<PAGE>
INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT TO
COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME A FINAL PROSPECTUS SUPPLEMENT IS DELIVERED. THIS
PRELIMINARY PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BY ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
Filed pursuant to Rule 424(b)(3)
Registration No. 333-34545
PROSPECTUS SUPPLEMENT (SUBJECT TO COMPLETION, ISSUED SEPTEMBER 5, 1997)
(TO PROSPECTUS DATED JULY 23, 1997)
$89,257,538
[LOGO]
1997-3 PASS THROUGH TRUSTS
PASS THROUGH CERTIFICATES, SERIES 1997-3
---------------------
EACH PASS THROUGH CERTIFICATE (COLLECTIVELY, THE "CERTIFICATES") WILL
REPRESENT A FRACTIONAL UNDIVIDED INTEREST IN ONE OF THE THREE CONTINENTAL
AIRLINES 1997-3 PASS THROUGH TRUSTS (THE "CLASS A TRUST", THE "CLASS B TRUST"
AND THE "CLASS C TRUST", AND, COLLECTIVELY, THE "TRUSTS") TO BE FORMED PURSUANT
TO A PASS THROUGH TRUST AGREEMENT (THE "BASIC AGREEMENT") AND THREE SEPARATE
SUPPLEMENTS THERETO (EACH, A "TRUST SUPPLEMENT" AND, TOGETHER WITH THE BASIC
AGREEMENT, COLLECTIVELY, THE "PASS THROUGH TRUST AGREEMENTS") RELATING TO SUCH
TRUSTS BETWEEN CONTINENTAL AIRLINES, INC. ("CONTINENTAL" OR THE "COMPANY") AND
WILMINGTON TRUST COMPANY (THE "TRUSTEE"), AS TRUSTEE UNDER EACH TRUST. PURSUANT
TO THE INTERCREDITOR AGREEMENT (AS DEFINED HEREIN), (I) THE CERTIFICATES OF THE
CLASS B TRUST WILL BE SUBORDINATED IN RIGHT OF PAYMENT TO THE CERTIFICATES OF
THE CLASS A TRUST AND (II) THE CERTIFICATES OF THE CLASS C TRUST WILL BE
SUBORDINATED IN RIGHT OF PAYMENT TO THE CERTIFICATES OF THE CLASS B TRUST.
PAYMENTS OF INTEREST ON THE CERTIFICATES TO BE ISSUED BY EACH TRUST WILL BE
SUPPORTED BY A SEPARATE LIQUIDITY FACILITY FOR THE BENEFIT OF THE HOLDERS OF
SUCH CERTIFICATES, EACH SUCH FACILITY TO BE PROVIDED INITIALLY BY ABN AMRO BANK
N.V., ACTING THROUGH ITS CHICAGO BRANCH, IN AN AMOUNT SUFFICIENT TO PAY INTEREST
THEREON AT THE APPLICABLE INTEREST RATE FOR SUCH CERTIFICATES ON UP TO SIX
CONSECUTIVE QUARTERLY DISTRIBUTION DATES.
THE PROPERTY OF THE TRUSTS WILL INCLUDE, AMONG OTHER THINGS, EQUIPMENT NOTES
(THE "EQUIPMENT NOTES") TO BE ISSUED ON A NONRECOURSE BASIS BY THE TRUSTEES OF
SEPARATE OWNER TRUSTS (EACH, AN "OWNER TRUSTEE") IN CONNECTION WITH NINE
SEPARATE LEVERAGED LEASE TRANSACTIONS TO FINANCE A PORTION OF THE PURCHASE PRICE
OF NINE EMBRAER EMB-145ER AIRCRAFT (COLLECTIVELY, THE "AIRCRAFT"), WHICH WILL BE
LEASED TO CONTINENTAL. THE EQUIPMENT NOTES IN RESPECT OF EACH AIRCRAFT WILL BE
ISSUED IN THREE SERIES (THE "SERIES A EQUIPMENT NOTES", THE "SERIES B EQUIPMENT
NOTES" AND THE "SERIES C EQUIPMENT NOTES"). THE CLASS A TRUST, THE CLASS B TRUST
AND THE CLASS C TRUST WILL PURCHASE THE SERIES OF EQUIPMENT NOTES ISSUED WITH
RESPECT TO EACH AIRCRAFT THAT HAS AN INTEREST RATE EQUAL TO THE INTEREST RATE
APPLICABLE TO THE CERTIFICATES TO BE ISSUED BY SUCH TRUST. THE MATURITY DATES OF
THE EQUIPMENT NOTES ACQUIRED BY EACH TRUST WILL OCCUR ON OR BEFORE THE FINAL
EXPECTED DISTRIBUTION DATE APPLICABLE TO THE CERTIFICATES ISSUED BY SUCH TRUST.
THE EQUIPMENT NOTES ISSUED WITH RESPECT TO EACH AIRCRAFT WILL BE SECURED BY A
SECURITY INTEREST IN SUCH AIRCRAFT AND BY AN ASSIGNMENT OF THE LEASE RELATING
THERETO (EACH, A "LEASE"), INCLUDING THE RIGHT TO RECEIVE RENTALS PAYABLE IN
RESPECT OF SUCH AIRCRAFT BY CONTINENTAL. ALTHOUGH NEITHER THE CERTIFICATES NOR
THE EQUIPMENT NOTES ARE OBLIGATIONS OF, OR GUARANTEED BY, CONTINENTAL, THE
AMOUNTS UNCONDITIONALLY PAYABLE BY CONTINENTAL FOR LEASE OF THE AIRCRAFT WILL BE
SUFFICIENT TO PAY IN FULL WHEN DUE ALL AMOUNTS REQUIRED TO BE PAID ON THE
EQUIPMENT NOTES HELD IN THE TRUSTS.
ALL OF THE EQUIPMENT NOTES HELD IN EACH TRUST WILL ACCRUE INTEREST AT THE
APPLICABLE RATE PER ANNUM FOR THE CERTIFICATES TO BE ISSUED BY SUCH TRUST,
PAYABLE ON MARCH 10, JUNE 10, SEPTEMBER 10 AND DECEMBER 10 OF EACH YEAR,
COMMENCING ON DECEMBER 10, 1997. SUCH INTEREST WILL BE DISTRIBUTED TO
CERTIFICATEHOLDERS (AS DEFINED HEREIN) OF SUCH TRUST ON EACH SUCH DATE, SUBJECT
TO THE INTERCREDITOR AGREEMENT. SEE "DESCRIPTION OF THE CERTIFICATES--GENERAL"
AND "--PAYMENTS AND DISTRIBUTIONS".
SCHEDULED PRINCIPAL PAYMENTS ON THE EQUIPMENT NOTES HELD IN EACH TRUST WILL
BE PASSED THROUGH TO THE CERTIFICATEHOLDERS OF EACH SUCH TRUST ON MARCH 10, JUNE
10, SEPTEMBER 10 AND DECEMBER 10 OF EACH YEAR, COMMENCING ON DECEMBER 10, 1997.
SUCH PAYMENTS WILL BE MADE IN ACCORDANCE WITH THE PRINCIPAL REPAYMENT SCHEDULE
SET FORTH BELOW UNDER "DESCRIPTION OF THE CERTIFICATES--POOL FACTORS", IN EACH
CASE SUBJECT TO THE INTERCREDITOR AGREEMENT.
UNDER EACH PASS THROUGH TRUST AGREEMENT A PTC EVENT OF DEFAULT (AS DEFINED
HEREIN) WILL OCCUR IF THE TRUSTEE FAILS TO PAY WITHIN 10 BUSINESS DAYS OF THE
DUE DATE THEREOF: (I) THE OUTSTANDING POOL BALANCE (AS DEFINED HEREIN) OF THE
APPLICABLE CLASS OF CERTIFICATES ON THE FINAL MATURITY DATE (AS DEFINED HEREIN)
FOR SUCH CLASS OR (II) INTEREST DUE ON SUCH CERTIFICATES ON ANY DISTRIBUTION
DATE (UNLESS THE SUBORDINATION AGENT (AS DEFINED HEREIN) SHALL HAVE MADE
INTEREST DRAWINGS (AS DEFINED HEREIN), OR DRAWINGS ON THE CASH COLLATERAL
ACCOUNT (AS DEFINED HEREIN), FOR SUCH CLASS OF CERTIFICATES IN AN AGGREGATE
AMOUNT SUFFICIENT TO PAY SUCH INTEREST AND SHALL HAVE DISTRIBUTED SUCH AMOUNT TO
THE TRUSTEE ENTITLED THERETO). A PTC EVENT OF DEFAULT WITH RESPECT TO THE MOST
SENIOR OUTSTANDING CLASS OF CERTIFICATES RESULTING FROM AN INDENTURE DEFAULT (AS
DEFINED HEREIN) UNDER ALL INDENTURES (AS DEFINED HEREIN) WILL, AMONG OTHER
EVENTS, CONSTITUTE A TRIGGERING EVENT (AS DEFINED HEREIN).
------------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE S-25 FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PASS THROUGH PRINCIPAL INTEREST FINAL EXPECTED PUBLIC OFFERING
CERTIFICATES AMOUNT* RATE DISTRIBUTION DATE* PRICE(1)(2)
- ------------- ------------- ----------- ------------------ ---------------
<S> <C> <C> <C> <C>
1997-3A $ 55,987,573 % JUNE 10, 2013 100%
1997-3B 19,286,644 JUNE 10, 2007 100
1997-3C 13,983,321 JUNE 10, 2005 100
</TABLE>
- ------------------------------
* THE PRINCIPAL AMOUNTS AND THE FINAL EXPECTED DISTRIBUTION DATES ARE
INDICATIVE ONLY AND SUBJECT TO CHANGE.
(1) PLUS ACCRUED INTEREST, IF ANY, FROM THE DATE OF ISSUANCE.
(2) THE UNDERWRITING COMMISSION VARIES BY TRUST AND AGGREGATES $ ,
WHICH CONSTITUTES % OF THE PRINCIPAL AMOUNT OF THE CERTIFICATES OFFERED
HEREBY. THE UNDERWRITING COMMISSIONS, AND CERTAIN OTHER EXPENSES ESTIMATED
AT APPROXIMATELY $ , WILL BE PAID BY THE OWNER PARTICIPANTS OR
ROLLS-ROYCE PLC. ALL PROCEEDS OF THE CERTIFICATES WILL BE USED BY THE TRUSTS
TO PURCHASE THE EQUIPMENT NOTES.
--------------------------
THE CERTIFICATES OFFERED HEREBY ARE OFFERED BY THE UNDERWRITERS (AS DEFINED
HEREIN), SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY THE UNDERWRITERS AND
SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS BY SHEARMAN & STERLING, COUNSEL FOR
THE UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES IN BOOK-ENTRY
FORM WILL BE MADE ON OR ABOUT , 1997 THROUGH THE FACILITIES OF THE
DEPOSITORY TRUST COMPANY, AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE
FUNDS.
------------------------------
MORGAN STANLEY DEAN WITTER
CITICORP SECURITIES, INC.
SEPTEMBER , 1997
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS
PROSPECTUS SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CONTINENTAL
OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF CONTINENTAL SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
------------
<S> <C>
Prospectus Supplement Summary....................................................................... S-3
Risk Factors........................................................................................ S-25
Use of Proceeds..................................................................................... S-34
The Company......................................................................................... S-35
Incorporation of Certain Documents by Reference..................................................... S-38
Description of the Certificates..................................................................... S-39
Description of the Liquidity Facilities............................................................. S-49
Description of the Intercreditor Agreement.......................................................... S-52
Description of the Aircraft and the Appraisals...................................................... S-57
Description of the Equipment Notes.................................................................. S-59
Certain U.S. Federal Income Tax Consequences........................................................ S-73
Certain Delaware Taxes.............................................................................. S-75
ERISA Considerations................................................................................ S-75
Plan of Distribution................................................................................ S-78
Legal Matters....................................................................................... S-79
Experts............................................................................................. S-79
Index of Terms...................................................................................... Appendix I
Appraisal Letters................................................................................... Appendix II
Equipment Notes Principal Payment Schedule.......................................................... Appendix III
PROSPECTUS
Available Information............................................................................... 2
Incorporation of Certain Documents by Reference..................................................... 2
The Company......................................................................................... 3
General Outline of Trust Structure.................................................................. 3
Use of Proceeds..................................................................................... 3
Ratio of Earnings to Fixed Charges.................................................................. 4
Description of the Certificates..................................................................... 5
Description of the Equipment Notes.................................................................. 17
Certain United States Federal Income Tax Consequences............................................... 20
ERISA Considerations................................................................................ 23
Plan of Distribution................................................................................ 23
Legal Opinions...................................................................................... 24
Experts............................................................................................. 24
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PASS THROUGH
CERTIFICATES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING, AND MAY BID FOR AND PURCHASE THE PASS THROUGH CERTIFICATES IN THE
OPEN MARKET. IN ADDITION, UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN
PASSIVE MARKET MAKING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION".
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY INFORMATION DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. CERTAIN CAPITALIZED
TERMS USED HEREIN ARE DEFINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT ON THE
PAGES INDICATED IN THE "INDEX OF TERMS" APPEARING AS APPENDIX I TO THIS
PROSPECTUS SUPPLEMENT, AND ALL CROSS REFERENCES HEREIN REFER TO SECTIONS OF THIS
PROSPECTUS SUPPLEMENT UNLESS OTHERWISE INDICATED.
SUMMARY OF TERMS OF CERTIFICATES*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
CERTIFICATES CERTIFICATES CERTIFICATES
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Aggregate Face Amount....................... $55,987,573 $19,286,644 $13,983,321
Ratings:
Moody's.................................
Standard & Poor's.......................
Initial Loan to Aircraft Value
(cumulative)(1)........................... 42.7% 57.5% 68.1%
Principal Distribution Window (in
years). .................................. 0.5 - 15.8 0.3 - 9.8 0.3 - 7.8
Expected Initial Average Life (in years).... 10.9 6.4 4.2
Regular Distribution Dates.................. March 10, March 10, March 10,
June 10, June 10, June 10,
September 10 & September 10 & September 10 &
December 10 December 10 December 10
Final Expected Regular Distribution Date.... June 10, 2013 June 10, 2007 June 10, 2005
Final Maturity Date......................... December 10, 2014 December 10, 2008 December 10, 2006
Section 1110 Protection(2).................. Yes Yes Yes
Liquidity Facility Coverage(3).............. 6 quarterly 6 quarterly 6 quarterly
interest payments interest payments interest payments
Initial Liquidity Facility Amount(3)........ $ $ $
</TABLE>
- ------------------------
* The aggregate face amount, the initial loan to Aircraft value, the expected
principal distribution window, the initial average life, the final expected
Regular Distribution Date and the Final Maturity Date for each Class of
Certificates are indicative only and subject to change.
(1) Assumes an aggregate appraised Aircraft value of $130,980,000. The appraised
value is only an estimate and reflects certain assumptions. See "Description
of the Aircraft and the Appraisals--The Appraisals".
(2) The benefits of Section 1110 of the U.S. Bankruptcy Code will be available
to the Loan Trustees.
(3) For each Class of Certificates, the initial amount of the Liquidity Facility
will cover six consecutive quarterly 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 will be $ .
S-3
<PAGE>
EQUIPMENT NOTES AND THE AIRCRAFT*
Set forth below is certain information about the Equipment Notes to be held
in the Trusts and the Aircraft that will (under the related Indenture) secure
such Equipment Notes:
<TABLE>
<CAPTION>
ORIGINAL
PRINCIPAL
AIRCRAFT AIRCRAFT LATEST AMOUNT OF
REGISTRATION MANUFACTURER'S DELIVERY EQUIPMENT NOTE EQUIPMENT APPRAISED
AIRCRAFT TYPE NUMBER SERIAL NUMBER MONTH MATURITY DATE NOTES VALUE
- -------------------------- ----------- -------------- --------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Embraer EMB-145ER N14925 145.004 December 1996 June 10, 2013 $9,933,562 $14,500,000
Embraer EMB-145ER N15926 145.005 December 1996 June 10, 2013 9,933,562 14,500,000
Embraer EMB-145ER N16927 145.006 January 1997 June 10, 2013 9,933,562 14,500,000
Embraer EMB-145ER N17928 145.007 January 1997 September 10, 2011 9,883,604 14,500,000
Embraer EMB-145ER N13929 145.009 February 1997 September 10, 2011 9,883,604 14,530,000
Embraer EMB-145ER N14930 145.011 April 1997 December 10, 2012 9,922,411 14,590,000
Embraer EMB-145ER N14931 145.013 April 1997 December 10, 2012 9,922,411 14,590,000
Embraer EMB-145ER N15932 145.015 May 1997 December 10, 2012 9,922,411 14,620,000
Embraer EMB-145ER N14933 145.018 July 1997 December 10, 2012 9,922,411 14,650,000
</TABLE>
- ------------------------
* The principal amounts and maturity dates are indicative only and subject to
change.
(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: AVMARK, Inc. ("AVMARK"), Morten Beyer and Agnew, Inc.
("MBA") and Simat, Helliesen & Eichner, Inc. ("SH&E") (collectively, the
"Appraisers"), determined as of August 29, August 28 and September 4, 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 date of the consummation of the Offering
(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 Issuance
Date included in the table depreciates by approximately 3% of the initial
appraised value per year commencing in the year commercial service begins (the
"in-service date") until the tenth year after such in-service date of such
Aircraft and by approximately 4% of the initial appraised value per year
thereafter. 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 such Aircraft as
- ------------------------
* The information relating to periodic Pool Balances and resulting LTVs is
indicative only and subject to change.
S-4
<PAGE>
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".
The following table is compiled on an aggregate basis, and it should be
noted that, since the Equipment Notes are not cross-collateralized with respect
to the Aircraft, the excess proceeds realized from the disposition of any
particular Aircraft would not be available to offset shortfalls on the Equipment
Notes relating to any other Aircraft. Therefore, upon the occurrence of an
Indenture Default, even if the Aircraft as a group could be sold for more than
the total amounts payable in respect of all of the outstanding Equipment Notes,
if certain Aircraft were sold for less than the total amount payable in respect
of the related Equipment Notes, there would not be sufficient proceeds to pay
all Classes of Certificates in full. See "Description of the Equipment
Notes--Loan to Value Ratios of Equipment Notes" for the LTVs for the Equipment
Notes issued in respect of individual Aircraft, which may be more relevant in a
default situation than the aggregate values shown in the following table.
<TABLE>
<CAPTION>
ASSUMED CLASS A CLASS B CLASS C
AGGREGATE CERTIFICATES CLASS A CERTIFICATES CLASS B CERTIFICATES CLASS C
AIRCRAFT POOL CERTIFICATES POOL CERTIFICATES POOL CERTIFICATES
DATE VALUE BALANCE LTV BALANCE LTV BALANCE LTV
- ------------------------- -------------- ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
September , 1997....... $ 130,980,000 $ 55,987,573 42.7% $ 19,286,644 57.5% $ 13,983,321 68.1%
September 10, 1998....... 127,050,600 54,747,910 43.1 18,152,644 57.4 12,846,253 67.5
September 10, 1999....... 123,121,200 53,464,770 43.4 17,018,644 57.2 11,649,263 66.7
September 10, 2000....... 119,191,800 51,824,682 43.5 15,884,644 56.8 10,050,819 65.2
September 10, 2001....... 115,262,400 50,116,176 43.5 14,750,644 56.3 8,163,011 63.4
September 10, 2002....... 111,333,000 48,407,670 43.5 13,616,644 55.7 5,928,487 61.0
September 10, 2003....... 107,403,600 46,699,164 43.5 12,352,776 55.0 3,451,232 58.2
September 10, 2004....... 103,474,200 44,990,658 43.5 9,920,494 53.1 1,742,052 54.8
September 10, 2005....... 99,544,800 43,282,152 43.5 7,691,463 51.2 0 NA
September 10, 2006....... 95,615,400 41,573,646 43.5 3,790,415 47.4 0 NA
September 10, 2007....... 91,686,000 38,730,562 42.2 0 NA 0 NA
September 10, 2008....... 86,446,800 34,762,493 40.2 0 NA 0 NA
September 10, 2009....... 81,207,600 27,860,764 34.3 0 NA 0 NA
September 10, 2010....... 75,968,400 19,485,359 25.6 0 NA 0 NA
September 10, 2011....... 55,053,000 10,501,098 19.1 0 NA 0 NA
September 10, 2012....... 50,975,000 3,137,951 6.2 0 NA 0 NA
</TABLE>
S-5
<PAGE>
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 Lease Rental
Payments, which are assigned by the Owner Trustees, to the Loan Trustees. From
such Lease Rental Payments, the Loan Trustees will make Equipment Note Payments
on the Series A Equipment Notes, the Series B Equipment Notes and the Series C
Equipment Notes with respect to all Aircraft to the Subordination Agent. Excess
Rental Payments will be paid by the Loan Trustees to the Lessors. From such
Equipment Note Payments, the Subordination Agent will pay Principal, Premium, if
any, and Interest Distributions to the Pass Through Trustee for the Class A
Trust, the Pass Through Trustee for the Class B Trust and the Pass Through
Trustee for the Class C Trust, who will pay such Principal, Premium, if any, and
Interest Distributions to the Holders of Class A Certificates, the Holders of
Class B Certificates and the Holders of Class C Certificates, respectively. The
Subordination Agent may also receive Advances, if any, and pay Reimbursements,
if any, to the Liquidity Providers.]
- ------------------------
(1) Each Aircraft will be subject to a separate Lease and a related Indenture.
(2) The initial amount of the Liquidity Facility for each Class of Certificates
will cover six consecutive quarterly interest payments with respect to such
Class.
S-6
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Trusts:........................... Each of the Class A Trust, the Class B Trust and the
Class C Trust is to be formed pursuant to the Basic
Agreement and three separate Trust Supplements to be
entered into between the Company and Wilmington Trust
Company as trustee under each Trust. Each Trust will be
a separate entity.
Certificates Offered:............. Pass Through Certificates to be issued by each Trust,
representing fractional undivided interests in such
Trust. The Certificates to be issued by the Class A
Trust, the Class B Trust and the Class C Trust in the
offering contemplated hereby (the "Offering") are
referred to herein as the "Class A Certificates", the
"Class B Certificates" and the "Class C Certificates",
respectively.
Use of Proceeds:.................. The proceeds from the sale of the Certificates offered
hereby will be used by the Trustees to purchase
Equipment Notes issued by each Owner Trustee to finance
a portion of the purchase price of the related
Aircraft.
Subordination Agent, Trustee, Loan
Trustee:........................ Wilmington Trust Company will act (i) as subordination
agent under the Intercreditor Agreement (the
"Subordination Agent"), (ii) as Trustee, paying agent
and registrar for the Certificates of each Trust, and
(iii) as Loan Trustee, paying agent and registrar for
each series of Equipment Notes.
Liquidity Provider:............... ABN AMRO Bank N.V., acting through its Chicago branch
(the "Liquidity Provider"), initially will provide a
separate liquidity facility for the benefit of the
holders of each of the Class A Certificates, Class B
Certificates and Class C Certificates.
Trust Property:................... The property of each Trust (the "Trust Property") will
include (i) subject to the Intercreditor Agreement,
Equipment Notes issued on a nonrecourse basis by each
of the Owner Trustees in connection with each of the
nine separate leveraged lease transactions with respect
to each Aircraft to finance a portion of the purchase
price of such Aircraft, (ii) the rights of such Trust
under the Intercreditor Agreement (including all monies
receivable in respect of such rights), (iii) 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 will be
issued in three series under an Indenture (the
"Indenture") between the applicable Owner Trustee and
the mortgagee thereunder (the "Loan Trustee"). The
Class A Trust, the Class B Trust and the Class C Trust
each will acquire, 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 to be issued by such
Trust. The maturity dates of the Equipment Notes
acquired by each Trust will occur on or before the
final expected Regular Distribution Date applicable to
the Certificates to be issued by such Trust. The
aggregate
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
original principal amount of the Equipment Notes to be
held in each Trust will be the same as the aggregate
original face amount of the Certificates to be issued
by such Trust.
Certificates; Denominations:...... The Certificates of each Trust will be issued in a
minimum denomination of $1,000 and in integral multiples
thereof. See "Description of the
Certificates--General".
Regular Distribution Dates: ...... March 10, June 10, September 10 and December 10,
commencing on December 10, 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 March 10, June 10, September 10 and December 10 of
each year, commencing on December 10, 1997. Payments of
principal of the Equipment Notes are scheduled to be
received on March 10, June 10, September 10 and
December 10 of each year, commencing on December 10,
1997. Payments of principal, premium (if any) and
interest resulting from the early redemption or
purchase (if any) of the Equipment Notes held in any
Trust will be distributed to the Certificateholders of
such Trust on a Special Distribution Date after not
less than 15 days' notice to such Certificateholders 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 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 Class of Certificates on any Distribution Date
(unless the Subordination Agent shall have made
Interest Drawings, or a withdrawal from the Cash
Collateral Account for such Class of Certificates, with
respect thereto in an amount sufficient to pay such
interest and shall have distributed such amount to the
Trustee entitled thereto). The Final Maturity Date for
the Class A, B and C Certificates is December 10, 2014,
December 10, 2008 and December 10, 2006, respectively.
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.
