereto, will be invested and reinvested by such Loan
Trustee, at the direction of Continental, in investments described in the
related Indenture. (Indentures, Section 6.06)
LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The following tables titled "Loan to Value Ratios" set forth loan to
Aircraft value ratios for the Equipment Notes issued in respect of each Aircraft
as of the specified Regular Distribution Dates obtained by
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<PAGE> 66
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. Differences may occur due to rounding.
The Loan to Value Ratio tables are based on the assumption that the value
of each Aircraft set forth opposite the Issuance Date included in each table
depreciates by the respective percentages indicated in the table titled
"Depreciation Assumptions" below for the Boeing 737-300 Aircraft which were each
manufactured in 1986 (aircraft registration numbers N12322, N10323, N14324,
N69333, N14334 and N14335), and for the McDonnell Douglas MD-82 Aircraft
manufactured in 1985 (aircraft registration number N12811), manufactured in 1986
(aircraft registration number N15820) and manufactured in 1987 (aircraft
registration numbers N18833 and N10834).
Depreciation Assumptions
<TABLE>
<CAPTION>
VALUE DEPRECIATION PERCENTAGES
---------------------------------------
MANUFACTURE YEAR: 1986 1985 1986 1987
AIRCRAFT: B737-300 MD-82 MD-82 MD-82
----------------------------------------------- -------- ------ ----- -----
YEAR BEGINNING
-----------------------------------------------
<S> <C> <C> <C> <C>
1997........................................... 2.6% 3.1% 3.1% 3.0%
1998........................................... 2.6 3.1 3.1 3.0
1999........................................... 2.6 3.1 3.1 3.0
2000........................................... 2.6 5.3 3.1 3.0
2001........................................... 5.1 5.3 5.1 3.0
2002........................................... 5.1 5.3 5.1 5.0
2003........................................... 5.1 5.3 5.1 5.0
2004........................................... 5.1 5.3 5.1 5.0
2005........................................... 5.1 7.9 5.1 5.0
2006........................................... 7.7 7.9 7.7 5.0
</TABLE>
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.
Loan to Value Ratios
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER AIRCRAFT REGISTRATION NUMBER AIRCRAFT REGISTRATION NUMBER
N12322 N10323 N14324
---------------------------------- ---------------------------------- ----------------------------------
EQUIPMENT EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO BALANCE VALUE RATIO
- -------------------- ----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 25, 1997....... $ 16.11 $18.98 84.89% $ 16.11 $18.98 84.89% $ 16.11 $18.98 84.89%
June 30, 1998....... 15.07 18.49 81.53 15.07 18.49 81.53 15.07 18.49 81.53
June 30, 1999....... 13.90 17.99 77.26 13.90 17.99 77.26 13.90 17.99 77.26
June 30, 2000....... 12.56 17.50 71.77 12.56 17.50 71.77 12.56 17.50 71.77
June 30, 2001....... 11.12 17.01 65.42 11.12 17.01 65.42 11.12 17.01 65.42
June 30, 2002....... 10.33 16.04 64.43 10.33 16.04 64.43 10.33 16.04 64.43
June 30, 2003....... 8.86 15.07 58.79 8.86 15.07 58.79 8.86 15.07 58.79
June 30, 2004....... 6.67 14.10 47.29 6.67 14.10 47.29 6.67 14.10 47.29
June 30, 2005....... 4.66 13.13 35.51 4.66 13.13 35.51 4.66 13.13 35.51
June 30, 2006....... 2.77 12.17 22.77 2.77 12.17 22.77 2.77 12.17 22.77
</TABLE>
65
<PAGE> 67
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER AIRCRAFT REGISTRATION NUMBER AIRCRAFT REGISTRATION NUMBER
N69333 N14334 N14335
---------------------------------- ---------------------------------- ----------------------------------
EQUIPMENT EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO BALANCE VALUE RATIO
- -------------------- ----------- ---------- ------- ----------- ---------- ------- ----------- ---------- -------
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 25, 1997....... $ 16.13 $19.00 84.89% $ 16.13 $19.00 84.89% $ 16.13 $19.00 84.89%
June 30, 1998....... 15.09 18.51 81.53 15.09 18.51 81.53 15.09 18.51 81.53
June 30, 1999....... 13.92 18.01 77.26 13.92 18.01 77.26 13.92 18.01 77.26
June 30, 2000....... 12.57 17.52 71.77 12.57 17.52 71.77 12.57 17.52 71.77
June 30, 2001....... 11.14 17.02 65.42 11.14 17.02 65.42 11.14 17.02 65.42
June 30, 2002....... 10.34 16.06 64.43 10.34 16.06 64.43 10.34 16.06 64.43
June 30, 2003....... 8.87 15.09 58.79 8.87 15.09 58.79 8.87 15.09 58.79
June 30, 2004....... 6.68 14.12 47.29 6.68 14.12 47.29 6.68 14.12 47.29
June 30, 2005....... 4.67 13.15 35.51 4.67 13.15 35.51 4.67 13.15 35.51
June 30, 2006....... 2.77 12.18 22.77 2.77 12.18 22.77 2.77 12.18 22.77
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N12811 AIRCRAFT REGISTRATION NUMBER N15820
--------------------------------------------- ---------------------------------------------
EQUIPMENT NOTE EQUIPMENT NOTE
OUTSTANDING ASSUMED LOAN TO OUTSTANDING ASSUMED LOAN TO
DATE BALANCE AIRCRAFT VALUE VALUE RATIO BALANCE AIRCRAFT VALUE VALUE RATIO
- ---------------------------------- -------------- -------------- ----------- -------------- -------------- -----------
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
June 25, 1997..................... $13.20 $15.55 84.89% $14.43 $17.00 84.89%
June 30, 1998..................... 12.29 15.07 81.53 13.43 16.47 81.53
June 30, 1999..................... 11.27 14.59 77.26 12.32 15.95 77.26
June 30, 2000..................... 10.12 14.10 71.77 11.07 15.42 71.77
June 30, 2001..................... 8.69 13.28 65.42 9.74 14.89 65.42
June 30, 2002..................... 8.03 12.46 64.43 9.04 14.03 64.43
June 30, 2003..................... 6.84 11.63 58.79 7.74 13.16 58.79
June 30, 2004..................... 5.11 10.81 47.29 5.81 12.29 47.29
June 30, 2005..................... 3.55 9.98 35.51 4.06 11.42 35.51
June 30, 2006..................... 1.99 8.75 22.77 2.40 10.56 22.77
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N18833 AIRCRAFT REGISTRATION NUMBER N10834
--------------------------------------------- ---------------------------------------------
EQUIPMENT NOTE EQUIPMENT NOTE
OUTSTANDING ASSUMED LOAN TO OUTSTANDING ASSUMED LOAN TO
DATE BALANCE AIRCRAFT VALUE VALUE RATIO BALANCE AIRCRAFT VALUE VALUE RATIO
- ---------------------------------- -------------- -------------- ----------- -------------- -------------- -----------
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
June 25, 1997..................... $15.32 $18.05 84.89% $15.32 $18.05 84.89%
June 30, 1998..................... 14.28 17.51 81.53 14.28 17.51 81.53
June 30, 1999..................... 13.11 16.97 77.26 13.11 16.97 77.26
June 30, 2000..................... 11.79 16.43 71.77 11.79 16.43 71.77
June 30, 2001..................... 10.39 15.88 65.42 10.39 15.88 65.42
June 30, 2002..................... 9.89 15.34 64.43 9.89 15.34 64.43
June 30, 2003..................... 8.49 14.44 58.79 8.49 14.44 58.79
June 30, 2004..................... 6.40 13.54 47.29 6.40 13.54 47.29
June 30, 2005..................... 4.49 12.64 35.51 4.49 12.64 35.51
June 30, 2006..................... 2.67 11.73 22.77 2.67 11.73 22.77
</TABLE>
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will include: (a) the failure by
Continental to pay any interest or principal or premium, if any, when due, under
any Equipment Note issued thereunder that continues for 10 Business Days or
more, or the failure to pay any other amount payable by it thereunder or under
the related Participation Agreement when due, which failure shall continue for
more than 10 Business Days after Continental has received written notice from
the Loan Trustee of the failure to make such payment when due,
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<PAGE> 68
(b) the failure by Continental to maintain certain required insurance, (c) the
failure by Continental to perform or observe in any material respect any other
covenant or obligation under such Indenture or certain related documents that
continues after notice and specified cure periods, (d) the untruth or inaccuracy
in any material respect of any representation or warranty made by Continental in
such Indenture, in the related Participation Agreement or in certain related
documents which is material at the time in question, after notice and a
specified cure period, (e) the occurrence and continuation of an Indenture
Default under any of the other Indentures or (f) the occurrence of certain
events of bankruptcy, reorganization or insolvency of Continental. (Indenture,
Section 5.01)
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.
