<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration Number 333-34545
INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT TO
COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME A FINAL PROSPECTUS SUPPLEMENT IS DELIVERED. THIS
PRELIMINARY PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1998
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 4, 1997
$772,518,000
[Continental Airlines Logo]
1998-1 Pass Through Trusts
Pass Through Certificates, Series 1998-1
------------------
Each Pass Through Certificate (collectively, the "Certificates") will represent
a fractional undivided interest in one of the three Continental Airlines 1998-1
Pass Through Trusts (the "Class A Trust", the "Class B Trust" and the "Class C
Trust", and, collectively, the "Trusts") to be formed pursuant to a pass through
trust agreement between Continental Airlines, Inc. ("Continental" or the
"Company") and Wilmington Trust Company (the "Trustee"), as trustee dated as of
September 25, 1997 (the "Basic Agreement"), and three separate supplements
thereto (each, a "Trust Supplement" and, together with the Basic Agreement,
collectively, the "Pass Through Trust Agreements") relating to such Trusts
between the Company and the Trustee, as trustee under each Trust. Pursuant to
the Intercreditor Agreement (as defined herein), (i) the Certificates of the
Class B Trust will be subordinated in right of payment to the Certificates of
the Class A Trust and (ii) the Certificates of the Class C Trust will be
subordinated in right of payment to the Certificates of the Class B Trust.
Payments of interest on the Certificates to be issued by each Trust will be
supported by a separate liquidity facility for the benefit of the holders of
such Certificates, each such facility to be provided initially by AIG Matched
Funding Corp. in an amount sufficient to pay interest thereon at the applicable
interest rate for such Certificates on up to three successive semiannual
distribution dates (except that the liquidity facilities will not cover interest
payable on the Deposits (as defined herein) by the Depositary (as defined
herein)).
The Trusts have been established for the purpose of acquiring equipment notes
(the "Equipment Notes") expected to be issued in connection with the financing
of a portion of the purchase price of four Boeing 737-524 aircraft, six Boeing
737-724 aircraft, seven Boeing 737-824 aircraft, five Boeing 757-224 aircraft
and two Boeing 777-224 aircraft (collectively, the "Aircraft"), which are
scheduled for delivery during the period February 1998 through December 1998,
with the final delivery for purposes of purchase by the Trusts no later than
January 31, 1999 (or June 30, 1999 or later under certain circumstances) (the
"Delivery Period"). The Equipment Notes will be issued, at Continental's
election, either (i) on a non-recourse basis by the trustees of separate owner
trusts (each, an "Owner Trustee") in connection with separate leveraged lease
transactions, in which case the applicable Aircraft will be leased to
Continental (collectively, the "Leased Aircraft"), or (ii) on a recourse basis
by Continental in connection with separate secured loan transactions, in which
case the applicable Aircraft will be owned by Continental (collectively, the
"Owned Aircraft").
The cash proceeds of the offering of Certificates by each Trust in excess of any
amount used to purchase Equipment Notes on the issuance date of the Certificates
will be paid to First Security Bank, N.A., as escrow agent (the "Escrow Agent"),
under an Escrow and Paying Agent Agreement for the benefit of the holders of
Certificates issued by such Trust (each, an "Escrow Agreement"). The Escrow
Agent will cause such cash proceeds to be deposited (each, a "Deposit") with
Credit Suisse First Boston, New York branch (the "Depositary"), in accordance
with the Deposit Agreement relating to such Trust (each, a "Deposit Agreement").
Pursuant to each Deposit Agreement, the Depositary will pay for distribution to
the holders of Certificates issued by each Trust on each semiannual distribution
date an amount equal to interest accrued on the Deposits relating to such Trust
during the applicable interest period at a rate per annum equal to the interest
rate applicable to the Certificates issued by such Trust. Upon each delivery of
an Aircraft during the Delivery Period, the Trustee for the Class A Trust, the
(Continued on the following page.)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE CERTIFICATES, SEE "RISK FACTORS" ON PAGE S-31 HEREIN.
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>
PUBLIC
PRINCIPAL INTEREST FINAL EXPECTED OFFERING
PASS THROUGH CERTIFICATES AMOUNT* RATE DISTRIBUTION DATE* PRICE(1)(2)
- ---------------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
1998-1A......................... $485,605,000 % January 2, 2017 100%
1998-1B......................... 150,371,000 % January 2, 2017 100
1998-1C......................... 136,542,000 % January 2, 2008 100
--------------------
Total........................... $772,518,000
</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, fees and certain other expenses
estimated at approximately $ , will be paid by Continental. The
proceeds of the Certificates in excess of any amount used to purchase
Equipment Notes on the issuance date of the Certificates will be deposited
by the Escrow Agent with the Depositary and thereafter used by the Trusts to
purchase the Equipment Notes during the Delivery Period.
The Certificates are offered by the several Underwriters when, as and if
issued by the Trusts, delivered to and accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the Certificates in book-entry form will be made through the
facilities of The Depository Trust Company on or about February , 1998,
against payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON MORGAN STANLEY DEAN WITTER
CHASE SECURITIES INC.
Prospectus Supplement dated February , 1998
<PAGE> 2
(Continued from the cover page.)
Class B Trust and the Class C Trust will cause to be withdrawn from the Deposits
relating to such Trust funds sufficient to purchase the Equipment Note of the
series applicable to such Trust issued with respect to such Aircraft.
If any funds remain as Deposits relating to any Trust at the end of the
Delivery Period or, if earlier, upon the acquisition by the Trusts of the
Equipment Notes with respect to all of the Aircraft (the "Delivery Period
Termination Date"), such funds will be withdrawn by the Escrow Agent for such
Trust and distributed, with accrued and unpaid interest thereon, to the
Certificateholders (as defined herein) of such Trust after at least 15 days'
prior notice. If such remaining Deposits with respect to all of the Trusts
exceed $15 million (the "Par Redemption Amount"), such distribution will include
a premium payable by Continental equal to the Deposit Make-Whole Premium (as
defined herein) with respect to the remaining Deposits applicable to such Trust
in excess of such Trust's proportionate share of the Par Redemption Amount.
Since the maximum principal amount of Equipment Notes may not be issued with
respect to an Aircraft and, in any such case, the Equipment Notes to be acquired
by the Class C Trust are more likely not to be issued in the maximum principal
amount as compared to the other Equipment Notes, it is more likely that a
distribution of unused Deposits will be made with respect to the Certificates
issued by the Class C Trust as compared to the other Certificates. In addition,
notwithstanding the Par Redemption Amount limitation, if any Aircraft is not
delivered by the manufacturer prior to the Delivery Period Termination Date due
to any reason not occasioned by Continental's fault or negligence and no
Substitute Aircraft (as defined herein) is provided in lieu of such Aircraft, no
Deposit Make-Whole Premium will be paid with respect to the unused Deposits to
be distributed as a result of such failure to deliver in an amount equal to the
maximum principal amount of Equipment Notes that could (after giving effect to
all Equipment Notes theretofore issued) have been issued and acquired by such
Trust with respect to such Aircraft in accordance with the Mandatory Economic
Terms (as defined herein) and such unused Deposits shall not be included in the
calculation of the Par Redemption Amount.
The Equipment Notes in respect of each Aircraft will be issued in three
series (the "Series A Equipment Notes", the "Series B Equipment Notes" and the
"Series C Equipment Notes"). In addition, Continental may elect to issue a
fourth series of Equipment Notes (the "Series D Equipment Notes") in connection
with the financing of Owned Aircraft, but Series D Equipment Notes will not be
purchased by the Class A Trust, the Class B Trust or the Class C Trust and will
be funded from other sources. The Class A Trust, the Class B Trust and the Class
C Trust will purchase the series of Equipment Notes issued with respect to each
Aircraft that has an interest rate equal to the interest rate applicable to the
Certificates to be issued by such Trust. The maturity dates of the Equipment
Notes acquired by each Trust will occur on or before the final expected
distribution date applicable to the Certificates issued by such Trust. The
Equipment Notes issued with respect to each Aircraft will be secured by a
security interest in such Aircraft and, in the case of each Leased Aircraft, by
an assignment of the lease relating thereto, including the right to receive
rentals payable with respect to such Leased Aircraft by Continental. Although
neither the Certificates nor the Equipment Notes issued with respect to the
Leased Aircraft will be direct obligations of, or guaranteed by, Continental,
the amounts unconditionally payable by Continental for lease of the Leased
Aircraft will be sufficient to pay in full when due all scheduled amounts
required to be paid on the Equipment Notes issued with respect to the Leased
Aircraft. The Equipment Notes issued with respect to the Owned Aircraft will be
direct obligations of Continental.
All of the Equipment Notes held in each Trust will accrue interest at the
applicable rate per annum for the Certificates issued by such Trust, payable on
January 2 and July 2 of each year, commencing on the first such date to occur
after initial issuance thereof. The Deposits relating to each Trust will accrue
interest at the applicable rate per annum for the Certificates issued by such
Trust, payable on January 2 and July 2 of each year, commencing on July 2, 1998
until the Deposits have been fully withdrawn. The scheduled payments of interest
on the Equipment Notes and on the Deposits with respect to each Trust, taken
together, will be sufficient to pay an amount equal to accrued interest on the
outstanding Certificates issued by such Trust at the rate per annum applicable
thereto. Such interest will be distributed to Certificateholders of such Trust
on each such date, subject, in the case of interest payments made pursuant to
the Equipment Notes, to the
S-2
<PAGE> 3
Intercreditor Agreement. See "Description of the Certificates -- General" and
"-- Payments and Distributions".
Scheduled principal payments on the Equipment Notes held in each Trust will
be passed through to the Certificateholders of each such Trust on January 2 and
July 2 in certain years, commencing on January 2, 1999, in each case subject to
the Intercreditor Agreement.
On the earlier of (i) the first Business Day (as defined herein) after
January 31, 1999 or, if later, the fifth Business Day after the Delivery Period
Termination Date and (ii) the fifth Business Day after the occurrence of a
Triggering Event (as defined herein) (such Business Day, the "Transfer Date"),
each of the Trusts established at the time of the original issuance of the
Certificates (the "Original Trusts") will transfer and assign all of its assets
and rights to a newly-created successor trust with substantially identical terms
(each, a "Successor Trust"). The institution acting as Trustee of each of the
Original Trusts (each, an "Original Trustee") will also act as Trustee of the
corresponding Successor Trust (each, a "New Trustee"), and each New Trustee will
assume the obligations of the related Original Trustee under each transaction
document to which such Original Trustee was a party. Upon the effectiveness of
such transfer, assignment and assumption, each of the Original Trusts will be
liquidated and each of the Certificates will represent the same percentage
interest in the Successor Trust as it represented in the Original Trust
immediately prior to such transfer, assignment and assumption. Unless the
context otherwise requires, all references in this Prospectus Supplement to the
Trusts, the Trustees, the Pass Through Trust Agreements and similar terms shall
apply to the Original Trusts until the effectiveness of such transfer,
assignment and assumption and, thereafter shall apply to the Successor Trusts.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PASS THROUGH
CERTIFICATES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING".
IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES WILL BE MADE AGAINST
PAYMENT THEREFOR ON OR ABOUT THAT DATE SPECIFIED IN THE LAST PARAGRAPH OF THE
COVER PAGE OF THIS PROSPECTUS SUPPLEMENT, WHICH WILL BE THE BUSINESS DAY
FOLLOWING THE DATE OF PRICING OF THE CERTIFICATES (SUCH SETTLEMENT CYCLE BEING
HEREIN REFERRED TO AS "T+ "). PURCHASERS OF CERTIFICATES SHOULD NOTE THAT
TRADING OF THE CERTIFICATES ON THE DATE OF PRICING AND THE SUCCEEDING
BUSINESS DAYS MAY BE AFFECTED BY THE T+ SETTLEMENT. SEE "UNDERWRITING".
S-3
<PAGE> 4
(This page intentionally left blank)
S-4
<PAGE> 5
PROSPECTUS SUPPLEMENT SUMMARY
The following summary information does not purport to be complete and is
qualified in its entirety by reference to the detailed information appearing
elsewhere in this Prospectus Supplement and the Prospectus accompanying this
Prospectus Supplement (the "Prospectus"). Certain capitalized terms used herein
are defined elsewhere in this Prospectus Supplement on the pages indicated in
the "Index of Terms" appearing as Appendix I to this Prospectus Supplement, and
all cross references herein refer to sections of this Prospectus Supplement
unless otherwise indicated.
SUMMARY OF TERMS OF CERTIFICATES*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
CERTIFICATES CERTIFICATES CERTIFICATES
---------------- ---------------- ----------------
<S> <C> <C> <C>
Aggregate Face Amount................... $485,605,000 $150,371,000 $136,542,000
Ratings:
Moody's...............................
Standard & Poor's.....................
Expected Initial Loan to Aircraft Value
(cumulative)(1)....................... 40.43% 52.28% 63.74%
Expected Principal Distribution Window
(in years)............................ 0.9-18.9 0.9-18.9 0.9-9.9
Expected Initial Average Life (in years
from Issuance Date)................... 12.3 11.4 6.2
Regular Distribution Dates.............. January 2 January 2 January 2
& July 2 & July 2 & July 2
Final Expected Regular Distribution
Date.................................. January 2, 2017 January 2, 2017 January 2, 2008
Final Maturity Date..................... July 2, 2018 July 2, 2018 July 2, 2009
Minimum Denomination.................... $1,000 $1,000 $1,000
Section 1110 Protection(2).............. Yes Yes Yes
Liquidity Facility Coverage(3).......... 3 semiannual 3 semiannual 3 semiannual
interest interest interest
payments payments payments
Liquidity Facility Amount at July 2,
1999(3)............................... $ $ $
</TABLE>
- ---------------
* The aggregate face amount, the initial loan to Aircraft value, the expected
principal distribution window, the expected initial average life, the final
expected Regular Distribution Date and the Final Maturity Date for each
Class of Certificates are indicative only and subject to change.
(1) Determined as of July 2, 1999, the first Regular Distribution Date after the
scheduled Delivery Period Termination Date, assuming that all Aircraft are
delivered prior to such date, that the maximum principal amount of Equipment
Notes is issued with respect to all Aircraft and that the aggregate
appraised Aircraft value is $1,186,555,800. The appraised value is only an
estimate and reflects certain assumptions. See "Description of the Aircraft
and the Appraisals -- The Appraisals". The initial loan to Aircraft values
for each series of Equipment Notes will be limited according to specific
Aircraft type. See "Description of the Certificates -- Obligation to
Purchase Equipment Notes".
(2) Following the delivery of each Aircraft, the benefits of Section 1110 of the
U.S. Bankruptcy Code will be available to the applicable Loan Trustee with
respect to such Aircraft.
(3) For each Class of Certificates, the initial amount of the Liquidity Facility
will cover three consecutive semiannual interest payments (without regard to
any future payments of principal on such Certificates), except that the
Liquidity Facility with respect to each Trust will not cover interest
payable by the Depositary on the Deposits relating to such Trust. The
scheduled payments of interest on the Equipment Notes held by a Trust and on
the Deposits relating to such Trust, taken together, will be sufficient to
pay accrued interest on the outstanding Certificates issued by such Trust at
the rate per annum applicable thereto. In aggregate for Class A, B and C
Certificates, the amount of the Liquidity Facilities at July 2, 1999, the
first Regular Distribution Date after the scheduled Delivery Period
Termination Date, assuming that Equipment Notes in the maximum principal
amount with respect to all Aircraft are acquired by the Trusts and that all
interest and principal due on or prior to July 2, 1999 is paid, will be
$ .
S-5
<PAGE> 6
EQUIPMENT NOTES AND THE AIRCRAFT*
Set forth below is certain information about the Equipment Notes expected
to be held in the Trusts and the Aircraft expected to secure such Equipment
Notes:
<TABLE>
<CAPTION>
EXPECTED AIRCRAFT MAXIMUM PRINCIPAL
MANUFACTURER'S REGISTRATION DELIVERY AMOUNT OF APPRAISED
AIRCRAFT TYPE SERIAL NUMBER NUMBER MONTH(1) EQUIPMENT NOTES(2) VALUE(3)
- --------------- -------------- ------------ -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
Boeing 737-524 28925 N14664 September 1998 $19,380,000.00 $ 28,500,000
Boeing 737-524 28926 N13665 September 1998 19,380,000.00 28,500,000
Boeing 737-524 28927 N14667 October 1998 19,380,000.00 28,600,000
Boeing 737-524 28928 N14668 October 1998 19,380,000.00 28,600,000
Boeing 737-724 28782 N54711 August 1998 24,480,000.00 37,800,000
Boeing 737-724 28783 N15712 August 1998 24,480,000.00 37,800,000
Boeing 737-724 28784 N16713 August 1998 24,480,000.00 37,800,000
Boeing 737-724 28785 N33714 September 1998 24,480,000.00 37,900,000
Boeing 737-724 28786 N24715 October 1998 24,480,000.00 38,000,000
Boeing 737-724 28787 N13716 November 1998 24,480,000.00 38,000,000
Boeing 737-824 28929 N18220 October 1998 29,240,000.00 44,653,333
Boeing 737-824 28930 N12221 November 1998 29,240,000.00 44,720,000
Boeing 737-824 28931 N34222 December 1998 29,240,000.00 44,786,667
Boeing 737-824 28932 N18223 December 1998 29,240,000.00 44,786,667
Boeing 737-824 28933 N24224 December 1998 29,240,000.00 44,786,667
Boeing 737-824 28934 N12225 December 1998 29,240,000.00 44,786,667
Boeing 737-824 28935 N26226 December 1998 29,240,000.00 44,786,667
Boeing 757-224 28968 N48127 February 1998 39,000,000.00 55,870,000
Boeing 757-224 27567 N17128 March 1998 39,000,000.00 55,980,000
Boeing 757-224 28969 N29129 March 1998 39,000,000.00 55,980,000
Boeing 757-224 28970 N19130 April 1998 39,000,000.00 56,100,000
Boeing 757-224 28972 N33132 June 1998 39,000,000.00 56,330,000
Boeing 777-224 27580 N78004 November 1998 85,000,000.00 131,070,000
Boeing 777-224 27581 N78005 December 1998 85,000,000.00 131,270,000
------------
Total $1,197,406,667(4)
============
</TABLE>
- ---------------
* The principal amounts are indicative only and subject to change.
(1) Reflects the scheduled delivery months under Continental's purchase
agreement with the Aircraft manufacturer. The actual delivery date for any
Aircraft may be subject to delay or acceleration. See "Description of the
Aircraft and the Appraisals -- Deliveries of Aircraft". Continental has the
option to substitute other Boeing 737-524, 737-724, 737-824, 757-224 or
777-224 aircraft in the event that the delivery of any Aircraft is expected
to be delayed for more than 30 days after the month scheduled for delivery
or beyond the Delivery Period Termination Date. See "Description of the
Aircraft and the Appraisals -- Substitute Aircraft".
(2) Reflects the initial maximum principal amount as of the date of original
issuance of the Equipment Notes, which principal amount may be less with
respect to an Aircraft depending on the circumstances of the financing of
such Aircraft. The Mandatory Economic Terms require that the maximum
aggregate principal amount of the Equipment Notes issued with respect to all
Boeing 737-524 not exceed $77,520,000, all Boeing 737-724 Aircraft not
exceed $146,880,000, all Boeing 737-824 not exceed $204,680,000, all Boeing
757-224 not exceed $195,000,000 and all Boeing 777-224 not exceed
$170,000,000. The aggregate principal amount of all of the Equipment Notes
will not exceed the aggregate face amount of the Certificates.
(3) The appraised value of each Aircraft set forth above is based upon varying
assumptions and methodologies and reflects the lesser of the average and
median values of such Aircraft as appraised by three independent appraisal
and consulting firms: Aircraft Information Services, Inc. ("AISI"), BK
Associates, Inc. ("BK") and Morten Beyer and Agnew, Inc. ("MBA")
(collectively, the "Appraisers"), determined as of February 5, January 29
and February 5, 1998, respectively, and projected as of the scheduled
delivery month of each Aircraft. An appraisal is only an estimate of value
and should not be relied upon as a measure of realizable value. See "Risk
Factors -- Risk Factors Relating to the Certificates and the
Offering -- Appraisals and Realizable Value of Aircraft" and "Description of
the Aircraft and the Appraisals".
(4) The total of the appraised values of all of the Aircraft reflects the sum of
the initial appraised value of each Aircraft as of its scheduled delivery
month. However, since the Aircraft will be delivered at different times
during the Delivery Period and may depreciate in value after initial
delivery, such total does not reflect the aggregate appraised value of the
Aircraft subject to the security interest of the Equipment Notes at any
time. See "Description of the Equipment Notes -- Loan to Value Ratios of
Equipment Notes".
S-6
<PAGE> 7
LOAN TO AIRCRAFT VALUE RATIOS*
The following table sets forth loan to Aircraft value ratios ("LTVs") for
each Class of Certificates as of July 2, 1999 (the first Regular Distribution
Date that occurs after the scheduled Delivery Period Termination Date) and each
January 2 Regular Distribution Date thereafter assuming that Equipment Notes of
each series in the maximum principal amount for all of the Aircraft are acquired
by the Trusts prior to the Delivery Period Termination Date. The LTVs for any
Class of Certificates as of dates prior to the Delivery Period Termination Date
are not meaningful, since the Trust Property will not include during such period
all of the Equipment Notes expected to be acquired by the Trusts. See
"Description of the Certificates -- General". The LTVs for each Class of
Certificates were obtained for each such Regular Distribution Date by dividing
(i) the expected Pool Balance of such Class of Certificates together in each
case with the expected Pool Balance of all other Classes of Certificates senior
in right of payment to such Class of Certificates under the Intercreditor
Agreement determined immediately after giving effect to the distributions
expected to be made on such Regular Distribution Date, by (ii) the assumed value
of all of the Aircraft (the "Assumed Aggregate Aircraft Value") on such Regular
Distribution Date based on the assumptions set forth below. The Pool Balances
and resulting LTVs are subject to change if, among other things, the aggregate
principal amount of the Equipment Notes acquired by the Trusts is less than the
maximum permitted by the Mandatory Economic Terms, Equipment Notes with respect
to any Aircraft are purchased by the Trusts in other than the month currently
scheduled for delivery of such Aircraft or the amortization of the Equipment
Notes differs from the Assumed Amortization Schedule. See "Description of the
Certificates -- Pool Factors".
The following table is based on the assumption that the value of each
Aircraft included in the Assumed Aggregate Aircraft Value opposite the initial
Regular Distribution Date included in the table depreciates by approximately 2%
of the initial appraised value per year until the fifteenth year after the year
of delivery of such Aircraft and by approximately 4% of the initial appraised
value per year thereafter. See "Description of the Equipment Notes -- Loan to
Value Ratios of Equipment Notes". Other rates or methods of depreciation would
result in materially different LTVs, and no assurance can be given (i) that the
depreciation rates and method assumed for the purpose of the table are the ones
most likely to occur or (ii) as to the actual future value of any Aircraft.
Thus, the table should not be considered a forecast or prediction of expected or
likely LTVs but simply a mathematical calculation based on one set of
assumptions. In addition, the initial appraised value of each Aircraft was based
upon the lesser of the average and the median value of each Aircraft as
appraised by the Appraisers, as of the respective date of their appraisals and
projected as of the scheduled delivery month of each such Aircraft. No assurance
can be given that such value represents the realizable value of any Aircraft.
See "Risk Factors -- Risk Factors Relating to the Certificates and the
Offering -- Appraisals 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 will not be cross-collateralized with
respect to the Aircraft (except in certain cases, if any, where the related
Owner Participant and Continental shall agree to cross-collateralization), the
excess proceeds realized from the disposition of any particular Aircraft would
not be available to offset shortfalls on the Equipment Notes relating to any
other Aircraft. Therefore, upon the occurrence of an Indenture Default, even if
the Aircraft as a group could be sold for more than the total amounts payable in
respect of all of the outstanding Equipment Notes, if certain Aircraft were sold
for less than the total amount payable in respect of the related Equipment
Notes, there would not be sufficient proceeds to pay all Classes of Certificates
in full. See "Description of the Equipment Notes -- Loan to Value Ratios of
Equipment Notes" for examples of LTVs
- ---------------
* The information relating to periodic Pool Balances and resulting LTVs is
indicative only and subject to change.
S-7
<PAGE> 8
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 A CLASS B CLASS B
AGGREGATE CERTIFICATES POOL CERTIFICATES CERTIFICATES POOL CERTIFICATES
DATE AIRCRAFT VALUE BALANCE LTV BALANCE LTV
- ---------------- -------------- ----------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
July 2, 1999 $1,186,555,800 $ 479,734,331 40.4% $ 140,611,398 52.3%
January 2, 2000 1,169,919,000 467,304,358 39.9 129,140,487 51.0
January 2, 2001 1,145,974,600 453,459,774 39.6 125,665,142 50.5
January 2, 2002 1,122,030,200 441,400,872 39.3 114,239,930 49.5
January 2, 2003 1,098,085,800 433,561,654 39.5 108,432,812 49.4
January 2, 2004 1,074,141,400 421,584,268 39.2 108,114,519 49.3
January 2, 2005 1,050,197,000 409,956,754 39.0 108,114,519 49.3
January 2, 2006 1,026,252,600 389,899,726 38.0 108,019,855 48.5
January 2, 2007 1,002,308,200 370,583,638 37.0 105,004,083 47.4
January 2, 2008 978,363,800 346,365,369 35.4 103,186,468 45.9
January 2, 2009 954,419,400 322,909,686 33.8 98,189,843 44.1
January 2, 2010 930,475,000 288,660,781 31.0 88,020,901 40.5
January 2, 2011 906,530,600 248,759,884 27.4 75,709,936 35.8
January 2, 2012 882,586,200 195,657,291 22.2 60,700,171 29.0
January 2, 2013 858,641,800 145,219,347 16.9 47,653,246 22.5
January 2, 2014 831,340,800 90,396,010 10.9 34,587,708 15.0
January 2, 2015 783,452,000 47,492,644 6.1 21,362,957 8.8
January 2, 2016 735,563,200 10,288,413 1.4 7,300,475 2.4
<CAPTION>
CLASS C CLASS C
CERTIFICATES POOL CERTIFICATES
DATE BALANCE LTV
- ---------------- ----------------- ------------
<S> <C> <C>
July 2, 1999 $ 135,982,640 63.7%
January 2, 2000 135,898,105 62.5
January 2, 2001 127,543,701 61.7
January 2, 2002 109,585,190 59.3
January 2, 2003 87,852,086 57.4
January 2, 2004 64,195,354 55.3
January 2, 2005 40,565,205 53.2
January 2, 2006 23,053,118 50.8
January 2, 2007 10,170,764 48.3
January 2, 2008 0 NA
January 2, 2009 0 NA
January 2, 2010 0 NA
January 2, 2011 0 NA
January 2, 2012 0 NA
January 2, 2013 0 NA
January 2, 2014 0 NA
January 2, 2015 0 NA
January 2, 2016 0 NA
</TABLE>
S-8
<PAGE> 9
CASH FLOW STRUCTURE
Set forth below is a diagram illustrating the structure for the offering of
the Certificates and certain cash flows.
[Diagram omitted, which shows that Continental will pay to the Loan Trustees for
Leased Aircraft and Owned Aircraft (i) the Lease Rental Payments, which are
assigned by the Owner Trustees, on Leased Aircraft and (ii) the Mortgage
Payments on Owned Aircraft. From such Lease Rental Payments and Mortgage
Payments, the Loan Trustees will make Equipment Note Payments on the Series A
Equipment Notes, the Series B Equipment Notes and the Series C Equipment Notes
with respect to all Aircraft to the Subordination Agent. Excess Rental Payments
will be paid by the Loan Trustees to the Lessors for Leased Aircraft. From such
Equipment Note Payments, the Subordination Agent will pay Principal, Premium,
if any, and Interest Distributions to the Pass Through Trustee for the Class A
Trust, the Pass Through Trustee for the Class B Trust and the Pass Through
Trustee for the Class C Trust, who will pay such Principal, Premium, if any, and
Interest Distributions to the Holders of Class A Certificates, the Holders of
Class B Certificates and Holders of Class C Certificates, respectively. The
Subordination Agent may also receive Advances, if any, from and pay
Reimbursements, if any, to the Liquidity Provider. The Depositary will make
Interest Payments on the Deposits to the Escrow Agent. From such Interest
Payments, the Escrow Agent will make payments to the Holders of Class A
Certificates, the Holders of Class B Certificates and the Holders of Class C
Certificates.]
- ---------------
(1) Each Leased Aircraft will be subject to a separate Lease and a related
Indenture; each Owned Aircraft will be subject to a separate Indenture.
(2) Funds held as Deposits relating to each Trust will be withdrawn to purchase
Equipment Notes on behalf of such Trust from time to time during the
Delivery Period as each Aircraft is delivered. If any funds remain as
Deposits with respect to any Trust at the Delivery Period Termination Date,
such funds will be withdrawn by the Escrow Agent and distributed to the
holders of the Certificates issued by such Trust, together with accrued and
unpaid interest thereon and, if such remaining Deposits with respect to all
of the Trusts exceed the Par Redemption Amount, a Deposit Make-Whole Premium
payable by Continental with respect to the remaining Deposits applicable to
such Trust in excess of such Trust's proportionate share of the Par
Redemption Amount, provided that no premium shall be paid with respect to
unused Deposits attributable to the failure of an Aircraft to be delivered
prior to the Delivery Period Termination Date due to any reason not
occasioned by Continental's fault or negligence. No interest will accrue
with respect to the Deposits after they have been fully withdrawn.
(3) The initial amount of the Liquidity Facility for each Trust will cover three
consecutive semiannual interest payments with respect to the Certificates
issued by such Trust, except that the Liquidity Facility will not cover
interest payable by the Depositary on the Deposits relating to such Trust.
The scheduled payments of interest on the Equipment Notes and on the
Deposits relating to a Trust, taken together, will be sufficient to pay an
amount equal to accrued interest on the outstanding Certificates of such
Trust at the rate per annum applicable thereto.
S-9
<PAGE> 10
THE OFFERING
Trusts:.................... The Original Trusts are to be formed pursuant to
the Basic Agreement and three separate Trust
Supplements to be entered into between the Company
and Wilmington Trust Company as trustee under each
Original Trust. Each Original Trust will be a
separate entity. On the Transfer Date, each of the
Original Trusts will transfer and assign all of its
assets and rights to a substantially identical
Successor Trust, and the New Trustee thereof will
assume the obligations of the related Original
Trustee under each transaction document to which
such Original Trustee was a party. Upon
effectiveness of such transfer, assignment and
assumption, each of the Original Trusts will be
liquidated and each of the Certificates will
represent the same percentage interest in the
Successor Trust as it represented in the Original
Trust immediately prior to such transfer,
assignment and assumption.