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
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 and (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, in each case at a
purchase price equal to the Pool Balance of the
relevant Class or Classes of Certificates plus accrued
and unpaid interest thereon to the date of purchase
without premium but including any other amounts due to
the Certificateholders of such Class or Classes.
"Triggering Event" means (x) the occurrence of an
Indenture Default under all Indentures resulting in a
PTC Event of Default with respect to the most senior
Class of Certificates then outstanding, (y) the
acceleration of all of the outstanding Equipment Notes
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 Supplement, payable on
March 10, June 10, September 10 and December 10 of each
year, commencing on December 10, 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".
(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 March 10, June
10, September 10 and December 10 of each year,
commencing on December 10, 1997, in each case, subject
to the Intercreditor Agreement. See "Description of the
Certificates--Pool Factors" and "Description of the
Equipment Notes--Principal and Interest Payments".
(c) Redemption and Purchase: ... (i) The Equipment Notes issued with respect to an
Aircraft will be redeemed in whole upon the occurrence
of an Event of Loss with respect to such Aircraft, 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 in the case of the
Series A Equipment Notes, in the case of the
Series
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
B Equipment Notes and in the case of the Series C
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.
(iii) If, with respect to an Aircraft, one or more Lease
Events of Default shall have occurred and been
continuing or the Equipment Notes with respect to such
Aircraft have been accelerated, then all, but not less
than all, of the Equipment Notes issued with respect to
such Aircraft may be purchased by the related Owner
Trustee or Owner Participant at a price equal to the
aggregate unpaid principal thereof, together with
accrued interest thereon to, but not including, the
purchase date, but without any premium (PROVIDED that a
Make-Whole Premium shall be payable if such Equipment
Notes are to be purchased prior to the Premium
Termination Date applicable thereto when a Lease Event
of Default shall have occurred and been continuing for
less than 180 days).
(d) Security:................... The Equipment Notes issued with respect to each Aircraft
will be secured by a security interest in such Aircraft
and by an assignment to the related Loan Trustee of
certain of the related Owner Trustee's rights under the
Lease with respect to such Aircraft, including the
right to receive payments of rent thereunder, with
certain exceptions. The Equipment Notes will not be
cross-collateralized and, consequently, the Equipment
Notes issued in respect of any one Aircraft are not
secured by any of the other Aircraft or the Leases
related thereto. There will not be cross-default
provisions in the Indentures or in the Leases.
Consequently, events resulting in an Indenture Default
under any particular Indenture may or may not result in
an Indenture Default occurring under any other
Indenture, and a Lease Event of Default under any
particular Lease may or may not constitute a Lease
Event of Default under any other Lease. If the
Equipment Notes issued with respect to one or more
Aircraft are in default and the Equipment Notes issued
with respect to the remaining Aircraft are not in
default, no remedies will be exercisable under the
Indentures with respect to such remaining Aircraft. See
"Description of the Equipment Notes--Security" and
"--Indenture Defaults, Notice and Waiver".
Although the Equipment Notes are not obligations of, or
guaranteed by, Continental, the amounts unconditionally
payable by Continental for lease of the Aircraft will
be sufficient to pay in full when due all scheduled
amounts required to be paid on the Equipment Notes. See
"Description of the Equipment Notes--General".
(e) Section 1110 Protection: ... The Loan Trustee with respect to each Indenture will
receive an opinion of Hughes Hubbard & Reed LLP, counsel
to Continental, that the Owner Trustee, as lessor under
the Lease
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
for the Aircraft subject to such Indenture, and such
Loan Trustee, as assignee of such Owner Trustee's
rights under such Lease pursuant to such Indenture,
will be entitled to the benefits of Section 1110 of the
U.S. Bankruptcy Code with respect to the airframe and
engines comprising such Aircraft. See "Description of
the Equipment Notes--Remedies" for a description of
such opinion and certain assumptions and qualifications
contained therein.
(f) Ranking:.................... Series B Equipment Notes issued in respect of any
Aircraft will be subordinated in right of payment to
Series A Equipment Notes issued in respect of such
Aircraft; and Series C Equipment Notes issued in
respect of such Aircraft will be subordinated in right
of payment to such Series B 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 and (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.
Delayed Purchase of
Equipment Notes: ............... It is currently anticipated that the Equipment Notes
relating to all of the Aircraft will be purchased by the
Trusts on the Issuance Date. Any proceeds of the
issuance of the Certificates not immediately used to
purchase Equipment Notes (the Equipment Notes, to the
extent not purchased on the Issuance Date, the "Delayed
Delivery Notes") will be held by the Trustee in an
escrow account and invested in specified investments at
the direction and risk of, and for the account of, the
Company. If the Company notifies the applicable Trustee
that any such proceeds will not be used to purchase
Equipment Notes, or if any such proceeds are not used
to purchase Equipment Notes on or before October 31,
1997, an amount equal to such unused proceeds will be
distributed to the Certificateholders after at least 15
days' prior written notice following the Company's
notice that such funds will not be used to purchase
Equipment Notes or October 31, 1997, as the case may
be. Such distribution with respect to Certificates
issued by a Trust will include an amount equal to the
interest that would have accrued on any Equipment Notes
not purchased by such Trust on the Issuance Date, had
such Equipment Notes been issued, until the date of
such distribution. No premium will be paid with respect
to proceeds attributable to the nonpurchase of
Equipment Notes. See "Description of Certificates--
Delayed Purchase of Equipment Notes."
</TABLE>
S-11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Liquidity Facilities:............. The Liquidity Provider and the Subordination Agent will
enter into a separate revolving credit agreement (each,
a "Liquidity Facility") with respect to each of the
Trusts. Under the Liquidity Facility with respect to
any Trust, the Liquidity Provider will, if necessary,
make advances ("Interest Drawings") in an aggregate
amount (the "Required Amount") sufficient to pay
interest on the Class A, B or C, as the case may be,
Certificates of such Trust on up to six successive
quarterly Regular Distribution Dates (without regard to
any future payments of principal on such Certificates)
at the respective interest rates shown on the cover
page of this Prospectus Supplement for such
Certificates (the "Stated Interest Rates"). The initial
Required Amount under the Liquidity Facilities for the
Class A Certificates, the Class B Certificates and the
Class C Certificates will be $ , $ and
$ , 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 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 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 will be obligated to reimburse
(to the extent that the Subordination Agent has
available funds therefor) the Liquidity Provider for
the amount of such drawing. Such reimbursement
obligation and all interest, fees and other amounts
owing to the Liquidity Provider under each Liquidity
Facility or certain other agreements (the "Liquidity
Obligations") will rank PARI PASSU with the Liquidity
Obligations relating to all other Liquidity Facilities
and will rank senior to the Certificates in right of
payment. Upon
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
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
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 (without giving effect to any acceleration);
PROVIDED that in the event of a bankruptcy proceeding
involving Continental under the U.S. Bankruptcy Code,
(i) any payment default existing during the 60-day
period under Section 1110(a)(1)(A) of the U.S.
Bankruptcy Code (or such longer period as may apply
under Section 1110(b) of the U.S. Bankruptcy Code) (the
"Section 1110 Period") shall not be taken into
consideration, unless during the Section 1110 Period
the trustee in such proceeding or Continental refuses
to assume or agree to perform its obligations under the
Lease related to such Equipment Note 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 the Liquidity Provider may 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
10 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. In
addition, the Intercreditor Agreement will provide for
the replacement or extension of the Liquidity Facility
for any Class of Certificates if it is then scheduled
to expire prior to the date that is fifteen days after
the Final Maturity Date for such Class. If such
Liquidity Facility cannot be so replaced or extended by
the date that is 25 days prior to the then scheduled
expiration date of such Liquidity Facility, such
Liquidity Facility will be drawn in full up to the then
Maximum Available Commitment
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
(the "Non-Extension Drawing") and the proceeds will be
deposited in the Cash Collateral Account for the
related Class of Certificates and used for the same
purposes and under the same circumstances and subject
to the same conditions as cash payments of Interest
Drawings under such Liquidity Facility would be used.
Each Liquidity Facility is scheduled to expire on the
364th day after the Issuance Date, subject to annual
extensions by mutual agreement.
Upon receipt by the Subordination Agent of a Termination
Notice with respect to any Liquidity Facility from the
applicable Liquidity Provider (given as described in
"Description of the Liquidity Facilities--Liquidity
Events of Default"), the Subordination Agent shall
request a final drawing (the "Final Drawing") under
such Liquidity Facility in an amount equal to the then
Maximum Available Commitment thereunder and shall hold
the proceeds thereof in the Cash Collateral Account for
the related Trust to be used for the same purposes and
under the same circumstances, and subject to the same
conditions, as cash payments of Interest Drawings under
such Liquidity Facility would be used. All amounts 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 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.
Notwithstanding the subordination provisions of the
Intercreditor Agreement, the holders of the
Certificates to be issued by each Trust will be
entitled to receive and retain the proceeds of drawings
under the Liquidity 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 will enter into an agreement (the
"Intercreditor Agreement") which will provide as
follows:
(i) All payments made in respect of the Equipment Notes
and certain other payments will be made to the
Subordination Agent, which will distribute such
payments in accordance with the provisions of
paragraphs (ii) and (iii) below.
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
(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) to the Trustee
for the Class A Certificates to the extent required
to pay Expected Distributions on the Class A
Certificates; (3) to the Trustee for the Class B
Certificates to the extent required to pay Expected
Distributions on the Class B Certificates; (4) to
the Trustee for the Class C Certificates to the
extent required to pay Expected Distributions on
the Class C Certificates; and (5) payment of
certain fees and expenses of the Subordination
Agent and each Trustee.
"Expected Distributions" means, with respect to the
Certificates of any Trust on any Distribution Date (the
"Current Distribution Date"), the sum of (x) accrued,
due 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), less
(if applicable) the aggregate amount of escrowed funds
for such Class of Certificates as of such immediately
preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, as of
the date of original issuance of the Certificates of
such Class) thereafter distributed to the holders of
such Certificates (instead of being used to purchase
Delayed Delivery Notes) as described below under
"Description of the Certificates-- Delayed Purchase of
Equipment Notes" (excluding the interest component of
any such distribution), and (B) the Pool Balance of
such Certificates as of the Current Distribution Date
calculated on the basis that (i) the principal of the
Equipment Notes held in such Trust has been paid when
due (whether at stated maturity, upon redemption,
prepayment, purchase, 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
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
following order: (1) to the Subordination Agent,
each 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 Subordination Agent, each
Trustee and each Certificateholder for certain
tax-related expenses; (3) to the Trustee for the
Class A Certificates to the extent required to pay
Adjusted Expected Distributions on the Class A
Certificates; (4) to the Trustee for the Class B
Certificates to the extent required to pay
Adjusted Expected Distributions on the Class B
Certificates; and (5) to the Trustee for the Class
C Certificates to the extent required to pay
Adjusted Expected Distributions on the Class C
Certificates.
"Adjusted Expected Distributions" means, with respect to
the Certificates of any Trust on any Distribution Date,
the sum of (1) accrued, due 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), less (if applicable) the aggregate amount of
escrowed funds for such Class of Certificates as of
such immediately preceding Distribution Date (or, if
the Current Distribution Date is the first
Distribution Date, as of the date of original
issuance of the Certificates of such Class)
thereafter distributed to the holders of such
Certificates (instead of being used to purchase
Delayed Delivery Notes) as described below under
"Description of the Certificates--Delayed Purchase
of Equipment Notes" (excluding the interest
component of any such distribution), 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
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
(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 of principal on such
Distribution Date 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
Value of such Aircraft (or with respect to any such
Aircraft which has suffered an Event of Loss under and
as defined in the relevant Lease, the amount of the
insurance proceeds paid to the related Loan Trustee in
respect thereof to the extent then held by such Loan
Trustee (and/or on deposit in the Special Payments
Account) or payable to such Loan Trustee in respect
thereof) and (ii) the outstanding principal amount of
the Equipment Notes secured by such Aircraft after
giving effect to any principal payments of such
Equipment Notes on or before such Distribution Date.
"LTV Ratio" means for the Class A Certificates %, for
the Class B Certificates % and for the Class C
Certificates %.
"Appraised Current Market Value" of any Aircraft means
the lower of the average and the median of the most
recent three LTV Appraisals of such Aircraft. After a
Triggering Event occurs and any Equipment Note becomes
a Non-Performing Equipment Note, the Subordination
Agent shall obtain LTV Appraisals for the Aircraft as
soon as practicable and additional LTV Appraisals on or
prior to each anniversary of the date of such initial
LTV Appraisals; PROVIDED that if the Controlling Party
reasonably objects to the appraised value of the
Aircraft shown in such LTV Appraisals, the Controlling
Party shall have the right to obtain or cause to be
obtained
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
substitute LTV Appraisals (including LTV Appraisals
based upon physical inspection of such Aircraft).
"LTV Appraisal" means a current fair market value
appraisal (which may be a "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.
(b) Intercreditor Rights:....... Pursuant to the Intercreditor Agreement, the Trustees
and the Liquidity Provider will agree that, with respect
to any Indenture at any given time, the Loan Trustee,
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) by the Controlling Party if an
Indenture Default under such Indenture has occurred and
is continuing.
"Controlling Party" with respect to any Indenture means:
(x) the Trustee for the Class A Trust (the "Class A
Trustee"); (y) upon payment of Final Distributions to
the holders of Class A Certificates, the Trustee for
the Class B Trust (the "Class B Trustee"); and (z) upon
payment of Final Distributions to the holders of Class
B Certificates, the Trustee for the Class C Trust (the
"Class C Trustee"). See "Description of the
Certificates--Indenture Defaults and Certain Rights
Upon an Indenture Default" for a description of the
rights of the Certificateholders of each Trust to
direct the respective Trustees. Notwithstanding the
foregoing, at any time after 18 months from the earlier
to occur of (x) the date on which the entire Maximum
Available Commitment 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 with the highest outstanding amount of
Liquidity Obligations shall have the right to become
the Controlling Party with respect to such Indenture.
For purposes of giving effect to the foregoing, the
Trustees (other than the Controlling Party) shall
irrevocably agree (and the Certificateholders (other
than the Certificateholders represented by the
Controlling Party) shall be deemed to agree by virtue
of their purchase of Certificates) to exercise their
voting rights as directed by the Controlling
</TABLE>
S-18
<PAGE>
<TABLE>
<S> <C>
Party. For a description of certain limitations on the
Controlling Party's rights to exercise remedies, see
"Description of the Equipment Notes--Remedies".
"Final Distributions" means, with respect to the
Certificates of any Trust on any Distribution Date, the
sum of (x) the aggregate amount of all accrued and
unpaid interest on such Certificates and (y) the Pool
Balance of such Certificates as of the immediately
preceding Distribution Date. For purposes of
calculating Final 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 such Final
Distributions.
(i) Upon the occurrence and during the continuation of
any Indenture Default under any Indenture, the
Controlling Party may accelerate and sell all (but not
less than all) of the Equipment Notes issued under such
Indenture to any person, subject to the provisions of
paragraph (ii) below. The proceeds of such sale will be
distributed pursuant to the provisions of the
Intercreditor Agreement.
(ii) So long as any Certificates are outstanding, during
nine months after the earlier of (x) the acceleration
of the Equipment Notes under any Indenture or (y) the
bankruptcy or insolvency of Continental, without the
consent of each Trustee, (a) no Aircraft subject to the
lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less
than the Minimum Sale Price for such Aircraft or such
Equipment Notes, and (b) the amount and payment dates
of rentals payable by Continental under the Lease for
such Aircraft may not be adjusted, if, as a result of
such adjustment, the discounted present value of all
such rentals would be less than 75% of the discounted
present value of the rentals payable by Continental
under such Lease before giving effect to such
adjustment, in each case, using the weighted average
interest rate of the Equipment Notes outstanding under
such Indenture as the discount rate.
"Minimum Sale Price" means, with respect to any Aircraft
or the Equipment Notes issued in respect of such
Aircraft, at any time, the lesser of (1) 75% of the
Appraised Current Market Value of such Aircraft and (2)
the aggregate outstanding principal amount of such
Equipment Notes, plus accrued and unpaid interest
thereon.
Federal Income Tax
Consequences:................... Each Trust will be classified as a grantor trust for
federal income tax purposes. Each Certificate Owner
generally should report on its federal income tax
return its pro rata share of income
</TABLE>
S-19
<PAGE>
<TABLE>
<S> <C>
from the Equipment Notes and other property held by the
relevant Trust. See "Certain U.S. Federal Income Tax
Consequences".
ERISA Considerations: ............ In general, employee benefit plans subject to Title I of
the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code") (or
entities which may be deemed to hold the assets of any
such Plan) will be eligible to purchase the
Certificates, subject to the circumstances applicable
to such Plans. By its acceptance of a 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 one or more
prohibited transaction statutory or administrative
exemptions. 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.
Rating of the Certificates: ...... It is a condition to the issuance of the Certificates
that the Certificates be rated by Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc.
("Standard & Poor's", and together with Moody's, the
"Rating Agencies"), as set forth below. The Company's
ability to pay any losses on investments or interest
due with respect to the funds held by the Trustees in
escrow pending any delayed purchase of Equipment Notes
has not been rated.
</TABLE>
<TABLE>
<CAPTION>
STANDARD &
CERTIFICATES MOODY'S POOR'S
---------------------------------------------- --------- -----------
<S> <C> <C> <C>
Class A.......................................
Class B.......................................
Class C.......................................
</TABLE>
S-20
<PAGE>
<TABLE>
<S> <C>
A rating is not a recommendation to purchase, hold or
sell Certificates, inasmuch as such rating does not
address market price or suitability for a particular
investor. There can be no assurance that such ratings
will not be lowered or withdrawn by a Rating Agency if,
in the opinion of such Rating Agency, circumstances
(including the downgrading of Continental or the
Liquidity Provider) so warrant. See "Risk Factors--Risk
Factors Relating to the Certificates and the
Offering--Ratings of the Certificates".
</TABLE>
<TABLE>
<CAPTION>
MOODY'S STANDARD & 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>
S-21
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following tables summarize certain consolidated financial data and
certain operating data with respect to the Company. The following selected
consolidated financial data for the years ended December 31, 1996, 1995 and 1994
is derived from the audited consolidated financial statements of the Company
incorporated by reference in the Prospectus accompanying this Prospectus
Supplement and should be read in conjunction therewith. The consolidated
financial data of the Company for the three and six months ended June 30, 1997
and 1996 is derived from its unaudited consolidated financial statements, which
include all adjustments (consisting solely of normal recurring accruals) that
the Company considers necessary for the presentation of the financial position
and results of operations for these periods. Operating results for the three and
six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. The Company's
selected consolidated financial data should be read in conjunction with, and are
qualified in their entirety by reference to, the consolidated financial
statements, including the notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ---------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1997 1996 1996 1995 1994
------- ------- ------- ------- ---------- -------- --------
<CAPTION>
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA -- OPERATIONS:
Operating Revenue............. $ 1,786 $ 1,639 $ 3,484 $ 3,128 $ 6,360 $5,825 $5,670
Operating Expenses............ 1,555 1,410 3,107 2,779 5,835(1) 5,440(2) 5,681
------- ------- ------- ------- ---------- -------- --------
Operating Income (Loss)....... 231 229 377 349 525 385 (11)
Nonoperating Income
(Expense)................... (23) (23) (45) (48) (97) (75)(3) (640)(4)
------- ------- ------- ------- ---------- -------- --------
Income (Loss) before Income
Taxes, Minority Interest and
Extraordinary Loss.......... 208 206 332 301 428 310 (651)
Net Income (Loss)............. $ 128 $ 167 $ 202 $ 255 $ 319 $ 224 $ (613)
------- ------- ------- ------- ---------- -------- --------
------- ------- ------- ------- ---------- -------- --------
Earnings (Loss) per Common and
Common Equivalent
Share(5).................... $ 2.01 $ 2.53 $ 3.13 $ 3.90 $ 4.87 $ 3.60 $(11.88)
------- ------- ------- ------- ---------- -------- --------
------- ------- ------- ------- ---------- -------- --------
Earnings (Loss) per Common
Share Assuming Full
Dilution(5)................. $ 1.64 $ 2.04 $ 2.58 $ 3.25 $ 4.11 $ 3.15 $(11.88)
------- ------- ------- ------- ---------- -------- --------
------- ------- ------- ------- ---------- -------- --------
Ratio of Earnings to Fixed
Charges(6).................. 2.48 2.57 2.18 2.13 1.81 1.53 --
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ---------------- ------------------------------------
1997 1996 1997 1996 1996 1995 1994
------- ------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA (JET OPERATIONS
ONLY):(7)
Revenue passenger miles
(millions)(8)............... 11,922 10,527 22,813 20,279 41,914 40,023 41,588
Available seat miles
(millions)(9)............... 16,486 15,152 32,318 29,703 61,515 61,006 65,861
Passenger load factor(10)..... 72.3% 69.5% 70.6% 68.3% 68.1% 65.6% 63.1%
Breakeven passenger load
factor(11).................. 62.4% 59.4% 62.3% 60.2% 60.7%(13) 60.8% 62.9%
Passenger revenue per
available seat mile
(cents)..................... 9.31 9.35 9.30 9.13 8.93 8.20 7.22
Operating cost per available
seat mile (cents)........... 8.90 8.81 9.08 8.86 8.77(13) 8.36 7.86
Average yield per revenue
passenger mile
(cents)(12)................. 12.87 13.46 13.17 13.37 13.10 12.51 11.44
Average length of aircraft
flight (miles).............. 944 888 935 882 896 836 727
</TABLE>
(SEE FOOTNOTES ON THE FOLLOWING PAGE.)
S-22
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
<S> <C> <C>
(IN MILLIONS OF DOLLARS)
FINANCIAL DATA -- BALANCE SHEET:
Assets:
Cash and Cash Equivalents, including restricted cash and cash equivalents
of $74 and $76, respectively(14)....................................................... $ 994 $ 1,061
Other Current Assets..................................................................... 685 573
Total Property and Equipment, Net........................................................ 1,885 1,596
Routes, Gates and Slots, Net............................................................. 1,454 1,473
Other Assets, Net........................................................................ 498 503
----------- ------
Total Assets....................................................................... $ 5,516 $ 5,206
----------- ------
----------- ------
Liabilities and Stockholders' Equity:
Current Liabilities...................................................................... $ 2,324 $ 2,104
Long-Term Debt and Capital Leases........................................................ 1,581 1,624
Deferred Credits and Other Long-Term Liabilities......................................... 655 594
Minority Interest........................................................................ 15 15
Continental-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust
Holding Solely Convertible Subordinated
Debentures(15)......................................................................... 242 242
Redeemable Preferred Stock............................................................... -- 46
Common Stockholders' Equity.............................................................. 699 581
----------- ------
Total Liabilities and Stockholders' Equity......................................... $ 5,516 $ 5,206
----------- ------
----------- ------
</TABLE>
- ------------------------
(1) Includes a $128 million fleet disposition charge recorded in 1996 associated
primarily with the Company's decision to accelerate the replacement of its
DC-9-30, DC-10-10, 727-200, 737-100, and 737-200 aircraft. In connection
with its decision to accelerate the replacement of such aircraft, the
Company wrote down its Stage 2 aircraft inventory that is not expected to be
consumed through operations to its estimated fair value and recorded a
provision for costs associated with the return of leased aircraft at the end
of their respective lease terms.
(2) Includes a $20 million cash payment in 1995 by the Company in connection
with a 24-month collective bargaining agreement entered into by the Company
and the Independent Association of Continental Pilots.
(3) Includes a pre-tax gain of $108 million ($30 million after tax) on the
series of transactions by which the Company and its subsidiary, Continental
CRS Interests, Inc., transferred certain assets and liabilities relating to
the computerized reservation business of such subsidiary to a newly-formed
limited liability company and the remaining assets and liabilities were
sold.
(4) Includes a provision of $447 million recorded in 1994 associated with the
planned early retirement of certain aircraft and closed or underutilized
airport and maintenance facilities and other assets.
(5) In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128--'Earnings per Share" ("SFAS 128")
which specifies the computation, presentation and disclosure requirements
for 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.
S-23
<PAGE>
Under SFAS 128, the Company's basic and diluted EPS were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, FOR THE YEARS ENDED
-------------------- -------------------- --------------------
1997 1996 1997 1996 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS............................................... $ 2.22 $ 3.05 $ 3.50 $ 4.65 $ 5.75 $ 4.07
Diluted EPS............................................. $ 1.63 $ 2.09 $ 2.58 $ 3.31 $ 4.17 $ 3.37
<CAPTION>
1994
---------
<S> <C>
Basic EPS............................................... $ (11.88)
Diluted EPS............................................. $ (11.88)
</TABLE>
(6) For purposes of calculating this ratio, earnings consist of earnings before
taxes, minority interest and extraordinary loss plus interest expense (net
of capitalized interest), the portion of rental expense representative of
interest expense and amortization on previously capitalized interest. Fixed
charges consist of interest expense and the portion of rental expense
representative of interest expense. For the year ended December 31, 1994,
earnings were inadequate to cover fixed charges and the coverage deficiency
was $667 million.
(7) Includes operating data for CMI, but does not include operating data for
Express' regional jet operations or turboprop operations.
(8) The number of scheduled miles flown by revenue passengers.
(9) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(10) Revenue passenger miles divided by available seat miles.