(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 declare the principal of
all such Equipment Notes issued thereunder immediately due and payable, together
with all accrued but unpaid interest thereon. Since the occurrence and
continuation of an Indenture Default under an Indenture constitutes an Indenture
Default under each other Indenture, remedies will be exercisable under the
Indentures and the Second Indenture with respect to all Aircraft if an Indenture
Default exists under any Indenture. 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. (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 one or more of the remedies under such Indenture. The Loan Trustee
will not be entitled to exercise any rights under the Second Indenture in
respect of any Aircraft without the prior written consent of the Loan Trustee
under the related Indenture so long as the lien of such Indenture has not been
discharged and the Loan Trustee has not commenced to foreclose such lien in
respect of such Aircraft thereunder (Second Indenture, Section 5.02(d)). With
respect to each Aircraft, the Second Indenture will be discharged at the time of
discharge of the Indenture relating to such Aircraft so long as no Indenture
Default or certain other defaults exist under any other Indenture at such time
(Second Indenture, Section 11.01).
Section 1110 of the U.S. Bankruptcy Code provides in relevant part that the
right of lessors, conditional vendors and holders of purchase-money equipment
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, however, in relevant part that the right of a lessor, conditional
vendor or holder of a purchase-money equipment 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
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<PAGE> 69
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 purchase-money equipment 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 purchase-money
equipment 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.
On the Issuance Date, the relevant Loan Trustee has received a reasoned
opinion of Milbank, Tweed, Hadley & McCloy, counsel to the Initial Purchasers,
that, subject to the assumptions and qualifications contained therein, such Loan
Trustee's right to take possession of the Aircraft under the applicable
Indenture would be entitled to the benefits of Section 1110 with respect to the
airframe and engines comprising such 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. In rendering such opinion,
Milbank, Tweed, Hadley & McCloy has relied, among other things, on (i) an
officer's certificate of Continental to the effect that (a) Continental has
never held title to nor claimed to be the owner of the Aircraft, (b) immediately
prior to its purchase of the relevant Aircraft, it was the lessee of such
Aircraft under a lease agreement (the "Existing Lease") designated as such and
(c) the Existing Lease was entered into as part of a settlement of liability
under Title IV of ERISA with the PBGC at a time when Continental was a debtor
under Title 11 of the U.S. Bankruptcy Code, and (ii) the provisions of the
Aircraft Equipment Settlement Leases Act of 1993 (the "Settlement Act"), which
provides in relevant part that if the PBGC as part of a settlement of liability
under ERISA enters into an agreement with a debtor under Title 11 of the U.S.
Bankruptcy Code which agreement provides that it is to be treated as a lease,
then such agreement will be treated as a lease for purposes of Section 1110. The
opinion of Milbank, Tweed, Hadley & McCloy states that, while the residual value
sharing arrangement provided by Continental to the PBGC with respect to the
Aircraft may give rise to questions as to whether each Existing Lease is a "true
lease" for tax purposes and hence for Section 1110 purposes, the plain language
of the Settlement Act effectively eliminates such uncertainty. In the opinion of
Milbank, Tweed, Hadley & McCloy, on the basis that the Existing Lease is a lease
for purposes of Section 1110, and for the reasons noted therein, the purchase of
the relevant Aircraft by Continental would be an acquisition of rights by
Continental in the Aircraft sufficient to support the existence of a purchase
money security interest for purposes of Section 1110, notwithstanding
Continental's prior interest in the Aircraft as lessee under the Existing Lease.
See First National Bank of Geneva v. United States, 13 Cl. Ct. 385 (1987) (lease
of equipment, followed by purchase of equipment, supports existence of purchase
money security interest).
The opinion of Milbank, Tweed, Hadley & McCloy does not address the
possible replacement of an Aircraft after an Event of Loss in the future, the
consummation of which is conditioned upon the contemporaneous delivery of an
opinion of counsel to the effect that the related Loan Trustee 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 "-- Agreements Relating to the Aircraft -- Events of Loss". The
opinion of Milbank, Tweed, Hadley & McCloy does also not address the
availability of Section 1110 with respect to any possible lessee of an Aircraft
if it is leased by Continental.
The Second Indenture creates, with respect to the Equipment Notes issued
with respect to each Aircraft, a valid security interest in each of the other
Aircraft, which security interest ranks behind the security interest created by
the applicable Indenture with respect to each such Aircraft. In connection with
a reorganization under the Bankruptcy Code of Continental, the effect of such
additional, second-ranking security interest under the Second Indenture, in
conjunction with Section 1110, would be as follows: if the relevant Loan Trustee
were to repossess and sell an Aircraft in the exercise of its special
repossessory rights under
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<PAGE> 70
Section 1110 with respect to the Aircraft, (a) proceeds up to the amount owing
on the Equipment Notes issued under the Indenture with respect to such Aircraft
would be distributable outside the bankruptcy estate in respect of such
Equipment Notes, and (b) any proceeds in excess of such amount would become part
of the bankruptcy estate subject to a valid security interest that secures all
other Equipment Notes. All payments made under the Second Indenture in respect
of the Equipment Notes will be made to the Subordination Agent which will
distribute such payments as provided in the Intercreditor Agreement. See
"Description of the New Certificates -- Payments and Distribution".
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the related Loan Trustee or the Second Mortgagee may be
applied to reimburse such Loan Trustee or the Second Mortgagee for any tax,
expense or other loss incurred by it and to pay any other amounts due to such
Loan Trustee or the Second Mortgagee prior to any payments to holders of the
Equipment Notes issued under such Indenture or payments under the Second
Indenture. (Indentures, Section 3.03; Second Mortgage, Section 3.01; Second
Mortgage, Section 3.01)
MODIFICATION OF INDENTURES
Without the consent of holders of a majority in principal amount of the
Equipment Notes outstanding under any Indenture, the provisions of such
Indenture and the related Participation Agreement may not be amended or
modified, except to the extent indicated below.
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. (Indenture, Section
10.01(b))
Without the consent of 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 or 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. (Indenture,
Section 10.01(a))
INDEMNIFICATION
Continental will be required to indemnify each Loan Trustee, the Second
Mortgagee, the Liquidity Provider, the Subordination Agent and each Trustee, but
not the holders of Certificates, for certain losses, claims and other matters.
AGREEMENTS RELATING TO THE AIRCRAFT
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. Leases are also permitted to U.S. air carriers and foreign
air carriers that have their principal executive office in certain specified
countries. In addition, a lessee may not be subject to insolvency or similar
proceedings at the commencement of such lease. (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, and the Second Mortgagee'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, and the Second Mortgagee, to realize upon its security
interest
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<PAGE> 71
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 and to record each Indenture under the
Transportation Code. (Indenture, Section 4.02(e)) Such recordation of the
Indenture and certain 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.
Liens
Continental is required to maintain each Aircraft free of any liens, other
than the rights of the holders of the related Equipment Notes arising under the
applicable Indenture, 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; and (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 Loan 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 holders of Equipment Notes therein or impair
the lien of the relevant Indenture or Second Indenture. (Indenture, Section 4.01
and Annex A)
Maintenance; Replacement of Parts; Alterations
Continental is required to maintain, service, repair and overhaul the
Aircraft so as to keep them in as good operating condition as on the Issuance
Date, ordinary wear and tear excepted. 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 lessee 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 value, utility, or remaining useful life of the related Aircraft,
Airframe or Engine or invalidate the Aircraft's airworthiness certificate.
(Indenture, Section 4.04(d))
Insurance
Continental is required to maintain, at its expense (or at the expense of a
permitted lessee), all-risk aircraft hull insurance covering each Aircraft, at
all times in an amount not less than the aggregate outstanding principal amount
of the Equipment Notes related to such Aircraft, together with six months of
accrued interest thereon (the "Debt Balance"). 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, such proceeds up to the Debt Balance 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, such proceeds will be
payable directly to Continental so long as an Indenture Default or certain other
defaults do not exist with respect to the Indenture. So long as the loss does
not
70
<PAGE> 72
constitute an Event of Loss, insurance proceeds will be applied to repair or
replace the property. (Indenture, Section 4.06 and Annex B)
In addition, Continental is obligated to maintain comprehensive airline
liability insurance at its expense (or at the expense of a permitted lessee),
including, without limitation, passenger liability, baggage liability, cargo and
mail 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. (Indenture, Section 4.06 and Annex
B)
Continental is also required to maintain war-risk, hijacking or allied
perils insurance if it (or any permitted lessee) operates any Aircraft, Airframe
or Engine in any area of recognized hostilities or if Continental (or any
permitted lessee) maintains such insurance with respect to other aircraft
operated on the same international routes or areas on or in which the Aircraft
is operated. (Indenture, Section 4.06 and Annex B)
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. (Indenture, Section 4.06 and Annex B)
In respect of each Aircraft, Continental is required to name as additional
insured parties the relevant Loan Trustee, the Second Mortgagee and holders of
the Equipment Notes and 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 maintained
under the Indenture 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 or any other
person and to insure the respective interests of such additional insured
persons, regardless of any breach or violation of any representation, warranty,
declaration, term or condition contained in such policies by Continental or any
permitted lessee. (Indenture, Section 4.06 and Annex 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. If Continental elects to make such
payment, not later than the first Business Day following the earlier 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 pay to the Loan Trustee the aggregate
unpaid principal of the related Equipment Notes and accrued interest thereon up
to, but not including, the date of such payment, together with certain
additional amounts, but, in any case, without any Make-Whole Premium.