Certificates Offered:...... Pass Through Certificates to be issued by each
Trust, representing fractional undivided interests
in such Trust. The Certificates to be issued by the
Class A Trust, the Class B Trust and the Class C
Trust in the offering contemplated hereby (the
"Offering") are referred to herein as the "Class A
Certificates", the "Class B Certificates" and the
"Class C Certificates", respectively.
Use of Proceeds:........... The proceeds from the sale of the Certificates
offered hereby will be used by the Trustees to
purchase Equipment Notes during the Delivery Period
issued, at Continental's election, either (i) by
each Owner Trustee to finance a portion of the
purchase price of the Leased Aircraft or (ii) by
Continental to finance a portion of the purchase
price of the Owned Aircraft. Prior to utilization
of such proceeds to purchase Equipment Notes, the
proceeds from the sale of the Certificates of each
Trust will be deposited with the Depositary on
behalf of the Escrow Agent for the benefit of the
Certificateholders of such Trust.
Escrow Receipts:........... The holders of the Certificates are entitled to
certain rights with respect to the Deposits. Such
rights are evidenced by escrow receipts ("Escrow
Receipts") which are affixed to each Certificate.
Any transfer of a Certificate will have the effect
of transferring the corresponding rights in the
affixed Escrow Receipt. All payments to the holders
of Certificates in respect of the Deposits and the
Escrow Receipts relating to a Trust (i) will not
constitute Trust Property of such Trust and (ii)
will be deemed for all purposes of this Prospectus
Supplement to be payments to such holders of
Certificates in their capacity as holders of Escrow
Receipts.
Subordination Agent,
Trustee, Paying Agent and
Loan Trustee:............ Wilmington Trust Company will act (i) as
subordination agent under the Intercreditor
Agreement (the "Subordination Agent"), (ii) as
Trustee, paying agent and registrar for the
Certificates of each Trust, (iii) as paying agent
on behalf of the Escrow Agent in respect of each
Trust (the "Paying Agent") and (iv) as Loan
Trustee, paying agent and registrar for each series
of Equipment Notes.
Escrow Agent:.............. First Security Bank, National Association, will act
as Escrow Agent under each Escrow Agreement.
S-10
<PAGE> 11
Depositary:................ Credit Suisse First Boston, New York branch, will
act as Depositary under each Deposit Agreement.
Liquidity Provider:........ AIG Matched Funding Corp. (the "Liquidity
Provider") will provide a separate liquidity
facility for the benefit of the holders of each
Class of Certificates.
Trust Property:............ The property of each Trust (the "Trust Property")
will include (i) subject to the Intercreditor
Agreement, Equipment Notes issued, at Continental's
election in connection with the delivery of each
Aircraft during the Delivery Period, either (a) on
a nonrecourse basis by an Owner Trustee in each
separate leveraged lease transaction with respect
to each Leased Aircraft to finance a portion of the
purchase price of such Leased Aircraft by the Owner
Trustee, in which case the applicable Leased
Aircraft will be leased to Continental, or (b) on a
recourse basis by Continental in connection with
each separate secured loan transaction with respect
to each Owned Aircraft to finance a portion of the
purchase price of such Owned Aircraft by
Continental, (ii) the rights of such Trust to
acquire Equipment Notes under the Note Purchase
Agreement, (iii) the rights of such Trust under the
related Escrow Agreement to request the Escrow
Agent to withdraw from the Depositary funds
sufficient to enable such Trust to purchase
Equipment Notes on the delivery of each Aircraft
during the Delivery Period, (iv) the rights of such
Trust under the Intercreditor Agreement (including
all monies receivable in respect of such rights),
(v) all monies receivable under the Liquidity
Facility for such Trust and (vi) funds from time to
time deposited with the Trustee in accounts
relating to such Trust. Rights with respect to
Deposits or under the Escrow Agreement relating to
a Trust, except for the right to request
withdrawals for the purchase of Equipment Notes,
will not constitute Trust Property of such Trust.
The Equipment Notes with respect to each Leased
Aircraft will be issued in three series under an
indenture (each, a "Leased Aircraft Indenture")
between the applicable Owner Trustee and the
indenture trustee thereunder (the "Leased Aircraft
Trustee"). The Equipment Notes with respect to each
Owned Aircraft will be issued in three series (or,
at Continental's election, four series) under an
indenture (the "Owned Aircraft Indenture" and,
together with the other Owned Aircraft Indentures
and the Leased Aircraft Indentures, the
"Indentures") between Continental and the indenture
trustee thereunder (the "Owned Aircraft Trustee"
and, together with the other Owned Aircraft
Trustees and the Leased Aircraft Trustees, the
"Loan Trustees"). The Class A Trust, the Class B
Trust and the Class C Trust each will acquire,
pursuant to a certain Note Purchase Agreement (the
"Note Purchase Agreement"), the series of Equipment
Notes issued with respect to each of the Aircraft
having an interest rate equal to the interest rate
applicable to the Certificates to be issued by such
Trust. If Continental elects to issue Series D
Equipment Notes in connection with the financing of
an Owned Aircraft, such Notes will not be purchased
by any of the Trusts and will be funded from other
sources. The maturity dates of the Equipment Notes
acquired by each Trust will occur on or before the
final expected Regular Distribution Date applicable
to the Certificates to be issued by such Trust.
S-11
<PAGE> 12
Certificates;
Denominations:............. The Certificates of each Trust will be issued in a
minimum denomination of $1,000 and in integral
multiples thereof. See "Description of the
Certificates -- General".
Regular Distribution
Dates:..................... January 2 and July 2, commencing on July 2, 1998.
Special Distribution
Dates:..................... Any Business Day on which a Special Payment is to
be distributed.
Record Dates:.............. The fifteenth day preceding a Regular Distribution
Date or a Special Distribution Date.
Distributions:............. All payments of principal, premium (if any) and
interest received by the Trustee on the Equipment
Notes held in each Trust and all payments of
interest and Deposit Make-Whole Premium (if any) on
the Deposits relating to each Trust will be
distributed by the Trustee (in the case of the
Equipment Notes and Deposit Make-Whole Premium) or
by the Paying Agent (in the case of interest on the
Deposits) to the holders of the Certificates (the
"Certificateholders") of such Trust, subject in the
case of payments on the Equipment Notes to the
provisions of the Intercreditor Agreement. Such
payments of interest are scheduled to be received
by the Trustee of each Trust on January 2 and July
2 of each year, commencing on July 2, 1998.
Payments of principal of the Equipment Notes are
scheduled to be received on January 2 and July 2 in
certain years, commencing on January 2, 1999.
Payments of principal, premium (if any) and
interest resulting from the early redemption or
purchase (if any) of the Equipment Notes held in
any Trust will be distributed to the
Certificateholders of such Trust on a Special
Distribution Date after not less than 15 days'
notice to such Certificateholders, subject to the
provisions of the Intercreditor Agreement.
Payments in respect of Deposits will not be subject
to the Intercreditor Agreement. For a discussion of
distributions with respect to unused Deposits upon
the occurrence of a Triggering Event, see
"Description of the Deposit
Agreements -- Distribution Upon Occurrence of
Triggering Event", and for a discussion of
distributions by the Trusts upon an Indenture
Default, see "Description of the
Certificates -- Indenture Defaults and Certain
Rights Upon an Indenture Default".
Possible Issuance of Class
D Certificates:............ Subject to certain conditions, Continental may
elect to issue Series D Equipment Notes in
connection with the financing of Owned Aircraft,
but Series D Equipment Notes will not be purchased
by the Class A Trust, the Class B Trust or the
Class C Trust and will be funded from sources other
than this Offering. Continental may elect to fund
the sale of the Series D Equipment Notes through
the sale of Pass Through Certificates (the "Class D
Certificates") issued by a Class D Continental
Airlines 1998-1 Pass Through Trust (the "Class D
Trust").
Purchase Rights of
Certificateholders:...... Upon the occurrence and during the continuation of
a Triggering Event, (i) the Class B
Certificateholders shall have the right to purchase
all, but not less than all, of the Class A
Certificates, (ii) the Class C Certificateholders
shall have the right to purchase all, but not less
than all, of the Class A Certificates and the Class
B Certificates and (iii) if the Class D
Certificates are issued, the Class D
Certificateholders shall
S-12
<PAGE> 13
have the right to purchase all, but not less than
all, of the Class A Certificates, the Class B
Certificates and the Class C Certificates, in each
case at a purchase price equal to the Pool Balance
of the relevant Class or Classes of Certificates
plus accrued and unpaid interest thereon to the
date of purchase without premium but including any
other amounts due to the Certificateholders of such
Class or Classes.
"Triggering Event" means (x) the occurrence of an
Indenture Default under all Indentures resulting in
a PTC Event of Default with respect to the most
senior Class of Certificates then outstanding, (y)
the acceleration of all of the outstanding
Equipment Notes (provided that during the Delivery
Period the aggregate principal amount thereof
exceeds $200 million) or (z) certain bankruptcy or
insolvency events involving Continental.
"PTC Event of Default" under each Pass Through
Trust Agreement means the failure to pay: (i) the
outstanding Pool Balance of the applicable Class of
Certificates within ten Business Days of the Final
Maturity Date for such Class or (ii) interest due
on such Class of Certificates within ten Business
Days of any Distribution Date (unless the
Subordination Agent shall have made Interest
Drawings, or withdrawals from the Cash Collateral
Accounts for such Class of Certificates, with
respect thereto in an amount sufficient to pay such
interest and shall have distributed such amount to
the Trustee entitled thereto). The Final Maturity
Date for the Class A, B and C Certificates is July
2, 2018, July 2, 2018 and July 2, 2009,
respectively. Any failure to make expected
principal distributions with respect to any Class
of Certificates on any Regular Distribution Date
(other than the Final Maturity Date) will not
constitute a PTC Event of Default with respect to
such Certificates.
Successor Trusts:.......... On the Transfer Date, each of the Original Trusts
will transfer and assign all of its assets and
rights to a newly-created, substantially identical
Successor Trust, except that (i) the Successor
Trusts will not have the right to purchase new
Equipment Notes and (ii) Delaware law will govern
the Original Trusts and New York law will govern
the Successor Trusts. The institution acting as
Original Trustee for an Original Trust will also
act as the New Trustee of the corresponding
Successor Trust, and the New Trustee of each
Successor Trust will assume the obligations of the
related Original Trustee under each transaction
document to which such Original Trustee was a
party. Upon the effectiveness of such transfer,
assignment and assumption, each of the Original
Trusts will be liquidated and each of the
Certificates will represent the same percentage
interest in the Successor Trust as it represented
in the Original Trust immediately prior to such
transfer, assignment and assumption.
Escrow Agreements:......... Each Escrow Agent, each Paying Agent, each Trustee
and the Underwriters will enter into a separate
Escrow Agreement for the benefit of the
Certificateholders of each Trust. The cash proceeds
of the offering of Certificates of each Trust in
excess of any amount used to purchase Equipment
Notes on the Issuance Date will be deposited, on
behalf of the Escrow Agent for the benefit of the
holders of such Certificates, with the Depositary
as Deposits relating to such Trust. The Escrow
Agent of each Trust will be given irrevocable
instructions (i) to permit the
S-13
<PAGE> 14
Trustee of such Trust to cause funds to be
withdrawn from such Deposits on or prior to the
Delivery Period Termination Date for the purpose of
enabling such Trustee to purchase Equipment Notes
on and subject to the terms and conditions of the
Note Purchase Agreement and (ii) to direct the
Depositary to pay interest on the Deposits accrued
in accordance with the Deposit Agreement to the
Paying Agent for distribution to the
Certificateholders of such Trust. See "Description
of the Escrow Agreements".
Deposit Agreements and the
Depositary:.............. The Escrow Agent with respect to each Trust will
enter into a separate Deposit Agreement with the
Depositary relating to such Trust pursuant to which
the Depositary will establish one or more separate
accounts into which the proceeds of the Offering of
the Certificates of such Trust in excess of any
amount used to purchase Equipment Notes on the
Issuance Date will be deposited, from which the
Escrow Agent, upon request from the Trustee of such
Trust, will make withdrawals and into which such
Trustee will make re-deposits during the Delivery
Period. Pursuant to the Deposit Agreement with
respect to each Trust, on each Regular Distribution
Date the Depositary will pay to the Paying Agent on
behalf of the applicable Escrow Agent, for
distribution to the Certificateholders of such
Trust, an amount equal to interest accrued on the
Deposits relating to such Trust during the relevant
interest period at a rate per annum equal to the
interest rate applicable to the Certificates issued
by such Trust. Upon each delivery of an Aircraft
during the Delivery Period, the Trustees for the
Class A Trust, the Class B Trust and the Class C
Trust will request the Escrow Agent relating to
such Trust to withdraw from the Deposits relating
to such Trust funds sufficient to enable the
Trustee of such Trust to purchase the Equipment
Note of the series applicable to such Trust issued
with respect to such Aircraft. Accrued but unpaid
interest on all such Deposits withdrawn to purchase
Equipment Notes will be paid on the next Regular
Distribution Date. Any portion of any withdrawn
Deposit which is not used to purchase such
Equipment Note will be re-deposited with the
Depositary. The Deposits relating to each Trust and
interest paid thereon will not be subject to the
subordination provisions of the Intercreditor
Agreement and will not be available to pay any
other amount in respect of the Certificates.
The Depositary will be Credit Suisse First Boston,
New York branch. Credit Suisse First Boston is a
Swiss bank and is one of the largest banking
institutions in the world, with total pro forma
unaudited consolidated assets of approximately Sfr
422 billion ($291 billion) and total pro forma
unaudited consolidated shareholders' equity of
approximately Sfr 10.9 billion ($7.5 billion) in
each case as of June 30, 1997. Credit Suisse First
Boston has long-term unsecured debt ratings of Aa3
from Moody's and AA from Standard & Poor's and
short-term unsecured debt ratings of P-1 from
Moody's and A-1+ from Standard & Poor's. See
"Description of the Deposit
Agreement -- Depositary".
Unused Deposits:........... The Trustees' obligations to purchase the Equipment
Notes issued with respect to each Aircraft are
subject to satisfaction of certain conditions, and
no assurance can be given that all such conditions
will be satisfied. See "Description of the
Certificates -- Obligation to Purchase
S-14
<PAGE> 15
Equipment Notes". All of the Aircraft are scheduled
to be delivered by December 1998, although the
delivery of any Aircraft may be subject to delay or
acceleration. See "Description of the Aircraft and
the Appraisals -- Deliveries of Aircraft". The
Delivery Period expires on January 31, 1999 (or
June 30, 1999 or later under certain circumstances
discussed in "Description of the Aircraft and the
Appraisals -- Deliveries of Aircraft"). In
addition, depending on the circumstances of the
financing of each Aircraft, the maximum aggregate
principal amount of Equipment Notes may not be
issued. If any funds remain as Deposits with
respect to any Trust at the Delivery Period
Termination Date, they will be withdrawn by the
Escrow Agent for such Trust and distributed, with
accrued and unpaid interest thereon, to the
Certificateholders of such Trust after at least 15
days' prior written notice. In addition, if such
remaining Deposits exceed the Par Redemption Amount
with respect to all of the Trusts, such
distribution will include a premium payable by
Continental equal to the Deposit Make-Whole Premium
with respect to such Trust's remaining Deposits in
excess of such Trust's proportionate share of the
Par Redemption Amount, provided that no premium
shall be paid with respect to unused Deposits
attributable to the failure of an Aircraft to be
delivered prior to the Delivery Period Termination
Date due to any reason not occasioned by
Continental's fault or negligence. See "Description
of the Deposit Agreements -- Unused Deposits".
Obligation to Purchase
Equipment Notes:......... The Trustees will be obligated to purchase the
Equipment Notes issued with respect to each
Aircraft during the Delivery Period, subject to the
terms and conditions of the Note Purchase
Agreement. Under the Note Purchase Agreement,
Continental will have the option of entering into a
leveraged lease financing or a secured debt
financing with respect to each Aircraft. The Note
Purchase Agreement will provide for the relevant
parties to enter into (i) with respect to each
Leased Aircraft, a Participation Agreement, a Lease
and a Leased Aircraft Indenture relating to the
financing of such Leased Aircraft and (ii) with
respect to each Owned Aircraft, a Participation
Agreement and an Owned Aircraft Indenture relating
to the financing of such Owned Aircraft (any such
Participation Agreement, a "Participation
Agreement"). The description of such agreements in
this Prospectus Supplement is based on the forms of
such agreements contemplated by the Note Purchase
Agreement. In the case of a Leased Aircraft, the
terms of the agreements actually entered into may
differ from the forms of such agreements and,
consequently, may differ from the description of
such agreements contained in this Prospectus
Supplement. However, under the Note Purchase
Agreement, the terms of such agreements are
required to (i) contain the Mandatory Document
Terms and (ii) not vary the Mandatory Economic
Terms. In addition, Continental is obligated (i) to
certify to the Trustees that any such modifications
do not materially and adversely affect the
Certificateholders and (ii) to obtain written
confirmation from each Rating Agency that the use
of versions of such agreements modified in any
material respect will not result in a withdrawal,
suspension or downgrading of the rating of any
Class of Certificates. Further, under the Note
Purchase Agreement, it is a condition precedent to
the obligation of each Trustee to purchase the
Equipment Notes related to the financing of an
Aircraft that no
S-15
<PAGE> 16
Triggering Event shall have occurred. The Trustees
will have no right or obligation to purchase
Equipment Notes after the Delivery Period
Termination Date. See "Description of the
Certificates -- Obligation to Purchase Equipment
Notes".
Equipment Notes
(a) Interest:............ The Equipment Notes held in each Trust will accrue
interest at the applicable rate per annum for the
Certificates issued by such Trust set forth on the
cover page of this Prospectus Supplement, payable
on January 2 and July 2 of each year, commencing on
the first such date to occur after initial issuance
thereof, and such interest payments will be passed
through to the Certificateholders of such Trust on
each such date until the final distribution date
for such Certificates, in each case, subject to the
Intercreditor Agreement. Interest is calculated on
the basis of a 360-day year consisting of twelve
30-day months. See "Description of the Equipment
Notes -- Principal and Interest Payments".
(b) Principal:........... Scheduled principal payments on the Equipment Notes
held in each Trust will be passed through to the
Certificateholders of each such Trust on January 2
and July 2 in certain years, commencing on January
2, 1999, in each case, subject to the Intercreditor
Agreement. See "Description of the
Certificates -- Pool Factors" and "Description of
the Equipment Notes -- Principal and Interest
Payments".
(c) Redemption and
Purchase:............ (i) The Equipment Notes issued with respect to an
Aircraft will be redeemed in whole upon the
occurrence of an Event of Loss with respect to such
Aircraft if such Aircraft is not replaced by
Continental under the related Lease (in the case of
a Leased Aircraft) or under the related Owned
Aircraft Indenture (in the case of an Owned
Aircraft), in each case at a price equal to the
aggregate unpaid principal thereof, together with
accrued interest thereon to, but not including, the
date of redemption, but without any premium.
(ii) All of the Equipment Notes issued with respect
to any Aircraft may be redeemed prior to maturity
at a price equal to the aggregate unpaid principal
thereof, together with accrued interest thereon to,
but not including, the date of redemption, plus a
Make-Whole Premium. See "Description of the
Equipment Notes -- Redemption" for a description of
the manner of computing such Make-Whole Premium and
the circumstances under which the Equipment Notes
may be so redeemed.
(iii) If, with respect to a Leased Aircraft, (x)
one or more Lease Events of Default have occurred
and are continuing, (y) in the event of a
bankruptcy proceeding involving Continental, (A)
during the Section 1110 Period, the trustee in such
proceeding or Continental refuses to assume or
agree to perform its obligations under the related
Lease or (B) at any time after assuming or agreeing
to perform such obligations, such trustee or
Continental ceases to perform such obligations such
that the stay period applicable under the U.S.
Bankruptcy Code comes to an end or (z) the
Equipment Notes with respect to such Aircraft have
been accelerated or the Leased Aircraft Trustee
with respect to such Equipment Notes takes action
or notifies the applicable Owner Trustee that it
intends to take action to
S-16
<PAGE> 17
foreclose the lien of the related Leased Aircraft
Indenture or otherwise commence the exercise of any
significant remedy under such Indenture or the
related Lease, then in each case all, but not less
than all, of the Equipment Notes issued with
respect to such Leased Aircraft may be purchased by
the related Owner Trustee or Owner Participant on
the applicable purchase date at a price equal to
the aggregate unpaid principal amount thereof,
together with accrued and unpaid 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 pursuant to clause (x) above
when a Lease Event of Default has occurred and is
continuing for less than 180 days). Continental, as
owner of the Owned Aircraft, will have no
comparable right under any Owned Aircraft Indenture
to purchase the Equipment Notes under such
circumstances.
(d) Security:............ The Equipment Notes issued with respect to each
Aircraft will be secured by a security interest in
such Aircraft and, in the case of each Leased
Aircraft, by an assignment to the related Leased
Aircraft Trustee of certain of the related Owner
Trustee's rights under the Lease with respect to
such Aircraft, including the right to receive
payments of rent thereunder, with certain
exceptions. The Equipment Notes will not be
cross-collateralized (except in certain cases, if
any, where the related Owner Participant and
Continental shall agree to cross-collateralization)
and, consequently, the Equipment Notes issued in
respect of any one Aircraft are not secured by any
of the other Aircraft or the Leases related
thereto. There will not be cross-default provisions
in the Indentures or in the Leases (unless
otherwise agreed between an Owner Participant and
Continental). Consequently, events resulting in an
Indenture Default under any particular Indenture
may or may not result in an Indenture Default
occurring under any other Indenture, and a Lease
Event of Default under any particular Lease may or
may not constitute a Lease Event of Default under
any other Lease. If the Equipment Notes issued with
respect to one or more Aircraft are in default and
the Equipment Notes issued with respect to the
remaining Aircraft are not in default, no remedies
will be exercisable under the Indentures with
respect to such remaining Aircraft. See
"Description of the Equipment Notes -- Security"
and "-- Indenture Defaults, Notice and Waiver".
Although the Equipment Notes issued in respect of
the Leased Aircraft are not obligations of, or
guaranteed by, Continental, the amounts
unconditionally payable by Continental for lease of
the Leased Aircraft will be sufficient to pay in
full when due all scheduled amounts required to be
paid on the Equipment Notes issued in respect of
the Leased Aircraft. The Equipment Notes issued in
respect of the Owned Aircraft will be direct
obligations of Continental. See "Description of the
Equipment Notes -- General".
(e) Section 1110
Protection:.......... It is a condition to the Trustees' obligation to
purchase Equipment Notes with respect to each
Aircraft that outside counsel to Continental, which
is expected to be Hughes Hubbard & Reed LLP,
provide its opinion to the Trustees that (i) if
such Aircraft is a Leased Aircraft, the Owner
Trustee, as lessor under the Lease for such
Aircraft, and the related Leased Aircraft Trustee,
as assignee of such Owner Trustee's rights
S-17
<PAGE> 18
under such Lease pursuant to the related Leased
Aircraft Indenture, will be entitled to the
benefits of Section 1110 of the U.S. Bankruptcy
Code with respect to the airframe and engines
comprising such Aircraft or (ii) if such Aircraft
is an Owned Aircraft, the Owned Aircraft Trustee
will be entitled to the benefits of Section 1110 of
the U.S. Bankruptcy Code with respect to the
airframe and engines comprising such Aircraft. See
"Description of the Equipment Notes -- Remedies"
for a description of such required opinion and
certain assumptions and qualifications permitted to
be contained therein.
(f) Ranking:............. Series B Equipment Notes issued in respect of any
Aircraft will be subordinated in right of payment
to Series A Equipment Notes issued in respect of
such Aircraft; Series C Equipment Notes issued in
respect of such Aircraft will be subordinated in
right of payment to such Series B Equipment Notes;
and, if Continental elects to issue Series D
Equipment Notes with respect to an Owned Aircraft,
they will be subordinated in right of payment to
the Series C Equipment Notes issued with respect to
such Owned Aircraft. On each Distribution Date, (i)
payments of interest and principal due on Series A
Equipment Notes issued in respect of any Aircraft
will be made prior to payments of interest and
principal due on Series B Equipment Notes issued in
respect of such Aircraft; (ii) payments of interest
and principal due on such Series B Equipment Notes
will be made prior to payments of interest and
principal due on Series C Equipment Notes issued in
respect of such Aircraft; and (iii) if Continental
elects to issue Series D Equipment Notes with
respect to an Owned Aircraft, payments of interest
and principal due on such Series C Equipment Notes
will be made prior to payments of interest and
principal due on Series D Equipment Notes issued in
respect of such Aircraft.
(g) Owner Participant:... Continental has obtained the commitment of one
company to act as the owner participant ("Owner
Participant") with respect to leveraged leases for
certain of the Aircraft and plans to seek such
commitments from others for the remaining Aircraft.
The existing commitment is subject to satisfaction
of certain conditions, and Continental may elect to
terminate such commitment. Accordingly, Continental
may select one or more other Owner Participants for
some or all of the Aircraft or finance such
Aircraft as Owned Aircraft rather than Leased
Aircraft. Each Owner Participant will have the
right to sell, assign or otherwise transfer its
interests as Owner Participant in any of such
leveraged leases, subject to the terms and
conditions of the relevant Participation Agreement
and related documents. See "Risk Factors -- Risk
Factors Relating to the Certificates and the
Offering -- Owner Participant; Revisions to
Agreements".
Liquidity Facilities:...... 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 Certificates of such Trust on up to three
successive semiannual Regular Distribution Dates
(without regard to any future payments of principal
on such Certificates) at the respective interest
rates shown on the cover page of this Prospectus
S-18
<PAGE> 19
Supplement for such Certificates (the "Stated
Interest Rates"). The initial Required Amount under
the Liquidity Facilities on July 2, 1999, the first
Regular Distribution Date after the scheduled
Delivery Period Termination Date, for the Class A
Certificates, the Class B Certificates and the
Class C Certificates, assuming that Equipment Notes
in the maximum principal amount with respect to all
of the Aircraft are acquired by the Trusts and that
all interest and principal due on or prior to July
2, 1999 is paid, 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,
a Final Drawing or a Non-Extension Drawing under a
Liquidity Facility, the Maximum Available
Commitment under such Liquidity Facility 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, more than three semiannual
installments of interest thereon, any amounts
payable with respect to the Deposits or principal
of or interest or premium on the Certificates of
any other Class.
Upon each Interest Drawing under any Liquidity
Facility, the Subordination Agent will be obligated
to reimburse (to the extent that the Subordination
Agent has available funds therefor) the Liquidity
Provider for the amount of such drawing. Such
reimbursement obligation and all interest, fees and
other amounts owing to the Liquidity Provider under
each Liquidity Facility or certain other agreements
(the "Liquidity Obligations") will rank pari passu
with the Liquidity Obligations relating to all
other Liquidity Facilities and will rank senior to
the Certificates in right of payment. Upon
reimbursement in full of the Interest Drawings,
together with any accrued interest thereon, under
any Liquidity Facility, the Maximum Available
Commitment under such Liquidity Facility will be
reinstated to the then Required Amount of such
Liquidity Facility; provided that the amount will
not be so reinstated if (i) a Liquidity Event of
Default has occurred and is continuing and (ii)
less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are
Performing Equipment Notes.
"Performing Equipment Note" means an Equipment Note
with respect to which no payment default has
occurred and is continuing (without giving effect
to any acceleration); provided that in the event of
a bankruptcy proceeding involving Continental under
the U.S. Bankruptcy Code, (i) any payment default
existing during the 60-day period under Section
1110(a)(1)(A) of the U.S. Bankruptcy Code (or such
longer
S-19
<PAGE> 20
period as may apply under Section 1110(b) of the
U.S. Bankruptcy Code) (the "Section 1110 Period")
shall not be taken into consideration, unless
during the Section 1110 Period the trustee in such
proceeding or Continental refuses to assume or
agree to perform its obligations under the Lease
related to such Equipment Note (in the case of a
Leased Aircraft) or under the Owned Aircraft
Indenture related to such Equipment Note (in the
case of an Owned Aircraft), and (ii) any payment
default occurring after the date of the order of
relief in such proceeding shall not be taken into
consideration if such payment default is cured
under Section 1110(a)(1)(B) of the U.S. Bankruptcy
Code before the later of 30 days after the date of
such default or the expiration of the Section 1110
Period.
If at any time the short-term unsecured debt rating
of the Liquidity Provider issued by either Rating
Agency is lower than the Threshold Rating for any
Class, then the Liquidity Facility for such Class
may be replaced by a facility with a financial
institution having such short term unsecured debt
ratings issued by both Rating Agencies that are
equal to or higher than the Threshold Rating for
such Class. If such Liquidity Facility is not
replaced within ten days after notice of the
downgrading, such Liquidity Facility will be drawn
in full up to the then Maximum Available Commitment
under such Liquidity Facility (the "Downgrade
Drawing") and the proceeds will be deposited into a
cash collateral account (the "Cash Collateral
Account") for the related Class of Certificates and
used for the same purposes and under the same
circumstances and subject to the same conditions as
cash payments of Interest Drawings under such
Liquidity Facility would be used. In addition, the
Intercreditor Agreement will provide for the
replacement or extension of 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 thereunder (the "Non-Extension Drawing")
and the proceeds will be deposited in the Cash
Collateral Account for the related Class of
Certificates and used for the same purposes and
under the same circumstances and subject to the
same conditions as cash payments of Interest
Drawings under such Liquidity Facility would be
used. Each Liquidity Facility is scheduled to
expire 364 days after the initial issuance date of
the Certificates (the "Issuance Date"), from and
including the Issuance Date, subject to annual
extensions by mutual agreement of the relevant
Liquidity Provider and the Subordination Agent;
provided that so long as the initial Liquidity
Provider is the liquidity provider with respect to
any Trust, the Liquidity Facility for such Trust
shall be subject to automatic annual extensions
unless the Liquidity Provider affirmatively
exercises its right not to so extend.
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
S-20
<PAGE> 21
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.
Subject to certain limitations, Continental may, at
its option, arrange for a Replacement Facility to
replace the Liquidity Facility (or any prior
Replacement Facility) for any Trust. If such
Replacement Facility is provided at any time after
a Downgrade Drawing or Non-Extension Drawing under
such Liquidity Facility (or prior Replacement
Facility), the funds on deposit with respect to
such Liquidity Facility (or prior Replacement
Facility) in the Cash Collateral Account for such
Trust will be returned to the liquidity provider
being replaced. The provider of any Replacement
Facility will have the same rights (including,
without limitation, priority distribution rights
and rights as "Controlling Party") under the
Intercreditor Agreement as the replaced initial
Liquidity Provider.
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, the
Subordination Agent and any holder of Class D
Equipment Notes, if issued, will enter into an
agreement (the "Intercreditor Agreement") which
will provide as follows:
(i) All payments made in respect of the Equipment
Notes and certain other payments will be made
to the Subordination Agent, which will
distribute such payments in accordance with
the provisions of paragraphs (ii) and (iii)
below.