(11) The percentage of seats that must be occupied by revenue passengers in
order for the airline to break even on an income before income taxes basis,
excluding nonoperating items.
(12) The average revenue received for each mile a revenue passenger is carried.
(13) Excludes a $128 million fleet disposition charge. See Note (1) for
description of the fleet disposition charge.
(14) Restricted cash and cash equivalents agreements relate primarily to
workers' compensation claims and the terms of certain other agreements.
(15) The sole assets of such Trust are convertible subordinated debentures, with
an aggregate principal amount of $250 million, which bear interest at the
rate of 8 1/2% per annum and mature on December 1, 2020. Upon repayment,
the Continental-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust will be mandatorily redeemed.
S-24
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE CERTIFICATES SHOULD CAREFULLY REVIEW THE
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND SHOULD
PARTICULARLY CONSIDER THE FOLLOWING MATTERS:
RISK FACTORS RELATING TO THE COMPANY
LEVERAGE AND LIQUIDITY
Continental is more leveraged and has significantly less liquidity than
certain of its competitors, several of whom have substantial available lines of
credit and/or significant unencumbered assets. Accordingly, Continental may be
less able than certain of its competitors to withstand a prolonged recession in
the airline industry and may not have as much flexibility to respond to changing
economic conditions or to exploit new business opportunities.
During the first and second quarters of 1995, in connection with
negotiations with various lenders and lessors, Continental ceased or reduced
contractually required payments under various agreements, which produced a
significant number of events of default under debt, capital lease and operating
lease agreements. Through agreements reached with the various lenders and
lessors, Continental cured all of these events of default. The last such
agreement was put in place during the fourth quarter of 1995.
As of June 30, 1997, Continental had approximately $1.9 billion (including
current maturities) of long-term debt and capital lease obligations and had
approximately $1.0 billion of minority interest, Continental-obligated
mandatorily redeemable preferred securities of subsidiary trust and common
stockholders' equity. Common stockholders' equity reflects the adjustment of the
Company's balance sheet and the recording of assets and liabilities at fair
market value as of April 27, 1993 in accordance with the American Institute of
Certified Public Accountants' Statement of Position 90-7--"Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
As of June 30, 1997, Continental had $920 million in cash and cash
equivalents (excluding restricted cash and cash equivalents of $74 million).
Continental has significant encumbered assets.
For 1997, Continental expects to incur cash expenditures under operating
leases relating to aircraft of approximately $631 million, compared to $568
million for 1996, and approximately $232 million relating to facilities and
other rentals, compared to $210 million in 1996. In addition, Continental has
capital requirements relating to compliance with regulations that are discussed
below. See "--Risk Factors Relating to the Airline Industry--Regulatory
Matters".
As of August 1, 1997, the Company had firm commitments with The Boeing
Company ("Boeing") to take delivery of a total of 121 principally narrowbody jet
aircraft during the years 1997 through 2003 with options for an additional 90
aircraft (exercisable subject to certain conditions). These aircraft will
replace older, less efficient Stage 2 aircraft and allow for growth of
operations. In addition, the Company recently signed a letter of intent with
Boeing to purchase 35 new widebody jet aircraft. This new order consists of five
firm Boeing 777-200 aircraft and 30 firm Boeing 767-400ER aircraft, with options
for additional 777 and 767 aircraft to be negotiated by the parties. The new
widebody aircraft will replace Continental's fleet of DC10-10 and DC10-30
aircraft, which will be retired as the new Boeing aircraft are delivered, and
will also be used to expand the airline's international and transcontinental
service. Ten firm delivery 777 aircraft (including five aircraft the Company
already had on order, the deliveries of which will be accelerated) will be
delivered in September 1998 through May 1999, and the thirty firm delivery 767
aircraft will be delivered starting in mid-2000 through the end of 2004. In
connection with this new order, the Company will obtain the flexibility to
substitute certain aircraft on order with Boeing and will obtain other benefits.
The new order with Boeing is subject to the negotiation and execution of
definitive documentation. It provides that the Company will purchase from Boeing
the carrier's requirements for new jet aircraft (other than regional jets) over
the next twenty years, subject to certain conditions;
S-25
<PAGE>
provided, however, that Boeing has agreed with the European Commission not to
enforce such provision. The Company requested a business offer from Boeing which
would include the requirements commitment in order to obtain more favorable
terms and flexibility.
The estimated aggregate cost of the Company's firm commitments for the 121
Boeing aircraft previously ordered and the 35 widebody aircraft included in the
recent Boeing letter of intent is approximately $7 billion. The Company has
completed or has third party commitments for a total of approximately $662
million in financing for its future narrowbody Boeing deliveries, and has
commitments or letters of intent from various sources for backstop financing for
approximately one-fourth of the anticipated acquisition cost of its future
narrowbody and widebody Boeing deliveries. The Company currently plans on
financing the new Boeing aircraft with enhanced equipment trust certificates or
similar financing and lease equity, subject to availability and market
conditions. However, further financing will be needed to satisfy the Company's
capital commitments for other aircraft and aircraft-related expenditures such as
engines, spare parts, simulators and related items. There can be no assurance
that sufficient financing will be available for all aircraft and other capital
expenditures not covered by firm financing commitments. Deliveries of new Boeing
aircraft are expected to increase aircraft rental, depreciation and interest
costs while generating cost savings in the areas of maintenance, fuel and pilot
training.
Continental has also entered into agreements or letters of intent with
several outside parties to lease three and purchase one DC-10-30 aircraft and
will take delivery of such aircraft in 1997.
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 ten of the firm aircraft
through August 1, 1997 and will take delivery of the remaining 40 firm aircraft
through the third quarter of 1999. The Company expects to account for all of
these aircraft as operating leases.
In July 1997, Continental entered into a $575 million credit facility (the
"Credit Facility"), including a $275 million term loan. The proceeds of the term
loan were loaned by Continental to its wholly owned subsidiary Air Micronesia,
Inc. ("AMI"), the parent of CMI, reloaned to CMI and used by CMI to prepay its
existing secured term loan. In connection with this prepayment, Continental will
record 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 term loan for general corporate
purposes.
The Credit Facility is secured by substantially all of CMI's assets (other
than aircraft subject to other financing arrangements) but does not contain any
financial covenants relating to CMI other than covenants restricting CMI's
incurrence of certain indebtedness and pledge or sale of assets. AMI's rights
with respect to its loan to CMI and Continental's rights with respect to its
loan to AMI (as well as Continental's stock in AMI and AMI's stock in CMI) are
pledged as collateral for loans to Continental under the Credit Facility. CMI
and AMI have guaranteed Continental's obligations under the Credit Facility. In
addition, the Credit Facility contains certain financial covenants applicable to
Continental and prohibits Continental from granting a security interest on
certain of its international route authorities and domestic slots.
In July 1997, the Company purchased the rights of United Micronesia
Development Association, Inc. ("UMDA") to receive future payments under a
services agreement between UMDA and CMI (pursuant to which CMI was to pay UMDA
approximately 1% of the gross revenues of CMI, as defined, through January 1,
2012, which payment by CMI to UMDA totaled $6 million in 1996) and UMDA's 9%
interest in AMI, terminated the Company's obligations to UMDA under a settlement
agreement entered into in 1987, and terminated substantially all of the other
contractual arrangements between the Company, AMI and CMI, on the one hand, and
UMDA on the other hand, for an aggregate consideration of $73 million.
S-26
<PAGE>
In April 1997, Continental entered into a $160 million floating rate (e.g.,
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 charge ratio, a minimum net
worth and a minimum unrestricted cash balance. Continental is also restricted
from paying cash dividends and making certain other payments.
In March 1997, Continental completed an offering of $707 million of pass
through certificates. The pass through certificates are not direct obligations
of, or guaranteed by, Continental and are therefore not included in the
accompanying 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 30 new aircraft from Boeing scheduled to be
delivered to Continental through February 1998. In connection therewith, owner
participants have committed to approximately $184 million of equity financing to
be used in leveraged leases of 27 of such aircraft. If any funds remain as
deposits with the escrow agent for such pass through certificates at the end of
the delivery period (which may be extended to June 1998), such funds will be
distributed back to the certificate holders. Such distribution will include a
make-whole premium payable by Continental. Management believes that the
likelihood that the Company would be required to pay a material make-whole
premium is remote.
In June 1997, the Company acquired 10 aircraft previously leased by it. The
debt financing for the acquisition of the six Boeing 737-300 aircraft and the
four McDonnell Douglas MD-82 aircraft was funded by the private placement of
$155 million of pass through certificates. The pass through certificates, which
were issued by separate pass through trusts that acquired equipment trust notes
issued on a recourse basis by Continental, consist of $75 million of 7.148%
Class A certificates, maturing in June 2007, $26 million of 7.149% Class B
certificates, maturing in June 2005, $27 million of 7.206% Class C certificates,
maturing in June 2004, and $27 million of 7.522% Class D certificates, maturing
in June 2001.
In February 1997, the Company began construction of a new hangar and
improvements to a cargo facility at the Company's hub at Newark International
Airport which is expected to be completed in the fourth quarter of 1997. The
Company expects to finance these projects, which will cost approximately $21
million, through tax-exempt bonds to be issued by the New Jersey Economic
Development Authority. In addition, the Company is also planning a facility
expansion at Newark which would require, among other matters, agreements to be
reached with the applicable airport authority.
The Company has announced plans to expand its facilities at its Hopkins
International Airport hub in Cleveland, which 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.
The Company has announced plans to build a wide-body aircraft maintenance
hangar in Honolulu, Hawaii at an estimated cost of $24 million. Construction of
the hangar, anticipated to be completed by the second quarter of 1998, is
expected to be financed by tax-exempt special facilities revenue bonds issued by
the State of Hawaii. In connection therewith, the Company expects to enter into
long-term leases under which rental payments will be sufficient to service the
related bonds.
In April 1997, the City of Houston (the "City") completed the offering of
$190 million aggregate principal amount of tax-exempt special facilities revenue
bonds (the "IAH Bonds") payable solely from rentals paid by Continental under
long-term lease agreements with the City. The IAH Bonds are unconditionally
guaranteed by the Company. The proceeds from the IAH Bonds will be used to
finance
S-27
<PAGE>
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 April 1997, Continental redeemed for cash all of the 460,247 outstanding
shares of its Series A 12% Cumulative Preferred Stock ("Series A 12% Preferred")
held by an affiliate of Air Canada, a Canadian corporation, for $100 per share
plus accrued dividends thereon. The redemption price, including accrued
dividends, totaled $48 million.
In June 1997, Continental purchased from Air Partners warrants to purchase
3,842,542 shares of Class B common stock of the Company for $94 million in cash.
CONTINENTAL'S HISTORY OF OPERATING LOSSES
Although Continental recorded net income of $202 million for the six months
ended June 30, 1997, $319 million in 1996 and $224 million in 1995, it had
experienced significant operating losses in the previous eight years. In the
long term, Continental's viability depends on its ability to sustain profitable
results of operations.
AIRCRAFT FUEL
Since fuel costs constitute a significant portion of Continental's operating
costs (approximately 14.1% for the six months ended June 30, 1997 and 13.3% for
the year ended December 31, 1996), significant changes in fuel costs would
materially affect the Company's operating results. Jet fuel prices have
increased significantly since December 31, 1995, although such prices have
moderated recently. 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
The Company recently began collective bargaining agreement negotiations with
its Continental Airlines pilots, whose contract became amendable in July 1997,
and Express pilots, whose contract becomes amendable in October 1997.
Negotiations are in progress to amend these contracts. The Company believes that
mutually acceptable agreements can be reached with such employees, although the
ultimate outcome of the negotiations is unknown at this time. The Company's
mechanics and related employees recently voted to be represented by the
International Brotherhood of Teamsters (the "Teamsters"). The Company does not
believe that the Teamsters' union representation will be material to the
Company.
CERTAIN TAX MATTERS
At December 31, 1996, the Company had estimated net operating loss
carryforwards ("NOLs") of $2.3 billion for federal income tax purposes that will
expire through 2009 and federal investment tax credit carryforwards of $45
million that will expire through 2001.
The Company had, as of December 31, 1996, deferred tax assets aggregating
$1.3 billion, including $804 million of NOLs. The Company recorded a valuation
allowance of $694 million against such assets as of December 31, 1996. The
Company has consummated several built-in-gain transactions, which resulted in
the realization of tax benefits related to NOLs and investment tax credit
carryforwards attributable to the Company's predecessor that were previously
recorded. To the extent the Company consummates
S-28
<PAGE>
additional built-in-gain transactions, such benefits will reduce the valuation
allowance and reorganization value in excess of amounts allocable to
identifiable assets. If such reorganization value is exhausted, reductions in
the valuation allowance would decrease other intangibles.
As a result of NOLs, the Company will not pay United States federal income
taxes (other than alternative minimum tax) until it has recorded approximately
an additional $1.1 billion of taxable income following December 31, 1996.
Section 382 of the Internal Revenue Code ("Section 382") imposes limitations on
a corporation's ability to utilize NOLs if it experiences an "ownership change."
In general terms, an ownership change may result from transactions increasing
the ownership of certain stockholders in the stock of a corporation by more than
50 percentage points over a three-year period. In the event that an ownership
change should occur, utilization of Continental's NOLs would be subject to an
annual limitation under Section 382 determined by multiplying the value of the
Company's stock at the time of the ownership change by the applicable long-term
tax-exempt rate (which is 5.64% for August 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
$121 million per year.
CONTINENTAL MICRONESIA
Because the majority of CMI's traffic originates in Japan, its results of
operations are substantially affected by the Japanese economy and changes in the
value of the yen as compared to the dollar. Appreciation of the yen against the
dollar during 1994 and 1995 increased CMI's profitability while a decline of the
yen against the dollar in 1996 and 1997 to date have reduced CMI's
profitability. As a result of the recent weakness of the yen against the dollar
and increased fuel costs, CMI's operating earnings declined during the past four
quarters as compared to similar periods a year ago, and are not expected to
improve materially absent a stronger yen or reduced fuel costs.
To reduce the potential negative impact on CMI's dollar earnings, CMI, from
time to time, purchases average rate options as a hedge against a portion of its
expected net yen cash flow position. Such options 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
On November 21, 1996, Air Partners, L.P., a Texas limited partnership and
major stockholder of the Company ("Air Partners"), exercised its right to sell
to the Company, and the Company subsequently purchased, for $50 million,
warrants to purchase 2,614,379 shares of Class B common stock (representing a
portion of the total warrants held by Air Partners) pursuant to an agreement
entered into earlier in 1996 with the Company. Also, on June 2, 1997,
Continental purchased from Air Partners warrants to purchase 3,842,542 shares of
Class B common stock of the Company for $94 million. As of August 1, 1997, Air
Partners held approximately 9.4% of the common equity interest and 40.6% of the
general voting power of the Company. If all the remaining warrants held by Air
Partners had been exercised on August 1, 1997, approximately 13.8% of the common
equity interest and 51.5% 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.
S-29
<PAGE>
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
recently, 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 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 previously realized by
its expiration, can be precisely determined.
Additional laws and regulations have been proposed from time to time that
could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations have
also been considered that would prohibit or restrict the ownership and/or
transfer of airline routes or takeoff and landing slots. Also, the availability
of international routes to United States carriers is regulated by treaties and
related agreements between the United States and
S-30
<PAGE>
foreign governments that are amendable. Continental cannot predict what laws and
regulations may be adopted or their impact, but there can be no assurance that
laws or regulations currently proposed or enacted in the future will not
adversely affect the Company.
SEASONAL NATURE OF AIRLINE BUSINESS
Due to the greater demand for air travel during the summer months, revenue
in the airline industry in the third quarter of the year is generally
significantly greater than revenue in the first quarter of the year and
moderately greater than revenue in the second and fourth quarters of the year
for the majority of air carriers. Continental's results of operations generally
reflect this seasonality, but have also been impacted by numerous other factors
that are not necessarily seasonal, including the extent and nature of
competition from other airlines, fare wars, excise and similar taxes, changing
levels of operations, fuel prices, foreign currency exchange rates and general
economic conditions.
RISK FACTORS RELATING TO THE CERTIFICATES AND THE OFFERING
APPRAISALS AND REALIZABLE VALUE OF AIRCRAFT
Appraisals in respect of the Aircraft (without physical inspection thereof)
have been prepared by AVMARK, MBA and SH&E, and such appraisals are based on
varying assumptions and methodologies which differ among the Appraisers. The
Appraisers have delivered letters summarizing their respective reports, copies
of which are annexed to this Prospectus Supplement as Appendix II. See
"Description of the Aircraft and the Appraisals--The Appraisals". The appraised
value of each Aircraft, and accordingly the initial aggregate Aircraft value as
referred to herein, is based upon the lesser of the average and median value of
such Aircraft as appraised by the Appraisers. 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 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.
The Aircraft constitute the initial nine aircraft delivered pursuant to
Continental's firm order for 50 EMB-145ER aircraft, the first of which was
delivered in December 1996 and placed into commercial service in April 1997.
Continental has the option to acquire an additional 150 EMB-145ER aircraft.
Continental was the initial North American customer for the EMB-145ER aircraft,
and Embraer has advised Continental that in June 1997, American Airlines placed
a firm order for 42 EMB-145ER aircraft. Embraer has advised Continental that,
through July 1997, a total of 17 EMB-145ER aircraft have been delivered to a
total of five airlines.
The EMB-145ER aircraft is a 50-seat aircraft that represents Embraer's entry
into the regional jet aircraft market. Currently, most aircraft of such capacity
in commercial aviation service utilize propeller engines. Although Continental
believes that Express's customers will generally favor the EMB-145ER aircraft
over comparable propeller aircraft, no assurance can be given that the EMB-145ER
aircraft will become widely used in commercial aviation service.
Since the EMB-145ER aircraft is newly designed and recently introduced into
service, there is not currently an active market for used EMB-145ER aircraft. In
addition, Continental cannot predict whether a substantial number of EMB-145ER
aircraft will be produced or whether a significant number of other air carriers
will operate such aircraft. Accordingly, no assurance can be given that an
active secondary market
S-31
<PAGE>
in EMB-145ER aircraft will develop. As a result, the ability of the Indenture
Trustees to sell the Aircraft in connection with the exercise of remedies under
the Indenture could be adversely affected.
PRIORITY OF DISTRIBUTIONS; SUBORDINATION
Certain provisions of the Intercreditor Agreement, which provides for the
subordination of the Class B Certificates to the Class A Certificates and the
subordination of the Class C Certificates to the Class B Certificates, may
result in the holders of the subordinated Classes of Certificates receiving less
than the full amount due to them after the occurrence of a 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 will be parties, on each
Distribution Date, so long as no Triggering Event shall have occurred, all
payments in respect of Equipment Notes received by the Subordination Agent will
be distributed in the following order: (1) payment of certain Liquidity
Obligations to the Liquidity Provider; (2) to the Trustee for the Class A
Certificates to the extent required to pay Expected Distributions on the Class A
Certificates; (3) to the Trustee for the Class B Certificates to the extent
required to pay Expected Distributions on the Class B Certificates; (4) to the
Trustee for the Class C Certificates to the extent required to pay Expected
Distributions on the Class C Certificates; and (5) payment of certain fees and
expenses of the Subordination Agent and each Trustee.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order: (1) to the Subordination Agent, each Trustee and certain
other parties in payment of the Administration Expenses and to the Liquidity
Provider in payment of the Liquidity Obligations; (2) to the Subordination
Agent, each Trustee and each Certificateholder for certain tax-related expenses;
(3) to the Trustee for the Class A Certificates to the extent required to pay
Adjusted Expected Distributions on the Class A Certificates; (4) to the Trustee
for the Class B Certificates to the extent required to pay Adjusted Expected
Distributions on the Class B Certificates; and (5) to the Trustee for the Class
C Certificates to the extent required to pay Adjusted Expected Distributions on
the Class C Certificates.
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 will agree that, with respect to any Indenture at any given time, the
Loan Trustee will be directed (a) in taking, or refraining from taking, any
action thereunder by the holders of at least a majority of the outstanding
principal amount of the Equipment Notes issued thereunder as long as no
Indenture Default has occurred and is continuing thereunder and (b) subject to
certain conditions, in exercising remedies under such Indenture (including
acceleration of such Equipment Notes or foreclosing the lien on the Aircraft
securing such Equipment Notes) insofar as an Indenture Default has occurred and
is continuing under such Indenture, by the Controlling Party. See "Description
of the Certificates--Indenture Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the Certificateholders of each Trust
to direct the respective Trustee. Notwithstanding the foregoing, at any time
after 18 months from the earlier to
S-32
<PAGE>
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 such
Indenture. For purposes of giving effect to the foregoing, the Trustees (other
than the Controlling Party) shall irrevocably agree, and the Certificateholders
(other than the Certificateholders represented by the Controlling Party) shall
be deemed to agree by virtue of their purchase of Certificates, to exercise
their voting rights as directed by the Controlling Party. For a description of
certain limitations on the Controlling Party's rights to exercise remedies, see
"Description of the Equipment Notes--Remedies".
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions described in the last sentence of this paragraph, sell all (but not
less than all) of the Equipment Notes issued under such Indenture to any person.
The market for Equipment Notes at the time of the existence of any Indenture
Default may be very limited, and there can be no assurance as to the price at
which they could be sold. If the Controlling Party sells any such Equipment
Notes for less than their outstanding principal amount, certain
Certificateholders will receive a smaller amount of principal distributions than
anticipated and will not have any claim for the shortfall against Continental,
any Owner Trustee, any Owner Participant or any Trustee. So long as any
Certificates are outstanding, during nine months after the earlier of (x) the
acceleration of the Equipment Notes under any Indenture and (y) the bankruptcy
or insolvency of Continental, without the consent of each Trustee, (a) no
Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes and (b) the amount and payment
dates of rentals payable by Continental under the Lease for such Aircraft may
not be adjusted if, as a result of such adjustment, the discounted present value
of all such rentals would be less than 75% of the discounted present value of
the rentals payable by Continental under such Lease before giving effect to such
adjustment, in each case, using the weighted average interest rate of the
Equipment Notes issued under such Indenture as the discount rate.
The Equipment Notes will not be cross-collateralized and, consequently,
proceeds from the sale of an Aircraft in excess of the amounts due on Equipment
Notes related to such Aircraft will not be available to cover losses, if any, on
any other Equipment Notes.
EQUITY GUARANTY
Rolls-Royce plc (the "Equity Guarantor" or "Rolls-Royce"), has provided a
guaranty (the "Equity Guaranty") to the owner participant, with respect to two
of the Aircraft, which Equity Guaranty is not included in the collateral
securing the Equipment Notes. Under certain circumstances, the Equity Guarantor
has the right to acquire such owner participant's interest in such Aircraft. The
Equity Guarantor and certain of its affiliates have various business
relationships with Continental, including as a supplier of certain equipment to
Continental, and such business relationships could influence the Equity
Guarantor's actions as owner participant with respect to an Aircraft.
RATINGS OF THE CERTIFICATES
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated by Moody's and by Standard & Poor's, the Class
B Certificates be rated by Moody's and by Standard & Poor's and the
Class C Certificates be rated by Moody's and by Standard & Poor's. A
rating is not a recommendation to purchase, hold or sell Certificates, inasmuch
as such rating does not address market price or suitability for a particular
investor. There is no assurance that a rating will remain for any given period
of time or that a rating will not be lowered or withdrawn entirely by a Rating
Agency if in its judgment circumstances in the future (including the downgrading
of Continental or a Liquidity Provider) so warrant. The rating of the
Certificates is based primarily on the default risk of the Equipment Notes, the
availability of the Liquidity Facility for the benefit of holders of
S-33
<PAGE>
the Certificates, the collateral value provided by the Aircraft relating to the
Equipment Notes and the subordination in right of payment under the
Intercreditor Agreement of the Class B Certificates to the Class A Certificates
and of the Class C Certificates to the Class B Certificates. Continental's
ability to pay any interest due with respect to the Certificates in excess of
interest payable on the Equipment Notes and earnings on funds held by the
Trustees in escrow pending delayed purchase of the Equipment Notes has not been
rated.
ABSENCE OF A PUBLIC MARKET FOR THE CERTIFICATES
Prior to the Offering of the Certificates, there has been no public market
for the Certificates and neither Continental nor any Trust intends to apply for
listing of the Certificates on any securities exchange or otherwise. Continental
has been advised by the Underwriters that each of them presently intends to make
a market in the Certificates, as permitted by applicable laws and regulations,
after consummation of the Offering. None of the Underwriters is obligated,
however, to make a market in the Certificates and any such market-making
activity may be discontinued at any time without notice at the sole discretion
of each Underwriter. There can be no assurance as to the liquidity of the public
market for the Certificates or that any active public market for the
Certificates will develop or continue. If an active public market does not
develop or continue, the market price and liquidity of the Certificates may be
adversely affected.
USE OF PROCEEDS
The Aircraft are currently leased to Continental pursuant to interim
financing arrangements. The proceeds from the sale of the Certificates being
offered hereby will be used by the Trustees to purchase Equipment Notes issued
by each Owner Trustee to finance a portion of the purchase price with respect to
the purchase by such Owner Trustee of the applicable Aircraft. Any proceeds not
used on the Issuance Date to purchase Equipment Notes will be held in escrow by
the Trustees until applied to purchase Equipment Notes on or prior to October
31, 1997, and if not so applied, will be returned to the Certificateholders. See
"Description of the Certificates--Delayed Purchase of Equipment Notes."