(Indenture, Sections 2.09 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 will do so
within 120 days after the occurrence of such Event of Loss and will provide to
the relevant Loan Trustee and the Second Mortgagee 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 Loan Trustee 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). (Indenture, Section 4.05(c))
71
<PAGE> 73
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, 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 and the related Indenture, the lien of the
Indenture and the obligation of Continental thereafter to make the scheduled
interest and principal payments with respect thereto shall cease. (Indenture,
Sections 2.09 and 4.05(a)(ii)) The Debt Balance and other payments made under
the Indenture by Continental shall be deposited with the applicable Loan
Trustee.
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 Indenture. (Indenture, Section
4.04(e))
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 non-U.S. governmental entity or purported non-U.S.
governmental entity (other than the country of registration of the relevant
Aircraft) for a period exceeding 180 consecutive days (exceeding 90 consecutive
days in the case of a requisition of title); (v) 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 (vi) with respect to any Engine, any
divestiture of title to such Engine shall be treated as an Event of Loss.
(Indenture, Annex A)
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
EXCHANGE OF OLD CERTIFICATES FOR NEW CERTIFICATES
The following summary describes all material generally applicable U.S.
federal income tax consequences to Certificateholders of the exchange of the Old
Certificates for New Certificates. This summary is intended to address the
beneficial owners of Certificates 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, or estates or trusts the
income of which is subject to U.S. federal income taxation regardless of its
source that will hold the Certificates as capital assets.
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<PAGE> 74
The exchange of Old Certificates for New Certificates (the "Exchange")
pursuant to the Exchange Offer will not be a taxable event for U.S. federal
income tax purposes. As a result, a holder of an Old Certificate whose Old
Certificate is accepted in an Exchange Offer will not recognize gain or loss on
the Exchange. A tendering holder's tax basis in the New Certificates will be the
same as such holder's tax basis in its Old Certificates. A tendering holder's
holding period for the New Certificates received pursuant to the Exchange Offer
will include its holding period for the Old Certificates surrendered therefor.
ALL HOLDERS OF OLD CERTIFICATES ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES
OF THE EXCHANGE OF OLD CERTIFICATES FOR NEW CERTIFICATES AND OF THE OWNERSHIP
AND DISPOSITION OF NEW CERTIFICATES RECEIVED IN THE EXCHANGE OFFER IN LIGHT OF
THEIR OWN PARTICULAR CIRCUMSTANCES.
ERISA CONSIDERATIONS
IN GENERAL
ERISA imposes certain requirements on employee benefit plans subject to
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 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 Initial Purchasers, the
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
73
<PAGE> 75
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, 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.
CLASS A CERTIFICATES
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 Initial Purchasers which are substantially the same as the
administrative exemption issued to The First Boston Corporation, Prohibited
Transaction Exemption 89-90 (54 Fed. Reg. 42,597 (1989)), 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
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 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, and generally may not include cash
held for the purpose of acquiring additional receivables after the closing date.
However, the Department of Labor has indicated that in its view this requirement
would be satisfied where the receivables, although specifically identified as of
the closing date, are not all transferred to the trust on the closing date for
administrative or other reasons but will be transferred to the trust shortly
after the closing date. In addition, the Department of Labor has proposed
amendments to the Underwriter Exemption, effective as of January 1, 1992, which
would allow up to 25 percent of the principal amount of the certificates being
offered to be held in a pre-funding account for a period of up to three months
following the
74
<PAGE> 76
closing date for the acquisition of additional qualifying receivables, if
certain conditions are satisfied. The proposed amendments were published in the
Federal Register dated May 23, 1997.
The Underwriter Exemption does not apply to the Class B, Class C or Class D
Certificates. 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 Underwriter Exemption, as
well as the availability of any other exemptions with respect to transactions to
which the Underwriter Exemption may not apply.
CLASS B, CLASS C AND CLASS D CERTIFICATES
The Underwriter Exemption does not apply to the Class B, Class C or Class D
Certificates. The Class B, Class C and Class D Certificates may not be acquired
with the assets of a Plan, except that such Certificates may be acquired with
the assets of an insurance company general account that may be deemed to
constitute Plan assets, provided that the conditions of PTCE 95-60 are satisfied
at the time of the acquisition (and during the holding) of such Certificates.
Holders of Class B Certificates, Class C Certificates or Class D Certificates
that tender Old Certificates in exchange for New Certificates will be deemed to
have represented and warranted that either (i) no Plan assets have been used to
acquire and hold such Certificate or (ii) the acquisition and holding of such
Certificate is exempt from the prohibited transaction restrictions of ERISA and
the Code pursuant to PTCE 95-60.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Certificates for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Certificates. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Certificates received in
exchange for Old Certificates where such Old Certificates were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that, starting on the Expiration Date and ending on the close of business
180 days after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until such date all broker-dealers effecting transactions
in the New Certificates may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Certificates
by broker-dealers. New Certificates received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Certificates or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Certificates. Any
broker-dealer that resells New Certificates that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Certificates may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of New Certificates and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Starting on the Expiration Date, the Company will promptly send additional
copies of this Prospectus and any amendment or supplement to this Prospectus to
any broker-dealer that requests such documents in the Letter of Transmittal. The
Company has agreed to pay all expenses incident to the Exchange Offer other than
75
<PAGE> 77
commissions or concessions of any brokers or dealers, fees of counsel to the
Holders and certain transfer taxes, and will indemnify the Holders of the New
Certificates (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Certificates will be passed upon for Continental by
Hughes Hubbard & Reed LLP, New York, New York.
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 have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such consolidated
financial statements are, and audited consolidated financial statements to be
included in subsequently filed documents will be, incorporated herein by
reference in reliance upon reports of Ernst & Young LLP pertaining to such
consolidated financial statements (to the extent covered by consents filed with
the Commission) 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, dated as May 20, May 16 and June 6, 1997, respectively, 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.