(ii) On any Regular Distribution Date or Special
Distribution Date (each, a "Distribution
Date"), so long as no Triggering Event shall
have occurred (whether or not continuing),
all payments received by the Subordination
Agent in respect of the Equipment Notes and
certain other payments under the related
Indenture shall be distributed in the
following order: (1) to the Liquidity
Provider to the extent required to pay
certain Liquidity Obligations; (2) to the
Trustee for the Class A Trust (the "Class A
Trustee") to the extent required to pay
Expected Distributions on the Class A
Certificates; (3) to the Trustee for the
Class B Trust (the "Class B Trustee") to the
extent required to pay Expected Distributions
on the Class B Certificates; (4) to the
Trustee for the Class C Trust (the "Class C
Trustee") to the extent required to pay
Expected Distributions on the Class C
Certificates; (5) if Class D Certificates
have been issued, to the Trustee for the
Class D Trust (the "Class D Trustee") to the
extent required to pay "Expected
Distributions" (to be defined in a manner
equivalent to the definition below for other
Classes of Certificates) on the Class D
S-21
<PAGE> 22
Certificates; and (6) to the Subordination
Agent and each Trustee for the payment of
certain fees and expenses.
"Expected Distributions" means, with respect
to the Certificates of any Trust on any
Distribution Date (the "Current Distribution
Date"), the sum of (x) accrued and unpaid
interest on such Certificates (excluding
interest, if any, payable with respect to the
Deposits relating to such Trust) and (y) the
difference between (A) the Pool Balance of
such Certificates as of the immediately
preceding Distribution Date (or, if the
Current Distribution Date is the first
Distribution Date, the original aggregate face
amount of the Certificates of such Trust), and
(B) the Pool Balance of such Certificates as
of the Current Distribution Date calculated on
the basis that (i) the principal of the
Equipment Notes held in such Trust has been
paid when due (whether at stated maturity,
upon redemption, prepayment, purchase,
acceleration or otherwise) and such payments
have been distributed to the holders of such
Certificates and (ii) the principal of any
Equipment Notes formerly held in such Trust
that have been sold pursuant to the
Intercreditor Agreement has been paid in full
and such payments have been distributed to the
holders of such Certificates, but without
giving effect to any reduction in the Pool
Balance as a result of any distribution
attributable to Deposits occurring after the
immediately preceding Distribution Date (or,
if the Current Distribution Date is the first
Distribution Date, occurring after the initial
issuance of the Certificates of such Trust).
For purposes of determining the priority of
distributions on account of the redemption,
purchase or prepayment of all of the Equipment
Notes issued pursuant to an Indenture, clause
(x) of the definition of Expected
Distributions shall be deemed to read as
follows: "(x) accrued, due and unpaid interest
on such Certificates (excluding interest, if
any, payable with respect to the Deposits
relating to such Trust) together with (without
duplication) accrued and unpaid interest on a
portion of such Certificates equal to the
outstanding principal amount of the Equipment
Notes being redeemed, purchased or prepaid
(immediately prior to such redemption,
purchase or prepayment)".
(iii) Upon the occurrence of a Triggering Event and
at all times thereafter, all payments
received by the Subordination Agent in
respect of the Equipment Notes and certain
other payments shall be distributed in the
following order: (1) to the Subordination
Agent, each Trustee and certain other parties
in payment of the Administration Expenses and
to the Liquidity Provider in payment of the
Liquidity Obligations; (2) to the
Subordination Agent, each Trustee and each
Certificateholder for certain fees, taxes,
charges and other amounts payable to the
Subordination Agent, any Trustee or any
Certificateholder; (3) to the Class A Trustee
to the extent required to pay Adjusted
Expected Distributions on the Class A
Certificates; (4) to the Class B Trustee to
the extent required to pay Adjusted Expected
Distributions on the Class B Certificates;
(5) to the Class C Trustee to the extent
required to pay Adjusted Expected
Distributions on the Class C Certificates;
and (6) if Class D Certificates have been
issued, to the Class D
S-22
<PAGE> 23
Trustee to the extent required to pay "Adjusted
Expected Distributions" (to be defined in a
manner equivalent to the definition below for
other Classes of Certificates) on the Class D
Certificates.
"Adjusted Expected Distributions" means, with
respect to the Certificates of any Trust on any
Current Distribution Date, the sum of (1) accrued
and unpaid interest on such Certificates (excluding
interest, if any, payable with respect to the
Deposits relating to such Trust) and (2) the
greater of:
(A) the difference between (x) the Pool Balance of
such Certificates as of the immediately
preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution
Date, the original aggregate face amount of the
Certificates of such Trust) and (y) the Pool
Balance of such Certificates as of the Current
Distribution Date calculated on the basis that
(i) the principal of the Equipment Notes other
than Performing Equipment Notes (the
"Non-Performing Equipment Notes") held in such
Trust has been paid in full and such payments
have been distributed to the holders of such
Certificates, (ii) the principal of the
Performing Equipment Notes held in such Trust
has been paid when due (but without giving
effect to any acceleration of Performing
Equipment Notes) and such payments have been
distributed to the holders of such Certificates
and (iii) the principal of any Equipment Notes
formerly held in such Trust that have been sold
pursuant to the Intercreditor Agreement has
been paid in full and such payments have been
distributed to the holders of such
Certificates, but without giving effect to any
reduction in the Pool Balance as a result of
any distribution attributable to Deposits
occurring after the immediately preceding
Distribution Date (or, if the Current
Distribution Date is the first Distribution
Date, occurring after the initial issuance of
the Certificates of such Trust), and
(B) the amount of the excess, if any, of (i) the
Pool Balance of such Class of Certificates as
of the immediately preceding Distribution Date
(or, if the Current Distribution Date is the
first Distribution Date, the original aggregate
face amount of the Certificates of such Trust),
less the amount of the Deposits for such Class
of Certificates as of such preceding
Distribution Date (or, if the Current
Distribution Date is the first Distribution
Date, the original aggregate amount of the
Deposits for such Class of Certificates) other
than any portion of such Deposits thereafter
used to acquire Equipment Notes pursuant to the
Note Purchase Agreement, over (ii) the
Aggregate LTV Collateral Amount for such Class
of Certificates for the Current Distribution
Date;
provided that, until the date of the initial LTV
Appraisals, clause (B) shall not apply.
For purposes of calculating Expected Distributions
or Adjusted Expected Distributions with respect to
the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not
been distributed to the Certificateholders of such
Trust (other than such premium or a portion thereof
applied to the payment of interest on the
S-23
<PAGE> 24
Certificates of such Trust or the reduction of the
Pool Balance of such Trust) shall be added to the
amount of Expected Distributions or Adjusted
Expected Distributions.
"Aggregate LTV Collateral Amount" for any Class of
Certificates for any Distribution Date means (i)
the sum of the applicable LTV Collateral Amounts
for each Aircraft, minus (ii) the Pool Balance for
each Class of Certificates, if any, senior to such
Class, after giving effect to any distribution of
principal on such Distribution Date with respect to
such senior Class or Classes.
"LTV Collateral Amount" of any Aircraft for any
Class of Certificates means, as of any Distribution
Date, the lesser of (i) the LTV Ratio for such
Class of Certificates multiplied by the Appraised
Current Market Value of such Aircraft (or with
respect to any such Aircraft which has suffered an
Event of Loss under and as defined in the relevant
Lease, in the case of a Leased Aircraft, or
relevant Indenture, in the case of an Owned
Aircraft, the amount of the insurance proceeds paid
to the related Loan Trustee in respect thereof to
the extent then held by such Loan Trustee (and/or
on deposit in the Special Payments Account) or
payable to such Loan Trustee in respect thereof)
and (ii) the outstanding principal amount of the
Equipment Notes secured by such Aircraft after
giving effect to any principal payments of such
Equipment Notes on or before such Distribution
Date.
"LTV Ratio" means for the Class A Certificates
40.50%, for the Class B Certificates 53.75% and for
the Class C Certificates 68.00%.
"Appraised Current Market Value" of any Aircraft
means the lower of the average and the median of
the most recent three LTV Appraisals of such
Aircraft. After a Triggering Event occurs and any
Equipment Note becomes a Non-Performing Equipment
Note, the Subordination Agent shall obtain LTV
Appraisals for the Aircraft as soon as practicable
and additional LTV Appraisals on or prior to each
anniversary of the date of such initial LTV
Appraisals; provided that if the Controlling Party
reasonably objects to the appraised value of the
Aircraft shown in such LTV Appraisals, the
Controlling Party shall have the right to obtain or
cause to be obtained substitute LTV Appraisals
(including LTV Appraisals based upon physical
inspection of such Aircraft).
"LTV Appraisal" means a current fair market value
appraisal (which may be a "desk-top" appraisal)
performed by any Appraiser or any other nationally
recognized appraiser on the basis of an
arm's-length transaction between an informed and
willing purchaser under no compulsion to buy and an
informed and willing seller under no compulsion to
sell and both having knowledge of all relevant
facts.
(b) Deposits:............ Payments in respect of the Deposits will not be
subject to the subordination provisions of the
Intercreditor Agreement.
(c) Intercreditor
Rights:.............. Pursuant to the Intercreditor Agreement, the
Trustees and the Liquidity Provider will agree
that, with respect to any Indenture at any given
time, the relevant Loan Trustee will be directed
(a) in taking, or refraining from taking, any
action thereunder or with respect to the Equipment
Notes issued thereunder, by the holders of at least
a majority of the outstanding principal amount of
such Equipment Notes as long as no
S-24
<PAGE> 25
Indenture Default has occurred and is continuing
thereunder and (b) subject to certain conditions,
in taking, or refraining from taking, any action
under such Indenture (including exercising remedies
thereunder, such as acceleration of such Equipment
Notes or foreclosing the lien on the Aircraft
securing such Equipment Notes), by the Controlling
Party if an Indenture Default under such Indenture
has occurred and is continuing.
"Controlling Party" with respect to any Indenture
means: (x) the Class A Trustee; (y) upon payment of
Final Distributions to the holders of Class A
Certificates, the Class B Trustee; and (z) upon
payment of Final Distributions to the holders of
Class B Certificates, the Class C Trustee. See
"Description of the Certificates -- Indenture
Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the
Certificateholders of each Trust to direct the
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
(provided that if such acceleration occurs prior to
the Delivery Period Termination Date, the aggregate
principal amount thereof exceeds $200 million), the
liquidity provider with the highest outstanding
amount of Liquidity Obligations will have the right
to become the Controlling Party with respect to
such Indenture. For purposes of giving effect to
the foregoing, the Trustees (other than the
Controlling Party) shall irrevocably agree (and the
Certificateholders (other than the
Certificateholders represented by the Controlling
Party) shall be deemed to agree by virtue of their
purchase of Certificates) to exercise their voting
rights as directed by the Controlling Party. For a
description of certain limitations on the
Controlling Party's rights to exercise remedies,
see "Description of the Equipment
Notes -- Remedies".
"Final Distributions" means, with respect to the
Certificates of any Trust on any Distribution Date,
the sum of (x) the aggregate amount of all accrued
and unpaid interest on such Certificates (excluding
interest payable on the Deposits relating to such
Trust) and (y) the Pool Balance of such
Certificates as of the immediately preceding
Distribution Date (less the amount of the Deposits
for such Class of Certificates as of such preceding
Distribution Date other than any portion of such
Deposits thereafter used to acquire Equipment Notes
pursuant to the Note Purchase Agreement). 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 which 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
S-25
<PAGE> 26
paragraph (ii) below. The proceeds of such
sale will be distributed pursuant to the
provisions of the Intercreditor Agreement.
(ii) So long as any Certificates are outstanding,
during nine months after the earlier of (x)
the acceleration of the Equipment Notes under
any Indenture or (y) the bankruptcy or
insolvency of Continental, without the consent
of each Trustee, (a) no Aircraft subject to
the lien of such Indenture or such Equipment
Notes may be sold, if the net proceeds from
such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment
Notes, and (b) with respect to any Leased
Aircraft, the amount and payment dates of
rentals payable by Continental under the Lease
for such Leased Aircraft may not be adjusted,
if, as a result of such adjustment, the
discounted present value of all such rentals
would be less than 75% of the discounted
present value of the rentals payable by
Continental under such Lease before giving
effect to such adjustment, in each case, using
the weighted average interest rate of the
Equipment Notes outstanding under such
Indenture as the discount rate.
"Minimum Sale Price" means, with respect to any
Aircraft or the Equipment Notes issued in respect
of such Aircraft, at any time, the lesser of (1)
75% of the Appraised Current Market Value of such
Aircraft and (2) the aggregate outstanding
principal amount of such Equipment Notes, plus
accrued and unpaid interest thereon.
Federal Income Tax
Consequences:............ Each Original Trust should be classified as a
grantor trust for federal income tax purposes and,
if not so classified, will be classified as a
partnership. Each Successor Trust will be
classified as a grantor trust. Each Certificate
Owner generally should report on its federal income
tax return its pro rata share of income from the
relevant Deposits and income from the Equipment
Notes and other property held by the relevant
Trust. See "Certain U.S. Federal Income Tax
Consequences".
Certain ERISA
Considerations:.......... In general, employee benefit plans subject to Title
I of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the
"Code") (or entities which may be deemed to hold
the assets of any such Plan) will be eligible to
purchase the Certificates, subject to certain
conditions and the circumstances applicable to such
Plans. Each Plan fiduciary (and each fiduciary for
a governmental or church plan subject to rules
similar to those imposed on Plans under ERISA)
should consult with its legal advisor concerning an
investment in any of the Certificates.
Each person who acquires or accepts a Certificate
or an interest therein, will be deemed by such
acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been
used to purchase such Certificate or an interest
therein or (ii) the purchase and holding of such
Certificate or an interest therein are exempt from
the prohibited transaction restrictions of ERISA
and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
See "Certain ERISA Considerations".
S-26
<PAGE> 27
Rating of the
Certificates:.............. It is a condition to the issuance of the
Certificates that the Certificates and the related
Escrow Receipts be rated by Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's
Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's", and together
with Moody's, the "Rating Agencies"), not less than
the ratings set forth below. Continental's ability
to pay any premium due upon distribution of
Deposits not used to acquire Equipment Notes during
the Delivery Period has not been rated by either of
the Rating Agencies. Standard & Poor's has
indicated that its rating applies to a unit
consisting of Certificates representing the Trust
Property and Escrow Receipts initially representing
undivided interests in certain rights to
$772,518,000 of Deposits (less any amount used to
purchase Equipment Notes on the Issuance Date).
Amounts deposited under the Escrow Agreements are
not property of Continental and are not entitled to
the benefits of Section 1110 of the U.S. Bankruptcy
Code. Neither the Certificates nor the Escrow
Receipts may be separately assigned or transferred.
<TABLE>
<CAPTION>
STANDARD &
CERTIFICATES MOODY'S POOR'S
------------------------------------------ ------- ----------
<S> <C> <C>
Class A...................................
Class B...................................
Class C...................................
</TABLE>
A rating is not a recommendation to purchase, hold
or sell Certificates, inasmuch as such rating does
not address market price or suitability for a
particular investor. There can be no assurance that
such ratings will not be lowered or withdrawn by a
Rating Agency if, in the opinion of such Rating
Agency, circumstances (including the downgrading of
Continental, the Depositary or the Liquidity
Provider) so warrant. See "Risk Factors -- Risk
Factors Relating to the Certificates and the
Offering -- Ratings of the Certificates".
<TABLE>
<CAPTION>
STANDARD &
MOODY'S POOR'S
------- ----------
<S> <C> <C> <C>
Rating of the Depositary:..... Short Term............................... P-1 A-1+
Minimum Required Initial
Rating of the Liquidity
Provider:................... Short Term
Class A Liquidity Provider............... P-1 A-1+
Class B Liquidity Provider............... P-1 A-1+
Class C Liquidity Provider............... P-1 A-1
Threshold Rating:............. Short Term
Class A Liquidity Provider............... P-1 A-1+
Class B Liquidity Provider............... P-1 A-1+
Class C Liquidity Provider............... P-1 A-1
</TABLE>
S-27
<PAGE> 28
SUMMARY FINANCIAL AND OPERATING DATA
The following tables summarize certain consolidated financial data and
certain operating data with respect to the Company. The following selected
consolidated financial data for the years ended December 31, 1996, 1995 and 1994
is derived from the audited consolidated financial statements of the Company
incorporated by reference in the Prospectus of the Company and should be read in
conjunction therewith. The consolidated financial data of the Company for the
three and nine months ended September 30, 1997 and 1996 is derived from its
unaudited consolidated financial statements of the Company incorporated by
reference in the Prospectus of the Company, which include all adjustments
(consisting solely of normal recurring accruals) that the Company considers
necessary for the fair presentation of the financial position and results of
operations for these periods. Operating results for the three and nine months
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997. The Company's selected
consolidated financial data should be read in conjunction with, and are
qualified in their entirety by reference to, the consolidated financial
statements, including the notes thereto. The Company recently announced
preliminary unaudited net income for the full year 1997 of $389 million before
an extraordinary charge for debt prepayment of $4 million. See "The
Company -- Recent Developments -- Fourth Quarter and Full Year 1997 Results of
Operations".
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 30, YEAR ENDED DECEMBER 31,
--------------- --------------- -------------------------------
1997 1996 1997 1996 1996 1995 1994
------ ------ ------ ------ ------ ------ -------
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA -- OPERATIONS:
Operating Revenue............. $1,890 $1,671 $5,374 $4,799 $6,360 $5,825 $ 5,670
Operating Expenses............ 1,683 1,594 4,790 4,373 5,835(1) 5,440(2) 5,681
------ ------ ------ ------ ------ ------ ------
Operating Income (Loss)....... 207 77 584 426 525 385 (11)
Nonoperating Expense, net..... (21) (30) (66) (78) (97) (75)(3) (640)(4)
------ ------ ------ ------ ------ ------ ------
Income (Loss) before Income
Taxes, Minority Interest and
Extraordinary Loss.......... 186 47 518 348 428 310 (651)
Net Income (Loss)............. $ 110 $ 18 $ 312 $ 272 $ 319 $ 224 $ (613)
====== ====== ====== ====== ====== ====== ======
Earnings (Loss) per Common
Share(5).................... $ 1.90 $ 0.30 $ 5.40 $ 4.94 $ 5.75 $ 4.07 $(11.88)
====== ====== ====== ====== ====== ====== ======
Earnings (Loss) per Common
Share Assuming Full
Dilution(5)................. $ 1.44 $ 0.26 $ 4.02 $ 3.55 $ 4.17 $ 3.37 $(11.88)
====== ====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed
Charges(6).................. 2.24 1.36 2.20 1.88 1.81 1.53 --
</TABLE>
(See footnotes on the following page.)
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<PAGE> 29
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 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).......... 13,038 11,302 35,851 31,581 41,914 40,023 41,588
Available seat miles
(millions)(9).......... 17,686 16,117 50,004 45,820 61,515 61,006 65,861
Passenger load
factor(10)............. 73.7% 70.1% 71.7% 68.9% 68.1% 65.6% 63.1%
Breakeven passenger load
factor(11)............. 65.6% 61.0% 63.5% 60.5% 60.7%(14) 60.8% 62.9%
Passenger revenue per
available seat mile
(cents)(12)............ 9.18 8.95 9.26 9.07 8.93 8.20 7.22
Operating cost per
available seat mile
(cents)(13)............ 8.98 8.60 9.05 8.77 8.77(14) 8.36 7.86
Average yield per revenue
passenger mile
(cents)(15)............ 12.45 12.77 12.91 13.16 13.10 12.51 11.44
Average length of
aircraft flight
(miles)................ 991 914 954 893 896 836 727
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
FINANCIAL DATA -- BALANCE SHEET:
Assets:
Cash and Cash Equivalents, including restricted cash and cash
equivalents of $27 and $76, respectively(16)..................... $ 988 $1,061
Other Current Assets............................................... 722 573
Total Property and Equipment, Net.................................. 2,104 1,596
Routes, Gates and Slots, Net....................................... 1,439 1,473
Other Assets, Net.................................................. 551 503
------ ------
Total Assets............................................. $ 5,804 $5,206
====== ======
Liabilities and Stockholders' Equity:
Current Liabilities................................................ $ 2,456 $2,104
Long-Term Debt and Capital Leases.................................. 1,592 1,624
Deferred Credits and Other Long-Term Liabilities................... 699 594
Minority Interest(17).............................................. -- 15
Continental-Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Convertible
Subordinated Debentures(18)...................................... 242 242
Redeemable Preferred Stock......................................... -- 46
Common Stockholders' Equity........................................ 815 581
------ ------
Total Liabilities and Stockholders' Equity............... $ 5,804 $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.
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<PAGE> 30
(2) Includes a $20 million cash payment in 1995 by the Company in connection
with a 24-month collective bargaining agreement entered into by the Company
and the Independent Association of Continental Pilots.
(3) Includes a pre-tax gain of $108 million ($30 million after tax) on the
series of transactions by which the Company and its subsidiary, Continental
CRS Interests, Inc., transferred certain assets and liabilities relating to
the computerized reservation business of such subsidiary to a newly-formed
limited liability company and the remaining assets and liabilities were
sold.
(4) Includes a provision of $447 million recorded in 1994 associated with the
planned early retirement of certain aircraft and closed or underutilized
airport and maintenance facilities and other assets.
(5) In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 -- "Earnings per Share" ("SFAS
128") which specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). SFAS 128 replaces the
presentation of primary and fully diluted EPS pursuant to Accounting
Principles Board Opinion No. 15 -- "Earnings per Share" ("APB 15") with the
presentation of basic and diluted EPS. The Company has adopted SFAS 128
with its December 31, 1997 financial statements and has restated all prior
period EPS data. EPS under SFAS 128 for the year ended December 31, 1992
and the period April 28 through December 31, 1993 were $(2.70) and $(2.33),
respectively. EPS for the period January 1 through April 27, 1993 was not
meaningful.
(6) For purposes of calculating this ratio, earnings consist of earnings before
taxes, minority interest and extraordinary loss plus interest expense (net
of capitalized interest), the portion of rental expense representative of
interest expense and amortization on previously capitalized interest. Fixed
charges consist of interest expense and the portion of rental expense
representative of interest expense. For the year ended December 31, 1994,
earnings were inadequate to cover fixed charges and the coverage deficiency
was $667 million.
(7) Includes operating data for CMI, but does not include operating data for
Express' regional jet operations or turboprop operations.
(8) The number of scheduled miles flown by revenue passengers.
(9) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(10) Revenue passenger miles divided by available seat miles.
(11) The percentage of seats that must be occupied by revenue passengers in
order for the airline to break even on an income before income taxes basis,
excluding nonoperating items.
(12) Passenger revenue divided by available seat miles.
(13) Operating expenses divided by available seat miles.
(14) Excludes a $128 million fleet disposition charge. See Note (1) for
description of the fleet disposition charge.
(15) The average revenue received for each mile a revenue passenger is carried.
(16) Restricted cash and cash equivalents agreements relate primarily to
workers' compensation claims and the terms of certain other agreements.
(17) In July 1997, the Company purchased the minority interest holder's 9%
interest in Air Micronesia, Inc., the parent of CMI.
(18) The sole assets of such Trust are convertible subordinated debentures, with
an aggregate principal amount of $250 million, which bear interest at the
rate of 8 1/2% per annum and mature on December 1, 2020. Upon repayment,
the Continental-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust will be mandatorily redeemed.
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<PAGE> 31
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE CERTIFICATES SHOULD CAREFULLY REVIEW THE
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS AND SHOULD PARTICULARLY CONSIDER THE FOLLOWING MATTERS:
RISK FACTORS RELATING TO THE COMPANY
Leverage and Liquidity
Continental is more leveraged and has significantly less liquidity than
certain of its competitors, several of whom have substantial available lines of
credit and/or significant unencumbered assets. Accordingly, Continental may be
less able than certain of its competitors to withstand a prolonged recession in
the airline industry and may not have as much flexibility to respond to changing
economic conditions or to exploit new business opportunities.
As of September 30, 1997, Continental had approximately $1.9 billion
(including current maturities) of long-term debt and capital lease obligations
and had approximately $1.1 billion of Continental-obligated mandatorily
redeemable preferred securities of subsidiary trust and common stockholders'
equity. Common stockholders' equity reflects the adjustment of the Company's
balance sheet and the recording of assets and liabilities at fair market value
as of April 27, 1993 in accordance with the American Institute of Certified
Public Accountants' Statement of Position 90-7 -- "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). As of
September 30, 1997, Continental had $961 million in cash and cash equivalents
(excluding restricted cash and cash equivalents of $27 million). Continental has
significant encumbered assets.
For 1997, Continental incurred 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. Continental expects that its operating lease
expenses for 1998 will increase over 1997 amounts. 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 January 1, 1998, the Company had firm commitments with The Boeing
Company ("Boeing") to take delivery of a total of 147 jet aircraft during the
years 1998 through 2005 with options for additional aircraft (exercisable
subject to certain conditions). These aircraft will replace older, less
efficient Stage 2 aircraft and allow for growth of operations. The estimated
aggregate cost of the Company's firm commitments for the Boeing aircraft is
approximately $6 billion. As of January 1, 1998, the Company had completed or
had third party commitments for a total of approximately $1.0 billion in
financing for its future Boeing deliveries, and had commitments or letters of
intent from various sources for backstop financing for approximately one-third
of the anticipated remaining acquisition cost of such Boeing deliveries. The
Company currently plans on financing the new Boeing aircraft with a combination
of enhanced equipment trust certificates, lease equity and other third party
financing, 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's History of Operating Losses
Although Continental has reported preliminary unaudited net income of $385
million for 1997, and has recorded net income of $319 million in 1996 and $224
million in 1995, respectively, 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.
S-31
<PAGE> 32
Aircraft Fuel
Since fuel costs constitute a significant portion of Continental's
operating costs (approximately 13.8% for the nine months ended September 30,
1997 and 13.3% for the year ended December 31, 1996), significant changes in
fuel costs would materially affect the Company's operating results. Fuel prices
continue to be susceptible to international events, and the Company cannot
predict near or longer-term fuel prices. The Company enters into petroleum
option contracts to provide some short-term protection (generally three to six
months) against a sharp increase in jet fuel prices. In the event of a fuel
supply shortage resulting from a disruption of oil imports or otherwise, higher
fuel prices or curtailment of scheduled service could result.
Labor Matters
In April 1997, collective bargaining agreement negotiations began with the
Independent Association of Continental Pilots ("IACP") to amend both the
Continental Airlines pilots contract (which became amendable in July 1997) and
Express' pilots contract (which became amendable in October 1997). In November
1997, a tentative agreement regarding the Continental Airlines pilots contract
was announced on all major economic issues, including rates of pay, pension,
duration and effective date. The Company has been accruing for the increased
costs of such tentative agreement since October 1, 1997. For the first quarter
of 1998, the Company estimates that such accrual will be approximately $35
million. As a result of the recently announced Northwest Alliance, the IACP has
expressed its desire to reopen certain economic issues. See "The
Company -- Recent Developments -- Continental/Northwest Alliance and Related
Agreements" for a description of the alliance. Negotiations are continuing, and
although significant issues remain at both Continental and Express, the Company
believes that mutually acceptable agreements will be reached with such employees
in a timely fashion. The Company's mechanics and related employees recently
voted to be represented by the International Brotherhood of Teamsters (the
"Teamsters"). The Company does not believe that the Teamsters' union
representation will be material to the Company. In September 1997, the Company
announced that it intends to bring all employees to industry standard wages (the
average of the top ten air carriers as ranked by the Department of
Transportation, excluding Continental) within 36 months. The announcement
further stated that wage increases will be phased in over the 36-month period as
revenue, interest rates and rental rates reached industry standards. The Company
estimates that the increased wages will aggregate approximately $500 million
over the 36-month period.
Certain Tax Matters
At December 31, 1997 the Company had estimated net operating loss
carryforwards ("NOLs") of $1.7 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. As a result of the change in ownership of
the Company on April 27, 1993, the ultimate utilization of the Company's NOLs
and investment tax credits could be limited. Reflecting this possible
limitation, the Company recorded a valuation allowance of $617 million at
December 31, 1997.
The Company had, as of December 31, 1997, deferred tax assets aggregating
$1.1 billion, including $615 million of NOLs. Realization of a substantial
portion of the Company's remaining NOLs will require the completion by April 27,
1998 of transactions resulting in recognition of built-in gains for federal
income tax purposes. The Company has consummated several such transactions
resulting in a $62 million reduction in reorganization value in excess of
amounts allocable to identifiable assets. The Company may consummate one or more
additional built-in gain transactions by April 27, 1998.
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 $450 million of taxable income following December 31, 1997.
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
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<PAGE> 33
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 5.23% for February 1998). 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 $147 million per year.
The Company announced on January 26, 1998 that Air Partners, the holder of
approximately 14% of the Company's equity and approximately 51% of its voting
power (after giving effect to the exercise of warrants), had entered into an
agreement to dispose of its interest in the Company to an affiliate of Northwest
Airlines, Inc. ("Northwest"). Based on information currently available to the
Company, the Company believes that such disposition by Air Partners will not in
and of itself result in an ownership change for purposes of Section 382.
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 have reduced CMI's profitability. As a
result of the continued weakness of the yen against the dollar, a weak Japanese
economy and increased fuel costs, CMI's operating earnings have declined during
1996 and 1997 and are not expected to improve materially absent a significant
improvement in these factors.
To reduce the potential negative impact on CMI's dollar earnings, CMI, from
time to time, purchases average rate options as a hedge against a portion of its
expected net yen cash flow position. Such options historically have not had a
material effect on the Company's results of operations or financial condition.
Any significant and sustained decrease in traffic or yields (including due to
the value of the yen) to and from Japan could materially adversely affect
Continental's consolidated profitability.
Principal Stockholder
As of September 30, 1997, Air Partners, L.P., a Texas limited partnership
and major stockholder of the Company ("Air Partners"), held approximately 9.4%
of the common equity interest and 40.8% of the general voting power of the
Company. If all the remaining warrants held by Air Partners had been exercised
on September 30, 1997, approximately 13.8% of the common equity interest and
51.7% of the general voting power of the Company would have been held by Air
Partners. Various provisions in the Company's Certificate of Incorporation and
Bylaws currently provide Air Partners with the right to elect one-third of the
directors in certain circumstances; these provisions could have the effect of
delaying, deferring or preventing a change in the control of the Company. On
January 26, 1998, the Company announced that Air Partners had entered into an
agreement to dispose of its interest in the Company to an affiliate of
Northwest. See "The Company -- Recent Developments -- Continental/Northwest
Alliance and Related Agreements".
Risks Regarding Continental/Northwest Alliance
On January 26, 1998, the Company and Northwest announced a long-term global
alliance involving schedule coordination, frequent flyer reciprocity, executive
lounge access, airport facility coordination, code sharing, the formation of a
joint venture among the two carriers and KLM Royal Dutch Airlines ("KLM") with
respect to their respective trans-Atlantic services, cooperation regarding other
alliance partners of the two carriers and regional alliance development, certain
coordinated sales programs, preferred reservations displays and other
activities. See "The Company -- Recent Developments -- Continental/Northwest
Alliance and Related Agreements".