S-34
<PAGE>
THE COMPANY
Continental is a major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth largest United
States airline (as measured by revenue passenger miles in the first six months
of 1997) and, together with its wholly owned subsidiaries Continental Express,
Inc. ("Express") and Continental Micronesia, Inc., ("CMI"), serves 198 airports
worldwide as of August 1, 1997. Internationally, Continental flies to 65
destinations and offers additional connecting service through alliances with
foreign carriers. Continental is one of the leading airlines providing service
to Mexico and Central America, serving more destinations there than any other
United States airline. Through CMI, Continental provides extensive service in
the western Pacific, including service to more Japanese cities than any other
United States carrier.
DOMESTIC OPERATIONS
Continental operates its domestic route system primarily through its hubs at
Newark, George Bush Intercontinental in Houston and Cleveland. The Company's hub
system allows it to transport passengers between a large number of destinations
with substantially more frequent service than if each route were served
directly. The hub system also allows Continental to add service to a new
destination from a large number of cities using only one or a limited number of
aircraft. Each of Continental's hubs is located in a large business and
population center, contributing to a high volume of "origin and destination"
traffic.
NEWARK
As of August 1, 1997, Continental operated 56% (240 departures) of average
daily jet departures and, together with Express, accounted for 60% (381
departures) of all average daily departures (jet and turboprop) from Newark.
Considering the three major airports serving New York City (Newark, LaGuardia
and John F. Kennedy), the Company and Express accounted for 25% of all average
daily departures, while the next largest carrier, USAirways, and its commuter
affiliate accounted for 15% of all average daily departures.
HOUSTON
As of August 1, 1997, Continental operated 80% (328 departures) of average
daily jet departures and, together with Express, accounted for 83% (453
departures) of all average daily departures from Houston's George Bush
Intercontinental Airport. Southwest also has a significant share of Houston
departures through Hobby Airport. Considering both Intercontinental and Hobby
Airports, Continental operated 54% and Southwest operated 25% of all average
daily jet departures from Houston.
CLEVELAND
As of August 1, 1997, Continental operated 54% (99 departures) of all
average daily jet departures and, together with Express, accounted for 66% (256
departures) of all average daily departures from Cleveland Hopkins International
Airport. The next largest carrier, USAirways, and its commuter affiliate
accounted for 6% of all average daily departures.
CONTINENTAL EXPRESS
Continental's jet service at each of its domestic hub cities is coordinated
with Express, which operates under the name "Continental Express". Express
operates both advanced, new-generation turboprop aircraft that average
approximately five years of age and seat 64 passengers or less and regional jets
that are less than a year old and seat 50 passengers. Express began service with
these 50-seat regional jets initially in Cleveland in April 1997.
S-35
<PAGE>
As of August 1, 1997, Express served 22 destinations from Newark, 20
destinations from George Bush Intercontinental and 35 destinations from
Cleveland. In addition, commuter feed traffic is currently provided by other
code-sharing partners. In general, Express flights are less than 200 miles in
length and less than 90 minutes in duration.
Management believes Express's turboprop and regional jet operations
complement Continental's jet operations by allowing more frequent service to
small cities than could be provided economically with conventional jet aircraft
and by carrying traffic that connects onto Continental's jets. In many cases,
Express (and Continental) compete for such connecting traffic with commuter
airlines owned by or affiliated with other major airlines operating out of the
same or other cities. Management believes that Express's new EMB-145ER regional
jets will provide better customer acceptance and comfort than its turboprop
aircraft and will also allow Express to serve certain routes which cannot be
served by turboprop aircraft.
DOMESTIC CARRIER ALLIANCES
Pursuant to the Company's Fly to Win initiative under the Go Forward Plan,
Continental has entered into and continues to develop alliances with domestic
carriers:
- Continental has entered into a series of agreements with America West,
including agreements related to code sharing and ground handling, which
have created substantial benefits for both airlines. These code-sharing
agreements cover 75 city-pairs and allow Continental to link additional
destinations to its route network. The sharing of facilities and employees
by Continental and America West in their respective key markets has
resulted in significant cost savings.
- Currently, SkyWest, a commuter operator, provides Continental access to
six additional markets in California and Arizona through Los Angeles.
- Continental has entered into a code-sharing arrangement with Gulfstream
International Airlines, Inc. ("Gulfstream") which commenced in April 1997.
Gulfstream serves as a connection for Continental passengers throughout
Florida as well as five markets in the Bahamas.
- Continental has entered into a code-sharing arrangement with Colgan Air,
Inc. which commenced July 1, 1997 on flights connecting in five cities in
the eastern United States and offering connections for Continental
passengers to 12 cities in the North Eastern and mid-Atlantic regions of
the United States.
- In July 1997, Continental and CMI announced a cooperative marketing
agreement with Hawaiian Airlines beginning October 1, 1997 on flights
connecting in Honolulu.
INTERNATIONAL OPERATIONS
Continental serves destinations throughout Europe, Mexico, Central and South
America and the Carribean, and has extensive operations in the western Pacific
conducted by CMI. As measured by 1996 available seat miles, approximately 28.0%
of Continental's jet operations were dedicated to international traffic. As of
August 1, 1997, the Company offered 111 weekly departures to 10 European cities
and marketed service to six other cities through code-sharing agreements.
Continental is one of the leading airlines providing service to Mexico and
Central America, serving more destinations there than any other United States
airline.
The Company's Newark hub is a significant international gateway. From
Newark, the Company serves London, Manchester, Paris, Frankfurt, Dusseldorf,
Madrid, Rome, Milan, Lisbon, Vancouver, Toronto and Montreal, and markets
through code-sharing arrangements with foreign carriers other destinations in
Canada, the United Kingdom and other points in Europe. Continental recently
commenced service from Newark to Birmingham, England, and to Sao Paulo and Rio
de Janeiro, Brazil.
S-36
<PAGE>
The Company also has non-stop service to two Mexican cities, five Caribbean
destinations and four South American cities from Newark. In addition, the
Company offers one-stop service to two additional South American cities from
Newark.
The Company's Houston hub is the focus of its operations in Mexico and
Central America. Continental currently flies from Houston to 11 cities in
Mexico, every country in Central America and four cities in South America.
Continental recently announced service from Houston to Caracas, Venezuela
(scheduled to commence in the fourth quarter of 1997). Continental commenced
service from Houston to Toronto on September 4, 1997. In addition, Continental
flies nonstop from Houston to London and Paris.
CONTINENTAL MICRONESIA
CMI is a United States-certificated international air carrier engaged in the
business of transporting passengers, cargo and mail in the western Pacific,
which is one of the fastest growing areas for air travel in the world. From its
hub operations based on the island of Guam, CMI provides slot-controlled service
to six cities in Japan, more than any other United States carrier, as well as
other Pacific Rim destinations, including Taiwan, the Philippines, Hong Kong,
South Korea and Indonesia. Service to these Japanese cities and certain other
Pacific Rim destinations is subject to a variety of regulatory restrictions,
limiting the ability of other carriers to service these markets.
FOREIGN CARRIER ALLIANCES
Over the last decade, major United States airlines have developed and
expanded alliances with foreign air carriers, generally involving adjacent
terminal operations, coordinated flights, code-sharing and other joint marketing
activities. Continental is the sole major United States carrier to operate a hub
in the New York City area, by virtue of its Newark operation. Consequently,
management believes the Company is uniquely situated to attract alliance
partners from Europe, the Far East and South America and intends to aggressively
pursue such alliances.
In addition, management believes that developing a network of international
alliance partners will better leverage the Company's hub assets by attracting
high-yield flow traffic and result in improved returns to the Company. Further,
Continental can enlarge its scope of service more rapidly and enter additional
markets with lower capital and start-up costs through formation of alliances
with partners as compared with entering markets independently of other carriers.
Management has a goal of developing alliance relationships that, together
with the Company's own flying, will permit expanded service through Newark to
major destinations in South America, Europe and Asia, and expanded service
through Houston to South America, Europe and Asia. Certain route authorities
that would be required for the Company's own service to certain of these
destinations are not currently available to the Company.
Continental has implemented international code-sharing agreements with
Alitalia, Air Canada, Transavia, CSA Czech Airlines, Business Air and China
Airlines (effective September 20, 1997). Upon receipt of government approval,
Continental will commence code sharing arrangements with Aerolineas Centrales de
Colombia (ACES), Aeroflot Russian International Airline, Air France, EVA Air
Corporation and Virgin Atlantic Airways.
Alitalia and Continental code-share between points in the United States and
Italy, with Alitalia placing its code on Continental flights between Newark and
Rome and Milan, and between Newark and seven U.S. cities and Mexico City.
Continental's agreement with Alitalia involves a block-space arrangement
pursuant to which the Company and Alitalia share capacity and bear economic risk
for blocks of seats on the code-shared trans-Atlantic flights.
Continental and Air Canada (and its subsidiaries) code-share on six
cross-border routes, where Continental places its code on 28 Air Canada flights
per day and Air Canada places its code on four
S-37
<PAGE>
Continental flights per day. Continental and Air Canada provide ground handling
and other services for each other at certain locations in the United States,
Canada and elsewhere. All code-sharing operations between Continental and Air
Canada are scheduled to terminate by April 1, 1998.
In addition, the Company has also entered into joint marketing agreements
with other airlines, all of which are currently subject to government approval,
which will involve block-space arrangements which 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. In January
1997, the Company announced a similar agreement with Aeroflot which management
anticipates will commence in the second quarter of 1998. Aeroflot will place its
code on one daily Continental flight to Moscow and will market the service
throughout the Commonwealth of Independent States. In addition, the Company
recently signed an agreement for a code-share arrangement with Virgin Atlantic
Airways involving the carriers' Newark/New York-London routes and eight other
routes flown by Virgin between the United Kingdom and the United States.
The Company anticipates entering into other code-sharing, joint marketing
and block-space agreements, which may include the Company undertaking the
financial commitment to purchase seats from other carriers.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document filed with the Commission (File No. 0-9781) is hereby
incorporated by reference in this Prospectus Supplement: Continental's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1997, filed on
August 14, 1997.
See "Incorporation of Certain Documents by Reference" in the Prospectus.
S-38
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Basic Agreement and three
separate Trust Supplements. The following summary describes all material terms
of the Certificates and supplements (or, to the extent inconsistent therewith,
replaces) the description of the general terms and provisions of the
Certificates set forth in the Prospectus. The summary does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Certificates, the Basic Agreement (which is filed as an exhibit to the
Registration Statement), the Trust Supplements and the Intercreditor Agreement,
each of which will be filed as an exhibit to a Current Report on Form 8-K to be
filed by Continental with the Securities and Exchange Commission (the
"Commission").
Except as otherwise indicated, the following summary relates to each of the
Trusts and the Certificates issued by each Trust. The terms and conditions
governing each of the Trusts will be substantially the same, except as described
under "--Subordination" below and except that the principal amount and scheduled
principal repayments of the Equipment Notes held by each Trust and the interest
rate and maturity date of the Equipment Notes held by each of the Class A Trust,
the Class B Trust and the Class C Trust will differ. The references to Sections
in parentheses in the following summary are to the relevant Sections of the
Basic Agreement unless otherwise indicated.
GENERAL
The Certificates of each Trust will be issued in fully registered form only
and will be subject to the provisions described below under "--Book Entry;
Delivery and Form". (Section 3.01) Each Certificate will represent a fractional
undivided interest in the Trust created by the Basic Agreement and the
applicable Trust Supplement pursuant to which such Certificate is issued.
(Section 2.01) The Trust Property of each Trust will consist of (i) subject to
the Intercreditor Agreement, Equipment Notes issued on a nonrecourse basis by
each of the Owner Trustees in connection with each of the nine separate
leveraged lease transactions to finance a portion of the purchase price of each
of the nine Aircraft, (ii) the rights of such Trust under the Intercreditor
Agreement (including all monies receivable in respect of such rights), (iii) 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.
Certificates will represent fractional undivided interests in the related Trust
and will be issued only in minimum denominations of $1,000 and integral
multiples thereof, except that one Certificate of each Trust may be issued in a
different denomination. (Sections 3.01(a) and 3.01(b)).
The Certificates represent interests in the respective Trusts, and all
payments and distributions thereon will be made only from the Trust Property of
the related Trust. (Section 3.09) The Certificates do not represent an interest
in or obligation of Continental, the Trustees, any of the Loan Trustees or the
Owner Trustees in their individual capacities, any Owner Participant or any
affiliate of any thereof.
SUBORDINATION
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity Provider will be parties, on each
Distribution Date, so long as no Triggering Event shall have occurred (whether
or not continuing), all payments received by the Subordination Agent in respect
of Equipment Notes and certain other payments will be distributed under the
Intercreditor Agreement in the following order: (1) payment of certain Liquidity
Obligations to the Liquidity Provider; (2) to the Trustee for the Class A
Certificates to the extent required to pay Expected Distributions on the Class A
Certificates; (3) to the Trustee for the Class B Certificates to the extent
required to pay Expected Distributions on the Class B Certificates; (4) to the
Trustee for the Class C Certificates to the extent required to pay Expected
Distributions on the Class C Certificates; and (5) payment of certain fees and
expenses of the Subordination Agent and each Trustee.
S-39
<PAGE>
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order: (1) to the Subordination Agent, each Trustee and certain
other parties in payment of the Administration Expenses and to the Liquidity
Provider in payment of the Liquidity Obligations; (2) to the Subordination
Agent, each Trustee and each Certificateholder for certain tax-related expenses;
(3) to the Trustee for the Class A Certificates to the extent required to pay
Adjusted Expected Distributions on the Class A Certificates; (4) to the Trustee
for the Class B Certificates to the extent required to pay Adjusted Expected
Distributions on the Class B Certificates; and (5) to the Trustee for the Class
C Certificates to the extent required to pay Adjusted Expected Distributions on
the Class C Certificates.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
The priority of distributions after a 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 will accrue interest at the
applicable rate per annum for Certificates to be issued by such Trust set forth
on the cover page of this Prospectus Supplement, payable on March 10, June 10,
September 10 and December 10 of each year, commencing on December 10, 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. Payments of interest applicable
to the Certificates to be issued by each of the Trusts will be supported by a
separate Liquidity Facility to be 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 six
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 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 March 10, June 10, September 10 and
December 10 of each year, commencing on December 10, 1997. Scheduled payments of
interest or principal on the Equipment Notes are herein referred to as
S-40
<PAGE>
"Scheduled Payments", and March 10, June 10, September 10 and December 10 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 10, 2014, for the
Class B Certificates is December 10, 2008 and for the Class C Certificates is
December 10, 2006.
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 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 on the date
received to such holders of record. If it is received after such five-day
period, it will be treated as a Special Payment and distributed as described
below.
Any payment in respect of, or any proceeds of, any Equipment Note or the
Collateral under (and as defined in) each Indenture other than a Scheduled
Payment (each, a "Special Payment") will 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 15 days prior to the date such Special Payment is scheduled to be
distributed, and in the case of any other Special Payment, such notice will be
mailed as soon as practicable after the Trustee has confirmed that it has
received funds for such Special Payment. (Section 4.02(c)) 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".
The Basic Agreement and each Trust Supplement require that the Trustee
establish and maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more non-interest bearing accounts (the
"Certificate Account") for the deposit of payments representing Scheduled
Payments received by such Trustee. The Basic Agreement and each Trust Supplement
require that the Trustee establish and maintain, for such Trust and for the
benefit of the Certificate holders 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 the Basic Agreement and
each Trust Supplement, the Trustee is required to deposit any Scheduled Payments
relating to such 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
S-41
<PAGE>
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 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 will be 1.0000000 on the
date of issuance of the Certificates; thereafter, the Pool Factor for each Trust
will decline as described herein to reflect reductions in the Pool Balance of
such Trust. The amount of a Certificateholder's pro rata share of the Pool
Balance of a Trust can be determined by multiplying the par value of the
holder's Certificate of such Trust by the Pool Factor for such Trust as of the
applicable Regular Distribution Date or Special Distribution Date. Notice of the
Pool Factor and the Pool Balance for each Trust will be mailed to
Certificateholders of such Trust on each Regular Distribution Date and Special
Distribution Date. (Section 4.03)
S-42
<PAGE>
As of the Issuance Date, assuming that no early redemption, purchase or
default in the payment of principal of any Equipment Notes shall occur and that
all of the Equipment Notes are purchased by the Trustees on or prior to October
31, 1997 as described below under "--Delayed Purchase of Equipment Notes", 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>
1997-3A TRUST 1997-3B TRUST 1997-3C TRUST
EQUIPMENT NOTES EQUIPMENT NOTES EQUIPMENT NOTES
SCHEDULED 1997-3A TRUST SCHEDULED 1997-3B TRUST SCHEDULED 1997-3C TRUST
PAYMENTS OF EXPECTED PAYMENTS OF EXPECTED PAYMENTS OF EXPECTED
DATE PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR
- --------------------- ---------------- -------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0 1.0000000 $ 0 1.0000000 $ 0 1.0000000
</TABLE>
The Pool Factor and Pool Balance of each Trust will be recomputed if there
has been an early redemption, purchase, or default in the payment of principal
or interest in respect of one or more of the Equipment Notes held in a Trust, as
described in "--Indenture Defaults and Certain Rights Upon an Indenture Default"
and "Description of the Equipment Notes--Redemption", or if any Equipment Notes
are not purchased on or prior to October 31, 1997, as described in "--Delayed
Purchase of Equipment Notes".
INDENTURE DEFAULTS AND CERTAIN RIGHTS UPON AN INDENTURE DEFAULT
An event of default under an Indenture (an "Indenture Default") will include
an event of default under the related Lease (a "Lease Event of Default"). See
"Description of Equipment Notes--Indenture Default; Notice and Waiver". Since
the Equipment Notes issued under an Indenture will be held in more than one
Trust, a continuing Indenture Default under such Indenture would affect the
Equipment Notes held by each such Trust. There are no cross-default provisions
in the Indentures or in the Leases. Consequently, events resulting in an
Indenture Default under any particular Indenture may or may not result in an
Indenture Default under any other Indenture, and a Lease Event of Default under
any particular Lease may or may not constitute a Lease Event of Default under
any other Lease. If an Indenture Default occurs in fewer than all of the
Indentures, notwithstanding the treatment of Equipment Notes issued under any
Indenture under which an Indenture Default has occurred, payments of principal
S-43
<PAGE>
and interest on the Equipment Notes issued pursuant to Indentures with respect
to which an Indenture Default has not occurred will continue to be distributed
to the holders of the Certificates as originally scheduled, subject to the
Intercreditor Agreement. See "Description of the Intercreditor Agreement--
Priority of Distributions."
With respect to each Aircraft, the applicable Owner Trustee and Owner
Participant will, under the related Indenture, have the right under certain
circumstances to cure Indenture Defaults that result from the occurrence of a
Lease Event of Default under the related Lease. If the Owner Trustee or the
Owner Participant exercises any such cure right, the Indenture Default will be
deemed to have been cured.
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential conflict of interest upon an
Indenture Default. In such event, each Trustee has indicated that it would
resign as Trustee of one or all such Trusts, and a successor trustee would be
appointed in accordance with the terms of the Basic Agreement. Wilmington Trust
Company will be the initial Trustee under each Trust.
Upon the occurrence and continuation of an Indenture Default, the
Controlling Party will direct the Indenture Trustee under such Indenture in the
exercise of remedies thereunder and may accelerate and sell all (but not less
than all) of the Equipment Notes issued under such Indenture to any person,
subject to certain limitations. See "Description of Intercreditor
Agreement--Sale of Equipment Notes and Aircraft". The proceeds of such sale will
be distributed pursuant to the provisions of the Intercreditor Agreement. Any
such proceeds so distributed to any Trustee upon any such sale shall be
deposited in the applicable Special Payments Account and shall be distributed to
the holders 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, any Owner Trustee, any Owner Participant or any Trustee.
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) In addition, if, following an Indenture Default
under any Indenture, the applicable Owner Participant or Owner Trustee exercises
its option to redeem or purchase the outstanding Equipment Notes issued under
such Indenture, the price paid by such Owner Participant or Owner Trustee for
the Equipment Notes issued under such Indenture and distributed to such Trust by
the Subordination Agent will be deposited in the Special Payments Account for
such Trust and will be distributed to the Certificateholders of such Trust on a
Special Distribution Date. (Sections 4.01 and 4.02)
Any funds representing payments received with respect to any defaulted
Equipment Notes, or the proceeds from the sale of any Equipment Notes, held by
the Trustee in the Special Payments Account for such Trust will, to the extent
practicable, be invested and reinvested by such Trustee in certain permitted
investments pending the distribution of such funds on a Special Distribution
Date. (Section 4.04) Such permitted investments are defined as obligations of
the United States or agencies or instrumentalities thereof for the payment of
which the full faith and credit of the United States is pledged and which mature
in not more than 60 days or such lesser time as is required for the distribution
of any such funds on a Special Distribution Date. (Section 1.01)
Each Pass Through Trust Agreement provides that the Trustee of each Trust
will, within 90 days after the occurrence of any default known to the Trustee,
give to the Certificateholders of such Trust notice, transmitted by mail, of all
uncured or unwaived defaults with respect to such Trust known to it, PROVIDED
S-44
<PAGE>
that, except in the case of default in a payment of principal, premium, if any,
or interest on any of the Equipment Notes held in such Trust, the applicable
Trustee will be protected in withholding such notice if it in good faith
determines that the withholding of such notice is in the interests of such
Certificateholders. (Section 7.02) The term "default" as used in this paragraph
only with respect to any Trust means the occurrence of an Indenture Default
under any Indenture pursuant to which Equipment Notes held by such Trust were
issued, as described above, except that in determining whether any such
Indenture Default has occurred, any grace period or notice in connection
therewith will be disregarded.
Each Pass Through Trust Agreement contains a provision entitling the Trustee
of each 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 the Basic Agreement at the request of such
Certificateholders. (Section 7.03(e))
Subject to certain qualifications set forth in each Pass Through Trust
Agreement and to the Intercreditor Agreement, the Certificateholders of each
Trust holding Certificates evidencing fractional undivided interests aggregating
not less than a majority in interest in such Trust shall have the right to
direct the time, method 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 pursuant to which Equipment Notes held by such Trust were
issued) 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 with respect thereto,
except (i) a default in the deposit of any Scheduled Payment or Special Payment
or in the distribution thereof, (ii) a default in payment of the principal,
premium, if any, or interest with respect to any of the Equipment Notes and
(iii) a default in respect of any covenant or provision of the Pass Through
Trust Agreement that cannot be modified or amended without the consent of each
Certificateholder of such Trust affected thereby. (Section 6.05) Each Indenture
will provide that, with certain exceptions, the holders of the majority in
aggregate unpaid principal amount of the Equipment Notes issued thereunder may
on behalf of all such holders waive any past default or Indenture Default
thereunder. Notwithstanding such provisions of the Indentures, pursuant to the
Intercreditor Agreement only the Controlling Party will be entitled to waive any
such past default or Indenture Default.
PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event, with
ten days' written notice to the Trustee and each Certificateholder of the same
Class, (i) the Class B Certificateholders will have the right to purchase all,
but not less than all, of the Class A Certificates and (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, 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))
S-45
<PAGE>
PTC EVENT OF DEFAULT
A PTC Event of Default is defined under the Pass Through Trust Agreements 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 the Subordination Agent shall have made
Interest Drawings, or a withdrawal from 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 will be prohibited from consolidating with or merging into any
other corporation or transferring substantially all of its assets as an entirety
to any other corporation unless (i) the surviving successor or transferee
corporation shall (a) be validly existing under the laws of the United States or
any state thereof, (b) be a "citizen of the United States" (as defined in
Section 40102 of Title 49 of the United States Code, relating to aviation (the
"Transportation Code")) holding a carrier operating certificate issued by the
Secretary of Transportation pursuant to Chapter 447 of Title 49, United States
Code, if, and so long as, such status is a condition of entitlement to the
benefits of Section 1110 of the Bankruptcy Code, and (c) expressly assume all of
the obligations of Continental contained in the Basic Agreement and any Trust
Supplement, the Participation Agreements and the Leases, and any other operative
documents; and (ii) Continental shall have delivered a certificate and an
opinion or opinions of counsel indicating that such transaction, in effect,
complies with such conditions. In addition, after giving effect to such
transaction, no Lease Event of Default shall have occurred and be continuing.
(Lease, Section 13.2.1; Basic Agreement, Section 5.01)
The Basic Agreement, the Trust Supplements, the Participation Agreements,
the Indentures and the Leases will not contain any covenants or provisions which
may afford the applicable Trustee or Certificateholders protection in the event
of a highly leveraged transaction, including transactions effected by management
or affiliates, which may or may not result in a change in control of
Continental.
MODIFICATIONS OF CERTAIN AGREEMENTS
See "Description of the Certificates--Modifications of the Basic Agreement"
in the Prospectus for a discussion of matters relating to amendments and
supplements to the Basic Agreement or any Trust Supplement.