76
<PAGE> 78
APPENDIX I -- INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Adjusted Expected Distributions..... 21
Administration Expenses............. 59
Aeroflot............................ 5
Aggregate LTV Collateral Amount..... 22
Air Partners........................ 32
Aircraft............................ 2
AISI................................ 12
Alitalia............................ 5
America West........................ 5
AMI................................. 29
Appraisal........................... 60
Appraised Current Market Value...... 22
Appraisers.......................... 12
Assumed Aggregate Aircraft Value.... 12
Assumed Aircraft Value.............. 65
Average Life Date................... 64
BK.................................. 12
Boeing.............................. 28
Book-Entry Confirmation............. 39
Book-Entry Transfer Facility........ 39
Business Day........................ 45
Cash Collateral Account............. 19
CDG................................. 5
Cede................................ 23
Certificate Account................. 45
Certificate Owners.................. 23
Certificateholders.................. 15
Certificates........................ 1
City................................ 30
Class Exemptions.................... 74
Class A Certificates................ 10
Class A Trust....................... 1
Class A Trustee..................... 22
Class B Certificates................ 10
Class B Trust....................... 1
Class B Trustee..................... 22
Class C Certificates................ 10
Class C Trust....................... 1
Class C Trustee..................... 22
Class D Trust....................... 1
Class D Trustee..................... 22
Class D Certificates................ 10
Cleveland........................... 5
CMI................................. 5
Code................................ 24
Commission.......................... 2
Company............................. 1
Continental......................... 1
Controlling Party................... 22
<CAPTION>
PAGE
-------
<S> <C>
Convention.......................... 69
Credit Facility..................... 29
Current Distribution Date........... 20
Debt Balance........................ 70
disqualified persons................ 73
Distribution Date................... 20
Downgrade Drawing................... 19
DTC................................. 23
DTC Participants.................... 24
EDGAR............................... 4
Eligible Institution................ 39
Equipment Notes..................... 2
ERISA............................... 24
ERISA Plans......................... 73
EVA................................. 5
Event of Loss....................... 72
Exchange............................ 73
Exchange Act........................ 3
Exchange Agent...................... 9
Exchange Offer...................... 1
Exchange Offer No-Action Letters.... 2
Existing Lease...................... 68
Expected Distributions.............. 20
Expiration Date..................... 1
Express............................. 5
Exxon Capital Letter................ 2
FAA................................. 32
Facility............................ 29
Final Distributions................. 23
Final Drawing....................... 19
Final Maturity Date................. 45
Global Certificates................. 53
H.15(519)........................... 64
holder.............................. 39
Holdings............................ 4
IAH Bonds........................... 30
Indenture........................... 10
Indenture Default................... 48
indirect participants............... 53
Initial Purchasers.................. 3
Intercreditor Agreement............. 20
Interest Drawings................... 17
Issuance Date....................... 7
Letter of Transmittal............... 1
Liquidity Event of Default.......... 56
Liquidity Expenses.................. 58
Liquidity Facility.................. 17
Liquidity Obligations............... 18
Liquidity Provider.................. 10
</TABLE>
I-1
<PAGE> 79
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Loan Trustee........................ 10
LTV Appraisals...................... 22
LTV Collateral Amount............... 21
LTV Ratio........................... 22
LTVs................................ 12
Make-Whole Premium.................. 64
Maximum Available Commitment........ 18
MBA................................. 12
Minimum Sale Price.................. 23
Morgan Stanley Letter............... 2
most recent H.15(519)............... 64
New Certificates.................... 1
NOLs................................ 31
Non-Extension Drawing............... 20
Non-Performing Equipment Notes...... 21
NYSE................................ 41
Old Certificates.................... 1
participants........................ 53
Participating Broker-Dealer......... 3
Participation Agreement............. 11
parties in interest................. 73
Pass Through Trust Agreements....... 1
Performing Equipment Note........... 18
Plan Asset Regulation............... 73
Plans............................... 73
Pool Balance........................ 45
Pool Factor......................... 46
Premium Termination Date............ 16
PTC Event of Default................ 15
PTCE................................ 24
Registration Event.................. 37
Registration Statement.............. 4
Regular Distribution Dates.......... 44
PAGE
-------
Remaining Weighted Average Life..... 64
Replacement Facility................ 55
Required Amount..................... 17
Scheduled Payments.................. 44
Second Indenture.................... 10
Second Mortgagee.................... 10
Section 1110 Period................. 18
Section 382......................... 31
Securities Act...................... 1
Series A Equipment Notes............ 2
Series B Equipment Notes............ 2
Series C Equipment Notes............ 2
Series D Equipment Notes............ 2
Settlement Act...................... 68
Shearman & Sterling Letter.......... 2
Shelf Registration Statement........ 37
SOP 90-7............................ 28
Special Distribution Date........... 45
Special Payment..................... 45
Special Payments Account............ 46
Stated Interest Rates............... 18
Subordination Agent................. 10
Teamsters........................... 31
Threshold Rating.................... 55
ticket tax.......................... 32
Transportation Code................. 50
Treasury Yield...................... 64
Triggering Event.................... 16
Trust Property...................... 10
Trustee............................. 1
Trusts.............................. 1
Underwriter Exemption............... 74
Virgin.............................. 5
</TABLE>
I-2
<PAGE> 80
APPENDIX II -- APPRAISAL LETTERS
[AIRCRAFT INFORMATION SERVICES, INC. LETTERHEAD]
20 May 1997
Continental Airlines
2929 Allen Parkway, Suite 1588
Houston, TX 77019
Subject: AISI Report No.: A7D055BVO
AISI Sight Unseen Current Market Half-Life Value Appraisal,
Six B737-300 and Four MD-82 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 current
market half-life value of six B737-300 and four MD-82 aircraft as listed and
defined in Table I.
1. METHODOLOGY AND DEFINITIONS
This 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 values.
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. 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. Definitions
of aircraft condition, buyer/seller qualifications and type of transaction
remain unchanged from
<PAGE> 81
[AIRCRAFT INFORMATION SERVICES, INC. LOGO]
20 May 1997
AISI File No. A7D055BVO
Page - 2 -
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.
2. MARKET ANALYSIS B737-300 AND MD-80
B737-300
The B737-300 is a twin engine, narrowbody, stage 3, two man crew aircraft
typically seating 128 passengers in mixed class configuration. Typical range
with full passengers at low MTOW is approximately 1,600 nautical miles, while
at high MTOW the range increases to approximately 2,600 nautical miles,
sufficient for short range domestic operations.
The B737-300 has a large fleet of 909 active aircraft, with 63 on firm order,
and a very strong customer base of 83 airlines with good representation in
every major geographic area. A significant number of the B737-300 fleet, 521
aircraft, are operated via either a finance lease or operating lease.
The major competitors to the B737-300 are the MD-80/MD-90 and the Airbus A320
even though these aircraft types are larger than the B737-300. The B737-300
also must compete with its larger variant the B737-400 and in some markets with
the older B737-200A. It will also shortly have to compete with the new B737-700
family.
We expect B737-300 production to cease by 1999. The aircraft was first
delivered in 1986, and AISI analysis of the market for the B737-300 indicates
that the present strong demand has stabilized and will continue at least until
the next major economic downturn, and that near term current market purchase
prices are decreasing slightly, while current market lease rates are still
increasing. Over the longer term, the B737-300 faces significant competition
from more advanced aircraft such as the B737-700 and A320 on the high end, and
from still viable B737-200 and MD-80 aircraft on the low end. B737-300 values
will probably decline to meet this challenge. B737-700 orders now equal
B737-300 backlog; we expect B737-300 deliveries to overtake the B737-300
shortly, however there are expected to be some B737-300 users who put
insufficient value in the advantages of the B737-700 over the B737-300 to
support any significant price differential between the two. Due to small size
and limited range, we expect the future potential for freighter conversion to
be confined to the domestic small package carrier market, and then only after
the aircraft has approached the end of its economic useful life as a passenger
aircraft.
<PAGE> 82
20 May 1997 [LOGO]
AISI File No. A7D055BVO
Page -3-
Boeing in recent head-to-head B737-300 competition with Airbus A319 and A320
aircraft has shown a willingness to offer B737-300 aircraft at drastically
reduced prices; over 40% less than the so called "list" prices; Airbus has
generally matched or exceeded Boeing's discounts. This willingness to discount,
combined with significant increases in production rates, produces an artificial
softening of market prices of all new and newer 100 to 160 seat stage III
narrowbody domestic aircraft.
MD-80
The McDonnell Douglas MD-80 series aircraft family is a twin JT8D-200 turbofan
engined, narrowbody, stage 3, two man crew aircraft derived from the DC-9
family, intended for short to medium range domestic passenger transport.
The MD-81, -82 and -83 all feature the same typical 135 passenger dual class
configuration, but vary in maximum gross takeoff weights to achieve different
ranges of approximately 1,550, 2,050 and 2,500 nautical miles respectively. The
MD-88 is an MD-82 with a modern 'glass' EFIS cockpit. The MD-87 features a
shorter cabin accommodating 114 passengers in dual class configuration, with
2,350 nautical mile range. Production of the MD-80 began in 1980 and we
forecast termination of production by 1998. In all 114 MD-81's were built,
operating with 10 airlines, with 64 on lease, and none on order. 562 MD-82's
were built, operating with 27 airlines, with 281 on lease and 7 on order. 221
MD-83 were built, operating with 32 airlines, with 162 on lease and 19 on
order. 72 MD-87's were built, operating with 11 airlines, with 21 on lease and
none on order. 152 MD-88's were built, operating with 6 airlines, with 71 on
lease and 5 on order. The operators are reasonably well geographically
distributed.
The MD-80 is a marginal stage 3 noise compliant aircraft, and its JT8D-200
engines are older technology, less fuel efficient than many of its newer
competitors, which include the B737-300/400/500 and soon the B737-600/700/800,
the A319/A320, the Fokker 100, the new MD-90/95 and the Avro RJ family as well
as less expensive older aircraft, including the B737-200, DC-9 family, Fokker
F-28, and Bae 146 family. Prior to the December 1996 announcement of the
acquisition of McDonnell Douglas, we had forecast termination of MD-80
production by 1998. Now, further production of the successor to the MD-80, the
MD-90/95, is also in doubt.
While MD-80 values have been steady in the current high demand market
conditions for narrowbody stage 3 aircraft, the combination of older
technology, minimal noise compliance margin, higher fuel consumption and now,
probability of termination of production of the variant and its high
commonality successor, make the MD-80 family quite vulnerable to reductions in
value with any economic downturn or lessening of demand. However, so long as
stiffer noice regulations are not effected, the aircraft should find a ready
home in startup airline
<PAGE> 83
20 May 1997 [LOGO]
AISI File No. A7D055BVO
Page -4-
fleets as it declines in value and drops out of major airline fleets. The MD-87
and MD-81 should be most vulnerable, with the MD-82/88 and MD-83 less
vulnerable to reductions in value. The aircraft should enjoy a long useful life,
with its durable airframe and reliable systems, just as demonstrated by its
predecessor, the DC-9 family.
3. VALUATION
Following in Table I is AISI's opinion of the current market value for the
subject aircraft based on the assumptions, definitions and disclaimers herein.