Successful implementation of the alliance and the achievement and timing of
the anticipated synergies by the Company are subject to certain risks and
uncertainties, some of which are beyond the control of the Company, including
(a) competitive pressures, including developments with respect to existing and
potential
S-33
<PAGE> 34
future competitive alliances; (b) customer perception of and acceptance of the
alliance, including product differences and benefits provided; (c) whether the
Northwest pilots approve those aspects of the alliance requiring their approval,
and the timing thereof; (d) potential adverse developments with respect to
regional economic performance; (e) costs or difficulties in implementing the
alliance being greater than expected, including those caused by the Company's or
Northwest's workgroups; (f) contractual impediments to the implementation by the
Company of certain aspects of the alliance; and (g) non-approval or delay by
regulatory authorities or possible adverse regulatory decisions or changes.
There can be no assurance that the Company's alliance with Northwest will be
fully and timely implemented or continued, or that the anticipated synergies
will not be delayed or will be achieved.
Corporate Governance Agreement
The Company announced on January 26, 1998 that Air Partners, the holder of
approximately 14% of the Company's equity and approximately 51% of its voting
power (after giving effect to the exercise of warrants), had entered into an
agreement to dispose of its interest in the Company to an affiliate of Northwest
(the "Air Partners Transaction"). See "The Company -- Recent
Developments -- Continental/Northwest Alliance and Related Agreements". In
connection therewith, the Company has entered into a corporate governance
agreement with certain affiliates of Northwest, designed to assure the
independence of the Company's board of directors and management during the six
year period of the governance agreement. During the term of the governance
agreement, the securities of the Company beneficially owned by Northwest and its
affiliates will be deposited into a voting trust and generally voted in the same
proportion as the votes cast by other holders of the Company's voting
securities. However, pursuant to the governance agreement, those shares may be
voted as directed by the Northwest affiliate in connection with certain matters,
including with respect to mergers and certain other change in control matters
and the issuance of capital stock representing in excess of 20% of the voting
power of the Company prior to issuance requiring a stockholder vote. In
addition, in connection with the election of directors, those shares shall be
voted for the election of the independent directors; provided that with respect
to elections of directors in respect of which any person other than the Company
is soliciting proxies, the shares may be voted, at the election of Northwest's
affiliate, either as recommended by the Company's board of directors or in the
same proportion as the votes cast by other holders of the Company's voting
securities. As a result of the provisions of the corporate governance agreement,
the ability of the Company to engage in a change in control transaction other
than with Northwest or an affiliate thereof, or to issue significant amounts of
capital stock under certain circumstances, is limited.
Shareholder Litigation
Following the announcement of the Northwest Alliance, the Air Partners
Transaction and the related corporate governance agreement between the Company
and certain affiliates of Northwest (collectively, the "Northwest Transaction"),
to the Company's knowledge as of February 5, 1998, five separate lawsuits were
filed against the Company and its Directors (the "Shareholder Lawsuits"). The
complaints in the Shareholder Lawsuits, which were filed in the Court of
Chancery of the State of Delaware in and for New Castle County and seek class
certification, and which the Company anticipates will be consolidated, generally
allege that the Company's Directors improperly accepted the Northwest
Transaction in violation of their fiduciary duties owed to the public
shareholders of the Company. They further allege that Delta Air Lines, Inc.
submitted a proposal to purchase the Company which, in the plaintiffs' opinion,
was superior to the Northwest Transaction. The complaints in the Shareholder
Lawsuits seek, inter alia, to enjoin the Northwest Transaction and the award of
unspecified damages to the plaintiffs.
While there can be no assurance that the Shareholder Lawsuits will not
result in a delay in the implementation of any aspect of the Northwest
Transaction, or the enjoining of the Northwest Transaction, the Company believes
these Shareholder Lawsuits to be without merit and intends to defend them
vigorously.
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<PAGE> 35
RISK FACTORS RELATING TO THE AIRLINE INDUSTRY
Industry Conditions and Competition
The airline industry is highly competitive and susceptible to price
discounting. The Company has in the past both responded to discounting actions
taken by other carriers and initiated significant discounting actions itself.
Continental's competitors include carriers with substantially greater financial
resources (and in certain cases, lower cost structures), as well as smaller
carriers with low cost structures. Airline profit levels are highly sensitive
to, and during recent years have been severely impacted by, changes in fuel
costs, fare levels (or "average yield") and passenger demand. Passenger demand
and yields have been affected by, among other things, the general state of the
economy, international events and actions taken by carriers with respect to
fares. From 1990 to 1993, these factors contributed to the domestic airline
industry's incurring unprecedented losses. Although fare levels have increased
subsequently, fuel costs have also increased significantly. In addition,
significant industry-wide discounts could be reimplemented at any time, and the
introduction of broadly available, deeply discounted fares by a major United
States airline would likely result in lower yields for the entire industry and
could have a material adverse effect on the Company's operating results.
The airline industry has consolidated in past years as a result of mergers
and liquidations and may further consolidate in the future. Among other effects,
such consolidation has allowed certain of Continental's major competitors to
expand (in particular) their international operations and increase their market
strength. Furthermore, the emergence in recent years of several new carriers,
typically with low cost structures, has further increased the competitive
pressures on the major United States airlines. In many cases, the new entrants
have initiated or triggered price discounting. Aircraft, skilled labor and gates
at most airports continue to be readily available to start-up carriers.
Competition with new carriers or other low cost competitors on Continental's
routes could negatively impact Continental's operating results.
Regulatory Matters
In the last several years, the United States Federal Aviation
Administration (the "FAA") has issued a number of maintenance directives and
other regulations relating to, among other things, retirement of older aircraft,
security measures, collision avoidance systems, airborne windshear avoidance
systems, noise abatement, commuter aircraft safety and increased inspections and
maintenance procedures to be conducted on older aircraft. The Company expects to
continue incurring expenses for the purpose of complying with the FAA's noise,
aging aircraft and other regulations. In addition, several airports have
recently sought to increase substantially the rates charged to airlines, and the
ability of airlines to contest such increases has been restricted by federal
legislation, Department of Transportation regulations and judicial decisions.
Management believes that the Company benefited significantly from the
expiration of the aviation trust fund tax (the "ticket tax") on December 31,
1995. The ticket tax was reinstated on August 27, 1996, expired on December 31,
1996 and was reinstated again on March 7, 1997. Congress recently passed tax
legislation reimposing and significantly modifying the ticket tax. The
legislation includes the imposition of new excise tax and segment fee tax
formulas to be phased in over a multi-year period, an increase in the
international departure tax and the imposition of a new arrivals tax, and the
extension of the ticket tax to cover items such as the sale of frequent flyer
miles. Management believes that the ticket tax has a negative impact on the
Company, although neither the amount of such negative impact directly resulting
from the reimposition of the ticket tax, nor the benefit previously realized by
its expiration, can be precisely determined.
Additional laws and regulations have been proposed from time to time that
could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations have
also been considered that would prohibit or restrict the ownership and/or
transfer of airline routes or takeoff and landing slots. Also, the availability
of international routes to United States carriers is regulated by treaties and
related agreements between the United States and foreign governments that are
amendable. Continental cannot predict what laws and regulations may be adopted
or their impact, but there can be no assurance that laws or regulations
currently proposed or enacted in the future will not adversely affect the
Company.
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<PAGE> 36
Seasonal Nature of Airline Business
Due to the greater demand for air travel during the summer months, revenue
in the airline industry in the third quarter of the year is generally
significantly greater than revenue in the first quarter of the year and
moderately greater than revenue in the second and fourth quarters of the year
for the majority of air carriers. Continental's results of operations generally
reflect this seasonality, but have also been impacted by numerous other factors
that are not necessarily seasonal, including the extent and nature of
competition from other airlines, fare wars, excise and similar taxes, changing
levels of operations, fuel prices, foreign currency exchange rates and general
economic conditions.
RISK FACTORS RELATING TO THE CERTIFICATES AND THE OFFERING
Appraisals and Realizable Value of Aircraft
Appraisals in respect of the Aircraft (without physical inspection thereof)
have been prepared by AISI, BK and MBA, and such appraisals are based on varying
assumptions and methodologies which differ among the Appraisers. The Appraisers
have delivered letters summarizing their respective reports, copies of which are
annexed to this Prospectus Supplement as Appendix II. See "Description of the
Aircraft and the Appraisals -- The Appraisals". The appraised value of each
Aircraft and, accordingly, the initial aggregate Aircraft value as referred to
herein, is based upon the lesser of the average and median value of such
Aircraft as appraised by the Appraisers and projected as of the scheduled
delivery month of such Aircraft. Appraisals that are based on different
assumptions and methodologies may result in valuations that are materially
different from those contained in the appraisals of the Appraisers. An appraisal
is only an estimate of value, is not indicative of the price at which an
Aircraft may be purchased from the Aircraft manufacturer and should not in any
event be relied upon as a measure of realizable value; the proceeds realized
upon a sale of any Aircraft may be less than the appraised value thereof. In
particular, the appraisals are estimates of values as of future delivery dates.
The value of the Aircraft in the event of the exercise of remedies under the
applicable Indenture will depend on market and economic conditions, the supply
of aircraft, the availability of buyers, the condition of the Aircraft and other
factors. Accordingly, there can be no assurance that the proceeds realized upon
any such exercise of remedies with respect to the Equipment Notes and the
Aircraft pursuant to the applicable Pass Through Trust Agreement and the
applicable Indenture would be sufficient to satisfy in full payments due on the
Certificates.
Priority of Distributions; Subordination
Certain provisions of the Intercreditor Agreement, which provides for the
subordination of the Class B Certificates to the Class A Certificates and the
subordination of the Class C Certificates to the Class B Certificates, may
result in the holders of the subordinated Classes of Certificates receiving less
than the full amount due to them after the occurrence of a payment default under
any Equipment Note or a Triggering Event, even if all of the Equipment Notes
eventually are paid in full.
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity 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) to the Liquidity Provider to the
extent required to pay certain Liquidity Obligations; (2) to the Class A Trustee
to the extent required to pay Expected Distributions on the Class A
Certificates; (3) to the Class B Trustee to the extent required to pay Expected
Distributions on the Class B Certificates; (4) to the Class C Trustee to the
extent required to pay Expected Distributions on the Class C Certificates; (5)
if Class D Certificates have been issued, to the Class D Trustee to the extent
required to pay "Expected Distributions" (to be defined in a manner equivalent
to the definition for other Classes of Certificates) on the Class D
Certificates; and (6) to the Subordination Agent and each Trustee for the
payment of certain fees and expenses.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order: (1) to the Subordination Agent, each Trustee and certain
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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 fees, taxes, charges
and other amounts payable to the Subordination Agent, any Trustee or any
Certificateholder; (3) to the Class A Trustee to the extent required to pay
Adjusted Expected Distributions on the Class A Certificates; (4) to the Class B
Trustee to the extent required to pay Adjusted Expected Distributions on the
Class B Certificates; (5) to the Class C Trustee to the extent required to pay
Adjusted Expected Distributions on the Class C Certificates; and (6) if Class D
Certificates have been issued, to the Class D Trustee to the extent required to
pay "Adjusted Expected Distributions" (to be defined in a manner equivalent to
the definition for other Classes of Certificates) on the Class D Certificates.
Accordingly, the priority of distributions after a payment default under
any Equipment Note or a Triggering Event will have the effect in certain
circumstances of requiring the distribution to more senior Classes of
Certificates of payments received in respect of one or more junior series of
Equipment Notes. If this should occur, the interest accruing on the remaining
Equipment Notes would in the aggregate be less than the interest accruing on the
remaining Certificates because such Certificates include a relatively greater
proportion of junior Classes with relatively higher interest rates. As a result
of this possible interest shortfall, the holders of one or more junior Classes
of Certificates may not receive the full amount due to them after a payment
default under any Equipment Note even if all Equipment Notes are eventually paid
in full.
Payments in respect of the Deposits will not be subject to the
subordination provisions of the Intercreditor Agreement.
Control over Collateral; Sale of Collateral
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
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 occur of (x) the date on which the entire
available amount under any Liquidity Facility shall have been drawn (for any
reason other than a Downgrade Drawing or a Non-Extension Drawing) and remain
unreimbursed and (y) the date on which all Equipment Notes shall have been
accelerated (provided that if such acceleration occurs prior to the Delivery
Period Termination Date, the aggregate principal amount thereof exceeds $200
million), 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
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Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes, and (b) with respect to any
Leased Aircraft, the amount and payment dates of rentals payable by Continental
under the Lease for such Leased Aircraft may not be adjusted, if, as a result of
such adjustment, the discounted present value of all such rentals would be less
than 75% of the discounted present value of the rentals payable by Continental
under such Lease before giving effect to such adjustment, in each case, using
the weighted average interest rate of the Equipment Notes issued under such
Indenture as the discount rate.
The Equipment Notes will not be cross-collateralized (except in certain
cases, if any, where the related Owner Participant and Continental shall agree
to cross-collateralization) and, consequently, proceeds from the sale of an
Aircraft in excess of the amounts due on Equipment Notes related to such
Aircraft will not be available to cover losses, if any, on any other Equipment
Notes.
Owner Participant; Revisions to Agreements
Continental has obtained the commitment of one company to act as the Owner
Participant with respect to leveraged leases for certain of the Aircraft and
plans to seek such commitments from others for the remaining Aircraft. The
existing commitment is subject to satisfaction of certain conditions, and
Continental may elect to terminate such commitment. Accordingly, Continental may
select one or more other Owner Participants for some or all of the Aircraft or
finance such Aircraft as Owned Aircraft rather than Leased Aircraft. Such Owner
Participants may request revisions to the forms of the Participation Agreement,
the Lease and the Leased Aircraft Indenture that are contemplated by the Note
Purchase Agreement, so that the terms of such agreements applicable to any
particular Leased Aircraft may differ from the description of such agreements
contained in this Prospectus Supplement. However, under the Note Purchase
Agreement, the terms of such agreements are required to (i) contain the
Mandatory Document Terms and (ii) not vary the Mandatory Economic Terms. In
addition, Continental is obligated (i) to certify to the Trustee that any such
modifications do not materially and adversely affect the Certificateholders and
(ii) to obtain written confirmation from each Rating Agency that the use of
versions of such agreements modified in any material respect will not result in
a withdrawal, suspension or downgrading of the rating of any Class of
Certificates. See "Description of the Certificates -- Obligation to Purchase
Equipment Notes".
Boeing and certain manufacturers of jet engines used by Continental may act
as Owner Participant with respect to Aircraft, directly or through affiliates.
Such manufacturers and their affiliates have various business relationships with
Continental, including as suppliers of certain equipment to Continental, and
such business relationships could influence the actions of such manufacturers or
their affiliates as Owner Participants.
Each Owner Participant will have the right to sell, assign or otherwise
transfer its interests as Owner Participant in any of such leveraged leases,
subject to the terms and conditions of the relevant Participation Agreement and
related documents.
Ratings of the Certificates
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated not lower than by Moody's and by Standard &
Poor's, the Class B Certificates be rated not lower than by Moody's and
by Standard & Poor's and the Class C Certificates be rated not lower than
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, the
Depositary or the Liquidity Provider) so warrant. The rating of the Certificates
is based primarily on the default risk of the Equipment Notes and the
Depositary, the availability of the Liquidity Facility for the benefit of
holders of the Certificates, the collateral value provided by the Aircraft
relating to the Equipment Notes and the subordination in right of payment under
the Intercreditor Agreement of the Class B Certificates to the Class A
Certificates and of the Class C Certificates to the Class B Certificates.
Standard & Poor's has indicated that its rating applies to a unit consisting of
Certificates
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representing the Trust Property and Escrow Receipts initially representing
undivided interests in certain rights to $772,518,000 of Deposits (less any
amount used to purchase Equipment Notes on the Issuance Date). Amounts deposited
under the Escrow Agreements are not property of Continental and are not entitled
to the benefits of Section 1110 of the U.S. Bankruptcy Code. Neither the
Certificates nor the Escrow Receipts may be separately assigned or transferred.
Continental's ability to pay any premium due upon distribution of Deposits
not used to acquire Equipment Notes during the Delivery Period has not been
rated by either of the Rating Agencies.
Unused Deposits
The Trustees' obligations to purchase the Equipment Notes issued with
respect to each Aircraft are subject to satisfaction of certain conditions at
the time of delivery, as set forth in the Note Purchase Agreement. See
"Description of the Certificates -- Obligation to Purchase Equipment Notes".
Since the Aircraft are scheduled for delivery from time to time during the
Delivery Period, no assurance can be given that all such conditions will be
satisfied at the time of delivery for each Aircraft. Moreover, since the
Aircraft will be newly manufactured, their delivery as scheduled is subject to
delays in the manufacturing process and to Boeing's right to postpone deliveries
under its agreement with Continental. Boeing has recently announced that it is
experiencing delays in deliveries of Aircraft, and the delivery schedule for the
Aircraft described in this Prospectus Supplement reflects adjustments made by
Boeing as a result of such delays. See "Description of the Aircraft and
Appraisals -- Deliveries of Aircraft". Continental cannot predict whether
further adjustments in such schedule will be required. Depending on the
circumstances of the financing of each Aircraft, the maximum aggregate principal
amount of Equipment Notes may not be issued. In addition, Continental's
obligations under its predelivery deposit credit facility are secured by
Continental's purchase agreement with Boeing relating to the Boeing 737-524,
737-724, 737-824 and certain 757-224 Aircraft (but not the Boeing 777-224
Aircraft). Accordingly, if Continental should breach its obligations secured
thereby, the secured parties could exercise remedies and prevent delivery of
Aircraft to Continental.
If any funds remain as Deposits with respect to any Trust at the Delivery
Period Termination Date, they will be withdrawn by the Escrow Agent for such
Trust and distributed, with accrued and unpaid interest thereon, to the
Certificateholders of such Trust. In addition, if such remaining Deposits with
respect to all of the Trusts exceed the Par Redemption Amount, such distribution
will include a premium payable by Continental equal to the Deposit Make-Whole
Premium with respect to the remaining Deposits related to such Trust in excess
of such Trust's proportionate share of the Par Redemption Amount. Since the
maximum principal amount of Equipment Notes may not be issued with respect to an
Aircraft and, in any such case, the Series C Equipment Notes are more likely not
to be issued in the maximum principal amount as compared to the other Equipment
Notes, it is more likely that a distribution of unused Deposits will be made
with respect to the Class C Certificates as compared to the other Certificates.
In addition, notwithstanding the Par Redemption Amount limitation, if any
Aircraft is not delivered by the manufacturer prior to the Delivery Period
Termination Date due to any reason not occasioned by Continental's fault or
negligence and no Substitute Aircraft is provided in lieu of such Aircraft, no
Deposit Make-Whole Premium will be paid with respect to the unused Deposits to
be distributed as a result of such failure to deliver in an amount equal to the
maximum principal amount of Equipment Notes that could (after giving effect to
all Equipment Notes theretofore issued) have been issued and acquired by such
Trust with respect to such Aircraft in accordance with the Mandatory Economic
Terms and such unused Deposits shall not be included in the calculation of the
Par Redemption Amount. See "Description of the Deposit Agreements -- Unused
Deposits".
Absence of a Public Market for the Certificates
Prior to the Offering of the Certificates, there has been no public market
for the Certificates and neither Continental nor any Trust intends to apply for
listing of the Certificates on any securities exchange or otherwise. Continental
has been advised by the Underwriters that each of them presently intends to make
a market in the Certificates, as permitted by applicable laws and regulations,
after consummation of the Offering. None of the Underwriters is obligated,
however, to make a market in the Certificates and any such
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market-making activity may be discontinued at any time without notice at the
sole discretion of each Underwriter. There can be no assurance as to the
liquidity of the public market for the Certificates or that any active public
market for the Certificates will develop or continue. If an active public market
does not develop or continue, the market price and liquidity of the Certificates
may be adversely affected.
USE OF PROCEEDS
The proceeds from the sale of the Certificates being offered hereby will be
used to purchase Equipment Notes during the Delivery Period issued, at
Continental's election, either (i) by each Owner Trustee to finance a portion of
the purchase price of the Leased Aircraft or (ii) by Continental to finance a
portion of the purchase price of the Owned Aircraft. Prior to utilization of
such proceeds to purchase Equipment Notes, such proceeds from the sale of the
Certificates of each Trust will be deposited with the Depositary on behalf of
the applicable Escrow Agent for the benefit of the Certificateholders of such
Trust.
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THE COMPANY
Continental is a major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth largest United
States airline (as measured by revenue passenger miles in 1997) and, together
with its wholly owned subsidiaries, Continental Express, Inc. ("Express") and
Continental Micronesia, Inc. ("CMI"), served 192 airports worldwide as of
December 31, 1997. Internationally, Continental flies to 67 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 International Airport, George Bush Intercontinental Airport in Houston
and Hopkins International Airport in 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 December 31, 1997, Continental operated 56% (232 departures) of
average daily jet departures and, together with Express, accounted for 58% (341
departures) of all average daily departures (jet and turboprop) from Newark
International Airport. Considering the three major airports serving New York
City (Newark International Airport, LaGuardia and John F. Kennedy), the Company
and Express accounted for 23% 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 December 31, 1997, Continental operated 80% (332 departures) of
average daily jet departures and, together with Express, accounted for 84% (465
departures) of all average daily departures from Houston's George Bush
Intercontinental Airport. Southwest Airlines ("Southwest") also has a
significant share of Houston departures through Hobby Airport. Considering both
Intercontinental and Hobby Airports, Continental operated 57% and Southwest
operated 26% of all average daily jet departures from Houston.
Cleveland
As of December 31, 1997, Continental operated 54% (99 departures) of all
average daily jet departures and, together with Express, accounted for 66% (243
departures) of all average daily departures from Cleveland Hopkins International
Airport. The next largest carrier, Southwest, 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 average under a year old and seat 50 passengers. Express began service with
these 50-seat regional jets initially in Cleveland in April 1997.
As of December 31, 1997, Express served 18 destinations from Newark
International Airport (5 by regional jet), 21 destinations from George Bush
Intercontinental Airport (1 by regional jet) and 34
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destinations from Cleveland (5 by regional jet). In addition, commuter feed
traffic is currently provided by other code-sharing partners. In general,
Express flights are less than 200 miles in length and less than 90 minutes in
duration.
Management believes Express' 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' new Embraer-145ER
regional jets will provide better customer acceptance and comfort than its
turboprop aircraft and will also allow Express to serve certain routes that
cannot be served by turboprop aircraft.
Domestic Carrier Alliances
Continental has entered into and continues to develop alliances with
domestic carriers:
- Continental has entered into a series of agreements with America West
Airlines, Inc. ("America West"), including agreements related to
code-sharing and ground handling, which have created substantial benefits
for both airlines. These code-sharing agreements cover 73 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 Airlines, Inc., a commuter operator, provides
Continental access to five additional markets in California through Los
Angeles.
- Continental has entered into a code-sharing arrangement with Gulfstream
International Airlines, Inc. ("Gulfstream") which commenced in April
1997. Gulfstream serves as a connection for Continental passengers
throughout Florida as well as five markets in the Bahamas.
- Continental has entered into a code-sharing arrangement with Colgan Air,
Inc. which commenced July 1, 1997 on flights connecting in four cities in
the eastern United States and offering connections for Continental
passengers to 10 cities in the Northeastern and mid-Atlantic regions of
the United States.
- In July 1997, Continental and CMI announced a cooperative marketing
agreement with Hawaiian Airlines that began October 1, 1997 on flights
connecting in Honolulu.
- In January 1998, Continental announced it had entered into a long-term
global alliance with Northwest. See "-- Recent
Developments -- Continental/Northwest Alliance and Related Agreements".
INTERNATIONAL OPERATIONS
Continental serves destinations throughout Europe, Mexico, Central and
South America and the Caribbean and has extensive operations in the western
Pacific conducted by CMI. As measured by 1997 available seat miles,
approximately 31.4% of Continental's jet operations were dedicated to
international traffic. As of December 31, 1997, the Company offered 112 weekly
departures to ten 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.
Continental's hub at Newark International Airport is a significant
international gateway. From Newark, the Company serves London, Manchester,
Birmingham, Paris, Frankfurt, Dusseldorf, Madrid, Rome, Milan, Lisbon, Toronto
and Montreal, and markets certain other destinations in Canada, the United
Kingdom, Amsterdam, Prague and certain other points in Europe through
code-sharing arrangements with other foreign carriers. Continental recently
announced new nonstop service, subject to government approval, between
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Newark and two cities in Ireland, Dublin and Shannon (effective June 1998), and
between Newark and Glasgow, Scotland (effective July 1998).
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. Continental has been given tentative approval by the United States
Department of Transportation to begin service between Newark and Santiago, Chile
(expected to commence May 30, 1998).
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 commenced service from Houston to Caracas, Venezuela in December
1997 and from Houston to Toronto in September 1997. Continental recently
announced four new international routes out of Houston to three cities in Mexico
(Tampico, Veracruz and Merida) and Calgary, Canada, all of which will begin in
the second quarter of 1998, subject to government approval. In addition,
Continental flies non-stop from Houston to London, Paris and Vancouver.
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 faster 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 operations at Newark International
Airport. Consequently, management believes the Company is uniquely situated to
attract alliance partners from Europe, the Far East and South America and
intends to aggressively pursue such alliances.
In addition, management believes that developing a network of international
alliance partners will better leverage the Company's hub assets by attracting
high-yield flow traffic and result in improved returns to the Company. Further,
Continental can enlarge its scope of service more rapidly and enter additional
markets with lower capital and start-up costs through formation of alliances
with partners as compared with entering markets independently of other carriers.
Management has a goal of developing alliance relationships that, together
with the Company's own flying, will permit expanded service through Newark and
Houston to major destinations in South America, Europe and Asia. Certain route
authorities that would be required for the Company's own service to certain of
these destinations are not currently available to the Company.
Continental has implemented international code-sharing agreements with
Alitalia, Air Canada, Transavia, CSA Czech Airlines, Business Air, China
Airlines and Virgin Atlantic Airways ("Virgin"). Upon receipt of government
approval, Continental will commence code-sharing arrangements with Aerolneas
Centrales de Colombia (ACES) and Air France. In addition, the Northwest Alliance
contemplates formation of a joint venture with KLM, a Dutch carrier. See
"-- Recent Developments -- Continental/Northwest Alliance and Related
Agreements".
Continental's agreement with Virgin (which commenced operations on February
2, 1998) is a code-share arrangement containing block-space commitments
involving the carrier's Newark/New York-London routes and nine other routes
flown by Virgin between the United Kingdom and the United States.
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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 International Airport and seven U.S. cities
and Mexico City. In June 1997, Alitalia and Continental entered into a
block-space agreement (pursuant to which the Company and another carrier agree
to share capacity and bear economic risk for blocks of seats on certain routes)
and expanded their existing code-share relationship. The two carriers will
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 eight cities within the United States.
Continental and Air Canada (and its subsidiaries) code-share on six
cross-border routes under agreements that expire on April 1998, where
Continental places its code on 18 Air Canada flights per day and Air Canada
places its code on six Continental flights per day. Continental and Air Canada
provide ground handling and other services for each other at certain locations
in the United States, Canada and elsewhere.
In addition, the Company has also entered into joint marketing agreements
with other airlines, all of which are currently subject to government approval.
Some of these agreements 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 International Airport and Charles de Gaulle Airport ("CDG") and
Houston and CDG (expected to commence in the third quarter of 1998). In August
1997, the Company entered into a code-sharing agreement (effective March 1998)
with EVA Airways Corporation ("EVA"), an airline based in Taiwan, that entitles
the Company to place its code on that carrier's flights between Taipei and five
cities in the United States.
Many of the Company's international alliance agreements provide that a
party may terminate the agreement upon a change of control of the other party.
If the Air Partners Transaction is consummated, certain of the Company's
international alliance partners will have the right to terminate their alliance
relationship with the Company. Based on discussions with such partners, the
Company believes that none of its partners will exercise such right.
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.
RECENT DEVELOPMENTS
Fourth Quarter and Full Year 1997 Results of Operations
The Company's preliminary unaudited net income for the fourth quarter of
1997 was $73 million ($1.26 basic and $0.97 diluted earnings per share) compared
to $47 million ($0.82 basic and $0.62 diluted earnings per share) in the prior
year. For the full year 1997, the Company reported preliminary unaudited net
income of $389 million ($6.72 basic and $5.03 diluted earnings per share) before
an extraordinary charge for debt prepayment of $4 million. This compares to $325
million in net income for the full year 1996 ($5.87 basic and $4.25 diluted
earnings per share) before an extraordinary charge of $6 million. The Company's
pre-tax profit for 1997 was $640 million which represents a 15% increase over
1996's pre-tax profit of $556 million, excluding special charges, minority
interest and extraordinary loss.
Continental/Northwest Alliance and Related Agreements
On January 26, 1998, the Company announced that, in connection with the Air
Partners Transaction, the Company had entered into a long-term global alliance
with Northwest (the "Northwest Alliance") involving schedule coordination,
frequent flyer reciprocity, executive lounge access, airport facility
coordination, code sharing, the formation of a joint venture among the two
carriers and KLM with respect to their trans-Atlantic services, cooperation
regarding other alliance partners of the two carriers and regional alliance
development, certain coordinated sales programs, preferred reservations displays
and other activities.
The Northwest Alliance is expected to be phased in over a multi-year
period. A significant portion of the alliance activities will commence promptly.
Code sharing will commence, subject to governmental approvals,
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with the Company initially placing its designator code on all of Northwest's
international flights (other than its trans-Atlantic flights) and those
Northwest domestic flights which create international connecting itineraries to
and from Latin America. Thereafter, subject to governmental approval and
approval by Northwest's pilots under their collective bargaining agreement, (i)
Northwest and the Company anticipate entering into a joint venture among
themselves and KLM with respect to their respective trans-Atlantic flights, (ii)
Northwest anticipates placing its designator code on substantially all of the
Company's other international flights, and (iii) Northwest and the Company each
anticipate placing their respective designator codes on substantially all of the
other carrier's domestic flights.
The Company estimates that the alliance, when fully phased in over a three
year period, will generate in excess of $500 million in additional annual
pre-tax operating income for the carriers, and anticipates that approximately
45% of such pre-tax operating income will accrue to the Company. The Company
believes that a significant portion of the alliance synergies allocable to the
Company can be achieved even without the activities which are subject to
approval of Northwest's pilots.
The Company also announced on January 26, 1998 that Air Partners, the
holder of approximately 14% of the Company's equity and approximately 51% of its
voting power (after giving effect to the exercise of warrants), had entered into
an agreement to dispose of its interest in the Company to an affiliate of
Northwest. The Air Partners Transaction is subject to, among other matters,
governmental approval and expiration of applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. The agreement also extends
to an affiliate of Air Partners a right of first offer to purchase certain
shares of Class A common stock of the Company to be acquired by Northwest or its
affiliates if such entities intend to dispose of those securities prior to the
fifth anniversary of the closing of the Air Partners Transaction.