In the event that a Trustee, as holder (or beneficial owner through the
Subordination Agent) of (or, with respect to any Delayed Delivery Notes as
described in "--Delayed Purchase of Equipment Notes", below, prospective
purchaser 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, any Participation
Agreement, any Lease or any other related document, the Trustee shall forthwith
send a notice of such proposed amendment, modification, waiver or supplement to
each Certificateholder of the relevant Trust as of the date of such notice. The
Trustee shall request from the Certificateholders a direction as to (a) whether
or not to take or refrain from taking (or direct the Subordination Agent to take
or refrain from taking) any action which a holder of (or, with respect to any
such Delayed Delivery Notes, prospective purchaser 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
S-46
<PAGE>
as a holder of (or, with respect to any such Delayed Delivery Notes, prospective
purchaser of) such Equipment Note or as Controlling Party and (c) how to vote
(or direct the Subordination Agent to vote) any Equipment Note (or, with respect
to any such Delayed Delivery Note, its commitment to acquire such Delayed
Delivery 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 (or Delayed Delivery 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 one Business Day
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 Basic Agreement and applicable Trust Supplement and
subject to the Intercreditor Agreement, the Trustee may, in its own discretion
and at its own direction, consent and notify the relevant Loan Trustee of such
consent (or direct the Subordination Agent to consent and notify the relevant
Loan Trustee of such consent) to any amendment, modification, waiver or
supplement under the relevant Indenture, any relevant Equipment Note (or Delayed
Delivery Note), any Participation Agreement, any Lease 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)
DELAYED PURCHASE OF EQUIPMENT NOTES
It is currently anticipated that the Equipment Notes relating to all of the
Aircraft will be purchased by the Trusts on Issuance Date. In the event that on
the Issuance Date any portion of the proceeds from the sale of the Certificates
is not used to purchase the Equipment Notes issuable under any Indenture, such
Equipment Notes may be purchased by the Trustees at any time on or prior to
October 31, 1997. In such event, the Trustees will hold such proceeds not used
to purchase Equipment Notes in an escrow account pending the purchase of the
Equipment Notes not so purchased. Such proceeds will be invested in certain
specified investments at the direction of the Company, and the Company will be
responsible for any losses of principal with respect to such investments.
Earnings on such investments in the escrow account for each Trust will be paid
to the Company periodically. If the Company notifies the applicable Trustee that
any such proceeds will not be used to purchase Equipment Notes, or if any
proceeds of the issuance of the Certificates are not used to purchase Equipment
Notes on or before October 31, 1997, an amount equal to such unused proceeds
will be distributed to the Certificateholders after at least 15 days' prior
written notice following the Company's notice that such funds will not be used
to purchase Equipment Notes or October 31, 1997, as the case may be. Such
distribution with respect to Certificates issued by a Trust will include an
amount equal to the interest that would have accrued on any Equipment Notes not
purchased by such Trust on the Issuance Date, had such Equipment Notes been
issued, until the date of such distribution. No premium will be paid with
respect to proceeds attributable to the nonpurchase of Equipment Notes. On the
first Regular Distribution Date or, if earlier, the date of the distribution
referred to in the preceding sentence, the Company will pay to the Trustee of
each Trust an amount equal to the interest that would have accrued on any
Equipment Notes not purchased by such Trust on the Issuance Date, had such
Equipment Notes been issued, until the date such Equipment Notes are purchased
by such Trust or, if earlier, the date of such distribution.
S-47
<PAGE>
THE TRUSTEES
The Trustee for each Trust will be Wilmington Trust Company.
BOOK-ENTRY; DELIVERY AND FORM
Upon issuance, each Class of Certificates will be represented by one or more
fully registered global certificates. Each global certificate will be deposited
with, or on behalf of, The Depository Trust Company ("DTC") and registered in
the name of Cede & Co. ("Cede"), the nominee of DTC. DTC was created to hold
securities for its participants ("DTC Participants") and facilitate the
clearance and settlement of securities transactions between DTC Participants
through electronic book-entry changes in accounts of the DTC Participants,
thereby eliminating the need for physical movement of certificates. DTC
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and certain other organizations. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. See "Description of the
Certificates--Book-Entry Registration" in the Prospectus for a discussion of the
book-entry procedures applicable to the Certificates and the limited
circumstances under which definitive certificates may be issued for the
Certificates.
So long as such book-entry procedures are applicable, no person acquiring an
interest in such Certificates ("Certificate Owner") will be entitled to receive
a certificate representing such person's interest in such Certificates. Unless
and until definitive certificates are issued under the limited circumstances
described in the Prospectus, all references to actions by Certificateholders
shall refer to actions taken by DTC upon instructions from DTC Participants, and
all references herein to distributions, notices, reports and statements to
Certificateholders shall refer, as the case may be, to distributions, notices,
reports and statements to DTC or Cede, as the registered holder of such
Certificates, or to DTC Participants for distribution to Certificate Owners in
accordance with DTC procedures.
S-48
<PAGE>
DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes all material terms of the Liquidity
Facilities and certain provisions of the Intercreditor Agreement relating to the
Liquidity Facilities. The summary supplements (and, to the extent inconsistent
therewith, replaces) the description of the general terms and provisions
relating to the Liquidity Facilities and the Intercreditor Agreement set forth
in the Prospectus. The summary does not purport to be complete and is qualified
in its entirety by reference to all of the provisions of the Liquidity
Facilities and the Intercreditor Agreement, each of which will be filed as an
exhibit to a Current Report on Form 8-K to be filed by Continental with the
Commission. The provisions of the Liquidity Facilities are substantially
identical except as otherwise indicated.
GENERAL
The Liquidity Provider will enter into a separate Liquidity Facility with
the Subordination Agent with respect to the Certificates of each of the Trusts
pursuant to which the Liquidity 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 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 six consecutive quarterly Regular Distribution Dates. If
interest payment defaults occur which exceed the amount covered by or available
under the Liquidity Facility for any Trust, the Certificateholders of such Trust
will bear their allocable share of the deficiencies to the extent that there are
no other sources of funds. Although ABN AMRO Bank N.V., acting through its
Chicago branch, is the initial liquidity provider for each of the Trusts, it may
be replaced by one or more other entities with respect to such Trusts under
certain circumstances. Therefore, the liquidity provider for each such 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 will be $ , $ and
$ , 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 Stated Interest Rate
for such Trust or more than six quarterly 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
by the same amount the Maximum Available Commitment under such Liquidity
Facility, subject to reinstatement as hereinafter described. With respect to any
Interest Drawings under 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 if (i) a Liquidity Event of Default shall have occurred and be continuing
and (ii) less than 65% of the then aggregate outstanding principal amount of all
Equipment Notes are Performing Equipment Notes. With respect to any other
drawings under such Liquidity Facility, amounts available to be drawn thereunder
are
S-49
<PAGE>
not subject to reinstatement. The Required Amount of the Liquidity Facility for
any Trust will be automatically reduced from time to time to an amount equal to
the next six 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 may be replaced by a
Replacement Facility. In the event that such Liquidity Facility is not replaced
with a Replacement Facility within 10 days after notice of the downgrading and
as otherwise provided in the Intercreditor Agreement, the Subordination Agent
will request the Downgrade Drawing in an amount equal to the then Maximum
Available Commitment thereunder and will hold the proceeds thereof in the Cash
Collateral Account for such Trust as cash collateral to be used for the same
purposes and under the same circumstances as cash payments of Interest Drawings
under such Liquidity Facility would be used. (Liquidity Facilities, Section
2.02(c); Intercreditor Agreement, Section 3.6(c))
A "Replacement Facility" for any Liquidity Facility will mean an irrevocable
liquidity facility (or liquidity facilities) in substantially the form of the
replaced Liquidity Facility, including reinstatement provisions, or in such
other form (which may include a letter of credit) as shall permit the Rating
Agencies to confirm in writing their respective ratings then in effect for the
Certificates (before downgrading of such ratings, if any, as a result of the
downgrading of the 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 six Regular Distribution Dates
following the date of replacement of such Liquidity Facility and issued by a
person (or persons) having unsecured short-term debt ratings issued by both
Rating Agencies which are equal to or higher than the Threshold Rating.
(Intercreditor Agreement, Section 1.1) The provider of any Replacement Facility
will have the same rights (including, without limitation, priority distribution
rights and rights as "Controlling Party") under the Intercreditor Agreement as
the 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 Trust provides that the Liquidity Provider's
obligations thereunder will expire on the earliest of (i) 364 days after the
Issuance Date; (ii) the date on which the Subordination Agent delivers to such
Liquidity Provider a certification that all of the Certificates of such Trust
have been paid in full; (iii) the date on which the Subordination Agent delivers
to such Liquidity Provider a certification that a Replacement Facility has been
substituted for such Liquidity Facility; (iv) the fifth Business Day following
receipt by the Subordination Agent of a Termination Notice from such Liquidity
Provider (see "--Liquidity Events of Default"); and (v) the date on which no
amount is or may (by reason of reinstatement) become available for drawing under
such Liquidity Facility. The Liquidity Facility for each Trust provides that the
scheduled expiration date thereof may be extended for additional 364-day periods
by mutual agreement.
The Intercreditor Agreement will provide for the replacement of the
Liquidity Facility for any Trust (if it is scheduled to expire earlier than 15
days after the Final Maturity Date for the Certificates of such Trust) in the
event that such Liquidity Facility is not extended at least 25 days prior to its
then scheduled expiration date. In the event such Liquidity Facility is not so
extended or replaced by the 25th day prior to its then scheduled expiration
date, the Subordination Agent shall request 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 Liquidity Facility would be used. (Intercreditor Agreement, Section 3.6(d))
S-50
<PAGE>
Continental may, at its option, subject to certain limitations, arrange for
a Replacement Facility at any time to replace the liquidity facility for any
Trust (including without limitation any Replacement Facility described in the
following sentence). In addition, if any liquidity provider shall determine not
to extend any liquidity facility, then such liquidity provider may, at its
option, arrange for a Replacement Facility to replace such liquidity facility
during the period no earlier than 40 days and no later than 25 days prior to the
then scheduled expiration date of such liquidity facility. If any Replacement
Facility is provided at any time after a Downgrade Drawing or a Non-Extension
Drawing under any Liquidity Facility, the funds with respect to such liquidity
facility on deposit in the Cash Collateral Account for such Trust will be
returned to the liquidity provider being replaced. (Intercreditor Agreement,
Section 3.6(e))
The Intercreditor Agreement provides that, upon receipt by the Subordination
Agent of a Termination Notice with respect to any Liquidity Facility from the
Liquidity Provider (given as described in
"--Liquidity Events of Default"), the Subordination Agent will request a Final
Drawing under such Liquidity Facility in an amount equal to the then Maximum
Available Commitment thereunder and will hold the proceeds thereof in the Cash
Collateral Account for the related Trust as cash collateral to be used for the
same purposes and under the same circumstances, and subject to the same
conditions, as cash payments of Interest Drawings under such Liquidity Facility
would be used. (Liquidity Facilities, Section 2.02(d); Intercreditor Agreement,
Section 3.6(i))
Drawings under any Liquidity Facility will be made by delivery by the
Subordination Agent of a certificate in the form required by such Liquidity
Facility. Upon receipt of such a certificate, the relevant Liquidity Provider is
obligated to make payment of the drawing requested thereby in immediately
available funds. Upon payment by any Liquidity Provider of the amount specified
in any drawing under any Liquidity Facility, such Liquidity Provider will be
fully discharged of its obligations under such Liquidity Facility with respect
to such drawing and will not thereafter be obligated to make any further
payments under such Liquidity Facility in respect of such drawing to the
Subordination Agent or any other person.
REIMBURSEMENT OF DRAWINGS
Amounts drawn under any Liquidity Facility by reason of an Interest Drawing
or the Final Drawing will be immediately due and payable, together with interest
on the amount of such drawing, with respect to the period from the date of its
borrowing to (but excluding) the third business day following the applicable
Liquidity Provider's receipt of the notice of such Interest Drawing, at the Base
Rate plus 2.00% per annum, and thereafter, at LIBOR for the applicable Interest
Period plus 2.00% 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 2.00% 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 for any Trust by reason of a
Downgrade Drawing or a Non-Extension Drawing will be treated as follows: (i)
such amount will be released on any Distribution Date to the 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 or Non-Extension Drawing under any of the
Liquidity Facilities (other than any portion thereof applied to the payment of
interest on the Certificates) will bear interest (x) during the period from the
date of its borrowing to (but excluding) the date if any, on which it is
converted into a Final Drawing as described below under "--Liquidity Events of
Default", in an amount equal to the investment earnings on amounts deposited in
the Cash Collateral Account attributable to such Liquidity Facility plus .40%
per annum on the outstanding amount from time to time of such Downgrade Drawing
or Non-Extension Drawing (excluding any portion thereof applied to the payment
of interest on the Certificates) and (y) thereafter, at a rate equal to LIBOR
for the applicable Interest Period (or, as described in the preceding paragraph,
the Base Rate) plus 2.00% per annum;
S-51
<PAGE>
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, give a notice of termination of the
related Liquidity Facility (a "Termination Notice") the effect of which will be
to cause (i) such Liquidity Facility to expire on the fifth Business Day after
the date on which such Termination Notice is received by the Subordination
Agent, (ii) the Subordination Agent to promptly request, and the Liquidity
Provider to make, a Final Drawing thereunder in an amount equal to the then
Maximum Available Commitment thereunder, (iii) any Drawing remaining
unreimbursed as of the date of termination to be automatically converted into a
Final Drawing under such Liquidity Facility, and (iv) all amounts owing to the
Liquidity Provider automatically to become 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 will be ABN AMRO Bank N.V., a
bank organized under the laws of the Netherlands, acting through its Chicago
branch. ABN AMRO Bank 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 supplements (and, to the extent inconsistent therewith,
replaces) the description of the general terms and provisions relating to the
Intercreditor Agreement set forth in the Prospectus. The summary does not
purport to be complete and is qualified in its entirety by reference to all of
the provisions of the Intercreditor Agreement, which will be filed as an exhibit
to a Current Report on Form 8-K to be filed by Continental with the Commission.
INTERCREDITOR RIGHTS
CONTROLLING PARTY
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Provider will agree that, with respect to any Indenture at any given time, the
Loan Trustee will be directed (a) in taking, or refraining from taking, any
action thereunder or with respect to the Equipment Notes issued under such
Indenture, by the holders of at least a majority of the outstanding principal
amount of the Equipment Notes issued under such Indenture (PROVIDED that, for so
long as the Subordination Agent is the registered holder of the Equipment Notes,
the Subordination Agent will act with respect to this clause (a) in accordance
with the directions of the Trustees (in the case of each such Trustee, with
respect to the Equipment Notes issued under such Indenture and held as Trust
Property of such Trust) constituting, in the aggregate, directions with respect
to such principal amount of Equipment Notes), so long as no Indenture Default
(which has
S-52
<PAGE>
not been cured by the applicable Owner Trustee or Owner Participant) shall have
occurred and be continuing thereunder, and (b) after the occurrence and during
the continuance of an Indenture Default under such Indenture (which has not been
cured by the applicable Owner Trustee or Owner Participant), in taking, or
refraining from taking, any action thereunder or with respect to the Equipment
Notes issued under such Indenture, including exercising remedies thereunder or
with respect to such Equipment Notes (including acceleration of such Equipment
Notes or foreclosing the lien on the Aircraft securing such Equipment Notes), by
the Controlling Party, subject to the limitations described below. See
"Description of the Certificates--Indenture Defaults and Certain Rights Upon an
Indenture Default" for a description of the rights of the Certificateholders of
each Trust to direct the respective Trustees.
"Controlling Party" with respect to any Indenture means: (x) the Class A
Trustee; (y) upon payment of Final Distributions to the holders of Class A
Certificates, the Class B Trustee; and (z) upon payment of Final Distributions
to the holders of Class B Certificates, the Class C Trustee. See "Description of
the Certificates--Indenture Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the Certificateholders of each Trust
to direct the respective Trustees. Notwithstanding the foregoing, at any time
after 18 months from the earlier to occur of (x) the date on which the entire
Maximum Available Commitment 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 with the highest outstanding amount of
Liquidity Obligations shall 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".
"Final Distributions" means, with respect to the Certificates of any Trust
on any Distribution Date, the sum of (x) the aggregate amount of all accrued and
unpaid interest on such Certificates and (y) the Pool Balance of such
Certificates as of the immediately preceding Distribution Date. For purposes of
calculating Final 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 such Final Distributions.
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,
(a) no Aircraft subject to the lien of such Indenture or such Equipment Notes
may be sold, if the net proceeds from such sale would be less than the Minimum
Sale Price for such Aircraft or such Equipment Notes, and (b) the amount and
payment dates of rentals payable by Continental under the Lease for such
Aircraft may not be adjusted, if, as a result of such adjustment, the discounted
present value of all such rentals would be less than 75% of the discounted
present value of the rentals payable by Continental under such Lease before
giving effect to such adjustment, in each case, using the weighted average
interest rate of the Equipment Notes outstanding under such Indenture as the
discount rate.
S-53
<PAGE>
The Subordination Agent may from time to time during the continuance of an
Indenture Default (and before the occurrence of a Triggering Event) commission
LTV Appraisals with respect to an Aircraft at the request of the Controlling
Party. (Intercreditor Agreement, Section 4.1(a)(iii))
PRIORITY OF DISTRIBUTIONS
So long as no Triggering Event shall have occurred, the payments in respect
of the Equipment Notes and certain other payments received on any Distribution
Date will be promptly distributed by the Subordination Agent on such
Distribution Date in the following order of priority:
(i) to 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 the Trustee for the Class A Certificates to the extent required
to pay Expected Distributions on the Class A Certificates;
(v) to the Trustee for the Class B Certificates to the extent required
to pay Expected Distributions on the Class B Certificates;
(vi) to the Trustee for the Class C Certificates to the extent required
to pay Expected Distributions on the Class C Certificates; and
(vii) to pay certain fees and expenses of the Subordination Agent and
each Trustee.
"Expected Distributions" means, with respect to the Certificates of any
Trust on any Current Distribution Date, the sum of (x) accrued, due 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), less (if
applicable) the aggregate amount of escrowed funds for such Class of
Certificates as of such immediately preceding Distribution Date (or, if the
Current Distribution Date is the first Distribution Date, as of the date of
original issuance of the Certificates of such Class) thereafter distributed to
the holders of such Certificates (instead of being used to purchase Delayed
Delivery Notes) as described above under "Description of the
Certificates--Delayed Purchase of Equipment Notes" (excluding the interest
component of any such distribution), and (B) the Pool Balance of such
Certificates as of the Current Distribution Date calculated on the basis that
(i) the principal of the Equipment Notes held in such Trust has been paid when
due (whether at stated maturity, upon redemption, prepayment, purchase,
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 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
S-54
<PAGE>
the value of the Equipment Notes or any Trust Indenture Estate
(collectively, 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 the Trustee for the Class A Certificates to the extent required
to pay Adjusted Expected Distributions on the Class A Certificates;
(vii) to the Trustee for the Class B Certificates to the extent required
to pay Adjusted Expected Distributions on the Class B Certificates; and
(viii) to the Trustee for the Class C Certificates to the extent required
to pay Adjusted Expected Distributions on the Class C Certificates.
"Adjusted Expected Distributions" means, with respect to the Certificates of
any Trust on any Current Distribution Date, the sum of (1) accrued, due 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), less (if applicable) the
aggregate amount of escrowed funds for such Class of Certificates as of such
immediately preceding Distribution Date (or, if the Current Distribution
Date is the first Distribution Date, as of the date of original issuance of
the Certificates of such Class) thereafter distributed to the holders of
such Certificates (instead of being used to purchase Delayed Delivery Notes)
as described above under "Description of the Certificates--Delayed Purchase
of Equipment Notes" (excluding the interest component of any such
distribution), 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
(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
S-55
<PAGE>
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 of principal on
such Distribution Date 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 Value of such Aircraft
(or with respect to any such Aircraft which has suffered an Event of Loss under
and as defined in the relevant Lease, the amount of the insurance proceeds paid
to the related Loan Trustee in respect thereof to the extent then held by such
Loan Trustee (and/or on deposit in the Special Payments Account) or payable to
such Loan Trustee in respect thereof) and (ii) the outstanding principal amount
of the Equipment Notes secured by such Aircraft after giving effect to any
principal payments of such Equipment Notes on or before such Distribution Date.
"LTV Ratio" means for the Class A Certificates %, for the Class B
Certificates % and for the Class C Certificates %.
"Appraised Current Market Value" of any Aircraft means the lower of the
average and the median of the most recent three LTV Appraisals of such Aircraft.
After a Triggering Event occurs and any Equipment Note becomes a Non-Performing
Equipment Note, the Subordination Agent shall obtain LTV Appraisals for the
Aircraft as soon as practicable and additional LTV Appraisals on or prior to
each anniversary of the date of such initial LTV Appraisals; PROVIDED that if
the Controlling Party reasonably objects to the appraised value of the Aircraft
shown in such LTV Appraisals, the Controlling Party shall have the right to
obtain or cause to be obtained substitute LTV Appraisals (including LTV
Appraisals based upon physical inspection of such Aircraft).
"LTV Appraisal" means a current fair market value appraisal (which may be a
"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, 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 or waiver under such Equipment Note, or the related Indenture (or,
if applicable, the related Lease, the related Participation Agreement or other
related document), (i) if no Indenture Default shall have occurred and be
continuing with respect to such Indenture, the Subordination Agent shall request
instructions from the Trustees and shall vote or consent in accordance with the
directions of the Trustees (in 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 and (ii) if any Indenture Default shall have occurred and
be continuing with respect to such Indenture, the Subordination Agent will
exercise its voting rights as directed by the Controlling Party, subject to
certain limitations; PROVIDED that no such amendment, modification or waiver
shall, without the consent of the Liquidity Provider, reduce the amount of rent,
S-56
<PAGE>
supplemental rent or stipulated loss values payable by Continental under any
Lease. (Intercreditor Agreement, Section 9.1(b))
THE SUBORDINATION AGENT
Wilmington Trust Company will be the Subordination Agent under the
Intercreditor Agreement. Continental and its affiliates may from time to time
enter into banking and trustee relationships with the Subordination Agent and
its affiliates. The Subordination Agent's address is Wilmington Trust Company,
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Corporate Trust Administration.
The Subordination Agent may resign at any time, in which event a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. The Controlling Party (or, prior to the occurrence of a Triggering
Event, the party who would be the Controlling Party if a Triggering Event had
occurred) 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 nine Embraer EMB-145ER aircraft manufactured in 1996
and 1997. The Aircraft are 50-seat, twin-turbofan jetliners powered by two
Allison AE3007A engines, each rated at 7,426 lbs. (3,368 kgs.) thrust. Each
Aircraft has a range of approximately 1,330 nautical miles, assuming full
seating capacity, a maximum cruise speed of 444 kt. (822 km/h) and a maximum
payload of 12,125 lbs. (5,500 kgs.). The Aircraft are new-generation jetliners
designed for use primarily on regional routes.
All of the Aircraft are currently leased on an interim basis by Continental.
In connection with the leveraged leases to be entered into in connection with
the Offering, the Aircraft will be leased to Continental and subleased to
Express. Express plans to use the Aircraft on its routes, which are generally
flights of less than 200 miles in length and less than 90 minutes in duration.
The subleases are not included in the security for the Equipment Notes and may
be modified or terminated at any time without notice to or the consent of the
Certificateholders.
S-57
<PAGE>
THE APPRAISALS
The table below sets forth the appraised values and certain additional
information regarding the Aircraft.
<TABLE>
<CAPTION>
APPRAISALS
---------------------------------
<S> <C> <C> <C> <C> <C> <C>
AIRCRAFT
MANUFACTURER'S REGISTRATION
AIRCRAFT TYPE ENGINE TYPE SERIAL NUMBER NUMBER AVMARK MBA SH&E
- --------------------------------------- ----------- -------------- ----------- ----------- --------- ---------
<CAPTION>
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Embraer EMB-145ER AE3007A 145.004 N14925 $ 14.50 $ 14.47 $ 15.14
Embraer EMB-145ER AE3007A 145.005 N15926 14.50 14.47 15.14
Embraer EMB-145ER AE3007A 145.006 N16927 14.50 14.50 15.14
Embraer EMB-145ER AE3007A 145.007 N17928 14.50 14.50 15.14
Embraer EMB-145ER AE3007A 145.009 N13929 14.50 14.53 15.14
Embraer EMB-145ER AE3007A 145.011 N14930 14.50 14.59 15.14
Embraer EMB-145ER AE3007A 145.013 N14931 14.50 14.59 15.14
Embraer EMB-145ER AE3007A 145.015 N15932 14.50 14.62 15.14
Embraer EMB-145ER AE3007A 145.018 N14933 14.50 14.65 15.14
</TABLE>
The appraised values set forth in the foregoing chart were determined by
three independent aircraft appraisal and consulting firms, AVMARK, MBA and SH&E,
as of June 11, June 10, and June 13, 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 Supplement as Appendix II. For a discussion of
the assumptions and methodologies used in each of the appraisals, reference is
hereby made to such summaries.
An appraisal is only an estimate of value 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.