TABLE I
<TABLE>
<CAPTION>
Aircraft 1997 Current Market
Date of Registration Manufacturer's Half Life Value
Manufacturer Number Serial Number USdollars
- ------------ ------------ -------------- -------------------
B737-300, CFM56-3B1 ENGINES, 135,000LB MTOW
<S> <C> <C> <C>
1986 N12322 23373 18,980,000
1986 N10383 23374 18,980,000
1986 N14324 23375 18,980,000
1986 N69333 23571 18,980,000
1986 N14334 23572 18,980,000
1986 N14335 23573 18,980,000
MD-82, JT8D-217A ENGINES, 149,500LB MTOW
1985 N12811 49265 15,300,000
1986 N15820 49480 16,100,000
1987 N18833 49493 16,900,000
1987 N10834 49494 16,900,000
</TABLE>
<PAGE> 84
[AISI LOGO]
20 May 1997
AISI File No. A7D055KBVO
Page - 5 -
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/ John McNicol
For: Fred E. Bearden
President
FB/JDM/jm
<PAGE> 85
[BK ASSOCIATES, INC. LETTERHEAD]
June 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 fair market value (FMV) as of June 1997 on each of six Boeing
737-3TO and four McDonnell Douglas DC9-82 (MD82) aircraft (Aircraft). Each of
the B737-3TO aircraft is powered by two CFM International CFM56-3B1 engines with
20,000 pounds thrust, a 135,000 pound maximum takeoff weight and a non-EFIS
(Electronic Flight Instrumentation System) flight deck. Each of the MD82s is
powered by two Pratt & Whitney JT8D-217A engines with 21,000 pounds thrust, has
a 149,500 pound maximum takeoff weight and is also non-EFIS. The Aircraft are
further identified in the conclusion to this letter.
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 FMV, to which BK Associates subscribes, the quoted FMV 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 FMV 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> 86
Continental Airlines, Inc.
June 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 B737 and
MD82 aircraft to be in reasonable balance at this time but tending to be strong
with demand slightly exceeding supply, and thus, the FMV is equal to or
slightly higher than the base value. In addition, values were adjusted for
engine type, maximum gross takeoff weights (MGTOW), and the absence of EFIS. In
arriving at the current fair market value, BK considered the impact of many
factors affecting the market for used aircraft, including: the current demand
for and availability of aircraft, the projected demand for lift, 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
fair market value of a used aircraft, the following assumptions apply to the
base aircraft:
<PAGE> 87
[BK Associates, Inc. Logo]
Continental Airlines, Inc.
June 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, it is our
opinion that the current fair market value of each aircraft are as follows:
<TABLE>
<CAPTION>
Date of Serial Registration
Model Delivery Number Number CFMV (Each)
----- -------- ------ ------------ -----------
<S> <C> <C> <C> <C>
B737-3TO 02/1986 23373 N12322 18,250,000
B737-3TO 03/1986 23374 N10323 18,250,000
B737-3TO 03/1986 23375 N14324 18,250,000
B737-3TO 10/1986 23571 N69333 19,000,000
B737-3TO 10/1986 23572 N14334 19,000,000
B737-3TO 11/1986 23573 N14335 19,000,000
MD82 03/1985 49265 N12811 15,550,000
MD82 08/1986 49480 N15820 17,000,000
MD82 05/1987 49493 N18833 18,050,000
MD82 05/1987 49494 N10834 18,050,000
</TABLE>
<PAGE> 88
[BK ASSOCIATES, INC. LOGO]
Continental Airlines, Inc.
June 6, 1997
Page 4
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 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/ John F. Keitz
John F. Keitz
President
ISTAT Senior Certified Appraiser
<PAGE> 89
[MORTEN BEYER AND AGNEW, INC. LETTERHEAD]
May 16, 1997
Continental Airlines, Inc.
2929 Allen Parkway
Houston, TX 77019
Gentlemen:
Pursuant to your request, Morten Beyer and Agnew (MBA) has set forth
its opinion regarding the value of six B-737-300 and four MD-82 aircraft (as
described in Schedule I herein) being operated by Continental Airlines.
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 Traders (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 who want to be 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, 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
case or equivalent consideration and given an adequate amount of time for
effective exposure to prospective buyers. Fair Market Value (FMV) is synonymous
to MV and Current Fair Market Value is synonymous with CMV because the criteria
<PAGE> 90
typically used in those documents that use the term "fair" reflect the same
criteria set forth in the above definition of Market Value.
BV contains the same elements as MV, but the market conditions are
always assumed to be in a reasonable state of equilibrium. Thus, BV pertains to
an idealized aircraft and market combination, but will not necessarily reflect
the actual CMV of the aircraft in question. BV is founded in the historical
trend of values and is generally used to analyze historic values or to project
future values.
The values set forth herein are Current Market Values. CMVs are
provided for each aircraft, identified by assigned manufacturer's serial
numbers and FAA registration numbers.
In preparing this report, MBA did not inspect the aircraft or their
historical maintenance documentation. Therefore, we used certain assumptions
that are generally accepted industry practice to determine the BV of an
aircraft. The principal assumptions are as follows:
1. The aircraft are in good overall condition.
2. The overhaul status of the airframe, engines, landing gear and other
major components are the equivalent of mid-time/mid-life unless
otherwise specified.
3. The historical maintenance documentation has been maintained to
acceptable international standards.
4. The specifications of the aircraft are those most common for
aircraft of their type and vintage.
5. The aircraft are in standard airline configuration.
6. The aircraft are current as to all Airworthiness Directives and
Service Bulletins.
7. Their modification status is comparable to that most common for
aircraft of their type and vintage.
8. Their utilization is comparable to industry averages.
9. There is no history of accident or incident damage.
[MBA LOGO] 2
<PAGE> 91
The aircraft are not encumbered by any attached lease, tax benefit
recapture or any other extraneous factor.
Based on the information set forth in this report the Current Market
Valuations of the subject aircraft, as of the date of this report, are as
follows:
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION SERIAL MANUFACTURE CURRENT
TYPE NUMBER NUMBER DATE MARKET VALUE
-------- ------------ ------ ----------- ------------
<S> <C> <C> <C> <C>
B737-300 N12322 23373 1986 $21.58
B737-300 N10323 23374 1986 21.58
B737-300 N14324 23375 1986 21.58
B737-300 N69333 23571 1986 21.58
B737-300 N14334 23572 1986 21.58
B737-300 N14335 23573 1986 21.58
MD-82 N12811 49265 1985 19.71
MD-82 N15820 49480 1986 20.67
MD-82 N18833 49493 1987 21.62
MD-82 N10834 49494 1987 21.62
</TABLE>
The Boeing 737-300 series aircraft is the Stage III upgraded successor to
the Boeing 737-200 series aircraft and has already has a 14-year production run,
with 948 produced to date and 76 more on order. Production is being phased out
over the next three years as the Boeing 737-700 series takes its place.
Nonetheless, we expect the -300 series will retain its value well into the next
century because of its strong market base and good economics. A few of these
aircraft are always in the float simply because there are so many of them, with
some being leased or operated by marginal carriers. Prices for these aircraft
have returned to near original acquisition costs after a dip in the early 1990s.
BACK Information Services currently lists three aircraft available for sale or
lease. MBA is of the opinion that the CMV is 110 percent of the Base Value.
[MBA LOGO] 3
<PAGE> 92
The MD-80 series aircraft was the first newly manufactured twin to meet
Stage III noise standards, and featured higher gross weights and greater range.
Almost 1,200 of all models have been built. American Airlines, with orders
totaling 260, literally saved the design in a crucial period when initial
orders declined. There have been surprisingly few new orders in the last four
years although there are almost no aircraft on the market. BACK lists one
MD-82 available for sale or lease. Any aircraft that come on the market are
immediately spoken for. MBA is of the opinion that the CMV of this aircraft is
110 percent of Base Value.
This report has been prepared for the exclusive use of Continental
Airlines, and shall not be provided to other parties by MBA without the express
consent of Continental.
MBA certifies that this report has been prepared independently and that
it fully and accurately represents MBA's opinion, as of the date of this
report, of the Current Market Value of the subject aircraft. MBA further
certifies that it does not have, and does not expect to have, any financial or
other interest in the subject of similar aircraft.