In connection with the Air Partners Transaction, the Company entered into a
corporate governance agreement with certain affiliates of Northwest (the
"Northwest Parties") designed to assure the independence of the Company's board
and management during the six year term of the governance agreement. Under the
corporate governance agreement, the Northwest Parties have agreed not to
beneficially own voting securities of the Company in excess of 50.1% of the
fully diluted voting power of the Company's voting securities, subject to
certain exceptions involving third party acquisitions or tender offers for 15%
or more of the voting power of the Company's voting securities. The Northwest
Parties have agreed to deposit all voting securities of the Company beneficially
owned by them in a voting trust with an independent voting trustee requiring
that such securities be voted (i) on all matters other than the election of
directors, either as recommended by the Company's board of directors (a majority
of whom must be independent directors as defined in the agreement) or in the
same proportion as the votes cast by other holders of voting securities, and
(ii) in the election of directors, for the election of independent directors
nominated by the board of directors; provided, that in the event of a merger or
similar business combination or a recapitalization, liquidation or similar
transaction, a sale of all or substantially all of the Company's assets, or an
issuance of voting securities which would represent more than 20% of the voting
power of the Company prior to issuance, or any amendment of the company's
charter or by-laws that would materially and adversely affect Northwest, the
shares may be voted as directed by the Northwest Party owning such shares, and
if a third party is soliciting proxies in connection with an election of
directors, the shares may be voted at the option of such Northwest Party either
as recommended by the Company's board of directors or in the same proportion as
the votes cast by the other holders of voting securities.
The Northwest Parties have also agreed to certain restrictions on the
transfer of voting securities owned by them, have agreed not to seek to affect
or influence the Company's board of directors or the control of the management
of the Company or the business, operations, affairs, financial matters or
policies of the Company or to take certain other actions, and have agreed to
take all actions as are necessary to cause independent directors to at all times
constitute at least a majority of the Company's board of directors. The Company
has agreed to cause one designee of a Northwest Party reasonably acceptable to
the board of directors to be appointed to the Company's board, and has agreed to
grant preemptive rights to a Northwest Party with respect to certain issuances
of Class A stock and Class B stock. The Northwest Parties have agreed that
certain specified actions, together with any material transaction between the
Company and Northwest or its affiliates, including any modifications or waivers
of the corporate governance agreement and the alliance
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<PAGE> 46
agreement, may not be taken without the prior approval of a majority of the
board of directors, including the affirmative vote of a majority of the
independent directors. The governance agreement also provides for the Company to
adopt a shareholder rights plan with reasonably customary terms and conditions,
with an acquiring person threshold of 15% and with appropriate exceptions for
the Northwest Parties for actions permitted by and taken in compliance with the
corporate governance agreement.
The corporate governance agreement and the alliance agreement provide that,
if after three years Northwest's pilots have not consented to those portions of
the alliance agreement requiring their consent and the Company, at its election,
then chooses to terminate the alliance agreement, the Northwest Parties can
elect either to dispose of its shares in the Company or negotiate with a
committee of independent directors of the Company regarding a merger. If a
merger agreement cannot be reached within six months of the establishment of the
committee, certain appraisal procedures are specified. If upon completion of the
appraisal procedures, Northwest is unwilling to enter into a merger agreement at
the value for the shares not held by the Northwest Parties and their affiliates
determined by such appraisal procedures, then the Northwest Parties must sell
their voting securities, and if the Company and the committee are unwilling to
approve a merger agreement at such value, then the corporate governance
agreement (except for certain provisions requiring continuing independent
directors and approval by a majority of such independent directors of material
transactions between the Company and Northwest and its affiliates) will expire.
The alliance agreement provides that if after four years the Company has not
entered into a code share with KLM or is not legally able to enter into a new
trans-Atlantic joint venture with KLM and Northwest and place its airline code
on certain Northwest flights, Northwest can elect to cause good faith
negotiations between the Company, KLM and Northwest as to the amount of losses
caused to the Continental/Northwest joint-venture by the foregoing, which losses
are required to be reimbursed by Continental, or terminate any or all of such
alliance agreement and any or all of the agreements contemplated thereunder.
The corporate governance agreement will otherwise expire after the sixth
anniversary of the date of closing of the acquisition by an affiliate of
Northwest of beneficial ownership of Air Partners' interest in the Company, or
if earlier, upon the date that Northwest and its affiliates cease to
beneficially own voting securities representing at least 10% of the fully
diluted voting power of the Company's voting securities. Upon a termination of
the above described terms of the governance agreement, the Northwest Parties
must nonetheless take such actions as are necessary to cause the Company's board
of directors to at all times include at least five directors who are independent
of and otherwise unaffiliated with Northwest or the Company and their respective
affiliates, and any material transaction between the Company and Northwest or
its affiliates, or relating to the governance agreement or the alliance
agreement, may not be taken without prior approval thereof by a majority vote of
the independent directors.
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<PAGE> 47
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Basic Agreement and three
separate Trust Supplements. The following summary describes all material terms
of the Certificates and supplements (or, to the extent inconsistent therewith,
replaces) the description of the general terms and provisions of the
Certificates set forth in the Prospectus. The summary does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Basic Agreement, which was filed with the Securities and Exchange
Commission (the "Commission") as an exhibit to the Company's Current Report on
Form 8-K dated September 25, 1997, and to all of the provisions of the
Certificates, the Trust Supplements, the Deposit Agreements, the Escrow
Agreements, the Intercreditor Agreement and the trust supplements applicable to
the Successor Trusts, each of which will be filed as an exhibit to a Current
Report on Form 8-K to be filed by Continental.
Except as otherwise indicated, the following summary relates to each of the
Trusts and the Certificates issued by each Trust. The terms and conditions
governing each of the Trusts will be substantially the same, except as described
under "-- Subordination" below and except that the principal amount and
scheduled principal repayments of the Equipment Notes held by each Trust and the
interest rate and maturity date of the Equipment Notes held by each Trust will
differ. The references to Sections in parentheses in the following summary are
to the relevant Sections of the Basic Agreement unless otherwise indicated.
GENERAL
The Certificates of each Trust will be issued in fully registered form only
and will be subject to the provisions described below under "-- Book Entry;
Delivery and Form". (Section 3.01) Each Certificate will represent a fractional
undivided interest in the Trust created by the Basic Agreement and the
applicable Trust Supplement pursuant to which such Certificate is issued.
(Section 2.01) The Trust Property of each Trust will consist of (i) subject to
the Intercreditor Agreement, Equipment Notes acquired under the Note Purchase
Agreement and issued, at Continental's election in connection with the delivery
of each Aircraft during the Delivery Period, either (a) on a nonrecourse basis
by an Owner Trustee in each separate leveraged lease transaction with respect to
each Leased Aircraft to finance a portion of the purchase price of such Leased
Aircraft by the Owner Trustee, in which case the applicable Leased Aircraft will
be leased to Continental, or (b) on a recourse basis by Continental in
connection with each separate secured loan transaction with respect to each
Owned Aircraft to finance a portion of the purchase price of such Owned Aircraft
by Continental, (ii) the rights of such Trust to acquire Equipment Notes under
the Note Purchase Agreement, (iii) the rights of such Trust under the applicable
Escrow Agreement to request the Escrow Agent to withdraw from the Depositary
funds sufficient to enable such Trust to purchase Equipment Notes on the
delivery of each Aircraft during the Delivery Period, (iv) the rights of such
Trust under the Intercreditor Agreement (including all monies receivable in
respect of such rights), (v) all monies receivable under the Liquidity Facility
for such Trust and (vi) funds from time to time deposited with the Trustee in
accounts relating to such Trust. Certificates will represent fractional
undivided interests in the related Trust and will be issued only in minimum
denominations of $1,000 or integral multiples thereof, except that one
Certificate of each Trust may be issued in a different denomination. (Section
3.01)
On the Transfer Date, each of the Original Trusts will transfer and assign
all of its assets and rights to a substantially identical Successor Trust, and
the New Trustee will assume the obligations of the related Original Trustee
under each transaction document to which such Original Trustee was a party. Upon
the effectiveness of such transfer, assignment and assumption, each of the
Original Trusts will be liquidated and each of the Certificates will represent
the same percentage interest in the Successor Trust as it represented in the
Original Trust immediately prior to such transfer, assignment and assumption.
Unless the context otherwise requires, all references in this Prospectus
Supplement to the Trusts, the Trustees, the Pass Through Trust Agreements and
similar terms shall be applicable to the Original Trusts until the effectiveness
of such transfer, assignment and assumption and thereafter shall be applicable
to the Successor Trusts. See "-- Liquidation of Original Trusts".
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<PAGE> 48
The Certificates represent interests in the respective Trusts, and all
payments and distributions thereon will be made only from the Trust Property of
the related Trust. (Section 3.09) The Certificates do not represent an interest
in or obligation of Continental, the Trustees, any of the Loan Trustees or Owner
Trustees in their individual capacities, any Owner Participant or any affiliate
of any thereof.
Pursuant to the Escrow Agreement applicable to each Trust, the
Certificateholders of such Trust as holders of the Escrow Receipts affixed to
each Certificate are entitled to certain rights with respect to the Deposits
relating to such Trust. Accordingly, any transfer of a Certificate will have the
effect of transferring the corresponding rights with respect to the Deposits,
and rights with respect to the Deposits may not be separately transferred by
Certificateholders. Rights with respect to the Deposits and the Escrow Agreement
relating to a Trust, except for the right to request withdrawals for the
purchase of Equipment Notes, will not constitute Trust Property of such Trust.
SUBORDINATION
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity 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 under the related Indenture will
be distributed under the Intercreditor Agreement in the following order: (1) to
the Liquidity Provider to the extent required to pay certain Liquidity
Obligations; (2) to the Class A Trustee to the extent required to pay Expected
Distributions on the Class A Certificates; (3) to the Class B Trustee to the
extent required to pay Expected Distributions on the Class B Certificates; (4)
to the Class C Trustee to the extent required to pay Expected Distributions on
the Class C Certificates; (5) if Class D Certificates have been issued, to the
Class D Trustee to the extent required to pay "Expected Distributions" (to be
defined in a manner equivalent to the definition for other Classes of
Certificates) on the Class D Certificates; and (6) to the Subordination Agent
and each Trustee for the payment of certain fees and expenses.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order: (1) to the Subordination Agent, each Trustee and certain
other parties in payment of the Administration Expenses and to the Liquidity
Provider in payment of the Liquidity Obligations; (2) to the Subordination
Agent, each Trustee and each Certificateholder for certain fees, taxes, charges
and other amounts payable to the Subordination Agent, any Trustee or any
Certificateholder; (3) to the Class A Trustee to the extent required to pay
Adjusted Expected Distributions on the Class A Certificates; (4) to the Class B
Trustee to the extent required to pay Adjusted Expected Distributions on the
Class B Certificates; (5) to the Class C Trustee to the extent required to pay
Adjusted Expected Distributions on the Class C Certificates; and (6) if Class D
Certificates have been issued, to the Class D Trustee Certificates to the extent
required to pay "Adjusted Expected Distributions" (to be defined in a manner
equivalent to the definition for other Classes of Certificates) on the Class D
Certificates.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
The priority of distributions after a payment default under any Equipment
Note or a Triggering Event will have the effect in certain circumstances of
requiring the distribution to more senior Classes of Certificates of payments
received in respect of one or more junior series of Equipment Notes. If this
should occur, the interest accruing on the remaining Equipment Notes would in
the aggregate be less than the interest accruing on the remaining Certificates
because such Certificates include a relatively greater proportion of junior
Classes with relatively higher interest rates. As a result of this possible
interest shortfall, the holders of one or more junior Classes of Certificates
may not receive the full amount due to them after a Triggering Event even if all
Equipment Notes are eventually paid in full.
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<PAGE> 49
Payments in respect of the Deposits relating to a Trust will not be subject
to the subordination provisions of the Intercreditor Agreement.
PAYMENTS AND DISTRIBUTIONS
Payments of interest on the Deposits with respect to each Trust and
payments of principal, premium (if any) and interest on the Equipment Notes or
with respect to other Trust Property held in each Trust will be distributed by
the Paying Agent (in the case of the Deposits) or by the Trustee (in the case of
Trust Property of such Trust) to Certificateholders of such Trust on the date
receipt of such payment is confirmed, except in the case of certain types of
Special Payments.
The Deposits held with respect to each Trust and the Equipment Notes held
in each Trust will accrue interest at the applicable rate per annum for
Certificates to be issued by such Trust set forth on the cover page of this
Prospectus Supplement, payable on January 2 and July 2 of each year, commencing
on July 2, 1998 (or, in the case of Equipment Notes issued after such date,
commencing with the first such date to occur after initial issuance thereof).
Such interest payments will be distributed to Certificateholders of such Trust
on each such date until the final Distribution Date for such Trust, subject in
the case of payments on the Equipment Notes to the Intercreditor Agreement.
Interest is calculated on the basis of a 360-day year consisting of twelve
30-day months. Payments of interest applicable to the Certificates to be issued
by each of the Trusts will be supported by 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 three successive Regular
Distribution Dates (without regard to any future payments of principal on such
Certificates), except that the Liquidity Facility with respect to such Trust
will not cover interest payable by the Depositary on the Deposits relating to
such Trust. 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 January 2 and July 2 in certain years
depending upon the terms of the Equipment Notes held in such Trust, commencing
on January 2, 1999. Scheduled payments of interest on the Deposits and of
interest or principal on the Equipment Notes are herein referred to as
"Scheduled Payments", and January 2 and July 2 of each year are herein referred
to as "Regular Distribution Dates". See "Description of the Equipment
Notes -- Principal and Interest Payments". The "Final Maturity Date" for the
Class A Certificates is July 2, 2018, for the Class B Certificates is July 2,
2018 and for the Class C Certificates is July 2, 2009.
The Paying Agent with respect to each Escrow Agreement will distribute on
each Regular Distribution Date to the Certificateholders of the Trust to which
such Escrow Agreement relates all Scheduled Payments received in respect of the
related Deposits, the receipt of which is confirmed by the Paying Agent on such
Regular Distribution Date. The Trustee of each Trust will distribute, subject to
the Intercreditor Agreement, on each Regular Distribution Date to the
Certificateholders of such Trust all Scheduled Payments received in respect of
Equipment Notes held on behalf of such Trust, the receipt of which is confirmed
by the Trustee on such Regular Distribution Date. Each Certificateholder of each
Trust will be entitled to receive a pro rata share of any distribution in
respect of Scheduled Payments of interest on the Deposits relating to such Trust
and, subject to the Intercreditor Agreement, of principal or interest on
Equipment Notes held on behalf of such Trust. Each such distribution of
Scheduled Payments will be made by the applicable Paying Agent or Trustee to the
Certificateholders of record of the relevant Trust on the record date applicable
to such Scheduled Payment subject to certain exceptions. (Sections 4.01 and
4.02; Escrow Agreement, Section 2.03) If a Scheduled Payment is not received by
the applicable Paying Agent or Trustee on a Regular Distribution Date but is
received within five days thereafter, it will be distributed on the date
received to such holders of record. If it is received after such five-day
period, it will be treated as a Special Payment and distributed as described
below.
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<PAGE> 50
Any payment in respect of, or any proceeds of, any Equipment Note, Trust
Indenture Estate under (and as defined in) any Leased Aircraft Indenture or
Collateral under (and as defined in) any Owned Aircraft 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 any Equipment Note, the date of
such early redemption or purchase (which shall be a Business Day), and otherwise
on the Business Day specified for distribution of such Special Payment pursuant
to a notice delivered by each Trustee as soon as practicable after the Trustee
has received funds for such Special Payment (each a "Special Distribution
Date"), subject to the Intercreditor Agreement. Any unused Deposits to be
distributed after the Delivery Period Termination Date or the occurrence of a
Triggering Event, together with accrued and unpaid interest thereon and any
premium payable by Continental (each, also a "Special Payment"), will be
distributed on a date 35 days after the Paying Agent has received notice of the
event requiring such distribution (also a "Special Distribution Date") unless
such date is within ten days before or after a Regular Distribution Date, in
which case such Special Payment shall be made on such Regular Distribution Date.
Each Paying Agent, in the case of the Deposits, and each Trustee, in the case of
Trust Property or any premium payable by Continental in connection with certain
distributions of unused Deposits, will mail a notice to the Certificateholders
of the applicable Trust stating the scheduled Special Distribution Date, the
related record date, the amount of the Special Payment and the reason for the
Special Payment. In the case of a redemption or purchase of the Equipment Notes
held in the related Trust or any distribution of unused Deposits after the
Delivery Period Termination Date or the occurrence of a Triggering Event, such
notice will be mailed not less than 15 days prior to the date such Special
Payment is scheduled to be distributed, and in the case of any other Special
Payment, such notice will be mailed as soon as practicable after the Trustee has
confirmed that it has received funds for such Special Payment. (Section 4.02(c);
Escrow Agreement, Sections 2.03 and 2.06) Each distribution of a Special
Payment, other than a final distribution, on a Special Distribution Date for any
Trust will be made by the Paying Agent or the Trustee, as applicable, to the
Certificateholders of record of such Trust on the record date applicable to such
Special Payment. (Section 4.02(b); Section 2.03 of the Escrow Agreement) See
"-- Indenture Defaults and Certain Rights Upon an Indenture Default" and
"Description of the Equipment Notes -- Redemption".
Each Pass Through Trust Agreement requires that the Trustee establish and
maintain, for the related Trust and for the benefit of the Certificateholders of
such Trust, one or more non-interest bearing accounts (the "Certificate
Account") for the deposit of payments representing Scheduled Payments received
by such Trustee. Each Pass Through Trust Agreement requires that the Trustee
establish and maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more accounts (the "Special Payments
Account") for the deposit of payments representing Special Payments received by
such Trustee, which shall be non-interest bearing except in certain
circumstances where the Trustee may invest amounts in such account in certain
permitted investments. Pursuant to the terms of each Pass Through Trust
Agreement, the Trustee is required to deposit any Scheduled Payments relating to
the applicable Trust received by it in the Certificate Account of such Trust and
to deposit any Special Payments so received by it in the Special Payments
Account of such Trust. (Section 4.01; Trust Supplements, Section 3.01) 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;
Trust Supplements, Section 3.01)
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the Receiptholders, one or more accounts (the
"Paying Agent Account"), which shall be non-interest bearing. Pursuant to the
terms of the Escrow Agreement, the Paying Agent is required to deposit interest
on Deposits relating to such Trust and any unused Deposits withdrawn by the
Escrow Agent in the Paying Agent Account. All amounts so deposited will be
distributed by the Paying Agent on a Regular Distribution Date or Special
Distribution Date, as appropriate.
The final distribution for each Trust will be made only upon presentation
and surrender of the Certificates for such Trust at the office or agency of the
Trustee specified in the notice given by the Trustee of such final distribution.
The Trustee will mail such notice of the final distribution to the
Certificateholders of such Trust, specifying the date set for such final
distribution and the amount of such distribution. (Trust Supplements, Section
7.01) 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.
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<PAGE> 51
If any Regular Distribution Date or Special Distribution Date is a
Saturday, Sunday or other day on which commercial banks are authorized or
required to close in New York, New York, Houston, Texas, Wilmington, Delaware,
or Salt Lake City, Utah (any other day being a "Business Day"), distributions
scheduled to be made on such Regular Distribution Date or Special Distribution
Date will be made on the next succeeding Business Day without additional
interest.
POOL FACTORS
The "Pool Balance" for each Trust or for the Certificates issued by any
Trust indicates, as of any date, the original aggregate face amount of the
Certificates of such Trust less the aggregate amount of all payments made in
respect of the Certificates of such Trust or in respect of Deposits relating to
such Trust other than payments made in respect of interest or premium or
reimbursement of any costs or expenses incurred in connection therewith. The
Pool Balance for each Trust or for the Certificates issued by any Trust as of
any Regular Distribution Date or Special Distribution Date shall be computed
after giving effect to any special distribution with respect to unused Deposits,
payment of principal of the Equipment Notes or payment with respect to other
Trust Property held in such Trust and the distribution thereof to be made on
that date. (Trust Supplements, Section 2.01)
The "Pool Factor" for each Trust as of any Regular Distribution Date or
Special Distribution Date is the quotient (rounded to the seventh decimal place)
computed by dividing (i) the Pool Balance by (ii) the original aggregate face
amount of the Certificates of such Trust. The Pool Factor for each Trust or for
the Certificates issued by any Trust as of any Regular Distribution Date or
Special Distribution Date shall be computed after giving effect to any special
distribution with respect to unused Deposits, payment of principal of the
Equipment Notes or payments with respect to other Trust Property held in such
Trust and the distribution thereof to be made on that date. (Trust Supplements,
Section 2.01) The Pool Factor for each Trust will be 1.0000000 on the date of
issuance of the Certificates; thereafter, the Pool Factor for each Trust will
decline as described herein to reflect reductions in the Pool Balance of such
Trust. The amount of a Certificateholder's pro rata share of the Pool Balance of
a Trust can be determined by multiplying the par value of the holder's
Certificate of such Trust by the Pool Factor for such Trust as of the applicable
Regular Distribution Date or Special Distribution Date. Notice of the Pool
Factor and the Pool Balance for each Trust will be mailed to Certificateholders
of such Trust on each Regular Distribution Date and Special Distribution Date.
(Trust Supplements, Section 3.02)
The following table sets forth an illustrative aggregate principal
amortization schedule for the Equipment Notes held in each Trust (the "Assumed
Amortization Schedule") and resulting Pool Factors with respect to such Trust.
The actual aggregate principal amortization schedule applicable to a Trust and
the resulting Pool Factors with respect to such Trust may differ from those set
forth below, since the amortization schedule for the Equipment Notes issued with
respect to an Aircraft may vary from such illustrative amortization schedule so
long as it complies with the Mandatory Economic Terms. In addition, the table
set forth below assumes that each Aircraft is delivered in the month scheduled
for its delivery (see "Description of the Aircraft and the Appraisals -- The
Appraisals" for the delivery schedule), that Equipment Notes in the maximum
principal amount in respect of all of the Aircraft are purchased by the Trusts
and that no early redemption or purchase, or default in the payment of
principal, in respect of any Equipment Notes occurs. Actual circumstances may
vary from these assumptions, which would result in differences in the aggregate
principal amortization schedule applicable to a Trust and in the resulting Pool
Factors.
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<PAGE> 52
<TABLE>
<CAPTION>
1998-1A TRUST 1998-1B TRUST 1998-1C TRUST
EQUIPMENT EQUIPMENT EQUIPMENT
NOTES SCHEDULED 1998-1A TRUST NOTES SCHEDULED 1998-1B TRUST NOTES SCHEDULED 1998-1C TRUST
PAYMENTS OF EXPECTED POOL PAYMENTS OF EXPECTED POOL PAYMENTS OF EXPECTED POOL
DATE PRINCIPAL FACTOR PRINCIPAL FACTOR PRINCIPAL FACTOR
- ------------------ --------------- ------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
February 20, 1998 $ 0 1.0000000 $ 0 1.0000000 $ 0 1.0000000
July 2, 1998 0 1.0000000 0 1.0000000 0 1.0000000
January 2, 1999 2,482,126 0.9948886 4,699,240 0.9687492 0 1.0000000
July 2, 1999 3,389,036 0.9879096 5,061,216 0.9350912 560,014 0.9958986
January 2, 2000 12,429,973 0.9623128 11,470,910 0.8588076 84,535 0.9952795
July 2, 2000 674,788 0.9609232 0 0.8588076 890,893 0.9887549
January 2, 2001 13,169,796 0.9338028 3,475,346 0.8356959 7,463,511 0.9340942
July 2, 2001 1,060,417 0.9316191 0 0.8356959 0 0.9340942
January 2, 2002 10,998,484 0.9089701 11,425,212 0.7597162 17,958,511 0.8025711
July 2, 2002 409,830 0.9081261 0 0.7597162 0 0.8025711
January 2, 2003 7,429,389 0.8928269 5,807,118 0.7210978 21,733,104 0.6434040
July 2, 2003 0 0.8928269 0 0.7210978 0 0.6434040
January 2, 2004 11,977,386 0.8681621 318,293 0.7189811 23,656,732 0.4701487
July 2, 2004 0 0.8681621 0 0.7189811 0 0.4701487
January 2, 2005 11,627,513 0.8442177 0 0.7189811 23,630,149 0.2970882
July 2, 2005 0 0.8442177 0 0.7189811 0 0.2970882
January 2, 2006 20,057,028 0.8029146 94,663 0.7183516 17,512,088 0.1688346
July 2, 2006 0 0.8029146 0 0.7183516 0 0.1688346
January 2, 2007 19,316,088 0.7631372 3,015,773 0.6982961 12,882,354 0.0744878
July 2, 2007 1,205,486 0.7606548 374,502 0.6958056 1,398,900 0.0642427
January 2, 2008 23,012,783 0.7132649 1,443,112 0.6862087 8,771,864 0.0000000
July 2, 2008 1,205,486 0.7107825 0 0.6862087 0 0.0000000
January 2, 2009 22,250,197 0.6649630 4,996,626 0.6529802 0 0.0000000
July 2, 2009 1,125,647 0.6626450 36,731 0.6527359 0 0.0000000
January 2, 2010 33,123,259 0.5944348 10,132,211 0.5853549 0 0.0000000
July 2, 2010 7,736 0.5944188 3,166,535 0.5642969 0 0.0000000
January 2, 2011 39,893,161 0.5122674 9,144,429 0.5034848 0 0.0000000
July 2, 2011 0 0.5122674 0 0.5034848 0 0.0000000
January 2, 2012 53,102,593 0.4029141 15,009,765 0.4036671 0 0.0000000
July 2, 2012 0 0.4029141 0 0.4036671 0 0.0000000
January 2, 2013 50,437,944 0.2990480 13,046,925 0.3169027 0 0.0000000
July 2, 2013 0 0.2990480 0 0.3169027 0 0.0000000
January 2, 2014 54,823,337 0.1861511 13,065,538 0.2300145 0 0.0000000
July 2, 2014 0 0.1861511 0 0.2300145 0 0.0000000
January 2, 2015 42,903,367 0.0978009 13,224,751 0.1420675 0 0.0000000
July 2, 2015 0 0.0978009 0 0.1420675 0 0.0000000
January 2, 2016 37,204,230 0.0211868 14,062,482 0.0485495 0 0.0000000
July 2, 2016 0 0.0211868 0 0.0485495 0 0.0000000
January 2, 2017 10,288,413 0.0000000 7,300,475 0.00000000 0 0.0000000
</TABLE>
The actual schedule of principal payments and the resulting schedule of
Pool Balances and Pool Factors may differ from that set forth above. As noted
above, this could result from the amortization schedule for the Equipment Notes
held in each Trust varying from the Assumed Amortization Schedule (see
"Description of the Equipment Notes -- Loan to Value Ratio of Equipment Notes"
for several illustrative amortization schedules). In addition, the Pool Factor
and Pool Balance of each Trust will be recomputed if there has been an early
redemption, purchase, or default in the payment of principal or interest in
respect of one or more of
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the Equipment Notes held in a Trust, as described in "-- Indenture Defaults and
Certain Rights Upon an Indenture Default" and "Description of the Equipment
Notes -- Redemption", or a special distribution attributable to unused Deposits
after the Delivery Period Termination Date or the occurrence of a Triggering
Event, as described in "Description of the Deposit Agreements". In the event of
(i) any such change in the scheduled repayments from the Assumed Amortization
Schedule or (ii) any such redemption, purchase, default or special distribution,
the Pool Factors and the Pool Balances of each Trust so affected will be
recomputed after giving effect thereto and notice thereof will be mailed to the
Certificateholders of such Trust promptly after the Delivery Period Termination
Date in the case of clause (i) and promptly after the occurrence of any event
described in clause (ii).
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the applicable Paying Agent and Trustee will
include with each distribution by it of a Scheduled Payment or Special Payment
to Certificateholders of the related Trust a statement setting forth the
following information (per $1,000 aggregate principal amount of Certificate for
such Trust, as to (ii), (iii), (iv) and (v) below):
(i) the aggregate amount of funds distributed on such Distribution
Date under the Pass Through Trust Agreement and under the Escrow Agreement,
indicating the amount allocable to each source;
(ii) the amount of such distribution under the Pass Through Trust
Agreement allocable to principal and the amount allocable to premium
(including any premium paid by Continental with respect to unused
Deposits), if any;
(iii) the amount of such distribution under the Pass Through Trust
Agreement allocable to interest;
(iv) the amount of such distribution under the Escrow Agreement
allocable to interest;
(v) the amount of such distribution under the Escrow Agreement
allocable to unused Deposits, if any; and
(vi) the Pool Balance and the Pool Factor for such Trust. (Trust
Supplements, Section 3.02(a))
So long as the Certificates are registered in the name of DTC or its
nominee, on the record date prior to each Distribution Date, the applicable
Trustee will request from DTC a securities position listing setting forth the
names of all DTC Participants reflected on DTC's books as holding interests in
the Certificates on such record date. On each Distribution Date, the applicable
Paying Agent and Trustee will mail to each such DTC Participant the statement
described above and will make available additional copies as requested by such
DTC Participant for forwarding to Certificate Owners. (Trust Supplements,
Section 3.02(a))
In addition, after the end of each calendar year, the applicable Trustee
and Paying Agent will furnish to each Certificateholder of each Trust at any
time during the preceding calendar year a report containing the sum of the
amounts determined pursuant to clauses (i), (ii), (iii), (iv) and (v) above with
respect to the Trust for such calendar year or, in the event such person was a
Certificateholder during only a portion of such calendar year, for the
applicable portion of such calendar year, and such other items as are readily
available to such Trustee and which a Certificateholder shall reasonably request
as necessary for the purpose of such Certificateholder's preparation of its U.S.
federal income tax returns. (Trust Supplements, Section 3.02(b)) Such report and
such other items shall be prepared on the basis of information supplied to the
applicable Trustee by the DTC Participants and shall be delivered by such
Trustee to such DTC Participants to be available for forwarding by such DTC
Participants to Certificate Owners in the manner described above. (Trust
Supplements, Section 3.02(b)) At such time, if any, as the Certificates are
issued in the form of definitive certificates, the applicable Paying Agent and
Trustee will prepare and deliver the information described above to each
Certificateholder of record of each Trust as the name and period of ownership of
such Certificateholder appears on the records of the registrar of the
Certificates.
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<PAGE> 54
INDENTURE DEFAULTS AND CERTAIN RIGHTS UPON AN INDENTURE DEFAULT
An event of default under an Indenture (an "Indenture Default") will, with
respect to the Leased Aircraft Indentures, include an event of default under the
related Lease (a "Lease Event of Default"). See "Description of the Equipment
Notes -- Indenture Defaults, Notice and Waiver". Since the Equipment Notes
issued under an Indenture will be held in each Trust, a continuing Indenture
Default under such Indenture would affect the Equipment Notes held by each
Trust. There are no cross-default provisions in the Indentures or in the Leases
(unless otherwise agreed between an Owner Participant and Continental).