S-58
<PAGE>
DESCRIPTION OF THE EQUIPMENT NOTES
The following summary describes all material terms of the Equipment Notes
and supplements (and, to the extent inconsistent therewith, replaces) the
description of the general terms and provisions relating to the Equipment Notes,
the Indentures, the Leases and the Participation Agreements set forth in the
Prospectus. The summaries make use of terms defined in and are qualified in
their entirety by reference to all of the provisions of the Equipment Notes, the
Indentures, the Leases and the Participation Agreements, which will be filed as
an exhibit to a Current Report on Form 8-K to be filed by Continental with the
Commission. Except as otherwise indicated, the following summaries relate to the
Equipment Notes, the Indenture, the Lease and the Participation Agreement that
may be applicable to each Aircraft.
GENERAL
The Equipment Notes will be issued in three series with respect to each
Aircraft under a separate Indenture between First Security Bank, National
Association, as Owner Trustee of a trust for the benefit of the owner
participant who will be the beneficial owner of such Aircraft (the "Owner
Participant"), and Wilmington Trust Company, as Loan Trustee.
The related Owner Trustee will lease each Aircraft to Continental pursuant
to a separate Lease between such Owner Trustee and Continental with respect to
such Aircraft. Under each Lease, Continental will be obligated to make or cause
to be made rental and other payments to the related Loan Trustee on behalf of
the related Owner Trustee, which rental and other payments will be at least
sufficient to pay in full when due all payments required to be made on the
Equipment Notes issued with respect to such Aircraft. The Equipment Notes are
not, however, direct obligations of, or guaranteed by, Continental.
Continental's rental obligations under each Lease will be general obligations of
Continental.
SUBORDINATION
Series B Equipment Notes issued in respect of an Aircraft will be
subordinated in right of payment to Series A Equipment Notes issued in respect
of such Aircraft and Series C Equipment Notes issued in respect of such Aircraft
will be subordinated in right of payment to such Series B Equipment Notes. On
each Equipment Note payment date, (i) payments of interest and principal due on
Series A Equipment Notes issued in respect of an Aircraft will be made prior to
payments of interest and principal due on Series B Equipment Notes issued in
respect of such Aircraft and (ii) payments of interest and principal due on
Series B Equipment Notes issued in respect of an Aircraft will be made prior to
payments of interest and principal due on Series C Equipment Notes issued in
respect of such Aircraft.
PRINCIPAL AND INTEREST PAYMENTS
Subject to the provisions of the Intercreditor Agreement, interest paid on
the Equipment Notes held in each Trust will be passed through to the
Certificateholders of such Trust on the dates and at the rate per annum set
forth on the cover page of this Prospectus Supplement with respect to
Certificates issued by such Trust until the final expected Regular Distribution
Date for such Trust. Subject to the provisions of the Intercreditor Agreement,
principal paid on the Equipment Notes held in each Trust will be passed through
to the Certificateholders of such Trust in scheduled amounts on the dates set
forth herein until the final expected Regular Distribution Date for such Trust.
S-59
<PAGE>
The aggregate original principal amounts of the Equipment Notes issued with
respect to each Aircraft, as such Equipment Notes will be held in each of the
Trusts, are as follows:
<TABLE>
<CAPTION>
TRUST 1997-3A TRUST 1997-3B TRUST 1997-3C
AIRCRAFT REGISTRATION NUMBER EQUIPMENT NOTES EQUIPMENT NOTES EQUIPMENT NOTES TOTAL
- ------------------------------------------ ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
N14925.................................... $ 6,158,244 $ 2,179,256 $ 1,596,062 $ 9,933,562
N15926.................................... 6,158,244 2,179,256 1,596,062 9,933,562
N16927.................................... 6,158,244 2,179,256 1,596,062 9,933,562
N17928.................................... 6,309,765 2,044,985 1,528,854 9,883,604
N13929.................................... 6,309,765 2,044,985 1,528,854 9,883,604
N14930.................................... 6,223,328 2,164,727 1,534,357 9,922,411
N14931.................................... 6,223,328 2,164,727 1,534,357 9,922,411
N15932.................................... 6,223,328 2,164,727 1,534,357 9,922,411
N14933.................................... 6,223,328 2,164,727 1,534,357 9,922,411
---------------- ---------------- ---------------- ----------------
Total................................. $ 55,987,573 $ 19,286,644 $ 13,983,321 $ 89,257,538
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
Interest will be payable on the unpaid principal amount of each Equipment
Note at the rate applicable to such Equipment Note on March 10, June 10,
September 10 and December 10 of each year, commencing on December 10, 1997. Such
interest will be computed on the basis of a 360-day year of twelve 30-day
months.
The principal of the Equipment Notes purchased by each Trust will be payable
as set forth in Appendix III to this Prospectus Supplement.
If any date scheduled for a payment of principal, premium (if any) or
interest with respect to the Equipment Notes is not a Business Day, such payment
will be made on the next succeeding Business Day without any additional
interest.
REDEMPTION
If an Event of Loss occurs with respect to an Aircraft, the Equipment Notes
issued with respect to such Aircraft will be redeemed, in whole, in each case at
a price equal to the aggregate unpaid principal amount thereof, together with
accrued interest thereon to, but not including, the date of redemption, but
without premium, on a Special Distribution Date. (Indentures, Section 2.10)
If Continental exercises its right to terminate a Lease under Section 9 of
such Lease, the Equipment Notes relating to the applicable Aircraft will be
redeemed, in whole, on a Special Distribution Date at a price equal to the
aggregate unpaid principal amount thereof, together with accrued interest
thereon to, but not including, the date of redemption, plus, in the case of any
series of Equipment Notes, if such redemption is made prior to the Premium
Termination Date applicable to such series, a Make-Whole Premium. (Indenture,
Section 2.10(b)) See "--The Leases--Lease Termination".
If one or more Lease Events of Default shall have occurred and been
continuing or the Equipment Notes with respect to an Aircraft have been
accelerated, then all, but not less than all, of the Equipment Notes issued with
respect to such Aircraft may be purchased by the related Owner Trustee or Owner
Participant at a price equal to the aggregate unpaid principal thereof, together
with accrued and unpaid interest thereon to, but not including, the date of
purchase, but without any premium (PROVIDED that a Make-Whole Premium shall be
payable if such Equipment Notes are to be purchased prior to the Premium
Termination Date applicable thereto when a Lease Event of Default shall have
occurred and been continuing for less than 180 days). (Indenture, Section 2.13)
"Make-Whole Premium" means, with respect to any Equipment Note, an amount
(as determined by an independent investment bank 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
S-60
<PAGE>
computed by discounting such payments on a quarterly 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 quarterly equivalent and as a 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 will be secured by
(i) an assignment by the related Owner Trustee to the related Loan Trustee of
such Owner Trustee's rights, except for certain limited rights, under the Lease
with respect to the related Aircraft, including the right to receive payments of
rent thereunder, (ii) a mortgage to such Loan Trustee of such Aircraft, subject
to the rights of Continental under such Lease, and (iii) an assignment to such
Loan Trustee of certain of such Owner Trustee's rights under the purchase
agreement between Continental and the manufacturer. Unless and until an
Indenture Default has occurred and is continuing, the Loan Trustee may not
exercise the rights of the Owner Trustee under the related Lease, except the
Owner Trustee's right to receive payments of rent due thereunder. The assignment
by the Owner Trustee to the Loan Trustee of its rights under the related Lease
will exclude certain rights of such Owner Trustee and the related Owner
Participant, including the rights of the Owner Trustee and the Owner Participant
with respect to indemnification by Continental for certain matters, insurance
proceeds payable to such Owner Trustee in its individual capacity or to such
Owner Participant under public liability insurance maintained by Continental
under such Lease or by such Owner Trustee or such Owner Participant, insurance
proceeds payable to such Owner Trustee in its individual capacity or to such
Owner Participant under certain casualty insurance maintained by such Owner
Trustee or such Owner Participant under such Lease and certain reimbursement
payments made by Continental to such Owner Trustee. (Indenture, Granting Clause)
The Equipment Notes are not cross-collateralized, and, consequently, the
Equipment Notes issued in respect of any one Aircraft will not be secured by any
of the other Aircraft or the Leases related thereto.
S-61
<PAGE>
Funds, if any, held from time to time by the Loan Trustee with respect to
any Aircraft, including funds held as the result of an Event of Loss to such
Aircraft or termination of the Lease, if any, relating thereto, will be invested
and reinvested by such Loan Trustee, at the direction of the related Owner
Trustee, in investments described in the related Indenture. (Indenture, Section
6.04)
LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The following tables set forth loan to Aircraft value ratios for the
Equipment Notes issued in respect of each Aircraft as of the Issuance Date and
the specified Regular Distribution Dates obtained by dividing (i) the
outstanding balance (assuming no payment default) of such Equipment Notes
determined, in the case of Regular Distribution Dates, 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 approximately 3% of the initial appraised value per year
commencing on the in-service date until the tenth year after the in-service date
of such Aircraft and by approximately 4% of the initial appraised value per year
thereafter. Other rates or methods of depreciation would result in materially
different LTVs and no assurance can be given (i) that the depreciation rates and
method assumed for the 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 LTVs, but
simply a mathematical calculation based on one set of assumptions.
<TABLE>
<CAPTION>
AIRCRAFT
AIRCRAFT REGISTRATION NUMBER N14925 AIRCRAFT REGISTRATION NUMBER N15926 REGISTRATION
NUMBER N16927
------------------------------------------- ------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
EQUIPMENT EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO NOTE
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE OUTSTANDING
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO BALANCE
- ------------------------- --------------- ------------- ----------- --------------- ------------- ----------- ---------------
<CAPTION>
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C>
ASSUMED LOAN TO
AIRCRAFT VALUE
DATE VALUE RATIO
- ------------------------- ------------- -----------
(MILLIONS)
<S> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT
AIRCRAFT REGISTRATION NUMBER N17928 AIRCRAFT REGISTRATION NUMBER N13929 REGISTRATION
NUMBER N14930
------------------------------------------- ------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
EQUIPMENT EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO NOTE
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE OUTSTANDING
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO BALANCE
- ------------------------- --------------- ------------- ----------- --------------- ------------- ----------- ---------------
<CAPTION>
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C>
ASSUMED LOAN TO
AIRCRAFT VALUE
DATE VALUE RATIO
- ------------------------- ------------- -----------
(MILLIONS)
<S> <C> <C>
</TABLE>
S-62
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT
AIRCRAFT REGISTRATION NUMBER N14931 AIRCRAFT REGISTRATION NUMBER N15932 REGISTRATION
NUMBER N16933
------------------------------------------- ------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
EQUIPMENT EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO NOTE
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE OUTSTANDING
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO BALANCE
- ------------------------- --------------- ------------- ----------- --------------- ------------- ----------- ---------------
<CAPTION>
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C>
ASSUMED LOAN TO
AIRCRAFT VALUE
DATE VALUE RATIO
- ------------------------- ------------- -----------
(MILLIONS)
<S> <C> <C>
</TABLE>
LIMITATION OF LIABILITY
The Equipment Notes are not direct obligations of, or guaranteed by,
Continental, any Owner Participant or the Owner Trustees in their individual
capacity. None of the Owner Trustees, the Owner Participants or the Loan
Trustees, or any affiliates thereof, will be personally liable to any holder of
an Equipment Note or, in the case of the Owner Trustees and the Owner
Participants, to the Loan Trustees for any amounts payable under the Equipment
Notes or, except as provided in each Indenture, for any liability under such
Indenture. All payments of principal of, premium, if any, and interest on the
Equipment Notes issued with respect to any Aircraft (other than payments made in
connection with an optional redemption or purchase of Equipment Notes by the
related Owner Trustee or the related Owner Participant) will be made only from
the assets subject to the lien of the Indenture with respect to such Aircraft or
the income and proceeds received by the related Loan Trustee therefrom
(including rent payable by Continental under the Lease with respect to such
Aircraft).
Except as otherwise provided in the Indentures, each Owner Trustee and each
Loan Trustee, in its individual capacity, will not be answerable or accountable
under the Indentures or under the Equipment Notes under any circumstances
except, among other things, for its own willful misconduct or gross negligence.
None of the Owner Participants will have any duty or responsibility under any of
the Indentures or the Equipment Notes to the Loan Trustees or to any holder of
any Equipment Note.
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will include: (a) the occurrence of
any Lease Event of Default under the related Lease (other than the failure to
make certain indemnity payments and other payments to the related Owner Trustee
or Owner Participant unless a notice is given by such Owner Trustee that such
failure shall constitute an Indenture Default), (b) the failure by the related
Owner Trustee (other than as a result of a Lease Default or Lease Event of
Default) to pay any interest or principal or premium, if any, when due, under
such Indenture or under any Equipment Note issued thereunder that continues for
more than 10 Business Days, in the case of principal, interest or Make-Whole
Premium, and, in all other cases, 10 Business Days after the relevant Owner
Trustee or Owner Participant receives written demand from the related Loan
Trustee or holder of an Equipment Note, (c) the failure by the related Owner
Participant or the related Owner Trustee (in its individual capacity) to
discharge certain liens that continues after notice and specified cure periods,
(d) any representation or warranty made by the related Owner Trustee or Owner
Participant in such Indenture, the related Participation Agreement or certain
related documents furnished to the Loan Trustee or any holder of an Equipment
Note pursuant thereto being false or incorrect in any material respect when made
that continues to be material and adverse to the interests of the Loan Trustee
or Note Holders and remains unremedied after notice and specified cure periods,
(e) failure by the related Owner Trustee or Owner
S-63
<PAGE>
Participant to perform or observe any covenant or obligation for the benefit of
the Loan Trustee or holders of Equipment Notes under such Indenture or certain
related documents that continues after notice and specified cure periods, (f)
the registration of the related Aircraft ceasing to be effective as a result of
the Owner Participant not being a citizen of the United States, as defined in
the Transportation Code (subject to a cure period) or (g) the occurrence of
certain events of bankruptcy, reorganization or insolvency of the related Owner
Trustee or Owner Participant. (Indenture, Section 4.02) There will not be
cross-default provisions in the Indentures or in the Leases. Consequently,
events resulting in an Indenture Default under any particular Indenture may or
may not result in an Indenture Default occurring under any other Indenture, and
a Lease Event of Default under any particular Lease may or may not constitute a
Lease Event of Default under any other Lease.
If Continental fails to make any quarterly basic rental payment due under
any Lease, within a specified period after such failure the applicable Owner
Trustee may furnish to the Loan Trustee the amount due on the Equipment Notes
issued with respect to the related Aircraft, together with any interest thereon
on account of the delayed payment thereof, in which event the Loan Trustee and
the holders of outstanding Equipment Notes issued under such Indenture may not
exercise any remedies otherwise available under such Indenture or such Lease as
the result of such failure to make such rental payment, unless such Owner
Trustee or Owner Participant has previously cured six or more immediately
preceding quarterly basic rental payment defaults or, in total, twelve or more
previous quarterly basic rental payment defaults. The applicable Owner Trustee
or Owner Participant also may cure any other default by Continental in the
performance of its obligations under any Lease that can be cured with the
payment of money. (Indenture, Section 4.03)
The holders of a majority in principal amount of the outstanding Equipment
Notes issued with respect to any Aircraft, by notice to the Loan Trustee, may on
behalf of all the holders waive any existing default and its consequences under
the Indenture with respect to such Aircraft, except a default in the payment of
the principal of, or premium or interest on any such Equipment Notes or a
default in respect of any covenant or provision of such Indenture that cannot be
modified or amended without the consent of each holder of Equipment Notes.
(Indenture, Section 4.08)
REMEDIES
If an Indenture Default occurs and is continuing under an Indenture, the
related Loan Trustee or the holders of a majority in principal amount of the
Equipment Notes outstanding under such Indenture may, subject to the applicable
Owner Participant's or Owner Trustee's right to cure, as discussed above,
declare the principal of all such Equipment Notes issued thereunder immediately
due and payable, together with all accrued but unpaid interest thereon. 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 4.03 and 4.04(b))
Each Indenture provides that if an Indenture Default under such Indenture
has occurred and is continuing, the related Loan Trustee may exercise certain
rights or remedies available to it under such Indenture or under applicable law,
including (if the corresponding Lease has been declared in default) one or more
of the remedies under such Indenture or such Lease with respect to the Aircraft
subject to such Lease. If an Indenture Default arises solely by reason of one or
more events or circumstances which constitute a Lease Event of Default, the
related Loan Trustee's right to foreclose the lien of the applicable Indenture
is subject, with certain exceptions, to its having proceeded to exercise one or
more of the dispossessory remedies under the Lease with respect to such
Aircraft; PROVIDED that the requirement to
S-64
<PAGE>
exercise one or more of such remedies under such Lease shall not apply in
circumstances where such exercise has been involuntarily stayed or prohibited by
applicable law or court order for a continuous period in excess of 60 days or
such period as may be specified in Section 1110(a)(1)(A) of the U.S. Bankruptcy
Code (plus an additional period, if any, resulting from (i) the trustee or
debtor-in-possession in such proceeding agreeing to perform its obligations
under such Lease with the approval of the applicable court and its continuous
performance of such Lease under Section 1110(a)(1)(A-B) of the U.S. Bankruptcy
Code or such Loan Trustee's consent to an extension of such period, (ii) such
Loan Trustee's failure to give any requisite notice, or (iii) Continental's
assumption of such Lease with the approval of the relevant court and its
continuous performance of the Lease as so assumed). See "--The Leases--Lease
Events of Default." Such remedies may be exercised by the related Loan Trustee
to the exclusion of the related Owner Trustee, subject to certain conditions
specified in such Indenture, and of Continental, subject to the terms of such
Lease. Any Aircraft sold in the exercise of such remedies will be free and clear
of any rights of those parties, including the rights of Continental under the
Lease with respect to such Aircraft; PROVIDED that no exercise of any remedies
by the related Loan Trustee may affect the rights of Continental under any Lease
unless a Lease Event of Default has occurred and is continuing. (Indenture,
Section 4.04; Lease, Section 15)
If the Equipment Notes issued in respect of one Aircraft are in default, the
Equipment Notes issued in respect of the other Aircraft may not be in default,
and, if not, no remedies will be exercisable under the applicable Indentures
with respect to such other Aircraft.
Section 1110 of the U.S. Bankruptcy Code provides in relevant part that the
right of lessors, conditional vendors and holders of security interests with
respect to "equipment" (as defined in Section 1110 of the U.S. Bankruptcy Code)
to take possession of such equipment in compliance with the provisions of a
lease, conditional sale contract or security agreement, as the case may be, is
not affected by (a) the automatic stay provision of the U.S. Bankruptcy Code,
which provision enjoins repossessions by creditors for the duration of the
reorganization period, (b) the provision of the U.S. Bankruptcy Code allowing
the trustee in reorganization to use property of the debtor during the
reorganization period, (c) Section 1129 of the U.S. Bankruptcy Code (which
governs the confirmation of plans of reorganization in Chapter 11 cases) and (d)
any power of the bankruptcy court to enjoin a repossession. Section 1110
provides, however, in relevant part that the right of a lessor, conditional
vendor or holder of a security interest to take possession of an aircraft in the
event of an event of default may not be exercised for 60 days following the date
of commencement of the reorganization proceedings (unless specifically permitted
by the bankruptcy court) and may not be exercised at all if, within such 60-day
period (or such longer period consented to by the lessor, conditional vendor or
holder of a security interest), the trustee in reorganization agrees to perform
the debtor's obligations that become due on or after such date and cures all
existing defaults (other than defaults resulting solely from the financial
condition, bankruptcy, insolvency or reorganization of the debtor). "Equipment"
is defined in Section 1110 of the U.S. Bankruptcy Code, in part, as an aircraft,
aircraft engine, propeller, appliance, or spare part (as defined in Section
40102 of Title 49 of the U.S. Code) that is subject to a security interest
granted by, leased to, or conditionally sold to a debtor that is a citizen of
the United States (as defined in Section 40102 of Title 49 of the U.S. Code)
holding an air carrier operating certificate issued by the Secretary of
Transportation pursuant to chapter 447 of Title 49 of the U.S. Code for aircraft
capable of carrying 10 or more individuals or 6,000 pounds or more of cargo.
Each Loan Trustee will receive an opinion of Hughes Hubbard & Reed LLP,
counsel to Continental, that the Owner Trustee, as lessor under the Lease for
such Aircraft, and the Loan Trustee, as assignee of such Owner Trustee's rights
under such Lease pursuant to the related Indenture, will be entitled to the
benefits of Section 1110 of the U.S. Bankruptcy Code with respect to the
airframe and engines comprising such Aircraft 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. The opinion of Hughes Hubbard & Reed LLP will not
S-65
<PAGE>
address the availability of Section 1110 with respect to any possible sublessee
of an Aircraft if it is subleased by Continental.
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the related Loan Trustee may be applied to reimburse
such Loan Trustee for any tax, expense or other loss incurred by it and to pay
any other amounts due to such Loan Trustee prior to any payments to holders of
the Equipment Notes issued under such Indenture. (Indenture, Section 3.03)
In the event of bankruptcy, insolvency, receivership or like proceedings
involving an Owner Participant, it is possible that, notwithstanding that the
applicable Aircraft is owned by the related Owner Trustee in trust, such
Aircraft and the related Lease and Equipment Notes might become part of such
proceeding. In such event, payments under such Lease or on such Equipment Notes
might be interrupted and the ability of the related Loan Trustee to exercise its
remedies under the related Indenture might be restricted, although such Loan
Trustee would retain its status as a secured creditor in respect of the related
Lease and the related Aircraft.
MODIFICATION OF INDENTURES AND LEASES
Without the consent of holders of a majority in principal amount of the
Equipment Notes outstanding under any Indenture, the provisions of such
Indenture and any related Lease, Participation Agreement or Trust Agreement may
not be amended or modified, except to the extent indicated below.
Subject to certain limitations, certain provisions of any Indenture, and of
the Lease, the Participation Agreement and the Trust Agreement related thereto,
may be amended or modified by the parties thereto without the consent of any
holders of the Equipment Notes outstanding under such Indenture. In the case of
each Lease, such provisions include, among others, provisions relating to (i)
the return to the related Owner Trustee of the related Aircraft at the end of
the term of such Lease (except to the extent that such amendment would affect
the rights or exercise of remedies under the Lease) and (ii) the renewal of such
Lease and the option of Continental at the end of the term of such Lease to
purchase the related Aircraft so long as the same would not adversely affect the
Note Holders. (Indenture, Section 9.01(a)) In addition, any Indenture may be
amended without the consent of the holders of Equipment Notes to, among other
things, cure any defect or inconsistency in such Indenture or the Equipment
Notes issued thereunder, PROVIDED that such change does not adversely affect the
interests of any such holder. (Indenture, Section 9.01(c))
Without the consent of each Liquidity Provider and 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, 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 9.01(b))
INDEMNIFICATION
Continental will be required to indemnify each Loan Trustee, each Owner
Participant, each Owner Trustee, the Liquidity Provider, the Subordination Agent
and each Trustee, but not the holders of Certificates, for certain losses,
claims and other matters. Continental will be required under certain
circumstances to indemnify each Owner Participant against the loss of
depreciation deductions and certain other benefits allowable for certain income
tax purposes with respect to the related Aircraft. Each Owner Participant will
be required to indemnify the related Loan Trustee and the holders of the
Equipment Notes
S-66
<PAGE>
issued with respect to the Aircraft in which such Owner Participant has an
interest for certain losses that may be suffered as a result of the failure of
such Owner Participant to discharge certain liens or claims on or against the
assets subject to the lien of the related Indenture.
THE LEASES
Each Aircraft will be leased to Continental by the relevant Owner Trustee
under the relevant Lease.
LEASE TERM RENTALS AND PAYMENTS
Each Aircraft will be leased separately by the relevant Owner Trustee to
Continental for a term commencing on the date on which the Aircraft is acquired
by the Owner Trustee and expiring on a date not earlier than the latest maturity
date of the relevant Equipment Notes, unless terminated prior to the originally
scheduled expiration date as permitted by the applicable Lease. The quarterly
basic rent payment under each Lease is payable by Continental on each related
Lease Payment Date (or, if such day is not a Business Day, on the next Business
Day), and will be assigned by the Owner Trustee under the corresponding
Indenture to provide the funds necessary to make scheduled payments of the
principal and interest due from the Owner Trustee on the Equipment Notes issued
under such Indenture. Each Lease provides that under no circumstances will rent
payments by Continental be less than the scheduled payments on the related
Equipment Notes. Any balance of each such quarterly basic rent payment under
each Lease, after payment of amounts due on the Equipment Notes issued under the
Indenture corresponding to such Lease, will be paid over to the Owner Trustee.
(Lease, Section 3: Indenture, Section 3.01)
"Lease Payment Date" means, with respect to each Lease, March 10, June 10,
September 10 or December 10 during the term of such Lease.
NET LEASE; MAINTENANCE
Under the terms of each Lease, Continental's obligations in respect of each
Aircraft will be those of a lessee under a "net lease". Accordingly, Continental
is obligated under each Lease, among other things and at its expense, to keep
each Aircraft duly registered and insured, to pay all costs of operating the
Aircraft and to maintain, service, repair and overhaul the Aircraft so as to
keep it in as good an operating condition as when delivered to Continental,
ordinary wear and tear excepted, and in such condition as required to maintain
the airworthiness certificate for the Aircraft in good standing at all times.