This report represents the opinion of MBA 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
ISTAT Certified Senior Appraiser
[MBA LOGO] 4
<PAGE> 93
APPENDIX III -- EQUIPMENT NOTES PRINCIPAL PAYMENT SCHEDULE
SERIES A
AIRCRAFT REGISTRATION NUMBER
<TABLE>
<CAPTION>
REGULAR
DISTRIBUTION DATES N12322 N10323 N14324 N69333 N14334 N14335 N12811
- -------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
June 25, 1997....... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
December 30, 1997... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 1998....... 215,417.00 215,417.00 215,417.00 215,644.00 215,644.00 215,644.00 176,488.00
December 30, 1998... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 1999....... 215,417.00 215,417.00 215,417.00 215,644.00 215,644.00 215,644.00 176,488.00
December 30, 1999... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2000....... 215,428,00 215,428.00 215,428.00 215,655.00 215,655.00 215,655.00 176,496.00
December 30, 2000... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2001....... 229,997.00 229,997.00 229,997.00 230,240.00 230,240.00 230,240.00 188,433.00
December 30, 2001... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2002....... 368,170.00 368,170.00 368,170.00 368,558.00 368,558.00 368,558.00 301,636.00
December 30, 2002... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2003....... 469,218.00 469,218.00 469,218.00 459,712.00 469,712.00 469,712.00 384,422.00
December 30, 2003... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2004....... 591,208.00 591,208,00 591,208.00 591,831.00 591,831.00 591,831.00 484,368.00
December 30, 2004... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2005....... 843,329.00 843,329.00 843,329.00 844,218.00 844,218.00 844,218.00 690,925.00
December 30, 2005... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2006....... 1,892,397.00 1,892,397.00 1,892,397.00 1,894,391.00 1,894,391.00 1,894,391.00 1,550,411.00
December 30, 2006... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2007....... 2,741,229.00 2,741,229.00 2,741,229.00 2,744,117.00 2,744,117.00 2,744,117.00 2,245,844.00
<CAPTION>
REGULAR
DISTRIBUTION DATES N15820 N18833 N10834
- -------------------- ------------- ------------- -------------
<S> <C> <C> <C>
June 25, 1997....... $ 0.00 $ 0.00 $ 0.00
December 30, 1997... 0.00 0.00 0.00
June 30, 1998....... 192,945.00 204,862.00 204,862.00
December 30, 1998... 0.00 0.00 0.00
June 30, 1999....... 192,945.00 204,862.00 204,862.00
December 30, 1999... 0.00 0.00 0.00
June 30, 2000....... 192,954.00 204,872.00 204,872.00
December 30, 2000... 0.00 0.00 0.00
June 30, 2001....... 206,004.00 218,728.00 218,728.00
December 30, 2001... 0.00 0.00 0.00
June 30, 2002....... 329,762.00 350,130.00 350,130.00
December 30, 2002... 0.00 0.00 0.00
June 30, 2003....... 420,269.00 446,226.00 446,226.00
December 30, 2003... 0.00 0.00 0.00
June 30, 2004....... 529,533.00 562,240.00 562,240.00
December 30, 2004... 0.00 0.00 0.00
June 30, 2005....... 755,353.00 802,007.00 802,007.00
December 30, 2005... 0.00 0.00 0.00
June 30, 2006....... 1,694,981.00 1,799,671.00 1,799,671.00
December 30, 2006... 0.00 0.00 0.00
June 30, 2007....... 2,455,263.00 2,606,912.00 2,606,912.00
</TABLE>
SERIES B
AIRCRAFT REGISTRATION NUMBER
<TABLE>
<CAPTION>
REGULAR
DISTRIBUTION DATES N12322 N10323 N14324 N69333 N14334 N14335 N12811
- -------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
June 25, 1997....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 1997... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 1998....... 73,557.00 73,557.00 73,557.00 73,635.00 73,635.00 73,635.00 60,264.00
December 30, 1998... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 1999....... 73,557.00 73,557.00 73,557.00 73,634.00 73,634.00 73,634.00 60,264.00
December 30, 1999... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2000....... 73,599.00 73,599.00 73,599.00 73,677.00 73,677.00 73,677.00 60,298.00
December 30, 2000... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2001....... 78,536.00 78,536.00 78,536.00 78,618.00 78,618.00 78,618.00 64,343.00
December 30, 2001... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2002....... 215,592.00 215,592.00 215,592.00 215,819.00 215,819.00 215,819.00 176,631.00
December 30, 2002... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2003....... 221,927.00 221,927.00 221,927.00 222,161.00 222,161.00 222,161.00 181,822.00
December 30, 2003... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2004....... 769,036.00 769,036.00 769,036.00 769,847.00 769,847.00 769,847.00 630,058.00
December 30, 2004... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2005....... 1,151,438.00 1,151,438.00 1,151,438.00 1,152,651.00 1,152,651.00 1,152,651.00 943,354.00
December 30, 2005... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2006....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 2006... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2007....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
<CAPTION>
REGULAR
DISTRIBUTION DATES N15820 N18833 N10834
- -------------------- ------------- ------------- -------------
<S> <C> <C> <C>
June 25, 1997....... 0.00 0.00 0.00
December 30, 1997... 0.00 0.00 0.00
June 30, 1998....... 65,884.00 69,953.00 69,953.00
December 30, 1998... 0.00 0.00 0.00
June 30, 1999....... 65,883.00 69,953.00 69,953.00
December 30, 1999... 0.00 0.00 0.00
June 30, 2000....... 65,921.00 69,992.00 69,992.00
December 30, 2000... 0.00 0.00 0.00
June 30, 2001....... 70,342.00 74,688.00 74,688.00
December 30, 2001... 0.00 0.00 0.00
June 30, 2002....... 193,102.00 205,028.00 205,028.00
December 30, 2002... 0.00 0.00 0.00
June 30, 2003....... 198,775.00 211,053.00 211,053.00
December 30, 2003... 0.00 0.00 0.00
June 30, 2004....... 688,809.00 731,354.00 731,354.00
December 30, 2004... 0.00 0.00 0.00
June 30, 2005....... 1,031,318.00 1,095,019.00 1,095,019.00
December 30, 2005... 0.00 0.00 0.00
June 30, 2006....... 0.00 0.00 0.00
December 30, 2006... 0.00 0.00 0.00
June 30, 2007....... 0.00 0.00 0.00
</TABLE>
III-1
<PAGE> 94
APPENDIX III -- EQUIPMENT NOTES PRINCIPAL PAYMENT SCHEDULE -- (CONTINUED)
SERIES C
AIRCRAFT REGISTRATION NUMBER
<TABLE>
<CAPTION>
REGULAR
DISTRIBUTION DATES N12322 N10323 N14324 N69333 N14334 N14335 N12811
- -------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
June 25, 1997....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 1997... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 1998 ...... 124,835.00 124,835.00 124,835.00 124,967.00 124,967.00 124,967.00 102,276.00
December 30, 1998... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 1999....... 241,663.00 241,663.00 241,663.00 241,918.00 241,918.00 241,918.00 197,990.00
December 30, 1999... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2000....... 330,103.00 330,103.00 330,103.00 330,450.00 330,450.00 330,450.00 270,448.00
December 30, 2000... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2001....... 376,874.00 376,874.00 376,874.00 377,271.00 377,271.00 377,271.00 308,767.00
December 30, 2001... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2002....... 157,018.00 157,018.00 157,018.00 157,183.00 157,183.00 157,183.00 128,642.00
December 30, 2002... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2003....... 777,457.00 777,457.00 777,457.00 778,277.00 778,277.00 778,277.00 636,959.00
December 30, 2003... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2004....... 820,079.00 820,079.00 820,079.00 820,943.00 820,943.00 820,943.00 671,878.00
December 30, 2004... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2005....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 2005... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2006....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 2006... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2007....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
<CAPTION>
REGULAR
DISTRIBUTION DATES N15820 N18833 N10834
- -------------------- ------------- ------------- -------------
<S> <C> <C> <C>
June 25, 1997....... 0.00 0.00 0.00
December 30, 1997... 0.00 0.00 0.00
June 30, 1998 ...... 111,812.00 118,718.00 118,718.00
December 30, 1998... 0.00 0.00 0.00
June 30, 1999....... 216,453.00 229,822.00 229,822.00
December 30, 1999... 0.00 0.00 0.00
June 30, 2000....... 295,666.00 313,928.00 313,928.00
December 30, 2000... 0.00 0.00 0.00
June 30, 2001....... 337,559.00 358,408.00 358,408.00
December 30, 2001... 0.00 0.00 0.00
June 30, 2002....... 140,637.00 149,324.00 149,324.00
December 30, 2002... 0.00 0.00 0.00
June 30, 2003....... 696,353.00 739,363.00 739,363.00
December 30, 2003... 0.00 0.00 0.00
June 30, 2004....... 734,528.00 779,896.00 779,896.00
December 30, 2004... 0.00 0.00 0.00
June 30, 2005....... 0.00 0.00 0.00
December 30, 2005... 0.00 0.00 0.00
June 30, 2006....... 0.00 0.00 0.00
December 30, 2006... 0.00 0.00 0.00
June 30, 2007....... 0.00 0.00 0.00
</TABLE>
SERIES D
AIRCRAFT REGISTRATION NUMBER
<TABLE>
<CAPTION>
REGULAR
DISTRIBUTION DATES N12322 N10323 N14324 N69333 N14334 N14335 N12811
- -------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
June 25, 1997....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 1997... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 1998....... 651,611.00 651,611.00 651,611.00 652,297.00 652,297.00 652,297.00 533,854.00
December 30, 1998... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 1999....... 663,571.00 663,571.00 663,571.00 664,271.00 664,271.00 664,271.00 543,654.00
December 30, 1999... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2000....... 742,986.00 742,986.00 742,986.00 743,769.00 743,769.00 743,769.00 608,716.00
December 30, 2000... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2001....... 786,805.00 786,805.00 786,805.00 787,634.00 787,634.00 787,634.00 644,616.00
December 30, 2001... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2002....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 2002... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2003....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 2003... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2004....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 2004... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2005....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 2005... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2006 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 30, 2006... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 30, 2007....... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
<CAPTION>
REGULAR
DISTRIBUTION DATES N15820 N18833 N10834
- -------------------- ------------- ------------- -------------
<S> <C> <C> <C>
June 25, 1997....... 0.00 0.00 0.00
December 30, 1997... 0.00 0.00 0.00
June 30, 1998....... 583,634.00 619,682.00 619,682.00
December 30, 1998... 0.00 0.00 0.00
June 30, 1999....... 594,348.00 631,058.00 631,058.00
December 30, 1999... 0.00 0.00 0.00
June 30, 2000....... 665,477.00 706,580.00 706,580.00
December 30, 2000... 0.00 0.00 0.00
June 30, 2001....... 704,725.00 748,252.00 748,252.00
December 30, 2001... 0.00 0.00 0.00
June 30, 2002....... 0.00 0.00 0.00
December 30, 2002... 0.00 0.00 0.00
June 30, 2003....... 0.00 0.00 0.00
December 30, 2003... 0.00 0.00 0.00
June 30, 2004....... 0.00 0.00 0.00
December 30, 2004... 0.00 0.00 0.00
June 30, 2005....... 0.00 0.00 0.00
December 30, 2005... 0.00 0.00 0.00
June 30, 2006 0.00 0.00 0.00
December 30, 2006... 0.00 0.00 0.00
June 30, 2007....... 0.00 0.00 0.00
</TABLE>
III-2
<PAGE> 95
======================================================
NO OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF
TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT.
NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH
TOGETHER, CONSTITUTE 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, NOR THE
ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................ 3
Reports to Certificateholders........ 4
Incorporation of Certain Documents By
Reference.......................... 4
Prospectus Summary................... 5
Risk Factors......................... 28
Use of Proceeds...................... 35
Ratios of Earnings to Fixed
Charges............................ 35
The Exchange Offer................... 36
Description of the New
Certificates....................... 43
Description of the Liquidity
Facilities......................... 54
Description of the Intercreditor
Agreement.......................... 57
Description of the Aircraft and the
Appraisals......................... 61
Description of the Equipment Notes... 62
Certain U.S. Federal Income Tax
Consequences....................... 72
ERISA Considerations................. 73
Plan of Distribution................. 75
Legal Matters........................ 76
Experts.............................. 76
Index of Terms....................... I-1
Appraisal Letters.................... II-1
Equipment Notes Principal Payment
Schedule........................... III-1
</TABLE>
======================================================
======================================================
CONTINENTAL AIRLINES, INC.
OFFER TO EXCHANGE
PASS THROUGH CERTIFICATES, SERIES 1997-2,
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
PASS THROUGH CERTIFICATES, SERIES 1997-2
PROSPECTUS
November , 1997
======================================================
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and Bylaws provide that the
Company will indemnify each of its directors and officers to the full extent
permitted by the laws of the State of Delaware and may indemnify certain other
persons as authorized by the Delaware General Corporation Law (the "GCL").
Section 145 of the GCL provides as follows:
"(a) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation
and except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b). Such determination shall be made (1) by a majority
vote of the board of directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) if there are no such
directors, or if such directors so direct, by independent legal counsel in
a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative, or investigative
action, suit or proceeding may be paid by the corporation in
II-1
<PAGE> 97
advance of the final disposition of such action, suit or proceeding upon
receipt of undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that he is not entitled to
be indemnified by the corporation as authorized in this section. Such
expenses (including attorneys' fees) incurred by other employees and agents
may be so paid upon such terms and conditions, if any, as the board of
directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability
under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent for such constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to an employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit
plan, its participants, or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorneys' fees)".
The Certificate of Incorporation and Bylaws also limit the personal
liability of directors to the Company and its stockholders for monetary damages
resulting from certain breaches of the directors' fiduciary duties. The bylaws
of the Company provide as follows:
"No Director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the. . . GCL, or
II-2
<PAGE> 98
(iv) for any transaction from which the Director derived any improper personal
benefit. If the GCL is amended to authorize corporate action further eliminating
or limiting the personal liability of Directors, then the liability of Directors
of the Corporation shall be eliminated or limited to the full extent permitted
by the GCL, as so amended".
The Company maintains directors' and officers' liability insurance.
ITEM 21. EXHIBITS.
The Index to Exhibits to this Registration Statement is incorporated herein
by reference.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
shall not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such posteffective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plans annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant, pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
II-3
<PAGE> 99
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by any such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
or not such indemnification is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on November 6, 1997.
CONTINENTAL AIRLINES, INC.
By: /s/ JEFFERY A. SMISEK
------------------------------------
Jeffery A. Smisek
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated, on November 6, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------- --------------------------------------------
<C> <S>
* Chairman of the Board, Chief Executive
- -------------------------------------------- Officer (Principal Executive Officer) and
Gordon M. Bethune Director
* Executive Vice President and Chief Financial
- -------------------------------------------- Officer (Principal Financial Officer)
Lawrence W. Kellner
* Vice President and Controller (Principal
- -------------------------------------------- Accounting Officer)
Michael P. Bonds
* Director
- --------------------------------------------
Thomas J. Barrack, Jr.
* Director
- --------------------------------------------
Lloyd M. Bentsen, Jr.
* Director
- --------------------------------------------
David Bonderman
* Director
- --------------------------------------------
Gregory D. Brenneman
* Director
- --------------------------------------------
Patrick Foley
* Director
- --------------------------------------------
Douglas H. McCorkindale
* Director
- --------------------------------------------
George G.C. Parker
</TABLE>
II-5
<PAGE> 101
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------- --------------------------------------------
<C> <S>
* Director
- --------------------------------------------
Richard W. Pogue
* Director
- --------------------------------------------
William S. Price III
* Director
- --------------------------------------------
Donald L. Sturm
* Director
- --------------------------------------------
Karen Hastie Williams
* Director
- --------------------------------------------
Charles A. Yamarone
*By: /s/ SCOTT R. PETERSON
- --------------------------------------------
Scott R. Peterson
Attorney-in-fact
</TABLE>
II-6
<PAGE> 102
EXHIBIT INDEX
(The below-listed exhibits have been previously filed except Exhibits 12.1, 23.1
and 23.6, which are filed herewith.)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -----------------------------------------------------------------------------------
<S> <C>
4.1 Form of New 7.148% Exchange Pass Through Certificate Series 1997-2A (included in
Exhibit 4.5)
4.2 Form of New 7.149% Exchange Pass Through Certificate Series 1997-2B (included in
Exhibit 4.6)
4.3 Form of New 7.206% Exchange Pass Through Certificate Series 1997-2C (included in
Exhibit 4.7)
4.4 Form of New 7.522% Exchange Pass Through Certificate Series 1997-2D (included in
Exhibit 4.8)
4.5 Pass Through Trust Agreement, dated as of June 25, 1997, between Continental
Airlines, Inc. and Wilmington Trust Company, as Trustee, made with respect to the
formation of Continental Airlines Pass Through Trust, Series 1997-2A and the
issuance of 7.148% Continental Airlines Pass Through Trust, Series 1997-2A Pass
Through Certificates representing fractional undivided interests in the Trust
4.6 Pass Through Trust Agreement, dated as of June 25, 1997, between Continental
Airlines, Inc. and Wilmington Trust Company, as Trustee, made with respect to the
formation of Continental Airlines Pass Through Trust, Series 1997-2B and the
issuance of 7.149% Continental Airlines Pass Through Trust, Series 1997-2B Pass
Through Certificates representing fractional undivided interests in the Trust
4.7 Pass Through Trust Agreement, dated as of June 25, 1997, between Continental
Airlines, Inc. and Wilmington Trust Company, as Trustee, made with respect to the
formation of Continental Airlines Pass Through Trust, Series 1997-2C and the
issuance of 7.206% Continental Airlines Pass Through Trust, Series 1997-2C Pass
Through Certificates representing fractional undivided interests in the Trust
4.8 Pass Through Trust Agreement, dated as of June 25, 1997, between Continental
Airlines, Inc., and Wilmington Trust Company, as Trustee, made with respect to the
formation of Continental Airlines Pass Through Trust, Series 1997-2D and the
issuance of 7.522% Continental Airlines Pass Through Trust, Series 1997-2D Pass
Through Certificates representing fractional undivided interests in the Trust
4.9 Revolving Credit Agreement, dated June 25, 1997, between Wilmington Trust Company,
as Subordination Agent, as agent and trustee for the Continental Airlines Pass
Through Trust 1997-2A, as Borrower and Kredietbank N.V., New York Branch, as
Liquidity Provider
4.10 Revolving Credit Agreement, dated June 25, 1997, between Wilmington Trust Company,
as Subordination Agent, as agent and trustee for the Continental Airlines Pass
Through Trust 1997-2B, as Borrower and Kredietbank N.V., New York Branch, as
Liquidity Provider
4.11 Revolving Credit Agreement, dated June 25, 1997, between Wilmington Trust Company,
as Subordination Agent, as agent and trustee for the Continental Airlines Pass
Through Trust 1997-2C, as Borrower and Kredietbank N.V., New York Branch, as
Liquidity Provider
4.12 Intercreditor Agreement, dated as of June 25, 1997, among Wilmington Trust Company,
as Trustee under the Continental Airlines Pass Through Trust 1997-2A, Continental
Airlines Pass Through Trust 1997-2B, Continental Airlines Pass Through Trust
1997-2C and Continental Pass Through Trust 1997-2D, Kredietbank N.V., New York
Branch, as Class A Liquidity Provider, Class B Liquidity Provider, Class C
Liquidity Provider, and Wilmington Trust Company, as Subordination Agent and
Trustee
</TABLE>
II-7
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -----------------------------------------------------------------------------------
<S> <C>
4.13 Exchange and Registration Rights Agreement, dated as of June 25, 1997, among
Continental Airlines, Inc., Wilmington Trust Company, as Trustee under Continental
Airlines Pass Through Trust, Series 1997-2A, Continental Airlines Pass Through
Trust, Series 1997-2B, Continental Airlines Pass Through Trust, Series 1997-2C, and
Credit Suisse First Boston Corporation, and Morgan Stanley & Co. Incorporated,
Chase Securities Inc. and Goldman, Sachs & Co.