Consequently, events resulting in an Indenture Default under any particular
Indenture may or may not result in an Indenture Default under any other
Indenture, and a Lease Event of Default under any particular Lease may or may
not constitute a Lease Event of Default under any other Lease. If an Indenture
Default occurs in fewer than all of the Indentures, notwithstanding the
treatment of Equipment Notes issued under any Indenture under which an Indenture
Default has occurred, payments of principal and interest on the Equipment Notes
issued pursuant to Indentures with respect to which an Indenture Default has not
occurred will continue to be distributed to the holders of the Certificates as
originally scheduled, subject to the Intercreditor Agreement. See "Description
of the Intercreditor Agreement -- Priority of Distributions".
With respect to each Leased Aircraft, the applicable Owner Trustee and
Owner Participant will, under the related Leased Aircraft Indenture, have the
right under certain circumstances to cure Indenture Defaults that result from
the occurrence of a Lease Event of Default under the related Lease. If the Owner
Trustee or the Owner Participant exercises any such cure right, the Indenture
Default will be deemed to have been cured.
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential conflict of interest upon an
Indenture Default. In such event, each Trustee has indicated that it would
resign as Trustee of one or all such Trusts, and a successor trustee would be
appointed in accordance with the terms of the applicable Pass Through Trust
Agreement. Wilmington Trust Company will be the initial Trustee under each
Trust.
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 the Intercreditor
Agreement -- Intercreditor Rights -- Sale of Equipment Notes or Aircraft". The
proceeds of such sale will be distributed pursuant to the provisions of the
Intercreditor Agreement. Any such proceeds so distributed to any Trustee upon
any such sale shall be deposited in the applicable Special Payments Account and
shall be distributed to the Certificateholders of the applicable Trust on a
Special Distribution Date. (Sections 4.01 and 4.02) The market for Equipment
Notes at the time of the existence of an Indenture Default may be very limited
and there can be no assurance as to the price at which they could be sold. If
any such Equipment Notes are sold for less than their outstanding principal
amount, certain Certificateholders will receive a smaller amount of principal
distributions than anticipated and will not have any claim for the shortfall
against Continental, any Liquidity Provider, any Owner Trustee, any Owner
Participant or any Trustee.
Any amount, other than Scheduled Payments received on a Regular
Distribution Date or within five days thereafter, distributed to the Trustee of
any Trust by the Subordination Agent on account of any Equipment Note, Trust
Indenture Estate under (and as defined in) any Leased Aircraft Indenture or
Collateral under (and as defined in) any Owned Aircraft Indenture held in such
Trust following an Indenture Default will be deposited in the Special Payments
Account for such Trust and will be distributed to the Certificateholders of such
Trust on a Special Distribution Date. (Sections 4.01 and 4.02; Trust
Supplements, Section 3.01) In addition, if, following an Indenture Default under
any Leased Aircraft Indenture, the applicable Owner Participant or Owner Trustee
exercises its option to redeem or purchase the outstanding Equipment Notes
issued under such Leased Aircraft Indenture, the price paid by such Owner
Participant or Owner Trustee for the Equipment Notes issued under such Leased
Aircraft Indenture and distributed to such Trust by the Subordination Agent will
be deposited in the Special Payments Account for such Trust and will be
distributed to the Certificateholders of such Trust on a Special Distribution
Date. (Sections 4.01 and 4.02)
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<PAGE> 55
Any funds representing payments received with respect to any defaulted
Equipment Notes, or the proceeds from the sale of any Equipment Notes, held by
the Trustee in the Special Payments Account for such Trust will, to the extent
practicable, be invested and reinvested by such Trustee in certain permitted
investments pending the distribution of such funds on a Special Distribution
Date. (Section 4.04) Such permitted investments are defined as obligations of
the United States or agencies or instrumentalities thereof for the payment of
which the full faith and credit of the United States is pledged and which mature
in not more than 60 days or such lesser time as is required for the distribution
of any such funds on a Special Distribution Date. (Section 1.01)
Each Pass Through Trust Agreement provides that the Trustee of the related
Trust will, within 90 days after the occurrence of any default known to the
Trustee, give to the Certificateholders of such Trust notice, transmitted by
mail, of such uncured or unwaived default with respect to such Trust known to
it, provided that, except in the case of default in a payment of principal,
premium, if any, or interest on any of the Equipment Notes held in such Trust,
the applicable Trustee will be protected in withholding such notice if it in
good faith determines that the withholding of such notice is in the interests of
such Certificateholders. (Section 7.02) The term "default" as used in this
paragraph only with respect to any Trust means the occurrence of an Indenture
Default under any Indenture pursuant to which Equipment Notes held by such Trust
were issued, as described above, except that in determining whether any such
Indenture Default has occurred, any grace period or notice in connection
therewith will be disregarded.
Each Pass Through Trust Agreement contains a provision entitling the
Trustee of the related Trust, subject to the duty of such Trustee during a
default to act with the required standard of care, to be offered reasonable
security or indemnity by the holders of the Certificates of such Trust before
proceeding to exercise any right or power under such Pass Through Trust
Agreement at the request of such Certificateholders. (Section 7.03(e))
Subject to certain qualifications set forth in each Pass Through Trust
Agreement and to the Intercreditor Agreement, the Certificateholders of each
Trust holding Certificates evidencing fractional undivided interests aggregating
not less than a majority in interest in such Trust shall have the right to
direct the time, method 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.
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<PAGE> 56
PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event, with
ten days' written notice to the Trustee and each Certificateholder of the same
Class, (i) the Class B Certificateholders will have the right to purchase all,
but not less than all, of the Class A Certificates, (ii) the Class C
Certificateholders will have the right to purchase all, but not less than all,
of the Class A Certificates and the Class B Certificates and (iii) if the Class
D Certificates are issued, the Class D Certificateholders shall have the right
to purchase all, but not less than all, of the Class A Certificates, the Class B
Certificates and the Class C Certificates, in each case at a purchase price
equal to the Pool Balance of the relevant Class or Classes of Certificates plus
accrued and unpaid interest thereon to the date of purchase, without premium,
but including any other amounts then due and payable to the Certificateholders
of such Class or Classes. In each case, if prior to the end of the ten-day
notice period, any other Certificateholder of the same Class notifies the
purchasing Certificateholder that the other Certificateholder wants to
participate in such purchase, then such other Certificateholder may join with
the purchasing Certificateholder to purchase the Certificates pro rata based on
the interest in the Trust held by each Certificateholder. (Trust Supplements,
Section 4.01)
PTC EVENT OF DEFAULT
A PTC Event of Default is defined under the Pass Through Trust Agreements
as the failure to pay: (i) the outstanding Pool Balance of the applicable Class
of Certificates within ten Business Days of the Final Maturity Date for such
Class or (ii) interest due on such Class of Certificates within ten Business
Days of any Distribution Date (unless the Subordination Agent shall have made
Interest Drawings, or withdrawals from the Cash Collateral Accounts for such
Class of Certificates, with respect thereto in an aggregate amount sufficient to
pay such interest and shall have distributed such amount to the Trustee entitled
thereto). (Section 1.01) Any failure to make expected principal distributions
with respect to any Class of Certificates on any Regular Distribution Date
(other than the Final Maturity Date) will not constitute a PTC Event of Default
with respect to such Certificates. A PTC Event of Default with respect to the
most senior outstanding Class of Certificates resulting from an Indenture
Default under all Indentures will constitute a Triggering Event. See
"Description of the Intercreditor Agreement -- Priority of Distributions" for a
discussion of the consequences of the occurrence of a Triggering Event.
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 or the District of Columbia, (b) be a "citizen of the United
States" (as defined in Title 49 of the United States Code relating to aviation
(the "Transportation Code")) holding an air carrier operating certificate issued
by the Secretary of Transportation pursuant to Chapter 447 of Title 49, United
States Code, if, and so long as, such status is a condition of entitlement to
the benefits of Section 1110 of the Bankruptcy Code, and (c) expressly assume
all of the obligations of Continental contained in the Basic Agreement and any
Trust Supplement, the Note Purchase Agreement, the Indentures, the Participation
Agreements and the Leases, and any other operative documents; and (ii)
Continental shall have delivered a certificate and an opinion or opinions of
counsel indicating that such transaction, in effect, complies with such
conditions. In addition, after giving effect to such transaction, no Lease Event
of Default, in the case of a Leased Aircraft, or Indenture Default, in the case
of an Owned Aircraft, shall have occurred and be continuing. (Section 5.02;
Leases, Section 13.2; Owned Aircraft Indenture, Section 4.07)
The Basic Agreement, the Trust Supplements, the Note Purchase Agreement,
the Indentures, the Participation Agreements and the Leases will not contain any
covenants or provisions which may afford the applicable Trustee or
Certificateholders protection in the event of a highly leveraged transaction,
including transactions effected by management or affiliates, which may or may
not result in a change in control of Continental.
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<PAGE> 57
MODIFICATIONS OF THE PASS THROUGH TRUST AGREEMENTS AND CERTAIN OTHER AGREEMENTS
Each Pass Through Trust Agreement contains provisions permitting, at the
request of the Company, the execution of amendments or supplements to such Pass
Through Trust Agreement or, if applicable, to the Deposit Agreements, the Escrow
Agreements, the Intercreditor Agreement, the Note Purchase Agreement or any
Liquidity Facility, without the consent of the holders of any of the
Certificates of such Trust, (i) to evidence the succession of another
corporation to Continental and the assumption by such corporation of
Continental's obligations under such Pass Through Trust Agreement or the Note
Purchase Agreement, (ii) to add to the covenants of Continental for the benefit
of holders of such Certificates or to surrender any right or power conferred
upon Continental in such Pass Through Trust Agreement, the Intercreditor
Agreement, the Note Purchase Agreement or any Liquidity Facility, (iii) to
correct or supplement any provision of such Pass Through Trust Agreement, the
Deposit Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility which may be defective or
inconsistent with any other provision in such Pass Through Trust Agreement, the
Intercreditor Agreement, or any Liquidity Facility, as applicable, or to cure
any ambiguity or to modify any other provision with respect to matters or
questions arising under such Pass Through Trust Agreement, the Deposit
Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility, provided that such action shall
not materially adversely affect the interests of the holders of such
Certificates; to correct any mistake in such Pass Through Trust Agreement, the
Intercreditor Agreement or any Liquidity Facility; or, as provided in the
Intercreditor Agreement, to give effect to or provide for a Replacement
Facility, (iv) to comply with any requirement of the Commission, any applicable
law, rules or regulations of any exchange or quotation system on which the
Certificates are listed, or any regulatory body, (v) to modify, eliminate or add
to the provisions of such Pass Through Trust Agreement, the Deposit Agreements,
the Escrow Agreements, the Intercreditor Agreement, the Note Purchase Agreement
or any Liquidity Facility to such extent as shall be necessary to continue the
qualification of such Pass Through Trust Agreement (including any supplemental
agreement) under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), or any similar federal statute enacted after the execution of
such Pass Through Trust Agreement, and to add to such Pass Through Trust
Agreement, the Deposit Agreements, the Escrow Agreements, the Intercreditor
Agreement, the Note Purchase Agreement or any Liquidity Facility such other
provisions as may be expressly permitted by the Trust Indenture Act, and (vi) to
evidence and provide for the acceptance of appointment under such Pass Through
Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement or any Liquidity Facility
by a successor Trustee and to add to or change any of the provisions of such
Pass Through Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement or any Liquidity Facility
as shall be necessary to provide for or facilitate the administration of the
Trusts under the Basic Agreement by more than one Trustee, provided that in each
case, such modification or supplement does not adversely affect the status of
the Trust as a grantor trust under Subpart E, Part I of Subchapter J of Chapter
1 of Subtitle A of the Code for U.S. federal income tax purposes. (Section 9.01;
Trust Supplements, Section 6.01)
Each Pass Through Trust Agreement also contains provisions permitting the
execution, with the consent of the holders of the Certificates of the related
Trust evidencing fractional undivided interests aggregating not less than a
majority in interest of such Trust, and with the consent of the applicable Owner
Trustee (such consent not to be unreasonably withheld), of amendments or
supplements adding any provisions to or changing or eliminating any of the
provisions of such Pass Through Trust Agreement, the Deposit Agreements, the
Escrow Agreements, the Intercreditor Agreement, the Note Purchase Agreement or
any Liquidity Facility to the extent applicable to such Certificateholders or of
modifying the rights and obligations of such Certificateholders under such Pass
Through Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement or any Liquidity Facility,
except that no such amendment or supplement may, without the consent of the
holder of each Certificate so affected thereby, (a) reduce in any manner the
amount of, or delay the timing of, any receipt by the Trustee (or, with respect
to the Deposits, the Receiptholders) of payments with respect to the Equipment
Notes held in such Trust or distributions in respect of any Certificate related
to such Trust (or, with respect to the Deposits, payments upon the Deposits), or
change the date or place of any payment in respect of any Certificate, or make
distributions payable in coin or currency other than that provided for in such
Certificates, or impair the
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<PAGE> 58
right of any Certificateholder of such Trust to institute suit for the
enforcement of any such payment when due, (b) permit the disposition of any
Equipment Note held in such Trust, except as provided in such Pass Through Trust
Agreement, or otherwise deprive such Certificateholder of the benefit of the
ownership of the applicable Equipment Notes, (c) alter the priority of
distributions specified in the Intercreditor Agreement in a manner materially
adverse to such Certificateholders, (d) reduce the percentage of the aggregate
fractional undivided interests of the Trust provided for in such Pass Through
Trust Agreement, the consent of the holders of which is required for any such
supplemental trust agreement or for any waiver provided for in such Pass Through
Trust Agreement, (e) modify any of the provisions relating to the rights of the
Certificateholders in respect of the waiver of events of default or receipt of
payment or (f) adversely affect the status of any Trust as a grantor trust under
Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A of the Code for
U.S. federal income tax purposes. (Section 9.02: Trust Supplements, Section
6.02)
In the event that a Trustee, as holder (or beneficial owner through the
Subordination Agent) of any Equipment Note in trust for the benefit of the
Certificateholders of the relevant Trust or as Controlling Party under the
Intercreditor Agreement, receives (directly or indirectly through the
Subordination Agent) a request for a consent to any amendment, modification,
waiver or supplement under any Indenture, any Participation Agreement, any
Lease, any Equipment Note or any other related document, the Trustee shall
forthwith send a notice of such proposed amendment, modification, waiver or
supplement to each Certificateholder of the relevant Trust as of the date of
such notice. The Trustee shall request from the Certificateholders a direction
as to (a) whether or not to take or refrain from taking (or direct the
Subordination Agent to take or refrain from taking) any action which a holder of
such Equipment Note or the Controlling Party has the option to direct, (b)
whether or not to give or execute (or direct the Subordination Agent to give or
execute) any waivers, consents, amendments, modifications or supplements as a
holder of such Equipment Note or as Controlling Party and (c) how to vote (or
direct the Subordination Agent to vote) any Equipment Note if a vote has been
called for with respect thereto. Provided such a request for Certificateholder
direction shall have been made, in directing any action or casting any vote or
giving any consent as the holder of any Equipment Note (or in directing the
Subordination Agent in any of the foregoing), (i) other than as Controlling
Party, the Trustee shall vote for or give consent to any such action with
respect to such Equipment Note in the same proportion as that of (x) the
aggregate face amount of all Certificates actually voted in favor of or for
giving consent to such action by such direction of Certificateholders to (y) the
aggregate face amount of all outstanding Certificates of the relevant Trust and
(ii) as the Controlling Party, the Trustee shall vote as directed in such
Certificateholder direction by the Certificateholders evidencing fractional
undivided interests aggregating not less than a majority in interest in the
relevant Trust. For purposes of the immediately preceding sentence, a
Certificate shall have been "actually voted" if the Certificateholder has
delivered to the Trustee an instrument evidencing such Certificateholder's
consent to such direction prior to 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
relevant Pass Through Trust Agreement and subject to the Intercreditor
Agreement, the Trustee may, in its own discretion and at its own direction,
consent and notify the relevant Loan Trustee of such consent (or direct the
Subordination Agent to consent and notify the relevant Loan Trustee of such
consent) to any amendment, modification, waiver or supplement under the relevant
Indenture, Participation Agreement or Lease, any relevant Equipment Note or any
other related document, if an Indenture Default under any Indenture shall have
occurred and be continuing, or if such amendment, modification, waiver or
supplement will not materially adversely affect the interests of the
Certificateholders. (Section 10.01)
OBLIGATION TO PURCHASE EQUIPMENT NOTES
The Trustees will be obligated to purchase the Equipment Notes issued with
respect to the Aircraft during the Delivery Period, subject to the terms and
conditions of the Note Purchase Agreement. Under the Note Purchase Agreement,
Continental agrees to finance each Aircraft in the manner provided therein and
in connection therewith will have the option of entering into a leveraged lease
financing or a secured debt financing with respect to each Aircraft. The Note
Purchase Agreement will provide for the relevant parties to enter into (i) with
respect to each Leased Aircraft, a Participation Agreement, a Lease and a Leased
Aircraft Indenture relating to the financing of such Leased Aircraft and (ii)
with respect to each Owned Aircraft, a
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<PAGE> 59
Participation Agreement and an Owned Aircraft Indenture relating to the
financing of such Owned Aircraft. The description of such agreements in this
Prospectus Supplement is based on the forms of such agreements to be utilized
pursuant to the Note Purchase Agreement. In the case of a Leased Aircraft, the
terms of the agreements actually entered into may differ from the forms of such
agreements and, consequently, may differ from the description of such agreements
contained in this Prospectus Supplement. See "Risk Factors -- Risk Factors
Relating to the Certificates and the Offering -- Owner Participant; Revisions to
Agreements". However, under the Note Purchase Agreement, the terms of such
agreements are required to (i) contain the Mandatory Document Terms and (ii) not
vary the Mandatory Economic Terms. In addition, Continental is obligated (i) to
certify to the Trustees that any such modifications do not materially and
adversely affect the Certificateholders and (ii) to obtain written confirmation
from each Rating Agency that the use of versions of such agreements modified in
any material respect will not result in a withdrawal, suspension or downgrading
of the rating of any Class of Certificates. Further, under the Note Purchase
Agreement, it is a condition precedent to the obligation of each Trustee to
purchase the Equipment Notes related to the financing of an Aircraft that no
Triggering Event shall have occurred. The Trustees will have no right or
obligation to purchase Equipment Notes after the Delivery Period Termination
Date.
The "Mandatory Economic Terms", as defined in the Note Purchase Agreement,
require, among other things, that:
(i) the maximum principal amount of all the Equipment Notes issued
with respect to an Aircraft not exceed the maximum principal amount of
Equipment Notes indicated for each such Aircraft as set forth in
"Prospectus Supplement Summary -- Equipment Notes and the Aircraft" under
the column "Maximum Principal Amount of Equipment Notes";
(ii) the initial LTV with respect to an Aircraft (with the value of
any Aircraft for these purposes to equal the value (the "Assumed Appraised
Value") for such Aircraft set forth in "Prospectus Supplement
Summary -- Equipment Notes and the Aircraft" under the column "Appraised
Value"), not exceed (a) in the case of the Boeing 737-524 Aircraft, 43.0%
for the Series A Equipment Notes, 56.0% for the Series B Equipment Notes
and 68.0% for the Series C Equipment Notes, (b) in the case of the Boeing
737-724 Aircraft, 43.0% for the Series A Equipment Notes, 53.8% for the
Series B Equipment Notes and 63.5% for the Series C Equipment Notes, (c) in
the case of the Boeing 737-824 Aircraft, 42.0% for the Series A Equipment
Notes, 54.0% for the Series B Equipment Notes and 62.7% for the Series C
Equipment Notes, (d) in the case of the Boeing 757-224 Aircraft, 42.0% for
the Series A Equipment Notes, 56.0% for the Series B Equipment Notes and
69.8% for the Series C Equipment Notes and (e) in the case of the Boeing
777-224 Aircraft, 40.5% for the Series A Equipment Notes, 53.8% for the
Series B Equipment Notes and 61.1% for the Series C Equipment Notes;
(iii) The LTVs for each series of Equipment Notes issued in respect of
each Aircraft (computed as of the date of the issuance thereof on the basis
of the Assumed Appraised Value of such Aircraft and the Depreciation
Assumption) will not exceed as of any Regular Distribution Date thereafter
(assuming no default in the payment of the Equipment Notes) the LTV for
such series of Equipment Notes set forth in clause (ii) above;
(iv) the initial average life of the Series A Equipment Notes not
extend beyond 11.5 years in the case of the Boeing 737-524 Aircraft, not
extend beyond 13.9 years in the case of the Boeing 737-724 Aircraft, not
extend beyond 13.9 years in the case of the Boeing 737-824 Aircraft, not
extend beyond 11.5 years in the case of the Boeing 757-224 Aircraft and not
extend beyond 14.4 years in the case of the Boeing 777-224 Aircraft, of the
Series B Equipment Notes not extend beyond 11.5 years in the case of the
Boeing 737-524 Aircraft, not extend beyond 12.0 years in the case of the
Boeing 737-724 Aircraft, not extend beyond 12.0 years in the case of the
Boeing 737-824 Aircraft, not extend beyond 11.5 years in the case of the
Boeing 757-224 Aircraft and not extend beyond 13.3 years in the case of the
Boeing 777-224 Aircraft and of the Series C Equipment Notes not extend
beyond 6.8 years in the case of the Boeing 737-524 Aircraft, not extend
beyond 6.8 years in the case of the Boeing 737-724 Aircraft, not extend
beyond 6.8 years in the case of the Boeing 737-824 Aircraft, not extend
beyond 6.8 years in the case of
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the Boeing 757-224 Aircraft and not extend beyond 6.8 years in the case of
the Boeing 777-224 Aircraft, in each case from the Issuance Date;
(v) as of the Delivery Period Termination Date (or if earlier, the
date of the occurrence of a Triggering Event), the average life of the
Class A Certificates, the Class B Certificates and the Class C Certificates
shall not be less than 10.9 years, 10.00 years and 5.00 years,
respectively, from the Issuance Date (computed without regard to the
acceleration of any Equipment Notes and after giving effect to any special
distribution on the Certificates thereafter required in respect of unused
Deposits);
(vi) the final maturity date of (a) the Series A Equipment Notes not
be in excess of 18.9 years after the Issuance Date, (b) the Series B
Equipment Notes not be in excess of 18.9 years after the Issuance Date and
(c) the Series C Equipment Notes not be in excess of 9.9 years after the
Issuance Date;
(vii) the original aggregate principal amount of all of the Equipment
Notes of each Series shall not exceed the original aggregate face amount of
the Certificates issued by the corresponding Trust;
(viii) the maximum aggregate principal amount of the Equipment Notes
issued with respect to all Boeing 737-524 Aircraft shall not exceed
$77,520,000, all Boeing 737-724 Aircraft shall not exceed $146,880,000, all
Boeing 737-824 Aircraft shall not exceed $204,680,000, all Boeing 757-224
Aircraft shall not exceed $195,000,000 and all Boeing 777-224 Aircraft
shall not exceed $170,000,000;
(ix) the interest rate applicable to each Series of Equipment Notes
must be equal to the rate applicable to the Certificates issued by the
corresponding Trust;
(x) the payment dates for the Equipment Notes and basic rent under the
Leases must be January 2 and July 2;
(xi) basic rent, stipulated loss values and termination values under
the Leases must be sufficient to pay amounts due with respect to the
related Equipment Notes;
(xii) the amounts payable under the all-risk aircraft hull insurance
maintained with respect to each Aircraft must be sufficient to pay the
applicable stipulated loss value, subject to certain rights of self-
insurance; and
(xiii) (a) the past due rate in the Indentures and the Leases, (b) the
Make-Whole Premium payable under the Indentures, (c) the provisions
relating to the redemption and purchase of Equipment Notes in the
Indentures, (d) the minimum liability insurance amount on Aircraft in the
Leases, (e) the interest rate payable with respect to stipulated loss value
in the Leases, and (f) the indemnification of the Loan Trustees,
Subordination Agent, Liquidity Provider, Trustees, Escrow Agents and
registered holders of the Equipment Notes (in such capacity, the "Note
Holders") with respect to certain taxes and expenses, in each case be
provided as set forth in the forms of Participation Agreements, Lease and
Indentures attached as exhibits to the Note Purchase Agreement
(collectively, the "Aircraft Operative Agreements").
The "Mandatory Document Terms" prohibit modifications in any material
adverse respect to certain specified provisions of the Aircraft Operative
Agreements contemplated by the Note Purchase Agreement, as follows:
In the case of the Indentures, modifications are prohibited (i) to the
Granting Clause of the Indentures so as to deprive the Note Holders of a
first priority security interest in the Aircraft, certain of Continental's
rights under its purchase agreement with the Aircraft manufacturer and, in
the case of a Leased Aircraft, the Lease or to eliminate the obligations
intended to be secured thereby, (ii) to certain provisions relating to the
issuance, redemption, purchase, payments, and ranking of the Equipment
Notes (including the obligation to pay the Make-Whole Premium in certain
circumstances), (iii) to certain provisions regarding Indenture Defaults,
remedies relating thereto and rights of the Owner Trustee and Owner
Participant in such circumstances, (iv) to certain provisions relating to
any replaced airframe or engines with respect to an Aircraft and (v) to the
provision that New York law will govern the Indentures.
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In the case of the Lease, modifications are prohibited to certain
provisions regarding the obligation of Continental (i) to pay basic rent,
stipulated loss value and termination value to the Leased Aircraft Trustee,
(ii) to record the Leased Aircraft Indenture with the Federal Aviation
Administration and to maintain such Indenture as a first-priority perfected
mortgage on the related Aircraft, (iii) to furnish certain opinions with
respect to a replacement airframe and (iv) to consent to the assignment of
the Lease by the Owner Trustee as collateral under the Leased Aircraft
Indenture, as well as modifications which would either alter the provision
that New York law will govern the Lease or would deprive the Loan Trustee
of rights expressly granted to it under the Leases.
In the case of the Participation Agreement, modifications are
prohibited (i) to certain conditions to the obligations of the Trustees to
purchase the Equipment Notes issued with respect to an Aircraft involving
good title to such Aircraft, obtaining a certificate of airworthiness with
respect to such Aircraft, entitlement to the benefits of Section 1110 with
respect to such Aircraft and filings of certain documents with the Federal
Aviation Administration, (ii) to the provisions restricting the Note
Holder's ability to transfer such Equipment Notes, (iii) to certain
provisions requiring the delivery of legal opinions and (iv) to the
provision that New York law will govern the Participation Agreement.
In the case of all of the Aircraft Operative Agreements, modifications
are prohibited in any material adverse respect as regards the interest of
the Note Holders, the Subordination Agent, the Liquidity Provider or the
Loan Trustee in the definition of "Make-Whole Premium". Notwithstanding the
foregoing, any such Mandatory Document Term may be modified to correct or
supplement any such provision which may be defective or to cure any
ambiguity or correct any mistake, provided that any such action shall not
materially adversely affect the interests of the Note Holders, the
Subordination Agent, the Liquidity Provider, the Mortgagee or the
Certificateholders.
POSSIBLE ISSUANCE OF CLASS D CERTIFICATES
Continental may elect to issue Series D Equipment Notes in connection with
the financing of Owned Aircraft, which will be funded from sources other than
this Offering. Continental may elect to fund the sale of the Series D Equipment
Notes through the sale of Class D Certificates. Continental will not issue any
Series D Equipment Notes at any time prior to the consummation of this Offering.
The Note Purchase Agreement provides that Continental's ability to issue any
Series D Equipment Notes is contingent upon its obtaining written confirmation
from each Rating Agency that the issuance of such Series D Equipment Notes will
not result in a withdrawal or downgrading of the rating of any Class of
Certificates. If the Class D Certificates are issued, the Trustee with respect
to such Certificates will become a party to the Intercreditor Agreement. See
"Description of the Intercreditor Agreement".
LIQUIDATION OF ORIGINAL TRUSTS
At the Transfer Date, each of the Original Trusts will transfer and assign
all of its assets and rights to a Successor Trust with substantially identical
terms, except that (i) the Successor Trusts will not have the right to purchase
new Equipment Notes and (ii) Delaware law will govern the Original Trusts and
New York law will govern the Successor Trusts. The Trustee of each of the
Original Trusts will also act as Trustee of the corresponding Successor Trust,
and each New Trustee will assume the obligations of the Original Trustee under
each transaction document to which such Original Trustee was a party. Upon the
effectiveness of such transfer, assignment and assumption, each of the Original
Trusts will be liquidated and each of the Certificates will represent the same
percentage interest in the Successor Trust as it represented in the Original
Trust immediately prior to such transfer, assignment and assumption. Unless the
context otherwise requires, all references in this Prospectus Supplement to the
Trusts, the Trustees, the Pass Through Trust Agreements and similar terms shall
be applicable with respect to the Original Trusts until the effectiveness of
such transfer, assignment and assumption and thereafter shall be applicable with
respect to the Successor Trusts. If for any reason such transfer, assignment and
assumption cannot be effected to any Successor Trust, the related Original Trust
will continue in existence until it is effected. The Original Trusts may be
treated as partnerships for U.S. federal income tax purposes. The Successor
Trusts will, in the opinion of Tax Counsel, be treated as grantor trusts. See
"Certain U.S. Federal Income Tax Consequences".
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TERMINATION OF THE TRUSTS
The obligations of Continental and the applicable Trustee with respect to a
Trust will terminate upon the distribution to Certificateholders of such Trust
of all amounts required to be distributed to them pursuant to the applicable
Pass Through Trust Agreement and the disposition of all property held in such
Trust. The applicable Trustee will send to each Certificateholder of such Trust
notice of the termination of such Trust, the amount of the proposed final
payment and the proposed date for the distribution of such final payment for
such Trust. The final distribution to any Certificateholder of such Trust will
be made only upon surrender of such Certificateholder's Certificates at the
office or agency of the applicable Trustee specified in such notice of
termination. (Trust Supplements, Section 7.01)
THE TRUSTEES
The Trustee for each Trust will be Wilmington Trust Company.
BOOK-ENTRY; DELIVERY AND FORM
Upon issuance, each Class of Certificates will be represented by one or
more fully registered global certificates. Each global certificate will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of Cede & Co. ("Cede"), the nominee of DTC. DTC was
created to hold securities for its participants ("DTC Participants") and
facilitate the clearance and settlement of securities transactions between DTC
Participants through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Interests in a
global certificate may also be held through the Euroclear System and Cedel Bank
societe anonyme. See "Description of the Certificates -- Book-Entry
Registration" in the Prospectus for a discussion of the book-entry procedures
applicable to the Certificates and the limited circumstances under which
definitive certificates may be issued for the Certificates.
So long as such book-entry procedures are applicable, no person acquiring
an interest in such Certificates ("Certificate Owner") will be entitled to
receive a certificate representing such person's interest in such Certificates.