(Lease, Sections 7.1, 8.1 and 11.1 and Annexes C and D)
POSSESSION, SUBLEASE AND TRANSFER
Each Aircraft may be operated by Continental or, subject to certain
restrictions, by certain other persons. Initially, the Aircraft will be
subleased to Express. Normal interchange and pooling agreements customary in the
commercial airline industry with respect to any Engine are permitted. Subleases
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
sublessee may not be subject to insolvency or similar proceedings at the
commencement of such sublease. (Lease, Section 7.2.7) Permitted foreign air
carriers are not limited to those based in a country that is a party to the
Convention on the International Recognition of Rights in Aircraft (Geneva 1948)
(the "Convention"). It is uncertain to what extent the relevant Loan Trustee's
security interest would be recognized if an Aircraft is registered or located in
a jurisdiction not a party to the Convention. Moreover, in the case of an
Indenture Default, the ability of the related Loan Trustee to realize upon its
security interest in an Aircraft could be adversely affected as a legal or
practical matter if such Aircraft were registered or located outside the United
States.
S-67
<PAGE>
REGISTRATION
Continental is required to keep each Aircraft duly registered under the
Transportation Code with the FAA, except if the relevant Owner Trustee or the
relevant Owner Participant fails to meet the applicable citizenship
requirements, and to record each Lease and Indenture and other documents under
the Transportation Code. (Lease, Section 7.1.1) 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.
So long as no Lease Event of Default exists, Continental has the right to
register the Aircraft subject to such Lease in a country other than the United
States at its own expense in connection with a permitted sublease of the
Aircraft to a permitted foreign air carrier, subject to certain conditions set
forth in the related Participation Agreement. These conditions include a
requirement that an opinion of counsel be provided that the lien of the
applicable Indenture will continue as a first priority security interest in the
applicable Aircraft. (Lease, Section 7.1.2; Participation Agreements, Section
7.6.11)
LIENS
Continental is required to maintain each Aircraft free of any liens, other
than the rights of the relevant Loan Trustee, the holders of the related
Equipment Notes, the Owner Participant and Owner Trustee arising under the
applicable Indenture, the Lease 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 35
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 30 days
or the execution of such judgment is stayed pending appeal or discharged,
vacated or reversed within 30 days after expiration of such stay; 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 danger of the
sale, forfeiture or loss of such Aircraft. (Lease, Section 6)
MAINTENANCE; REPLACEMENT OF PARTS; ALTERATIONS
Continental is required to maintain and operate the Aircraft so as to keep
them in as good operating condition as on the closing date under the Lease for
such Aircraft, 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 sublessee has the right, at its own
expense, to make such alterations, modifications and additions with respect to
each Aircraft as it deems desirable in the proper conduct of its business and to
remove parts which it deems to be obsolete or no longer suitable or appropriate
for use, so long as such alteration, modification, addition or removal does not
materially diminish the fair market value, utility, condition or useful life of
the related Aircraft or Engine or invalidate the Aircraft's airworthiness
certificate. (Lease, Section 8.1 and Annex C)
INSURANCE
Continental is required to maintain, at its expense (or at the expense of a
permitted sublessee), all-risk aircraft hull insurance covering each Aircraft,
at all times in an amount not less than the stipulated loss value of such
Aircraft (which will exceed the aggregate outstanding principal amount of the
Equipment Notes relating to such Aircraft). 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
S-68
<PAGE>
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 stipulated loss
value of the relevant Aircraft will be payable to the applicable Loan Trustee,
for so long as the relevant Indenture shall be in effect. In the event of a loss
involving insurance proceeds of up to $3,500,000 per occurrence, such proceeds
will be payable directly to Continental so long as the Owner Trustee has not
notified the insurance underwriters that a Lease Event of Default exists. So
long as the loss does not constitute an Event of Loss, insurance proceeds will
be applied to repair or replace the property. (Lease, Section 11 and Annex D)
In addition, Continental is obligated to maintain comprehensive airline
liability insurance at its expense (or at the expense of a permitted sublessee),
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. (Lease, Section 11.1 and Annex D)
Continental is also required to maintain war-risk, hijacking or allied
perils insurance if it (or any permitted sublessee) operates any Aircraft,
Airframe or Engine in any area of recognized hostilities or if Continental (or
any permitted sublessee) maintains such insurance with respect to other aircraft
operated on the same international routes or areas on or in which the Aircraft
is operated. (Lease, Annex D)
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. (Lease, Section 11.1 and Annex D)
In respect of each Aircraft, Continental is required to name as additional
insured parties the relevant Loan Trustee, holders of the Equipment Notes, the
relevant Owner Participant and Owner Trustee, in its individual capacity and as
owner of such Aircraft and in some cases certain other parties under all
liability, hull and property and war risk, hijacking and allied perils insurance
policies required with respect to such Aircraft. In addition, the insurance
policies will be required to provide that, in respect of the interests of such
additional insured persons, the insurance shall not be invalidated or impaired
by any act or omission of Continental, any permitted sublessee or any other
person. (Lease, Annex D)
LEASE TERMINATION
Unless a Lease Event of Default shall have occurred and be continuing,
Continental may terminate any Lease on any Lease Payment Date occurring after
the last day of the taxable year during which the sixth anniversary of the date
on which such Lease commenced occurred (or later dates under certain
circumstances), if it makes a good faith determination that the Aircraft subject
to such Lease is economically obsolete or surplus to its requirements.
Continental is required to give notice of its intention to exercise its right of
termination described in this paragraph at least 90 days prior to the proposed
date of termination, which notice may be withdrawn up to 20 days prior to such
proposed date; PROVIDED that Continental may give only three such termination
notices. In such a situation, unless the Owner Trustee elects to retain title to
such Aircraft, Continental is required to use commercially reasonable efforts to
sell such Aircraft as an agent for such Owner Trustee, and Owner Trustee will
sell such Aircraft on the date of termination to the highest cash bidder. If
such sale occurs, the Equipment Notes related thereto are required to be
prepaid. If the net proceeds to be received from such sale are less than the
termination
S-69
<PAGE>
value for such Aircraft (which is set forth in a schedule to each Lease),
Continental is required to pay to the applicable Owner Trustee an amount equal
to the excess, if any, of the applicable termination value for such Aircraft
over such net proceeds. Upon payment of termination value for such Aircraft and
an amount equal to the Make-Whole Premium, if any, payable on such date of
payment, together with certain additional amounts, the lien of the relevant
Indenture will be released, the relevant Lease will terminate and the obligation
of Continental thereafter to make scheduled rent payments under such Lease will
cease. (Lease, Section 9; Indenture, Section 2.10(b))
The Owner Trustee has the option to retain title to the Aircraft if
Continental has given a notice of termination under the Lease. In such event,
such Owner Trustee will pay to the applicable Loan Trustee an amount sufficient
to prepay the outstanding Equipment Notes issued with respect to such Aircraft
(including the Make-Whole Premiums), in which case the lien of the relevant
Indenture will be released, the relevant Lease will terminate and the obligation
of Continental thereafter to make scheduled rent payments under such Lease will
cease. (Lease, Section 9; Indenture Sections 2.06 and 2.10(b))
EVENTS OF LOSS
If an Event of Loss occurs with respect to the Airframe or the Airframe and
Engines of an Aircraft, 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 twentieth day following the receipt of the insurance proceeds
in respect of such Event of Loss, Continental must pay to the Owner Trustee the
stipulated loss value of such Aircraft, together with certain additional
amounts, but, in any case, without any Make-Whole Premium. (Lease, Section
10.1.2; Indenture, Sections 2.10 and 4.05(a)) Upon payment of the stipulated
loss value for 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, the lien of
the Indenture and the Lease relating to such Aircraft shall terminate with
respect to such Aircraft, the obligation of Continental thereafter to make the
scheduled rent payments with respect thereto shall cease and the related Owner
Trustee shall transfer all of its right, title and interest in and to the
related Aircraft to Continental. The stipulated loss value and other payments
made under the Leases by Continental shall be deposited with the applicable Loan
Trustee. Amounts in excess of the amounts due and owing under the Equipment
Notes issued with respect to such Aircraft will be distributed by such Loan
Trustee to the applicable Owner Trustee (Lease, Section 10.1.2; Indenture,
Sections 2.06 and 3.02)
If an Event of Loss occurs with respect to an Engine alone, Continental will
be required to replace such Engine within 90 days after the occurrence of such
Event of Loss with another engine, free and clear of all liens (other than
certain permitted liens). Such replacement engine shall be the same make and
model as the Engine to be replaced, or an improved model, suitable for
installation and use on the Airframe, and having a value, utility and remaining
useful life (without regard to hours or cycles remaining until overhaul) at
least equal to the Engine to be replaced, assuming that such Engine had been
maintained in accordance with the relevant Lease. (Lease, Section 10.2)
An "Event of Loss" with respect to an Aircraft, Airframe or any Engine means
any of the following events with respect to such property: (i) the destruction
of such property, damage to such property beyond economic repair or rendition of
such property permanently unfit for normal use; (ii) the actual or constructive
total loss of such property or any damage to such property or requisition of
title or use of such property which results in an insurance settlement with
respect to such property on the basis of a total loss or a constructive or
compromised total loss; (iii) any theft, hijacking or disappearance of such
property for a period of 180 consecutive days or more; (iv) any seizure,
condemnation, confiscation, taking or requisition of title to such property by
any governmental entity or purported governmental entity (other than the country
of registration of the relevant Aircraft) for a period exceeding 180 consecutive
days or, if earlier, at the end of the term of such Lease; (v) any seizure,
condemnation, confiscation, taking or
S-70
<PAGE>
requisition of use of such property by any U.S. government entity (or government
entity of the country of registration of the relevant aircraft) that continues
until the last day of the term of the relevant Lease (unless the Owner Trustee
shall have elected not to treat such event as an Event of Loss); and (vi) as a
result of any law, rule, regulation, order or other action by the FAA or any
governmental entity, the use of such property in the normal course of
Continental's business of passenger air transportation is prohibited for 180
consecutive days, unless Continental, prior to the expiration of such 180-day
period, shall have undertaken and shall be diligently carrying forward steps
which are necessary or desirable to permit the normal use of such property by
Continental, but in any event if such use shall have been prohibited for a
period of 720 days, 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 such use
shall be prohibited at the expiration of the term of the relevant Lease; or (vi)
with respect to any Engine, any divestiture of title to such Engine shall be
treated as an Event of Loss. (Lease, Annex A and Section 7.2.6)
RENEWAL AND PURCHASE OPTIONS
At the end of the term of each Lease after final maturity of the related
Equipment Notes and subject to certain conditions, Continental will have certain
options to renew such Lease for additional limited periods. In addition,
Continental will have the right at the end of the term of each Lease to purchase
the Aircraft subject thereto for an amount to be calculated in accordance with
the terms of such Lease. (Lease, Section 17)
EVENTS OF DEFAULT UNDER THE LEASES
Lease Events of Default under each Lease include, among other things, (i)
failure by Continental to make any payment of basic rent, stipulated loss value
or termination value under such Lease within five Business Days after the same
shall have become due, or failure by Continental to pay any other amount due
under such Lease or under any other related operative document within ten
Business Days from and after the date of any written notice from the Owner
Trustee or Loan Trustee of the failure to make such payment when due; (ii)
failure by Continental to make any excluded payment (as defined) within ten
Business Days after written notice that such failure constitutes a Lease Event
of Default is given by the relevant Owner Participant to Continental and the
relevant Loan Trustee; (iii) failure by Continental to carry and maintain
insurance on and in respect of the Aircraft, Airframe and Engines, in accordance
with the provisions of such Lease; (iv) failure by Continental to perform or
observe any other covenant or agreement to be performed or observed by it under
such Lease or the related Participation Agreement or any other related operative
document (other than the related tax indemnity agreement between Continental and
the Owner Participant), and such failure shall continue unremedied for a period
of 30 days after written notice of such failure by the applicable Owner Trustee
or Loan Trustee unless such failure is capable of being corrected and
Continental shall be diligently proceeding to correct such failure, in which
case there shall be no Lease Event of Default unless and until such failure
shall continue unremedied for a period of 90 days after the receipt of such
notice, (v) any representation or warranty made by Continental in such Lease or
the related Participation Agreement or in any other related operative document
(other than in the related tax indemnity agreement between Continental and the
Owner Participant) shall prove to have been untrue or inaccurate in any material
respect at the time made, such representation or warranty is material at the
time in question and the same shall remain uncured (to the extent of the adverse
impact thereof) for more than 30 days after the date of written notice thereof
to Continental; and (vi) the occurrence of certain voluntary events of
bankruptcy, reorganization or insolvency of Continental
S-71
<PAGE>
or the occurrence of involuntary events of bankruptcy, reorganization or
insolvency which shall continue undismissed, unvacated or unstayed for a period
of 90 days. (Lease, Section 14)
REMEDIES EXERCISABLE UPON EVENTS OF DEFAULT UNDER THE LEASE
If a Lease Event of Default has occurred and is continuing, the applicable
Owner Trustee may (or, so long as the Indenture shall be in effect, the
applicable Loan Trustee may, subject to the terms of the Indenture) exercise one
or more of the remedies provided in such Lease with respect to the related
Aircraft. These remedies include the right to repossess and use or operate such
Aircraft, to rescind or terminate such Lease, to sell or re-lease such Aircraft
free and clear of Continental's rights, except as set forth in the Lease, and
retain the proceeds, and to require Continental to pay, as liquidated damages
any due and unpaid basic rent plus an amount equal to the excess of the
stipulated loss value of such Aircraft over the fair market sales value of such
Aircraft or, if such Aircraft has been sold, the net sales proceeds from the
sale of such Aircraft. (Lease, Section 15; Indenture, Section 4.04)
TRANSFER OF OWNER PARTICIPANT INTERESTS
Subject to certain restrictions, each Owner Participant may transfer all or
any part of its interest in the related Aircraft. (Participation Agreement,
Section 10.1.1)
S-72
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary describes all material generally applicable U.S.
federal income tax consequences to Certificateholders of the purchase, ownership
and disposition of the Certificates offered hereby and in the opinion of Hughes
Hubbard & Reed LLP, special tax counsel to Continental ("Tax Counsel"), is
accurate in all material respects with respect to the matters discussed therein.
This summary supplements (and, to the extent inconsistent therewith, replaces)
the summary of federal income tax consequences set forth in the Prospectus.
Except as otherwise specified, the summary is addressed to beneficial owners of
Certificates ("U.S. Certificateholders") that are citizens or residents of the
United States, corporations, partnerships or other entities created or organized
in or under the laws of the United States or any state therein, or estates or
trusts the income of which is subject to U.S. federal income taxation regardless
of its source ("U.S. Persons") that will hold the Certificates as capital
assets. This summary does not address the tax treatment of U.S.
Certificateholders that may be subject to special tax rules, such as banks,
insurance companies, dealers in securities or commodities, tax-exempt entities,
holders that will hold Certificates as part of a straddle or holders that have a
"functional currency" other than the U.S. Dollar, nor does it address the tax
treatment of U.S. Certificateholders that do not acquire Certificates at the
public offering price as part of the initial offering thereof. The summary does
not purport to be a comprehensive description of all of the tax considerations
that may be relevant to a decision to purchase Certificates. This summary does
not describe any tax consequences arising under the laws of any state, locality
or taxing jurisdiction other than the United States.
The summary is based upon the tax laws and practice of the United States as
in effect on the date of this Prospectus Supplement, as well as judicial and
administrative interpretations thereof (in final or proposed form) available on
or before such date. All of the foregoing are subject to change, which change
could apply retroactively. Prospective investors should note that no rulings
have been sought from the Internal Revenue Service (the "IRS") with respect to
the federal income tax consequences discussed below, and no assurances can be
given that the IRS will not take contrary positions. The Trusts are not
indemnified for any federal income taxes that may be imposed upon them, and the
imposition of any such taxes on a Trust could result in a reduction in the
amounts available for distribution to the Certificateholders of such Trust.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE CERTIFICATES.
TAX STATUS OF THE TRUSTS
In the opinion of Tax Counsel, each Trust will be classified as a grantor
trust for U.S. federal income tax purposes.
TAXATION OF CERTIFICATEHOLDERS GENERALLY
A U.S. Certificateholder will be treated as owning its pro rata undivided
interest in each of the Equipment Notes and any other property held by the
relevant Trust. Accordingly, each U.S. Certificateholder's share of interest
paid on Equipment Notes will be taxable as ordinary income, as it is paid or
accrued, in accordance with such U.S. Certificateholder's method of accounting
for U.S. federal income tax purposes, and a U.S. Certificateholder's share of
premium, if any, paid on redemption of an Equipment Note will be treated as
capital gain. Any amounts received by the Trust under a Liquidity Facility in
order to make interest payments will be treated for U.S. federal income tax
purposes as having the same characteristics as the payments they replace.
Each U.S. Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding Trust as provided in Section 162 or 212 of the Code.
Certain fees and expenses, including fees paid to the Trustee and the Liquidity
Provider,
S-73
<PAGE>
will be borne by parties other than the Certificateholders. It is possible that
such fees and expenses will be treated as constructively received by the Trust,
in which event a U.S. Certificateholder will be required to include in income
and will be entitled to deduct its pro rata share of such fees and expenses. If
a U.S. Certificateholder is an individual, estate or trust, the deduction for
such holder's share of such fees or expenses will be allowed only to the extent
that all of such holder's miscellaneous itemized deductions, including such
holder's share of such fees and expenses, exceed 2% of such holder's adjusted
gross income. In addition, in the case of U.S. Certificateholders who are
individuals, certain otherwise allowable itemized deductions will be subject
generally to additional limitations on itemized deductions under applicable
provisions of the Code.
EFFECT OF SUBORDINATION OF CLASS B AND CLASS C CERTIFICATEHOLDERS
In the event that the Class B Trust or the Class C Trust (such Trusts being
the "Subordinated Trusts" and the related Certificates being the "Subordinated
Certificates") receives less than the full amount of the receipts of interest,
principal or premium paid with respect to the Equipment Notes held by it (any
shortfall in such receipts being the "Shortfall Amounts") because of the
subordination of such Trust, the corresponding owners of beneficial interests in
the Subordinated Certificates (the "Subordinated Certificateholders") would
probably be treated for federal income tax purposes as if they had (1) received
as distributions their full share of such receipts, (2) paid over to the
relevant preferred class of Certificateholders an amount equal to their share of
such Shortfall Amount, and (3) retained the right to reimbursement of such
amounts to the extent of future amounts payable to such Subordinated
Certificateholders with respect to such Shortfall Amount.
Under this analysis, (1) Subordinated Certificateholders incurring a
Shortfall Amount would be required to include as current income any interest or
other income of the corresponding Subordinated Trust that was a component of the
Shortfall Amount, even though such amount was in fact paid to the relevant
preferred class of Certificateholders, (2) a loss would only be allowed to such
Subordinated Certificateholders when their right to receive reimbursement of
such Shortfall Amount becomes worthless (I.E., when it becomes clear that funds
will not be available from any source to reimburse such loss), and (3)
reimbursement of such Shortfall Amount prior to such a claim of worthlessness
would not be taxable income to Subordinated Certificateholders because such
amount was previously included in income. These results should not significantly
affect the inclusion of income for Subordinated Certificateholders on the
accrual method of accounting, but could accelerate inclusion of income to
Subordinated Certificateholders on the cash method of accounting by, in effect,
placing them on the accrual method.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of a Certificate, a U.S.
Certificateholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the disposition (other than any amount
attributable to accrued interest which will be taxable as ordinary income) and
the U.S. Certificateholder's adjusted tax basis in the related Equipment Notes
and any other property held by the corresponding Trust. Any gain or loss will be
long-term capital gain or loss to the extent attributable to property held by
the Trust for more than one year.
FOREIGN CERTIFICATEHOLDERS
Subject to the discussion of backup withholding below, payments of principal
and interest on the Equipment Notes to, or on behalf of, any beneficial owner of
a Certificate that is not a U.S. Person (a "Non-U.S. Certificateholder") will
not be subject to U.S. federal withholding tax; provided, in the case of
interest, that (i) such Non-U.S. Certificateholder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of the stock of any Owner Participant or any transferee of an Owner
Participant's interest, (ii) such Non-U.S. Certificateholder is not a controlled
foreign corporation for U.S. tax purposes that is related to an Owner
Participant or any transferee of an Owner Participant's
S-74
<PAGE>
interest and (iii) either (A) the Non-U.S. Certificateholder certifies, under
penalties of perjury, that it is not a U.S. Person and provides its name and
address or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "financial institution") and holds the Certificate certifies,
under penalties of perjury, that such statement has been received from the
Non-U.S. Certificateholder by it or by another financial institution and
furnishes the payor with a copy thereof. Regulations proposed by the Internal
Revenue Service on April 15, 1996, if finalized in their current form, would
modify the certification requirements described in clause (iii) with respect to
certain payments after December 31, 1997.
Any capital gain realized upon the sale, exchange, retirement or other
disposition of a Certificate or upon receipt of premium paid on an Equipment
Note by a Non-U.S. Certificateholder will not be subject to U.S. federal income
or withholding taxes if (i) such gain is not effectively connected with a U.S.
trade or business of the holder and (ii) in the case of an individual, such
holder is not present in the United States for 183 days or more in the taxable
year of the sale, exchange, retirement or other disposition or receipt.
BACKUP WITHHOLDING
Payments made on the Certificates and proceeds from the sale of Certificates
will not be subject to a backup withholding tax of 31% unless, in general, the
Certificateholder fails to comply with certain reporting procedures or otherwise
fails to establish an exemption from such tax under applicable provisions of the
Code.
CERTAIN DELAWARE TAXES
The Trustee is a Delaware banking corporation with its corporate trust
office in Delaware. In the opinion of Morris, James, Hitchens & Williams,
Wilmington, Delaware, counsel to the Trustee, under currently applicable law,
assuming that the Trusts will not be taxable as corporations, but, rather, will
be classified as grantor trusts under subpart E, Part I of Subchapter J of
Chapter 1 of Subtitle A of the Code, (i) the Trusts will not be subject to any
tax (including, without limitation, net or gross income, tangible or intangible
property, net worth, capital, franchise or doing business tax), fee or other
governmental charge under the laws of the State of Delaware or any political
subdivision thereof and (ii) Certificateholders that are not residents of or
otherwise subject to tax in Delaware will not be subject to any tax (including,
without limitation, net or gross income, tangible or intangible property, net
worth, capital, franchise or doing business tax), fee or other governmental
charge under the laws of the State of Delaware or any political subdivision
thereof as a result of purchasing, holding (including receiving payments with
respect to) or selling a Certificate.
Neither the Trusts nor the Certificateholders will be indemnified for any
state or local taxes imposed on them, and the imposition of any such taxes on a
Trust could result in a reduction in the amounts available for distribution to
the Certificateholders of such Trust. In general, should a Certificateholder or
any Trust be subject to any state or local tax which would not be imposed if the
Trustee were located in a different jurisdiction in the United States, the
Trustee will resign and a new Trustee in such other jurisdiction will be
appointed.
ERISA CONSIDERATIONS
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.
S-75
<PAGE>
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 (i) the Certificate qualifies as a "publicly-offered security"
within the meaning of the Plan Asset Regulation which requires, among other
things, that the Certificate be part of a class of securities that is owned by
100 or more investors independent of the issuer and of one another, or (ii) 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, there can be no assurance that any class of the Certificates will be
owned by 100 or more investors which would be necessary for a Certificate of
that class to qualify as a "publicly-offered security" under the Plan Asset
Regulation. Moreover, the extent to which there is equity participation in a
particular Trust by, or on behalf of, employee benefit plans will not be
monitored. Accordingly, there can be no assurance that equity participation in
the Trust by benefit plan investors would not be "significant" within the
meaning of the Plan Asset Regulation. 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 Underwriters, the
Trustees, the Liquidity Provider, the Owner Trustees and the Owner Participants.
In addition, whether or not the assets of a Trust are deemed to be Plan assets
under the Plan Asset Regulation, if Certificates are purchased by a Plan and
Certificates of a subordinate Class are held by a party in interest or a
disqualified person with respect to such Plan, the exercise by the holder of the
subordinate Class of Certificates of its right to purchase the senior Classes of
Certificates upon the occurrence and during the continuation of a Triggering
Event could be considered to constitute a prohibited transaction unless a
statutory or administrative exemption were applicable.
Depending on the identity of the Plan fiduciary making the decision to
acquire or hold Certificates on behalf of a Plan, 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.
S-76
<PAGE>
In addition to the Class Exemptions referred to above, an individual
exemption may apply to the purchase, holding and secondary market sale of Class
A Certificates by Plans, provided that certain specified conditions are met. In
particular, the Department of Labor has issued individual administrative
exemptions to the Underwriters which are substantially the same as the
administrative exemption issued to Morgan Stanley & Co. Incorporated, Prohibited
Transaction Exemption 90-24 (55 Fed. Reg. 20,548 (1990)), as amended (the
"Underwriter Exemption"). The Underwriter Exemption generally exempts from the
application of certain, but not all, of the prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Code certain transactions relating
to the initial purchase, holding and subsequent secondary market sale of
pass-through certificates which represent an interest in a trust that holds
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.
The Underwriter Exemption does not apply to the Class B or Class C
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.
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.
By its acceptance of a 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 the Code
pursuant to one or more prohibited transaction statutory or administrative
exemptions.