4.14 Purchase Agreement, dated as of June 17, 1997, among Continental Airlines, Inc.,
Wilmington Trust Company as Trustee under each of the Trusts, Credit Suisse First
Boston Corporation and Morgan Stanley & Co., Incorporated as Purchasers
4.15 Participation Agreement 322, dated as of June 25, 1997, among Continental Airlines,
Inc., and Wilmington Trust Company, not in its individual capacity, but solely as
Mortgagee, Second Mortgagee, Subordination Agent under the Intercreditor Agreement
and Pass Through Trustee under each of the Pass Through Agreements (this instrument
is substantially the same for each Aircraft)
4.16 Trust Indenture and Mortgage 322, dated as of June 25, 1997, between Continental
Airlines, Inc., and Wilmington Trust Company, solely as Mortgagee (this instrument
is substantially the same for each Aircraft)
4.17 Second Trust Indenture and Mortgage, dated as of June 25, 1997, between Continental
Airlines, Inc., Owner and Wilmington Trust Company, not in its individual capacity,
but solely as Mortgagee, Second Mortgagee
5.1 Opinion of Hughes Hubbard & Reed LLP relating to validity of the New Certificates
12.1 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Ernst & Young LLP
23.2 Consent of Hughes Hubbard & Reed LLP (included in its opinion filed as exhibit 5.1)
23.3 Consent of Aircraft Information Services, Inc.
23.4 Consent of BK Associates, Inc.
23.5 Consent of Morten Beyer and Agnew, Inc.
23.6 Consent of Milbank, Tweed, Hadley & McCloy
24.1 Powers of Attorney
25.1 Statement of Eligibility of Wilmington Trust Company for the 1997-2A Pass Through
Certificates, on Form T-1
25.2 Statement of Eligibility of Wilmington Trust Company for the 1997-2B Pass Through
Certificates, on Form T-1
25.3 Statement of Eligibility of Wilmington Trust Company for the 1997-2C Pass Through
Certificates, on Form T-1
25.4 Statement of Eligibility of Wilmington Trust Company for the 1997-2D Pass Through
Certificates, on Form T-1
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees
99.4 Form of Letter to Clients
</TABLE>
II-8
<PAGE> 1
Exhibit 12.1
CONTINENTAL AIRLINES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nine Three Nine Three Year Ended
Months Months Months Months December 31, 4/30/93 | 1/1/93
Ended Ended Ended Ended ---------------- through | through
9/30/97 9/30/97 9/30/96 9/30/96 1996 1995 1994 12/31/93 | 4/27/93 1992
------- ------- ------- ------- ---- ---- ---- -------- | ------- ----
Earnings:
Earnings (Loss) Before
Income Taxes
Minority interest and
Extraordinary items $518 $186 $348 $ 47 $428 $310 $(651) ($ 52) | ($977) ($125)
Plus: |
Interest Expense(a) 126 42 129 40 165 213 241 165 | 52 153
Capitalized interest (23) (9) (2) (1) (5) (6) (17) (8) | (3) (6)
Amortization of |
Capitalized interest 3 1 2 1 3 2 1 0 | 0 0
Portion of Rent Expense |
Representative of |
interest Expense(a) 289 101 267 89 359 360 337 316 | 117 324
---- ---- ---- ---- ---- ---- ----- ----- | ---- ----
913 321 744 176 950 879 (89) 321 | ($10) 346
---- ---- ---- ---- ---- ---- ----- ----- | ---- ----
Fixed Charges: |
Interest Expense(a) 126 42 129 40 165 213 241 165 | 52 153
Portion of Rent Expense |
Representative of |
interest Expense(a) 289 101 267 89 359 360 337 216 | 117 324
---- ---- ---- ---- ---- ---- ----- ----- | ---- ----
Total Fixed Charges 415 143 396 129 524 573 578 381 | 469 177
---- ---- ---- ---- ---- ---- ----- ----- | ---- ----
Coverage Adequacy |
(Deficiency) $498 $178 $348 $ 47 $426 $306 $(667) $ (60) | $(379) $(131)
==== ==== ==== ==== ==== ==== ===== ===== | ===== =====
Coverage Ratio 2.20 2.24 1.88 1.36 1.81 1.53 NA NA | NA NA
==== ==== ==== ==== ==== ==== ===== ===== | ===== =====
</TABLE>
- ----------
Note: A vertical black line is shown is the table above to separate
Continental's post-reorganized consolidated financial data of Holdings
since they have not been prepared on a consistent basis of accounting.
(a) Includes Fair Market Value Adjustments resulting from the Company's
emergence from bankruptcy.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Continental
Airlines, Inc. for the registration of Pass Through Certificates, Series
1997-2, and to the incorporation by reference therein of our reports dated
February 10, 1997, with respect to the consolidated financial statements and
schedules of Continental Airlines, Inc. included in its Annual Report (Form
10-K) for the year ended December 31, 1996 filed with the Securities and
Exchange Commission.
[Ernst & Young LLP Signature]
Houston, Texas
November 5, 1997
<PAGE> 1
Exhibit 23.6
MILBANK, TWEED HADLEY & McCLOY
November 6, 1997
Continental Airlines, Inc.
2929 Allen Parkway
Houston, TX 77019
Re: Consent for Registration Statement on Form S-4
----------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Credit Suisse First Boston
Corporation and Morgan Stanley & Co. Incorporated (the "Initial Purchasers")
in connection with the issuance on June 25, 1997 of Pass Through Certificates,
Series 1997-2 (the "Old Certificates") pursuant to four separate pass through
trust agreements between Continental Airlines, Inc. (the "Company") and
Wilmington Trust Company, as pass through trustee. We understand that the
Company has filed a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act of 1933, as amended (the "Act"), in respect of
the registration under the Act of the Pass Through Certificates, Series 1997-2
(the "New Certificates") to be offered in exchange for all outstanding Old
Certificates. Terms not otherwise defined herein have the meanings specified in
the prospectus contained in the Registration Statement.
As counsel to the Initial Purchasers, we rendered on June 25, 1997
reasoned opinions to the Loan Trustees with respect to each Indenture
(collectively, the "Opinion"), subject to certain assumptions and
qualifications, concerning the benefit of Section 1110 of the U.S. Bankruptcy
Code with respect to the airframe and engines comprising the Aircraft that is
subject to the lien of such Indenture were the Company to become a debtor in a
case under Chapter 11 of the U.S. Bankruptcy Code. We hereby consent to the
filing of this letter as an exhibit to the Registration Statement, to the
reference to this firm and the Opinion under the headings "Prospectus
Summary-The New Certificates-Equipment Notes-(e) Section 1110 Protection" and
"Description of the Equipment Notes-Remedies" in the prospectus contained in
the Registration Statement, and to the summary of the Opinion contained in the
text under such headings. In giving such consent, we do not thereby admit that
we are "experts" within the meaning of the Act or the rules and regulations of
the Commission issued thereunder with respect to any part of the Registration
Statement, including this exhibit.
Very truly yours,
/s/ Milbank, Tweed, Hadley & McCloy
MILBANK, TWEED, HADLEY & MCCLOY
EG/DF/ABP