Unless and until definitive certificates are issued under the limited
circumstances described in the Prospectus, all references to actions by
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants, and all references herein to distributions, notices, reports
and statements to Certificateholders shall refer, as the case may be, to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of such Certificates, or to DTC Participants for distribution to
Certificate Owners in accordance with DTC procedures.
DESCRIPTION OF THE DEPOSIT AGREEMENTS
The following summary describes all material terms of the Deposit
Agreements. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Deposit Agreements, each
of which will be filed as an exhibit to a Current Report on Form 8-K to be filed
by Continental with the Commission. The provisions of the Deposit Agreements are
substantially identical except as otherwise indicated.
GENERAL
Under the Escrow Agreements, the Escrow Agent with respect to each Trust
will enter into a separate Deposit Agreement with the Depositary pursuant to
which the Depositary will establish separate accounts into which the proceeds of
the Offering attributable to Certificates of such Trust in excess of any amounts
used to purchase Equipment Notes on the Issuance Date will be deposited on
behalf of such Escrow Agent, from which the Escrow Agent, upon request from the
Trustee of such Trust, will make withdrawals and into which
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such Trustee will make re-deposits during the Delivery Period. Pursuant to the
Deposit Agreement with respect to each Trust, on each Regular Distribution Date
the Depositary will pay to the Paying Agent on behalf of the applicable Escrow
Agent, for distribution to the Certificateholders of such Trust, an amount equal
to interest accrued on the Deposits relating to such Trust during the relevant
interest period at a rate per annum equal to the interest rate applicable to the
Certificates issued by such Trust. Upon each delivery of an Aircraft during the
Delivery Period, the Trustee for each Trust will request the Escrow Agent
relating to such Trust to withdraw from the Deposits relating to such Trust
funds sufficient to enable the Trustee of such Trust to purchase the Equipment
Note of the series applicable to such Trust issued with respect to such
Aircraft. Accrued but unpaid interest on all such Deposits withdrawn will be
paid on the next Regular Distribution Date. Any portion of any Deposit withdrawn
which is not used to purchase such Equipment Note will be re-deposited by each
Trustee into an account relating to the applicable Trust. The Deposits relating
to each Trust and interest paid thereon will not be subject to the subordination
provisions of the Intercreditor Agreement and will not be available to pay any
other amount in respect of the Certificates.
UNUSED DEPOSITS
The Trustees' obligations to purchase the Equipment Notes issued with
respect to each Aircraft are subject to satisfaction of certain conditions at
the time of delivery, as set forth in the Note Purchase Agreement. See
"Description of the Certificates -- Obligation to Purchase Equipment Notes".
Since the Aircraft are scheduled for delivery from time to time during the
Delivery Period, no assurance can be given that all such conditions will be
satisfied at the time of delivery for each Aircraft. Moreover, since the
Aircraft will be newly manufactured, their delivery as scheduled is subject to
delays in the manufacturing process and to the Aircraft manufacturer's right to
postpone deliveries under its agreement with Continental. See "Description of
the Aircraft and Appraisals -- Deliveries of Aircraft". Depending on the
circumstances of the financing of each Aircraft, the maximum aggregate principal
amount of Equipment Notes may not be issued. In addition, Continental's
obligations under its predelivery deposit credit facility are secured by
Continental's purchase agreement with Boeing relating to the Boeing 737-524,
737-724, 737-824 and certain 757-224 Aircraft (but not to the Boeing 777-224
Aircraft). Accordingly, if Continental should breach its obligations secured
thereby, the secured parties could exercise remedies and prevent delivery of
Aircraft to Continental.
If any funds remain as Deposits with respect to any Trust at the Delivery
Period Termination Date, they will be withdrawn by the Escrow Agent and
distributed, with accrued and unpaid interest thereon to the Certificateholders
of such Trust after at least 15 days' prior written notice. In addition, if such
remaining Deposits exceed the Par Redemption Amount with respect to all of the
Trusts, such distribution will include a premium payable by Continental equal to
the Deposit Make-Whole Premium with respect to the remaining Deposits applicable
to such Trust in excess of such Trust's proportionate share of the Par
Redemption Amount. Since the maximum principal amount of Equipment Notes may not
be issued with respect to an Aircraft and, in any such case, the Series C
Equipment Notes are more likely not to be issued in the maximum principal amount
as compared to the other Equipment Notes, it is more likely that a distribution
of unused Deposits will be made with respect to the Class C Certificates as
compared to the other Certificates. In addition, notwithstanding the Par
Redemption Amount limitation, if any Aircraft is not delivered by the
manufacturer on or prior to the Delivery Period Termination Date due to any
reason not occasioned by Continental's fault or negligence and no Substitute
Aircraft is provided in lieu of such Aircraft, no Deposit Make-Whole Premium
will be paid with respect to the unused Deposits to be distributed as a result
of such failure to deliver in an amount equal to the maximum principal amount of
Equipment Notes that could (after giving effect to all Equipment Notes
theretofore issued) have been issued and acquired by such Trust with respect to
such Aircraft in accordance with the Mandatory Economic Terms and such unused
Deposits shall not be included in the calculation of the Par Redemption Amount.
"Deposit Make-Whole Premium" means, with respect to the distribution of
unused Deposits to holders of any Class of Certificates, as of any date of
determination, an amount equal to the excess, if any, of (a) the present value
of the excess of (i) the scheduled payment of principal and interest to maturity
of the Equipment Notes, assuming the maximum principal amount thereof (the
"Maximum Amount") minus such Class of Certificates' proportionate share (in the
same proportion that the amount of unused Deposits with
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respect to such Class of Certificates bears to the unused Deposits with respect
to all Classes of Certificates) of the Par Redemption Amount were issued, on
each remaining Regular Distribution Date for such Class under the Assumed
Amortization Schedule over (ii) the scheduled payment of principal and interest
to maturity of the Equipment Notes actually acquired by the Trustee for such
Class on each such Regular Distribution Date, such present value computed by
discounting such excess on a semiannual basis on each Regular Distribution Date
(assuming a 360-day year of twelve 30-day months) using a discount rate equal to
the Treasury Yield plus basis points in the case of the Class A Certificates,
basis points in the case of the Class B Certificates and basis points in the
case of the Class C Certificates, over (b) the amount of such unused Deposits to
be distributed to the holders of such Certificates, minus such Class of
Certificates' proportionate share of the Par Redemption Amount, plus accrued and
unpaid interest on such net amount to but excluding the date of determination
from and including the preceding Regular Distribution Date (or if such date of
determination precedes the first Regular Distribution Date, the date of issuance
of the Certificates).
DISTRIBUTION UPON OCCURRENCE OF TRIGGERING EVENT
If a Triggering Event shall occur prior to the Delivery Period Termination
Date, the Escrow Agent for each Trust will withdraw any funds then held as
Deposits with respect to such Trust and cause such funds, with accrued and
unpaid interest thereon but without any premium, to be distributed to the
Certificateholders of such Trust by the Paying Agent on behalf of the Escrow
Agent, after at least 15 days' prior written notice. Accordingly, if a
Triggering Event occurs prior to the Delivery Period Termination Date, the
Trusts will not acquire Equipment Notes issued with respect to Aircraft
delivered after the occurrence of such Triggering Event.
DEPOSITARY
Credit Suisse First Boston, New York branch, will act as Depositary. Credit
Suisse First Boston (or "CSFB") is a Swiss bank and is one of the largest
banking institutions in the world, with total pro forma unaudited consolidated
assets of approximately Sfr 422 billion ($291 billion) and total pro forma
unaudited consolidated shareholders' equity of approximately Sfr 10.9 billion
($7.5 billion), in each case as of June 30, 1997. As a "universal bank" (engaged
in both commercial and investment banking activities) CSFB provides a wide range
of financial services from locations around the globe to corporate,
institutional and public sector clients. CSFB was founded in 1856 in Zurich and
is the oldest of Switzerland's three principal banks. Credit Suisse First
Boston's registered head office is in Zurich, Switzerland.
CSFB has been licensed by the Superintendent of Banks of the State of New
York to operate a branch (the "Branch") in New York. It is also subject to
review and supervision by the Federal Reserve Bank. The Branch conducts an
extensive banking practice, concentrating primarily on wholesale banking
transactions and servicing the needs of the CSFB's customer base in the United
States.
Credit Suisse First Boston is part of Credit Suisse Group, which also
includes Credit Suisse, a Swiss bank conducting Swiss domestic banking for
individual and corporate clients and global private banking, and Winterthur
Group, merged with Credit Suisse Group on December 15, 1997. On December 31,
1997 CSFB acquired certain business lines of Barclays de Zoete Wedd Ltd. from
Barclays Bank plc. Credit Suisse Group is a publicly-held corporation organized
in Switzerland, and its securities are listed on the Swiss Exchange as well as
on the Frankfurt and Tokyo Stock Exchanges.
Credit Suisse First Boston has long-term unsecured debt ratings of Aa3 from
Moody's and AA from Standard & Poor's and short-term unsecured debt ratings of
P-1 from Moody's and A-1+ from Standard & Poor's.
Credit Suisse First Boston's New York branch has executive offices at
Eleven Madison Avenue, New York, New York 10010, (212) 325-9000. A copy of the
Annual Report of CSFB for the year ended December 31, 1996 may be obtained from
Credit Suisse First Boston by delivery of a written request to its New York
branch, Attention: Corporate Affairs.
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DESCRIPTION OF THE ESCROW AGREEMENTS
The following summary describes all material terms of the Escrow
Agreements. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Escrow Agreements, each of
which will be filed as an exhibit to a Current Report on Form 8-K to be filed by
Continental with the Commission. The provisions of the Escrow Agreements are
substantially identical except as otherwise indicated.
Each Escrow Agent, each Paying Agent, each Trustee and the Underwriters
will enter into a separate Escrow Agreement for the benefit of the
Certificateholders of each Trust as holders of the Escrow Receipts affixed
thereto (in such capacity, a "Receiptholder"). The cash proceeds of the offering
of Certificates of each Trust in excess of any amounts used to purchase
Equipment Notes on the Issuance Date will be deposited on behalf of the Escrow
Agent (for the benefit of Receiptholders) with the Depositary as Deposits
relating to such Trust. The Escrow Agent of each Trust will be given irrevocable
instructions (i) to permit the Trustee of such Trust to cause funds to be
withdrawn from such Deposits on or prior to the Delivery Period Termination Date
for the purpose of enabling such Trustee to purchase Equipment Notes on and
subject to the terms and conditions of the Note Purchase Agreement and (ii) to
direct the Depositary to pay interest on the Deposits accrued in accordance with
the Deposit Agreement to the Paying Agent for distribution to the
Receiptholders.
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the related Receiptholders, one or more Paying
Agent Account(s), which shall be non-interest-bearing. Pursuant to the terms of
the Escrow Agreement, the Paying Agent is required to deposit interest on
Deposits relating to each Trust and any unused Deposits withdrawn by the Escrow
Agent in the Paying Agent Account. All amounts so deposited will be distributed
by the Paying Agent on a Regular Distribution Date or Special Distribution Date,
as appropriate.
Upon receipt by the Depositary on behalf of the Escrow Agent of the cash
proceeds from the offering of the Certificates as described above, the Escrow
Agent will issue one or more Escrow Receipts which will be affixed by the
relevant Trustee to each Certificate. Each Escrow Receipt evidences a fractional
undivided interest in amounts from time to time deposited into the Paying Agent
Account and is limited in recourse to amounts deposited into such Account. An
Escrow Receipt may not be assigned or transferred except in connection with the
assignment or transfer of the Certificate to which it is affixed. Each Escrow
Receipt will be registered by the Escrow Agent in the same name and manner as
the Certificate to which it is affixed.
DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes all material terms of the Liquidity
Facilities and certain provisions of the Intercreditor Agreement relating to the
Liquidity Facilities. The summary supplements (and, to the extent inconsistent
therewith, replaces) the description of the general terms and provisions
relating to the Liquidity Facilities and the Intercreditor Agreement set forth
in the Prospectus. The summary does not purport to be complete and is qualified
in its entirety by reference to all of the provisions of the Liquidity
Facilities and the Intercreditor Agreement, each of which will be filed as an
exhibit to a Current Report on Form 8-K to be filed 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 three consecutive semiannual Regular Distribution Dates. If
interest payment defaults occur which exceed the amount covered by or available
under the Liquidity Facility for any Trust, the Certificateholders of such Trust
will bear their allocable share of the deficiencies to the extent that there are
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no other sources of funds. Although AIG Matched Funding Corp. 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 Trust may differ.
DRAWINGS
The aggregate amount available under the Liquidity Facilities for the Class
A Trust, the Class B Trust and the Class C Trust at July 2, 1999, the first
Regular Distribution Date after the scheduled Delivery Period Termination Date,
assuming that Equipment Notes in the maximum principal amount with respect to
all Aircraft are acquired by the Trusts and that all interest and principal due
on or prior to July 2, 1999, is paid, will be $ , $ , and
$ , respectively. Except as otherwise provided below, the Liquidity
Facility for each Trust will enable the Subordination Agent to make Interest
Drawings thereunder promptly after any Regular Distribution Date to pay interest
then due and payable on the Certificates of such Trust at the Stated Interest
Rate for such Trust to the extent that the amount, if any, available to the
Subordination Agent on such Regular Distribution Date is not sufficient to pay
such interest; provided, however, that the maximum amount available to be drawn
under 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 any Class of Certificates does not provide
for drawings thereunder to pay for principal of or premium on the Certificates
of such Class or any interest on the Certificates of such Class in excess of the
Stated Interest Rate for such Class or more than three semiannual installments
of interest thereon or principal of or interest or premium on the Certificates
of any other Class. (Liquidity Facilities, Section 2.02; Intercreditor
Agreement, Section 3.6) In addition, the Liquidity Facility with respect to each
Trust does not provide for drawings thereunder to pay any amounts payable with
respect to the Deposits relating to such Trust.
Each payment by the Liquidity Provider under each Liquidity Facility
reduces by the same amount the Maximum Available Commitment under such Liquidity
Facility, subject to reinstatement as hereinafter described. With respect to any
Interest Drawings under 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 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 three successive interest payments due on the Certificates of such
Trust (without regard to expected future payment of principal of such
Certificates) at the Stated Interest Rate for such Trust. (Liquidity Facilities,
Section 2.04(a); Intercreditor Agreement, Section 3.6(j))
If at any time the short-term unsecured debt rating of the Liquidity
Provider then issued by either Rating Agency is lower than the Threshold Rating
for any Class, then the Liquidity Facility for such Class may be replaced by a
Replacement Facility. In the event that such Liquidity Facility is not replaced
with a Replacement Facility within ten 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
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face amount) equal to the amount of interest payable on the Certificates of such
Trust (at the Stated Interest Rate for such Trust, and without regard to
expected future principal payments) on the three Regular Distribution Dates
following the date of replacement of such Liquidity Facility and issued by a
person (or persons) having unsecured short-term debt ratings issued by both
Rating Agencies which are equal to or higher than the Threshold Rating for the
relevant Class. (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, in the case of the Class A Liquidity
Facility and the Class B Liquidity Facility, and the short-term unsecured debt
rating of P-1 by Moody's and A-1 by Standard & Poor's, in the case of the Class
C Liquidity Facility. The initial Liquidity Provider for each Trust is required
to have short-term credit ratings from Moody's and Standard & Poor's on the
Issuance Date at least as high as the Threshold Ratings for the Liquidity
Facility of such Trust.
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 (counting from, and including, the Issuance Date); (ii)
the date on which the Subordination Agent delivers to such Liquidity Provider a
certification that all of the Certificates of such Trust have been paid in full;
(iii) the date on which the Subordination Agent delivers to such Liquidity
Provider a certification that a Replacement Facility has been substituted for
such Liquidity Facility; (iv) the fifth Business Day following receipt by the
Subordination Agent of a Termination Notice from such Liquidity Provider (see
"-- Liquidity Events of Default"); and (v) the date on which no amount is or may
(by reason of reinstatement) become available for drawing under such Liquidity
Facility. Each Liquidity Facility provides that the scheduled expiration date
thereof may be extended for additional 364-day periods by mutual agreement of
the relevant Liquidity Provider and the Subordination Agent; provided that so
long as the initial Liquidity Provider is the liquidity provider with respect to
any Trust, the Liquidity Facility for such Trust shall be subject to automatic
annual extensions unless the Liquidity Provider affirmatively exercises its
right not to so extend.
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, if such
Liquidity Facility is not extended at least 25 days prior to its then scheduled
expiration date. If such Liquidity Facility is not so extended or replaced by
the 25th day prior to its then scheduled expiration date, the Subordination
Agent shall request 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. (Liquidity Facilities, Section 2.02(b); Intercreditor Agreement,
Section 3.6(d))
Subject to certain limitations, Continental may, at its option, 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 shall request a Final Drawing under such
Liquidity Facility in an amount equal to the then Maximum Available Commitment
thereunder and will hold the proceeds thereof in the Cash Collateral Account for
the related Trust as cash collateral to be used for the same purposes and under
the same circumstances, and subject to the same conditions, as cash payments of
Interest Drawings
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under such Liquidity Facility would be used. (Liquidity Facilities, Section
2.02(d); Intercreditor Agreement, Section 3.6(i))
Drawings under any Liquidity Facility will be made by delivery by the
Subordination Agent of a certificate in the form required by such Liquidity
Facility. Upon receipt of such a certificate, the relevant Liquidity Provider is
obligated to make payment of the drawing requested thereby in immediately
available funds. Upon payment by any Liquidity Provider of the amount specified
in any drawing under any Liquidity Facility, such Liquidity Provider will be
fully discharged of its obligations under such Liquidity Facility with respect
to such drawing and will not thereafter be obligated to make any further
payments under such Liquidity Facility in respect of such drawing to the
Subordination Agent or any other person.
REIMBURSEMENT OF DRAWINGS
Amounts drawn under any Liquidity Facility by reason of an Interest Drawing
or the Final Drawing will be immediately due and payable, together with interest
on the amount of such drawing, with respect to the period from the date of its
borrowing to (but excluding) the third business day following the applicable
Liquidity Provider's receipt of the notice of such Interest Drawing, at the Base
Rate plus 1.75% per annum, and thereafter, at LIBOR for the applicable Interest
Period plus 1.75% per annum, provided that, in the case of the Final Drawing,
the Subordination Agent may convert the Final Drawing into a Drawing bearing
interest at the Base Rate plus 1.75% per annum on the last day of an Interest
Period for such Drawing; provided, further, that the Subordination Agent will be
obligated to reimburse such amounts only to the extent that the Subordination
Agent has funds available therefor.
"Base Rate" means a fluctuating interest rate per annum in effect from time
to time, which rate per annum shall at all times be equal to (a) the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or, if such day is not a business day, for the next preceding business day)
by the Federal Reserve Bank of New York, or if such rate is not so published for
any day that is a business day, the average of the quotations for such day for
such transactions received by the Liquidity Provider from three Federal funds
brokers of recognized standing selected by it, plus (b) one-quarter of one
percent ( 1/4 of 1%).
"LIBOR" means, with respect to any interest period, (i) the rate per annum
appearing on display page 3750 (British Bankers Association--LIBOR) of the Dow
Jones Markets Service (or any successor or substitute therefor) at approximately
11:00 A.M. (London time) two Business Days before the first day of such interest
period, as the rate for dollar deposits with a maturity comparable to such
interest period, or (ii) if the rate calculated pursuant to clause (i) above is
not available, the average (rounded upwards, if necessary, to the next 1/16 of
1%) of the rates per annum at which deposits in dollars are offered for the
relevant interest period by three banks of recognized standing selected by the
Liquidity Provider in the London interbank market at approximately 11:00 A.M.
(London time) two Business Days before the first day of such interest period in
an amount approximately equal to the principal amount of the LIBOR Advance to
which such interest period is to apply and for a period comparable to such
interest period.
The amount drawn under any Liquidity Facility for any Trust by reason of a
Downgrade Drawing or a Non-Extension Drawing will be treated as follows: (i)
such amount will be released on any Distribution Date to the 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. Any 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) subject to clause (y)
below, in an amount equal to the investment earnings on amounts deposited in the
Cash Collateral Account attributable to such Liquidity Facility plus .35% 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) from and after the date, if any, on which
it is converted into a Final Drawing as described below under "-- Liquidity
Events of Default", at a rate equal to LIBOR for the applicable Interest Period
(or, as described in the third preceding paragraph,
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the Base Rate) plus 1.75% per annum; provided that the Subordination Agent will
be obligated to pay such amount only to the extent that the Subordination Agent
has funds available therefor.
LIQUIDITY EVENTS OF DEFAULT
Events of Default under each Liquidity Facility (each, a "Liquidity Event
of Default") will consist of: (i) the acceleration of all the Equipment Notes
(provided, that if such acceleration occurs during the Delivery Period, the
aggregate principal amount thereof exceeds $200 million) and (ii) certain
bankruptcy or similar events involving Continental. (Liquidity Facilities,
Section 1.01)
If (i) any Liquidity Event of Default under any Liquidity Facility has
occurred and is continuing and (ii) less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes, the
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 AIG Matched Funding
Corp., a corporation organized under the laws of the State of Delaware. The
Liquidity Provider is an indirect wholly-owned subsidiary of American
International Group, Inc., a holding company which is engaged through its
subsidiaries in a broad range of insurance and insurance-related activities and
financial services. AIG Matched Funding Corp. has short-term debt ratings which
will qualify it to act as Liquidity Provider for each Trust. The description of
AIG Matched Funding Corp. set out above has been provided by AIG Matched Funding
Corp. AIG Matched Funding Corp. has, however, not been involved in the
preparation of and does not accept responsibility for the Prospectus or this
Prospectus Supplement other than such description.
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
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Indenture (provided that, for so long as the Subordination Agent is the
registered holder of the Equipment Notes, the Subordination Agent will act with
respect to this clause (a) in accordance with the directions of the Trustees (in
the case of each such Trustee, with respect to the Equipment Notes issued under
such Indenture and held as Trust Property of such Trust) constituting, in the
aggregate, directions with respect to such principal amount of Equipment Notes),
so long as no Indenture Default (which, with respect to Leased Aircraft, has not
been cured by the applicable Owner Trustee or Owner Participant) shall have
occurred and be continuing thereunder, and (b) after the occurrence and during
the continuance of an Indenture Default under such Indenture (which, with
respect to Leased Aircraft, has not been cured by the applicable Owner Trustee
or Owner Participant), in taking, or refraining from taking, any action
thereunder or with respect to the Equipment Notes issued under such Indenture,
including exercising remedies thereunder or with respect to such Equipment Notes
(including acceleration of such Equipment Notes or foreclosing the lien on the
Aircraft securing such Equipment Notes), by the Controlling Party, subject to
the limitations described below. 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
available amount under any Liquidity Facility shall have been drawn (for any
reason other than a Downgrade Drawing or a Non-Extension Drawing) and remain
unreimbursed and (y) the date on which all Equipment Notes shall have been
accelerated (provided that if such acceleration occurs prior to the Delivery
Period Termination Date, the aggregate principal amount thereof exceeds $200
million), the liquidity provider with the highest outstanding amount of
Liquidity Obligations shall have the right to become the Controlling Party with
respect to any Indenture. For purposes of giving effect to the foregoing, the
Trustees (other than the Controlling Party) shall irrevocably agree, and the
Certificateholders (other than the Certificateholders represented by the
Controlling Party) will be deemed to agree by virtue of their purchase of
Certificates, that the Subordination Agent, as record holder of the Equipment
Notes, shall exercise its voting rights in respect of the Equipment Notes as
directed by the Controlling Party. (Intercreditor Agreement, Section 2.6) For a
description of certain limitations on the Controlling Party's rights to exercise
remedies, see "Description of the Equipment Notes -- Remedies".
Sale of Equipment Notes or Aircraft
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the immediately following sentence, sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person. So long
as any Certificates are outstanding, during nine months after the earlier of (x)
the acceleration of the Equipment Notes under any Indenture and (y) the
bankruptcy or insolvency of Continental, without the consent of each Trustee,
(a) no Aircraft subject to the lien of such Indenture or such Equipment Notes
may be sold, if the net proceeds from such sale would be less than the Minimum
Sale Price for such Aircraft or such Equipment Notes, and (b) with respect to
any Leased Aircraft, the amount and payment dates of rentals payable by
Continental under the Lease for such Leased Aircraft may not be adjusted, if, as
a result of such adjustment, the discounted present value of all such rentals
would be less than 75% of the discounted present value of the rentals payable by
Continental under such Lease before giving effect to such adjustment, in each
case, using the weighted average interest rate of the Equipment Notes
outstanding under such Indenture as the discount rate.
The Subordination Agent may from time to time during the continuance of an
Indenture Default (and before the occurrence of a Triggering Event) commission
LTV Appraisals with respect to an Aircraft at the request of the Controlling
Party. (Intercreditor Agreement, Section 4.1(a)(iii))
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PRIORITY OF DISTRIBUTIONS
So long as no Triggering Event shall have occurred, the payments in respect
of the Equipment Notes and certain other payments received on any Distribution
Date will be promptly distributed by the Subordination Agent on such
Distribution Date in the following order of priority:
(i) to the Liquidity Provider to the extent required to pay the
Liquidity Obligations (other than any interest accrued thereon or the
principal amount of any Drawing) (the "Liquidity Expenses");
(ii) to the Liquidity Provider to the extent required to pay interest
accrued on the Liquidity Obligations;
(iii) to the Liquidity Provider to the extent required to pay or
reimburse the Liquidity Provider for certain Liquidity Obligations (other
than amounts payable pursuant to clauses (i) and (ii) above) and/ or, if
applicable, to replenish each Cash Collateral Account up to the Required
Amount;
(iv) to the Class A Trustee to the extent required to pay Expected
Distributions on the Class A Certificates;
(v) to the Class B Trustee to the extent required to pay Expected
Distributions on the Class B Certificates;
(vi) to the Class C Trustee to the extent required to pay Expected
Distributions on the Class C Certificates;
(vii) if Class D Certificates have been issued, to the Class D Trustee
to the extent required to pay "Expected Distributions" (to be defined in a
manner equivalent to the definition below for other Classes of
Certificates) on the Class D Certificates; and
(viii) to the Subordination Agent and each Trustee for the payment of
certain fees and expenses.
"Expected Distributions" means, with respect to the Certificates of any
Trust on any Current Distribution Date, the sum of (x) accrued and unpaid
interest on such Certificates (excluding interest, if any, payable with respect
to the Deposits relating to such Trust) and (y) the difference between (A) the
Pool Balance of such Certificates as of the immediately preceding Distribution
Date (or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), and (B) the
Pool Balance of such Certificates as of the Current Distribution Date calculated
on the basis that (i) the principal of the Equipment Notes held in such Trust
has been paid when due (whether at stated maturity, upon redemption, prepayment,
purchase, acceleration or otherwise) and such payments have been distributed to
the holders of such Certificates and (ii) the principal of any Equipment Notes
formerly held in such Trust that have been sold pursuant to the Intercreditor
Agreement has been paid in full and such payments have been distributed to the
holders of such Certificates, but without giving effect to any reduction in the
Pool Balance as a result of any distribution attributable to Deposits occurring
after the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, occurring after the initial
issuance of the Certificates of such Trust). For purposes of determining the
priority of distributions on account of the redemption, purchase or prepayment
of all of the Equipment Notes issued pursuant to an Indenture, clause (x) of the
definition of Expected Distributions shall be deemed to read as follows: "(x)
accrued, due and unpaid interest on such Certificates (excluding interest, if
any, payable with respect to the Deposits relating to such Trust) together with
(without duplication) accrued and unpaid interest on a portion of such
Certificates equal to the outstanding principal amount of the Equipment Notes
being redeemed, purchased or prepaid (immediately prior to such redemption,
purchase or prepayment)".
Subject to the terms of the Intercreditor Agreement, upon the occurrence of
a Triggering Event and at all times thereafter, all funds received by the
Subordination Agent in respect of the Equipment Notes and certain other payments
will be promptly distributed by the Subordination Agent in the following order
of priority:
(i) to the Subordination Agent, any Trustee, any Certificateholder and
the Liquidity Provider to the extent required to pay certain out-of-pocket
costs and expenses actually incurred by the Subordination Agent or any
Trustee or to reimburse any Certificateholder or the Liquidity Provider in
respect of
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payments made to the Subordination Agent or any Trustee in connection with
the protection or realization of the value of the Equipment Notes, any
Trust Indenture Estate under (and as defined in any Leased Aircraft
Indenture) or Collateral under (and as defined in) any Owned Aircraft
Indenture (collectively, the "Administration Expenses");
(ii) to the Liquidity Provider to the extent required to pay the
Liquidity Expenses;
(iii) to the Liquidity Provider to the extent required to pay interest
accrued on the Liquidity Obligations;
(iv) to the Liquidity Provider to the extent required to pay the
outstanding amount of all Liquidity Obligations and/or, if applicable, with
respect to any particular Liquidity Facility, unless (x) less than 65% of
the aggregate outstanding principal amount of all Equipment Notes are
Performing Equipment Notes and a Liquidity Event of Default shall have
occurred and is continuing under such Liquidity Facility or (y) a Final
Drawing shall have occurred under such Liquidity Facility, to replenish the
Cash Collateral Account with respect to such Liquidity Facility up to the
Required Amount for the related Class of Certificates (less the amount of
any repayments of Interest Drawings under such Liquidity Facility while
sub-clause (x) of this clause (iv) is applicable);
(v) to the Subordination Agent, any Trustee or any Certificateholder
to the extent required to pay certain fees, taxes, charges and other
amounts payable;
(vi) to the Class A Trustee to the extent required to pay Adjusted
Expected Distributions on the Class A Certificates;
(vii) to the Class B Trustee to the extent required to pay Adjusted
Expected Distributions on the Class B Certificates;
(viii) to the Class C Trustee to the extent required to pay Adjusted
Expected Distributions on the Class C Certificates; and
(ix) if Class D Certificates have been issued, to the Class D Trustee
to the extent required to pay "Adjusted Expected Distributions" (to be
defined in a manner equivalent to the definition below for other Classes of
Certificates) on the Class D Certificates.