S-77
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among Continental, Rolls-Royce and the
Underwriters listed below (the "Underwriters") relating to the Certificates,
Continental has agreed to cause each Trust to sell to each of the Underwriters,
and each of such Underwriters has severally agreed to purchase the respective
aggregate amounts of Certificates set forth after their names below. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the Certificates if any Certificates are purchased
thereunder.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A CLASS B CLASS C
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES
- -------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Morgan Stanley & Co. Incorporated...................................
Citicorp Securities, Inc............................................
------------- ------------- -------------
Total............................................................. $ 55,987,573 $ 19,286,644 $ 13,983,321
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Underwriters have advised Continental that the Underwriters propose
initially to offer the Certificates of each Class to the public at the public
offering price for such Class set forth on the cover page of this Prospectus
Supplement, and to certain dealers at such price less a concession not in excess
of the amounts for the respective Class set forth below. The Underwriters may
allow, and such dealers may reallow, a concession to certain other dealers not
in excess of the amounts for the respective Class set forth below. After the
initial public offering, the public offering prices and such concessions may be
changed.
<TABLE>
<CAPTION>
PASS THROUGH
CERTIFICATE CONCESSION REALLOWANCE
DESIGNATION TO DEALERS CONCESSION
- --------------------- ----------- -----------
<S> <C> <C>
1997-3A
1997-3B
1997-3C
</TABLE>
Continental does not intend to apply for the listing of the Certificates on
a national securities exchange, but has been advised by the Underwriters that
they presently intend to make a market in the Certificates, as permitted by
applicable laws and regulations. No Underwriter is obligated, however, to make a
market in the Certificates, and any such market-making may be discontinued at
any time at the sole discretion of such Underwriter. Accordingly, no assurance
can be given as to the liquidity of, or trading markets for, the Certificates.
The Underwriting Agreement provides that Rolls-Royce will reimburse the
Underwriters for certain expenses and that Continental will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Each of the Underwriters and certain of its affiliates have performed, and
may in the future perform, commercial banking and investment banking services
for Continental and its affiliates in the ordinary course of business.
In order to facilitate the offering of the Certificates, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Certificates. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Certificates for
their own account. In addition, to cover over allotments or to stabilize the
price of the Certificates, the Underwriters may bid for, and purchase,
Certificates in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing
Certificates in the Offering, if the syndicate repurchases previously
distributed Certificates in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price
S-78
<PAGE>
of the Certificates above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
LEGAL MATTERS
The validity of the Certificates is being passed upon for Continental by
Hughes Hubbard & Reed LLP, New York, New York, and for the Underwriters by
Shearman & Sterling, New York, New York. Both Hughes Hubbard & Reed LLP and
Shearman & Sterling will rely on the opinion of Morris, James, Hitchens &
Williams, Wilmington, Delaware, counsel for Wilmington Trust Company, as
Trustee, as to matters relating to the authorization, execution and delivery of
the Certificates under the Basic Agreement and the Trust Supplements. Shearman &
Sterling from time to time provides legal services to Continental.
EXPERTS
The consolidated financial statements (including financial statement
schedules) of Continental Airlines, Inc. appearing in Continental Airlines,
Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1996,
incorporated by reference in the Prospectus accompanying this Prospectus
Supplement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon. Such consolidated financial statements are
incorporated therein in reliance upon such reports of Ernst & Young LLP
pertaining to such consolidated financial statements given upon the authority of
such firm as experts in accounting and auditing.
The references to AVMARK, MBA and SH&E, and to their respective appraisal
reports, dated as of August 29, August 28 and September 4, 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.
S-79
<PAGE>
APPENDIX I--INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Adjusted Expected Distributions............... S-16
Administration Expenses....................... S-55
Aggregate LTV Collateral Amount............... S-17
Air Partners.................................. S-29
Aircraft...................................... S-1
AMI........................................... S-26
APB 15........................................ S-23
Appraised Current Market Value................ S-17
Appraisers.................................... S-4
Assumed Aggregate Aircraft Value.............. S-4
Assumed Aircraft Value........................ S-62
Average Life Date............................. S-61
average yield................................. S-30
AVMARK........................................ S-4
Basic Agreement............................... S-1
Boeing........................................ S-25
Business Day.................................. S-42
Cash Collateral Account....................... S-13
CDG........................................... S-38
Cede.......................................... S-48
Certificate Account........................... S-41
Certificate Owner............................. S-48
Certificateholders............................ S-8
Certificates.................................. S-1
City.......................................... S-27
Class Exemptions.............................. S-76
Class A Certificates.......................... S-7
Class A Trust................................. S-1
Class A Trustee............................... S-18
Class B Certificates.......................... S-7
Class B Trust................................. S-1
Class B Trustee............................... S-18
Class C Certificates.......................... S-7
Class C Trust................................. S-1
Class C Trustee............................... S-18
CMI........................................... S-35
Code.......................................... S-20
Commission.................................... S-39
Company....................................... S-1
Continental................................... S-1
Controlling Party............................. S-18
Convention.................................... S-67
Credit Facility............................... S-26
Current Distribution Date..................... S-15
default....................................... S-45
Delayed Delivery Notes........................ S-11
disqualified persons.......................... S-76
Distribution Date............................. S-15
<CAPTION>
PAGE
---------
<S> <C>
Downgrade Drawing............................. S-13
DTC........................................... S-48
DTC Participants.............................. S-48
Equipment..................................... S-65
Equipment Notes............................... S-1
Equity Guarantor.............................. S-33
Equity Guaranty............................... S-33
ERISA......................................... S-20
ERISA Plans................................... S-75
Event of Loss................................. S-70
Expected Distributions........................ S-15
Express....................................... S-35
FAA........................................... S-30
Facility...................................... S-27
Final Distributions........................... S-19
Final Drawing................................. S-14
Final Maturity Date........................... S-41
financial institution......................... S-75
Gulfstream.................................... S-36
H.15(519)..................................... S-61
IAH Bonds..................................... S-27
Indenture..................................... S-7
Indenture Default............................. S-43
in-service date............................... S-4
Intercreditor Agreement....................... S-14
Interest Drawings............................. S-12
IRS........................................... S-73
Issuance Date................................. S-4
Lease......................................... S-1
Lease Event of Default........................ S-43
Lease Payment Date............................ S-67
Liquidity Event of Default.................... S-52
Liquidity Expenses............................ S-54
Liquidity Facility............................ S-12
Liquidity Obligations......................... S-12
Liquidity Provider............................ S-7
Loan Trustee.................................. S-7
LTV Appraisal................................. S-18
LTV Collateral Amount......................... S-17
LTV Ratio..................................... S-17
LTVs.......................................... S-4
Make-Whole Premium............................ S-60
Maximum Available Commitment.................. S-12
MBA........................................... S-4
Minimum Sale Price............................ S-19
Moody's....................................... S-20
most recent H.15(519)......................... S-61
NOLs.......................................... S-28
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Non-Extension Drawing......................... S-14
Non-Performing Equipment Notes................ S-16
Non-U.S. Certificateholder.................... S-74
Offering...................................... S-7
Owner Participant............................. S-59
Owner Trustee................................. S-1
Participation Agreement....................... S-7
parties in interest........................... S-76
Pass Through Trust Agreements................. S-1
Performing Equipment Note..................... S-13
Plan Asset Regulation......................... S-76
Plans......................................... S-76
Pool Balance.................................. S-42
Pool Factor................................... S-42
Premium Termination Date...................... S-10
PTC Event of Default.......................... S-8
Rating Agencies............................... S-20
Regular Distribution Dates.................... S-41
Remaining Weighted Average Life............... S-61
Replacement Facility.......................... S-50
Required Amount............................... S-12
Rolls-Royce................................... S-33
Scheduled Payments............................ S-41
Section 1110 Period........................... S-13
Section 382................................... S-29
Series A Equipment Notes...................... S-1
Series B Equipment Notes...................... S-1
Series C Equipment Notes...................... S-1
Series A 12% Preferred........................ S-28
SFAS 128...................................... S-23
<CAPTION>
PAGE
---------
<S> <C>
SH&E.......................................... S-4
Shortfall Amounts............................. S-74
SOP 90-7...................................... S-25
Special Distribution Date..................... S-41
Special Payment............................... S-41
Special Payments Account...................... S-41
Standard & Poor's............................. S-20
Stated Interest Rates......................... S-12
Subordinated Certificateholders............... S-74
Subordinated Certificates..................... S-74
Subordinated Trusts........................... S-74
Subordination Agent........................... S-7
Tax Counsel................................... S-73
Teamsters..................................... S-28
Termination Notice............................ S-52
Threshold Rating.............................. S-50
ticket tax.................................... S-30
Transportation Code........................... S-46
Treasury Yield................................ S-61
Triggering Event.............................. S-9
Trust Property................................ S-7
Trust Supplement.............................. S-1
Trustee....................................... S-1
Trusts........................................ S-1
U.S. Certificateholders....................... S-73
U.S. Persons.................................. S-73
UMDA.......................................... S-26
Underwriter Exemption......................... S-77
Underwriters.................................. S-78
Underwriting Agreement........................ S-78
</TABLE>
I-2
<PAGE>
APPENDIX II-APPRAISAL LETTERS
[LETTERHEAD OF AVMARK INC.]
August 29, 1997
Gary Spulak
Embraer S.A.
Empresa Brasileira de Aeronautica S.A.
276 South West 34th Street
Fort Lauderdale, FL 33315
As requested by Patrick Kaufer of Morgan Stanley & Co., Inc., AVMARK has
determined that the then current fair market value for the nine EMB-145ER
regional jet equipped with Rolls-Royce Allison AE3007A engines to had a value of
US $14,500,000. It is our understanding that these aircraft will be used by
Continental Airlines. Their serial numbers and delivery dates are as follows:
Serial Number Delivery Date Serial Number Delivery Date
145.004 Dec. 1996 145.011 Apr. 1997
145.005 Dec. 1996 145.013 Apr. 1997
145.006 Jan. 1997 145.015 May 1997
145.007 Jan. 1997 145.018 Jul. 1997
145.009 Feb. 1997
THE DEFINITIONS, TERMS AND LIMITATIONS SET FORTH IN EXHIBIT A ARE
EXPRESSLY MADE A PART OF THIS APPRAISAL.
<PAGE>
Sincerely,
/s/ Robert C. Miers
Robert C. Miers
Director of Appraisals
cc. Patrick Kaufer, Morgan Stanley
<PAGE>
EXHIBIT A
Definitions, Terms, and Limitations Relating To This Report
AVMARK, Inc. ("AVMARK") defines "Fair Market Value" (either current or
future values) as the price at which we believe the aircraft would trade between
a willing buyer and a willing seller, both being informed of the relevant facts
and neither being under compulsion to buy or sell. In the context of our
evaluation, the value we have determined as a Fair Market Value is such only
when the specific conditions are met.
The current fair market values are based upon AVMARK's knowledge of the
industry and use of certain estimates, assumptions or definitions, some of which
are more fully described in the attached report. CURRENT FAIR MARKET VALUE OR
FUTURE FAIR MARKET VALUE SHOULD NOT BE UTILIZED OUTSIDE THE CONTEXT OF, OR
WITHOUT KNOWLEDGE OF THOSE ESTIMATES, ASSUMPTIONS OR DEFINITIONS.
The report reflects AVMARK's expert opinion and best judgment based on the
information available to it at time of preparation. The appraisal report was
prepared by AVMARK for the account of Embraer S.A. and Morgan Stanley. AVMARK
does not have, and does not expect to have, any financial interest in the
appraised property, nor is AVMARK privy to any effort to induce a financial
transaction, including solicitation of loans or other investments on the basis
of this report.
AVMARK accepts no responsibility for damages, if any, suffered by any
third party as a result of decisions made or actions taken based on this report.
This appraisal was prepared for the use of Embraer S.A. and Morgan Stanley
and, as such, is entitled to confidential treatment by AVMARK, Inc., and will
not be provided to other parties without the express consent of Embraer S.A. and
Morgan Stanley.
<PAGE>
[LETTERHEAD OF MORTEN BEYER & AGNEW]
August 28, 1997
Mr. Gary Spulak
EMBRAER S.A.
Empresa Brasileira de Aeronautica S.A.
276 South West 34th Street
Fort Lauderdale, FL 33315
CC: Mr. Patrick Kaufer - MORGAN STANLEY
Dear Mr. Spulak:
Pursuant to your request, Morten Beyer and Agnew (MBA) has set forth its
opinion regarding the value of nine EMB-145ER regional jetliners being
operated by Continental Airlines. It is MBA's opinion that the aggregate Base
Values of the subject aircraft, as more fully described herein, is
$130,920,000.00
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
<PAGE>
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 Market Value and Current Fair Market Value is synonymous with
Current Market Value because the criteria typically used in those documents that
use the term "fair" reflect the same criteria set forth in the above definition
of Market Value.
Base Value contains the same elements as MV, but the market conditions are
always assumed to be in a reasonable state of equilibrium. Thus, Base Value
pertains to an idealized aircraft and market combination, but will not
necessarily reflect the actual CMV of the aircraft in question. Base Value 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 Base Values. Base Values 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 Base Value of an
aircraft. The principal assumptions are as follows:
1. The aircraft is in good overall condition.
2. The overhaul status of the airframe and engines are as represented
and set forth herein.
3. The historical maintenance documentation has been maintained to
acceptable standards.
4. The specifications of the aircraft are those most common for an
aircraft of its type and vintage.
5. The aircraft is in a standard-use configuration.
6. The aircraft is current as to all Airworthiness Directives and
Service Bulletins.
7. Its modification status is comparable to that most common for an
aircraft of its type and vintage.
8. Its utilization is comparable to the average of its type.
<PAGE>
9. There is no damage history.
10. The aircraft is not encumbered by any attached lease, tax benefit
recapture or other extraneous factor.
Based on the information set forth in this report the Base Values of the
subject aircraft, as of the date of this report, are as follows:
EMB-145ER
(000,000)
Serial Current Delivery Base
Number Registration Date Value
- --------------------------------------------------------------------------------
145.004 N14925 December, 1996 $ 14,470,000.00
145.005 N15926 December, 1996 14,470,000.00
145.006 N16927 January, 1997 14,500,000.00
145.007 N17928 January, 1997 14,500,000.00
145.009 N13929 February, 1997 14,530,000.00
145.011 N14930 April, 1997 14,590,000.00
145.013 N14931 April, 1997 14,590,000.00
145.015 N15932 May, 1997 14,620,000.00
145.018 N14933 July, 1997 l4,650,000.00
---------------
TOTAL $130,920,000.00
===============
MBA is of the opinion that the CMV of this aircraft is 100 percent of Base
Value. The major markets for regional jetliners are the US and Europe. Both are
in a major upswing right now and therefore it is a prime time to launch a new
aircraft of this type.
The only competitor to the EMB, class-wise, is the Canadair RJ.
Admittedly, this aircraft has a 5 year market lead, but competition like the
EMB-145ER is needed and will ultimately strengthen this class of aircraft in the
markets they serve.
Embraer entered the air transport market with its ubiquitous,
unpressurized EMB-110 'Bandit', and built upwards of 500 between 1972 and 1986.
The company then turned to the highspeed 30-seater, the EMB-120 'Brasi1ia', with
over 300 built and two dozen still on order, making it one of the most popular
of the mid-sized turboprops
<PAGE>
supporting the burgeoning commuter/regional industry. The Bandits were
especially popular in the USA, largely superseding the troublesome Metro II and
IIIs. The EMB-120 also cut a wide swath through the American market,
constituting about rds of total production and being the backbone of Atlantic
Southeast, COMAIR and Continental Express' fleets.
MBA believes Embraer will achieve success similar to that of their earlier
models with this new aircraft.
The current status (as of 5-9-97) of the -145 order book is 65 firm
orders and 194 options for US, European and Brazilian customers.
COVENANTS
This report has been prepared for the exclusive use of EMBRAER S.A. and
MORGAN STANLEY, and shall not be provided to other parties by MBA without the
express consent of these parties.
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 Base 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 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 EMBRAER or MORGAN STANLEY 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
<PAGE>
A Desk Top Appraisal Of
NINE EMBRAER EMB-145 ER AIRCRAFT
Prepared for
EMPRESA BRASILEIRA DE AERONAUTICA, S.A.
Prepared by
SH&E
90 Park Avenue
New York, New York 10016
September 4, 1997
<PAGE>
TABLE OF CONTENTS
1. INTRODUCTION ........................................................ 2
2. DETERMINATION & ASSUMPTIONS ......................................... 2
2.1 Determination ................................................... 2
2.2 Assumptions ..................................................... 3
3. VALUE DETERMINATION ................................................. 4
3.1 Methodology Summary ............................................. 4
3.2 Base Value ...................................................... 5
4. LIMITATIONS ......................................................... 6
<PAGE>
1. INTRODUCTION
Empresa Brasileira de Aeronautica S.A. ("Embraer") has retained Simat,
Helliesen & Eichner, Inc. ("SH&E") to furnish an opinion as to the Base Value
("BV") of nine (9) Embraer EMBl45ER passenger aircraft (the "Subject Aircraft")
all of which have been delivered to Continental Express Airlines.
2. DETERMINATIONS & ASSUMPTIONS
2.1 Determination
SH&E has determined the following half-life values for the Subject
Aircraft:
AIRCRAFT SERIAL # REG. # DELIVERY DATE IN-SERVICE BASE VALUE
TYPE DATE ($MIL)
- --------------------------------------------------------------------------------
EMB-145ER 145.004 N14925 December, 1996 April, 1997 $15.14
- --------------------------------------------------------------------------------
EMB-145ER 145.005 N15926 December, 1996 April, 1997 $15.14
- --------------------------------------------------------------------------------
EMB-145ER 145.006 N16927 January, 1997 April, 1997 $15.14
- --------------------------------------------------------------------------------
EMB-145ER 145.007 N17928 January, 1997 April, 1997 $15.14
- --------------------------------------------------------------------------------
EMB-145ER 145.009 N13929 February, 1997 April, 1997 $15.14
- --------------------------------------------------------------------------------
EMB-145ER 145.011 N14930 April, 1997 April, 1997 $15.14
- --------------------------------------------------------------------------------
EMB-145ER 145.013 N14931 April, 1997 April, 1997 $15.14
- --------------------------------------------------------------------------------
EMB-145ER 145.015 N15932 May, 1997 May, 1997 $15.14
- --------------------------------------------------------------------------------
EMB-145ER 145.018 N14933 July, 1997 August, 1997 $l5.I4
- --------------------------------------------------------------------------------
<PAGE>
2.2 Assumptions
o SH&E has not performed a physical inspection of the Subject Aircraft.
o SH&E's values assume the Subject Aircraft meet or will meet all
specifications and performance capabilities for standard delivered
aircraft.
o SH&E assumed that the Subject Aircraft are in full compliance with all
Airworthiness Directives and Service Bulletins.
o Recognizing the fact that Embraer is also now offering a Long Range
("LR") version, SH&E assumed that at least a total of 100 EMBl45ER
aircraft will be delivered over the course of the next ten years.
o SH&E is aware that the Aircraft, as originally delivered to Continental
Express, failed to meet certain design performance criteria. SH&E has been
assured by the President of Continental Express that a number of
post-delivery modifications, to both the aircraft and to the FAA-approved
Airplane Flight Manual, now have all aircraft in full compliance with the
purchase contract performance guarantees.
<PAGE>
3. VALUE DETERMINATION
3.1 Methodology Summary
SH&E has studied many aircraft transactions over the past 30 years. This
list includes a wide variety of turbojet, turbofan, turboprop and
propeller-powered two, three and four-engined transports. Modes studied have
covered many types, including: Boeing 707, 727, 737, 747, 757, 767 and 777
aircraft; McDonnell Douglas DC-8, DC-9, MD-80, MD-90, DC-10 and MD-11; Airbus
A300, A310, A320, A330 and A340 models; Lockheed L-1011; Embraer EMB 120 and 145
models; Canadair Regional Jet and Avro/A(I)R Regional Jets aircraft; and various
turboprop models, including most major commuter aircraft.
The SH&E valuation approach starts by determining a half-life value. The
term "half-life" represents an asset whose major components have used 50 percent
of the time between scheduled or expected overhauls. This initial appraisal can
then be adjusted (positive or negative) for each individual unit to reflect the
asset's maintenance status relative to next overhaul. In most cases, the Base
Value of an asset assumes its physical condition is average and its maintenance
time status is at mid-life (or, benefiting from an above-average maintenance
status if it is new, or nearly new, as the case may be).
In the case of new aircraft. the above half-life values are automatically
adjusted upwards to reflect the fact that the aircraft has the full span of
maintenance overhaul internals available. Consequently, SH&E's initial
depreciation of new aircraft is considerably greater than for a used aircraft,
thereby accounting for both the change in its maintenance status and its
intrinsic depreciation.
SH&E half-life values are determined on a semi-annual basis by reviewing
recent past sales, availability trends, technological aspects, environmental
constraints and maintenance requirements.
<PAGE>
3.2 Base Value
The Base Value is the appraiser's opinion of the underlying economic
value of an asset in an open, unrestricted and stable market environment with
a reasonable balance of supply and demand, assuming full consideration of its
"highest and best use." An asset's Base Value is founded in the historical
trend of values and in the projection of value trends and presumes an
arm"-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.
Since Base Value pertains to a somewhat idealized asset and market
combination it may not necessarily reflect the actual value of the asset in
question, but is a nominal starting value to which adjustments may be applied to
determine an actual value.
The Base Value of each asset is derived from SH&E's valuation models. The
SH&E models provide trend lines derived from known transactions, econometric
factors affecting asset values, and economic life estimates. Because it is
related to long-term market trends, the Base Value definition is normally
applied to analyses of historical values and projections of residual values.
<PAGE>
4. LIMITATIONS
SH&E used information supplied by Continental Express, Embraer, and Morgan
Stanley together with in-house data accumulated through other recent studies of
aircraft transactions.
SH&E's opinions are based upon historical relationships and expectations
that it believes are reasonable. Some of the underlying assumptions, including
those described above, are detailed explicitly or implicitly elsewhere in this
report, may not materialize because of unanticipated events and circumstances.
SH&E's opinions could, and would, vary materially should any of the above
assumptions prove to be inaccurate.
The opinions expressed herein are not given for, or as inducement or
endorsement for, any financial transaction. They are prepared for the exclusive
use of the addressee. The report is not to be furnished to any third party
without written permission of SH&E. SH&E accepts no responsibility for damages,
if any, that result from decisions made or actions taken based on this report.
This report does not address ownership of, nor title to, the appraised
property and reflects SH&E's expert opinion and best judgement based upon the
information available to it at the time of its preparation. SH&E does not have,
and does not expect to have, any financial interest in the appraised property.
For SH&E:
By /s/ Clive G. Medland
----------------------------
Clive G. Medland
Vice President
Certified Appraiser
International Society of
Transport Aircraft Trading
<PAGE>
AIRCRAFT SPECIFICATIONS
- --------------------------------------------------------------------------------
AIRCRAFT TYPE EMBRAER EMB-145ER
- --------------------------------------------------------------------------------
Engine Type Two Allison AE3OO7A Turbofans
- --------------------------------------------------------------------------------
Approximate Range 1,900 nm
- --------------------------------------------------------------------------------
Maximum Ramp Weight 42,635 lbs.
- --------------------------------------------------------------------------------
Maximum Takeoff Weight 45,415 lbs.
- --------------------------------------------------------------------------------
Maximum Landing Weight 41,226 lbs.
- --------------------------------------------------------------------------------
Maximum Zero Fuel Weight 37,699 lbs.
- --------------------------------------------------------------------------------
Operating Weight Empty 25,573 lbs.
- --------------------------------------------------------------------------------
Maximum Structural Payload 12,125 lbs.
- --------------------------------------------------------------------------------
Maximum Usable Fuel 1,385 US gal.
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX III--EQUIPMENT NOTES PRINCIPAL PAYMENT SCHEDULE
<TABLE>
<CAPTION>
SERIES A
<S> <C> <C> <C> <C> <C> <C> <C>
AIRCRAFT REGISTRATION NUMBER
-------------------------------------------------------------------------------------------------------
<CAPTION>
REGULAR DISTRIBUTION
DATES N14925 N15926 N16927 N17928 N13929 N14930 N14931
- ------------------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
SERIES B
AIRCRAFT REGISTRATION NUMBER
-------------------------------------------------------------------------------------------------------
REGULAR DISTRIBUTION
DATES N14925 N15926 N16927 N17928 N13929 N14930 N14931
- ------------------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C>
REGULAR DISTRIBUTION
DATES N15932 N14933
- ------------------------ ------------- -------------
<S> <C> <C>
REGULAR DISTRIBUTION
DATES N15932 N14933
- ------------------------ ------------- -------------
<S> <C> <C>
</TABLE>
III-1
<PAGE>
APPENDIX III--EQUIPMENT NOTES PRINCIPAL PAYMENT SCHEDULE--(CONTINUED)
<TABLE>
<CAPTION>
SERIES C
<S> <C> <C> <C> <C> <C> <C> <C>
AIRCRAFT REGISTRATION NUMBER
-------------------------------------------------------------------------------------------------------
<CAPTION>
REGULAR DISTRIBUTION
DATES N14925 N15926 N16927 N17928 N13929 N14930 N14931
- ------------------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
<CAPTION>
<S> <C> <C>
REGULAR DISTRIBUTION
DATES N15932 N14933
- ------------------------ ------------- -------------
</TABLE>
III-2
<PAGE>
[LOGO]