"Adjusted Expected Distributions" means, with respect to the Certificates
of any Trust on any Current Distribution Date, the sum of (1) accrued and unpaid
interest on such Certificates (excluding interest, if any, payable with respect
to the Deposits relating to such Trust) and (2) the greater of:
(A) the difference between (x) the Pool Balance of such Certificates
as of the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, the original aggregate
face amount of the Certificates of such Trust) and (y) the Pool Balance of
such Certificates as of the Current Distribution Date calculated on the
basis that (i) the principal of the Non-Performing Equipment Notes held in
such Trust has been paid in full and such payments have been distributed to
the holders of such Certificates, (ii) the principal of the Performing
Equipment Notes held in such Trust has been paid when due (but without
giving effect to any acceleration of Performing Equipment Notes) and such
payments have been distributed to the holders of such Certificates and
(iii) the principal of any Equipment Notes formerly held in such Trust that
have been sold pursuant to the Intercreditor Agreement has been paid in
full and such payments have been distributed to the holders of such
Certificates, but without giving effect to any reduction in the Pool
Balance as a result of any distribution attributable to Deposits occurring
after the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, occurring after the
initial issuance of the Certificates of such Trust), and
(B) the amount of the excess, if any, of (i) the Pool Balance of such
Class of Certificates as of the immediately preceding Distribution Date
(or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), less the
amount of the Deposits for such Class of Certificates as of such preceding
Distribution Date (or, if the Current
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Distribution Date is the first Distribution Date, the original aggregate
amount of the Deposits for such Class of Certificates) other than any
portion of such Deposits thereafter used to acquire Equipment Notes
pursuant to the Note Purchase Agreement, over (ii) the Aggregate LTV
Collateral Amount for such Class of Certificates for the Current
Distribution Date;
provided that, until the date of the initial LTV Appraisals, clause (B) shall
not apply.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
"Aggregate LTV Collateral Amount" for any Class of Certificates for any
Distribution Date means (i) the sum of the applicable LTV Collateral Amounts for
each Aircraft, minus (ii) the Pool Balance for each Class of Certificates, if
any, senior to such Class, after giving effect to any distribution of principal
on such Distribution Date with respect to such senior Class or Classes.
"LTV Collateral Amount" of any Aircraft for any Class of Certificates
means, as of any Distribution Date, the lesser of (i) the LTV Ratio for such
Class of Certificates multiplied by the Appraised Current Market Value of such
Aircraft (or with respect to any such Aircraft which has suffered an Event of
Loss under and as defined in the relevant Lease, in the case of a Leased
Aircraft, or relevant Indenture, in the case of an Owned Aircraft, the amount of
the insurance proceeds paid to the related Loan Trustee in respect thereof to
the extent then held by such Loan Trustee (and/or on deposit in the Special
Payments Account) or payable to such Loan Trustee in respect thereof) and (ii)
the outstanding principal amount of the Equipment Notes secured by such Aircraft
after giving effect to any principal payments of such Equipment Notes on or
before such Distribution Date.
"LTV Ratio" means for the Class A Certificates 40.50%, for the Class B
Certificates 53.75% and for the Class C Certificates 68.00%.
"Appraised Current Market Value" of any Aircraft means the lower of the
average and the median of the most recent three LTV Appraisals of such Aircraft.
After a Triggering Event occurs and any Equipment Note becomes a Non-Performing
Equipment Note, the Subordination Agent shall obtain LTV Appraisals of the
Aircraft securing such Equipment Note as soon as practicable and additional LTV
Appraisals on or prior to each anniversary of the date of such initial LTV
Appraisals; provided that if the Controlling Party reasonably objects to the
appraised value of the Aircraft shown in such LTV Appraisals, the Controlling
Party shall have the right to obtain or cause to be obtained substitute LTV
Appraisals (including LTV Appraisals based upon physical inspection of such
Aircraft).
"LTV Appraisal" means a current fair market value appraisal (which may be a
"desk-top" appraisal) performed by any Appraiser or any other nationally
recognized appraiser on the basis of an arm's-length 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, consent or waiver under such Equipment Note or the related
Indenture (or, if applicable, the related Lease, the related Participation
Agreement or other related document), (i) if no Indenture Default shall have
occurred and be continuing with respect to such Indenture,
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the Subordination Agent shall request instructions from the Trustee(s) and shall
vote or consent in accordance with the directions of such Trustee(s) and (ii) if
any Indenture Default (which, in the case of any Leased Aircraft Indenture, has
not been cured by the applicable Owner Trustee or Owner Participant) shall have
occurred and be continuing with respect to such Indenture, the Subordination
Agent will exercise its voting rights as directed by the Controlling Party,
subject to certain limitations; provided that no such amendment, modification,
consent or waiver shall, without the consent of the Liquidity Provider, reduce
the amount of rent, supplemental rent or stipulated loss values payable by
Continental under any Lease or reduce the amount of principal or interest
payable by Continental under any Equipment Note issued under any Owned Aircraft
Indenture. (Intercreditor Agreement, Section 9.1(b))
ADDITION OF TRUSTEE FOR CLASS D CERTIFICATES
If the Class D Certificates are issued, the Class D Trustee will become a
party to the Intercreditor Agreement.
THE SUBORDINATION AGENT
Wilmington Trust Company will be the Subordination Agent under the
Intercreditor Agreement. Continental and its affiliates may from time to time
enter into banking and trustee relationships with the Subordination Agent and
its affiliates. The Subordination Agent's address is Wilmington Trust Company,
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Corporate Trust Administration.
The Subordination Agent may resign at any time, in which event a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. The Controlling Party may remove the Subordination Agent for cause as
provided in the Intercreditor Agreement. In such circumstances, a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. Any resignation or removal of the Subordination Agent and appointment
of a successor Subordination Agent does not become effective until acceptance of
the appointment by the successor Subordination Agent. (Intercreditor Agreement,
Section 8.1)
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DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft consist of four 737-524, six Boeing 737-724, seven Boeing
737-824, five Boeing 757-224 aircraft and two Boeing 777-224 aircraft, all of
which will be newly delivered by the manufacturer at the time that the Equipment
Notes relating thereto are issued. The Aircraft have been designed to be in
compliance with Stage 3 noise level standards, which are the most restrictive
regulatory standards currently in effect in the United States for aircraft noise
abatement.
Boeing 737-500 Aircraft
The Boeing 737-500 aircraft is a medium-range aircraft with a seating
capacity of approximately 104 passengers. The engine type utilized on
Continental's 737-524 is anticipated to be the CFM International, Inc.
CFM56-3-B1.
Boeing 737-700 Aircraft
The Boeing 737-700 aircraft is a medium-range aircraft with a seating
capacity of approximately 124 passengers. The engine type utilized on
Continental's 737-724 aircraft is anticipated to be the CFM International, Inc.
CFM56-7B24. Although the Boeing 737-700 series has entered commercial airline
service with other carriers, the deliveries of the Boeing 737-724 aircraft to
Continental are subject to Boeing obtaining certain approvals of the FAA with
respect to such model. See "-- Deliveries of Aircraft".
Boeing 737-800 Aircraft
The Boeing 737-800 aircraft is a medium-range aircraft with a seating
capacity of approximately 155 passengers. The Boeing 737-800 has not yet entered
commercial airline service, and the initial delivery of such model is scheduled
for March 1998. The engine type utilized on Continental's 737-824 aircraft is
anticipated to be the CFM International, Inc. CFM56-7B26. Deliveries of the
Boeing 737-824 aircraft to Continental are subject to Boeing obtaining certain
approvals of the FAA with respect to such model. See "-- Deliveries of
Aircraft".
Boeing 757-200 Aircraft
The Boeing 757-200 aircraft is a medium-range aircraft with a seating of
approximately 186 passengers. The engine type utilized on Continental's 757-224
is anticipated to be the Rolls Royce RB211-535E4B.
Boeing 777-200 Aircraft
The Boeing 777-200 aircraft is a long-range aircraft with a seating
capacity of approximately 285 passengers. The engine type utilized on
Continental's 777-224 is anticipated to be the General Electric GE90. Although
the Boeing 777-200 series has entered commercial airline service with other
carriers, the deliveries of the Boeing 777-224 aircraft to Continental are
subject to Boeing obtaining certain approvals of the FAA with respect to such
model. See "-- Deliveries of Aircraft".
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<PAGE> 76
THE APPRAISALS
The table below sets forth the appraised values and certain additional
information regarding the Aircraft.
<TABLE>
<CAPTION>
EXPECTED
REGISTRATION MANUFACTURER'S DELIVERY
AIRCRAFT TYPE ENGINE TYPE NUMBER SERIAL NUMBER MONTH*
- --------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Boeing 737-524 CFM56-3-B1 N14664 28925 September 1998
Boeing 737-524 CFM56-3-B1 N13665 28926 September 1998
Boeing 737-524 CFM56-3-B1 N14667 28927 October 1998
Boeing 737-524 CFM56-3-B1 N14668 28928 October 1998
Boeing 737-724 CFM56-7B24 N54711 28782 August 1998
Boeing 737-724 CFM56-7B24 N15712 28783 August 1998
Boeing 737-724 CFM56-7B24 N16713 28784 August 1998
Boeing 737-724 CFM56-7B24 N33714 28785 September 1998
Boeing 737-724 CFM56-7B24 N24715 28786 October 1998
Boeing 737-724 CFM56-7B24 N13716 28787 November 1998
Boeing 737-824 CFM56-7B26 N18220 28929 October 1998
Boeing 737-824 CFM56-7B26 N12221 28930 November 1998
Boeing 737-824 CFM56-7B26 N34222 28931 December 1998
Boeing 737-824 CFM56-7B26 N18223 28932 December 1998
Boeing 737-824 CFM56-7B26 N24224 28933 December 1998
Boeing 737-824 CFM56-7B26 N12225 28934 December 1998
Boeing 737-824 CFM56-7B26 N26226 28935 December 1998
Boeing 757-224 RB211-535E4B N48127 28968 February 1998
Boeing 757-224 RB211-535E4B N17128 27567 March 1998
Boeing 757-224 RB211-535E4B N29129 28969 March 1998
Boeing 757-224 RB211-535E4B N19130 28970 April 1998
Boeing 757-224 RB211-535E4B N33132 28972 June 1998
Boeing 777-224 GE90 N78004 27580 November 1998
Boeing 777-224 GE90 N78005 27581 December 1998
<CAPTION>
APPRAISED VALUE
------------------------------------------------------------
AIRCRAFT TYPE AISI BK MBA
- --------------- -------------- ---------------- ---------------
<S> <C> <C> <C>
Boeing 737-524 $ 34,480,000 $ 28,500,000 $ 27,670,000
Boeing 737-524 34,480,000 28,500,000 27,670,000
Boeing 737-524 34,560,000 28,600,000 27,730,000
Boeing 737-524 34,560,000 28,600,000 27,730,000
Boeing 737-724 41,110,000 37,800,000 37,530,000
Boeing 737-724 41,110,000 37,800,000 37,530,000
Boeing 737-724 41,110,000 37,800,000 37,530,000
Boeing 737-724 41,210,000 37,900,000 37,600,000
Boeing 737-724 41,310,000 38,000,000 37,680,000
Boeing 737-724 41,410,000 38,000,000 37,750,000
Boeing 737-824 45,800,000 43,500,000 44,660,000
Boeing 737-824 45,910,000 43,500,000 44,750,000
Boeing 737-824 46,020,000 43,500,000 44,840,000
Boeing 737-824 46,020,000 43,500,000 44,840,000
Boeing 737-824 46,020,000 43,500,000 44,840,000
Boeing 737-824 46,020,000 43,500,000 44,840,000
Boeing 737-824 46,020,000 43,500,000 44,840,000
Boeing 757-224 59,600,000 54,350,000 55,870,000
Boeing 757-224 59,750,000 54,450,000 55,980,000
Boeing 757-224 59,750,000 54,450,000 55,980,000
Boeing 757-224 59,890,000 54,450,000 56,100,000
Boeing 757-224 60,190,000 54,650,000 56,330,000
Boeing 777-224 134,370,000 127,000,000 131,840,000
Boeing 777-224 134,700,000 127,000,000 132,110,000
-------------- -------------- --------------
Total $1,275,400,000 $1,172,350,000 $1,194,240,000
============== ============== ==============
</TABLE>
- ---------------
* Reflects the scheduled delivery month under Continental's purchase agreements
with Boeing. The actual delivery date for any Aircraft may be subject to delay
or acceleration. See "-- Deliveries of Aircraft".
The appraised values set forth in the foregoing chart were determined by
the following three independent aircraft appraisal and consulting firms: AISI,
BK and MBA. Each Appraiser was asked to provide its opinion as to the appraised
value of each Aircraft as of February 5, January 29 and February 5, 1998,
respectively, and projected as of the scheduled delivery month of each such
Aircraft. As part of this process, all three Appraisers performed "desk-top"
appraisals without any physical inspection of the Aircraft. The appraisals are
based on various assumptions and methodologies, which vary among the appraisals.
The Appraisers have delivered letters summarizing their respective appraisals,
copies of which are annexed to this Prospectus Supplement as Appendix II. For a
discussion of the assumptions and methodologies used in each of the appraisals,
reference is hereby made to such summaries.
An appraisal is only an estimate of value, is not indicative of the price
at which an aircraft may be purchased from the manufacturer and should not be
relied upon as a measure of realizable value; the proceeds realized upon a sale
of any Aircraft may be less than the appraised value thereof. The value of the
Aircraft in the event of the exercise of remedies under the applicable Indenture
will depend on market and economic conditions, the availability of buyers, the
condition of the Aircraft and other similar factors. Accordingly, there can be
no assurance that the proceeds realized upon any such exercise with respect to
the Equipment Notes and the Aircraft pursuant to the applicable Indenture would
equal the appraised value of such Aircraft or be sufficient to satisfy in full
payments due on the Equipment Notes issued thereunder or the Certificates.
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<PAGE> 77
DELIVERIES OF AIRCRAFT
The Aircraft are scheduled for delivery under Continental's purchase
agreements with Boeing from February 1998 through December 1998. See the table
under "-- The Appraisals" for the scheduled month of delivery of each Aircraft.
Under such purchase agreements, delivery of an Aircraft may be delayed due to
"Excusable Delay", which is defined to include, among other things, acts of God,
governmental acts or failures to act, strikes or other labor troubles, inability
to procure materials, or any other cause beyond Boeing's control or not
occasioned by Boeing's fault or negligence. Boeing has recently announced that
it is experiencing delays in deliveries of Aircraft, and the delivery schedule
for the Aircraft described above reflects adjustments made by Boeing as a result
of such delays. Continental cannot predict whether further adjustments in such
schedule will be required. In addition, while the Boeing 737-700 series and the
Boeing 777-200 series have entered commercial airline service with other
carriers, the Boeing 737-724 and 777-224 aircraft models have not yet received
the necessary FAA approvals, which Boeing is required to obtain under its
purchase agreement with Continental. Boeing has advised Continental that it
expects to receive such approvals prior to the scheduled deliveries to
Continental, although no assurance can be given that this will occur. The first
of the six Boeing 737-724 aircraft included in the Aircraft is scheduled for
delivery in August 1998, and the first of the two Boeing 777-224 aircraft
included in the Aircraft is scheduled for delivery in November 1998. Also, the
Boeing 737-800 aircraft models have not yet received the necessary FAA
approvals, which Boeing is required to obtain under its purchase agreement with
Continental. Boeing has advised Continental that it expects to receive such
approvals by no later than March 1998, although no assurance can be given that
this will occur. The first of the seven Boeing 737-824 aircraft included in the
Aircraft is scheduled for delivery in October 1998.
The Note Purchase Agreement provides that the Delivery Period will expire
on January 31, 1999, subject to extension if the Equipment Notes relating to all
of the Aircraft (or Substitute Aircraft in lieu thereof) have not been purchased
by the Trustees on or prior to such date due to any reason beyond the control of
Continental and not occasioned by Continental's fault or negligence, to the
earlier of (i) the date on which the Trustees purchase Equipment Notes relating
to the last Aircraft (or a Substitute Aircraft in lieu thereof) and (ii) June
30, 1999. In addition, if a labor strike occurs at Boeing prior to the scheduled
expiration of the Delivery Period, the expiration date of the Delivery Period
will be extended by the number of days that such strike continued in effect.
If delivery of any Aircraft is delayed by more than 30 days after the month
scheduled for delivery or beyond January 31, 1999, Continental has the right to
replace such Aircraft with a Substitute Aircraft, subject to certain conditions.
See "-- Substitute Aircraft". If delivery of any Aircraft is delayed beyond the
Delivery Period Termination Date and Continental does not exercise its right to
replace such Aircraft with a Substitute Aircraft, there will be unused Deposits
that will be distributed to Certificateholders together with accrued and unpaid
interest thereon and, if applicable, a premium. See "Description of the Deposit
Agreements -- Unused Deposits".
SUBSTITUTE AIRCRAFT
If the delivery date for any Aircraft is delayed (i) more than 30 days
after the month scheduled for delivery or (ii) beyond January 31, 1999,
Continental may identify for delivery a substitute aircraft (each, a "Substitute
Aircraft") therefor meeting the following conditions: (i) a Substitute Aircraft
must be a Boeing 737-500, 737-700, 737-800, 757-200 or 777-200 aircraft
manufactured after the Issuance Date, (ii) one or more Substitute Aircraft of
the same or different types may be substituted for one or more Aircraft of the
same or different types so long as after giving effect thereto the maximum
principal amount of Equipment Notes of each Series issued in respect of the
Substitute Aircraft under the Mandatory Economic Terms would not exceed the
maximum principal amount of the Equipment Notes of each Series that could have
been issued under the Mandatory Economic Terms in respect of the replaced
Aircraft and (iii) Continental will be obligated to obtain written confirmation
from each Rating Agency that substituting such Substitute Aircraft for the
replaced Aircraft will not result in a withdrawal, suspension or downgrading of
the ratings of any Class of Certificates.
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<PAGE> 78
DESCRIPTION OF THE EQUIPMENT NOTES
The following summary describes all material terms of the Equipment Notes
and supplements (and, to the extent inconsistent therewith, replaces) the
description of the general terms and provisions relating to the Equipment Notes,
the Indentures, the Leases, the Participation Agreements, the trust agreements
under which the Owner Trustees act on behalf of the Owner Participants (the
"Trust Agreements") and the Note Purchase Agreement set forth in the Prospectus.
The summaries make use of terms defined in and are qualified in their entirety
by reference to all of the provisions of the Equipment Notes, the Indentures,
the Leases, the Participation Agreements, the Trust Agreements and the Note
Purchase Agreement, 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. Except as
otherwise indicated, the following summaries relate to the Equipment Notes, the
Indenture, the Lease, the Participation Agreement and the Trust Agreement that
may be applicable to each Aircraft.
Under the Note Purchase Agreement, Continental will have the option of
entering into a leveraged lease financing or a debt financing with respect to
each Aircraft. The Note Purchase Agreement provides for the relevant parties to
enter into either (i) with respect to each Leased Aircraft, a Participation
Agreement, a Lease and an Indenture (among other documents) relating to the
financing of such Aircraft and (ii) with respect to each Owned Aircraft, a
Participation Agreement and an Owned Aircraft Indenture relating to the
financing of such Owned Aircraft. The description of such agreements in this
Prospectus Supplement is based on the forms of such agreements annexed to the
Note Purchase Agreement.
Continental has obtained the commitment of one company to act as the Owner
Participant with respect to leveraged leases for certain of the Aircraft and
plans to seek commitments from others for the remaining Aircraft. The existing
commitment is subject to satisfaction of certain conditions, and Continental may
elect to terminate such commitment. Accordingly, Continental may select one or
more other Owner Participants for some or all of the Aircraft or finance such
Aircraft as Owned Aircraft rather than Leased Aircraft. Such Owner Participants
may request revisions to the forms of the Participation Agreement, the Lease and
the Leased Aircraft Indenture that are contemplated by the Note Purchase
Agreement, so that the terms of such agreements applicable to any particular
Leased Aircraft may differ from the description of such agreements contained in
this Prospectus Supplement. However, under the Note Purchase Agreement, the
terms of such agreements are required to (i) contain the Mandatory Documents
Terms and (ii) not vary the Mandatory Economic Terms. In addition, Continental
will be obligated (i) to certify to the Trustees that any such modifications do
not materially and adversely affect the Certificateholders and (ii) to obtain
written confirmation from each Rating Agency that the use of versions of such
agreements modified in any material respect would not result in a withdrawal,
suspension or downgrading of the ratings of any Class of Certificates. See
"Description of the Certificates -- Obligation to Purchase Equipment Notes".
Each Owner Participant will be required to satisfy certain requirements,
including having a minimum combined capital and surplus or net worth.
GENERAL
The Equipment Notes will be issued in three series with respect to each
Aircraft, provided that Continental may elect to issue a fourth series with
respect to Owned Aircraft, which will be funded from sources other than this
Offering. See "Description of the Certificates -- Possible Issuance of Class D
Certificates". The Equipment Notes with respect to each Leased Aircraft will be
issued under a separate Leased Aircraft Indenture between First Security Bank,
National Association, as Owner Trustee of a trust for the benefit of the Owner
Participant who will be the beneficial owner of such Aircraft, and Wilmington
Trust Company, as Leased Aircraft Trustee. The Equipment Notes with respect to
each Owned Aircraft will be issued under a separate Owned Aircraft Indenture
between Continental and Wilmington Trust Company, as Owned Aircraft Trustee. The
Indentures will not provide for defeasance, or discharge upon deposit of cash or
certain obligations of the United States, notwithstanding the description of
defeasance in the Prospectus.
The related Owner Trustee will lease each Leased Aircraft to Continental
pursuant to a separate Lease between such Owner Trustee and Continental with
respect to such Leased Aircraft. Under each Lease,
S-78
<PAGE> 79
Continental will be obligated to make or cause to be made rental and other
payments to the related Leased Aircraft Trustee on behalf of the related Owner
Trustee, which rental and other payments will be at least sufficient to pay in
full when due all payments required to be made on the Equipment Notes issued
with respect to such Leased Aircraft. The Equipment Notes issued with respect to
the Leased Aircraft are not, however, direct obligations of, or guaranteed by,
Continental. Continental's rental obligations under each Lease and Continental's
obligations under the Equipment Notes issued with respect to each Owned Aircraft
will be general obligations of Continental.
SUBORDINATION
Series B Equipment Notes issued in respect of an Aircraft will be
subordinated in right of payment to Series A Equipment Notes issued in respect
of such Aircraft; Series C Equipment Notes issued in respect of such Aircraft
will be subordinated in right of payment to such Series B Equipment Notes and,
if Continental elects to issue Series D Equipment Notes with respect to an Owned
Aircraft, they will be subordinated in right of payment to the Series C
Equipment Notes issued with respect to such Owned Aircraft. On each Equipment
Note payment date, (i) payments of interest and principal due on Series A
Equipment Notes issued in respect of an Aircraft will be made prior to payments
of interest and principal due on Series B Equipment Notes issued in respect of
such Aircraft; (ii) payments of interest and principal due on Series B Equipment
Notes issued in respect of an Aircraft will be made prior to payments of
interest and principal due on Series C Equipment Notes issued in respect of such
Aircraft; and (iii) if Continental elects to issue Series D Equipment Notes with
respect to an Owned Aircraft, payments of interest and principal due on such
Series C Equipment Notes will be made prior to payments of interest and
principal due on Series D Equipment Notes issued in respect of such Aircraft.
PRINCIPAL AND INTEREST PAYMENTS
Subject to the provisions of the Intercreditor Agreement, interest paid on
the Equipment Notes held in each Trust will be passed through to the
Certificateholders of such Trust on the dates and at the rate per annum set
forth on the cover page of this Prospectus Supplement with respect to
Certificates issued by such Trust until the final expected Regular Distribution
Date for such Trust. Subject to the provisions of the Intercreditor Agreement,
principal paid on the Equipment Notes held in each Trust will be passed through
to the Certificateholders of such Trust in scheduled amounts on the dates set
forth herein until the final expected Regular Distribution Date for such Trust.
Interest will be payable on the unpaid principal amount of each Equipment
Note at the rate applicable to such Equipment Note on January 2, and July 2 of
each year, commencing on the first such date to occur after initial issuance
thereof. Such interest will be computed on the basis of a 360-day year of twelve
30-day months.
Scheduled principal payments on the Equipment Notes will be made on January
2 and July 2 in certain years, commencing on January 2, 1999. See "Description
of the Certificates -- Pool Factors" for a discussion of the scheduled payments
of principal of the Equipment Notes and possible revisions thereto.
If any date scheduled for a payment of principal, premium (if any) or
interest with respect to the Equipment Notes is not a Business Day, such payment
will be made on the next succeeding Business Day without any additional
interest.
REDEMPTION
If an Event of Loss occurs with respect to an Aircraft and such Aircraft is
not replaced by Continental under the related Lease (in the case of a Leased
Aircraft) or under the related Owned Aircraft Indenture (in the case of an Owned
Aircraft), the Equipment Notes issued with respect to such Aircraft will be
redeemed, in whole, in each case at a price equal to the aggregate unpaid
principal amount thereof, together with accrued interest thereon to, but not
including, the date of redemption, but without premium, on a Special
Distribution Date. (Leased Aircraft Indentures, Section 2.10(a); Owned Aircraft
Indentures, Section 2.10)
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<PAGE> 80
If Continental exercises its right to terminate a Lease under Section 9 of
such Lease, the Equipment Notes relating to the applicable Leased Aircraft will
be redeemed, in whole, on a Special Distribution Date at a price equal to the
aggregate unpaid principal amount thereof, together with accrued and unpaid
interest thereon to, but not including, the date of redemption, plus a
Make-Whole Premium. (Leased Aircraft Indentures, Section 2.10(b)) See "-- The
Leases and Certain Provisions of the Owned Aircraft Indentures -- Lease
Termination".
All of the Equipment Notes issued with respect to a Leased Aircraft may be
redeemed prior to maturity as part of a refunding or refinancing thereof under
Section 11 of the applicable Participation Agreement, and all of the Equipment
Notes issued with respect to the Owned Aircraft may be redeemed prior to
maturity at any time at the option of Continental, in each case at a price equal
to the aggregate unpaid principal thereof, together with accrued and unpaid
interest thereon to, but not including, the date of redemption, plus a Make-
Whole Premium. (Indentures, Section 2.11) If notice of such a redemption shall
have been given in connection with a refinancing of Equipment Notes with respect
to a Leased Aircraft, such notice may be revoked not later than three days prior
to the proposed redemption date. (Leased Aircraft Indentures, Section 2.12).
If, with respect to a Leased Aircraft, (x) one or more Lease Events of
Default shall have occurred and been continuing, (y) in the event of a
bankruptcy proceeding involving Continental, (i) during the Section 1110 Period,
the trustee in such proceeding or Continental does not assume or agree to
perform its obligations under the related Lease or (ii) at any time after
assuming or agreeing to perform such obligations, such trustee or Continental
ceases to perform such obligations such that the stay period applicable under
the U.S. Bankruptcy Code comes to an end or (z) the Equipment Notes with respect
to such Aircraft have been accelerated or the Leased Aircraft Trustee with
respect to such Equipment Notes takes action or notifies the applicable Owner
Trustee that it intends to take action to foreclose the lien of the related
Leased Aircraft Indenture or otherwise commence the exercise of any significant
remedy under such Indenture or the related Lease, then in each case all, but not
less than all, of the Equipment Notes issued with respect to such Leased
Aircraft may be purchased by the related Owner Trustee or Owner Participant on
the applicable purchase date at a price equal to the aggregate unpaid principal
thereof, together with accrued and unpaid interest thereon to, but not
including, the date of purchase, but without any premium (provided that a
Make-Whole Premium shall be payable if such Equipment Notes are to be purchased
pursuant to clause (x) when a Lease Event of Default shall have occurred and
been continuing for less than 120 days). (Leased Aircraft Indentures, Section
2.13) Continental as owner of the Owned Aircraft has no comparable right under
the Owned Aircraft Indentures to purchase the Equipment Notes under such
circumstances.
"Make-Whole Premium" means, with respect to any Equipment Note, an amount
(as determined by an independent investment 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 computed by
discounting such payments on a semiannual basis on each payment date under the
applicable Indenture (assuming a 360-day year of twelve 30-day months) using a
discount rate equal to the Treasury Yield over (b) the outstanding principal
amount of such Equipment Note plus accrued interest to the date of
determination.
For purposes of determining the Make-Whole Premium and the Deposit
Make-Whole Premium, "Treasury Yield" means, at the date of determination with
respect to any Equipment Note, the interest rate (expressed as a 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
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<PAGE> 81
weekly statistical release designated as such, or any successor publication,
published by the Board of Governors of the Federal Reserve System. The date of
determination of a Make-Whole Premium shall be the third Business Day prior to
the applicable payment or redemption date and the "most recent H.15(519)" means
the H.15(519) published prior to the close of business on the third Business Day
prior to the applicable payment or redemption date.
"Average Life Date" for any Equipment Note shall be the date which follows
the time of determination by a period equal to the Remaining Weighted Average
Life of such Equipment Note. "Remaining Weighted Average Life" on a given date
with respect to any Equipment Note shall be the number of days equal to the
quotient obtained by dividing (a) the sum of each of the products obtained by
multiplying (i) the amount of each then remaining scheduled payment of principal
of such Equipment Note by (ii) the number of days from and including such
determination date to but excluding the date on which such payment of principal
is scheduled to be made, by (b) the then outstanding principal amount of such
Equipment Note.
SECURITY
The Equipment Notes issued with respect to each Leased Aircraft will be
secured by (i) an assignment by the related Owner Trustee to the related Leased
Aircraft Trustee of such Owner Trustee's rights, except for certain limited
rights, under the Lease with respect to the related Aircraft, including the
right to receive payments of rent thereunder, (ii) a mortgage to such Leased
Aircraft Trustee of such Aircraft, subject to the rights of Continental under
such Lease, and (iii) an assignment to such Leased Aircraft Trustee of certain
of such Owner Trustee's rights under the purchase agreement between Continental
and the Aircraft manufacturer. Unless and until an Indenture Default with
respect to a Leased Aircraft has occurred and is continuing, the Leased Aircraft
Trustee may not exercise the rights of the Owner Trustee under the related
Lease, except the Owner Trustee's right to receive payments of rent due
thereunder. The assignment by the Owner Trustee to the Leased Aircraft Trustee
of its rights under the related Lease will exclude certain rights of such Owner
Trustee and the related Owner Participant, including the rights of the Owner
Trustee and the Owner Participant with respect to indemnification by Continental
for certain matters, insurance proceeds payable to such Owner Trustee in its
individual capacity or to such Owner Participant under public liability
insurance maintained by Continental under such Lease or by such Owner Trustee or
such Owner Participant, insurance proceeds payable to such Owner Trustee in its
individual capacity or to such Owner Participant under certain casualty
insurance maintained by such Owner Trustee or such Owner Participant under such
Lease and certain reimbursement payments made by Continental to such Owner
Trustee. (Leased Aircraft Indenture, Granting Clause) The Equipment Notes will
not be cross-collateralized (except in certain cases, if any, where the related
Owner Participant and Continental shall agree to cross-collateralization), and,
consequently, the Equipment Notes issued in respect of any one Aircraft will not
be secured by any of the other Aircraft or replacement aircraft therefor (as
described in "-- The Leases and Certain Provisions of the Owned Aircraft
Indentures Events of Loss") or the Leases related thereto.
The Equipment Notes issued with respect to each Owned Aircraft will be
secured by (i) a mortgage to the Owned Aircraft Trustee of such Aircraft and
(ii) an assignment to the Owned Aircraft Trustee of certain of Continental's
rights under its purchase agreement with the Aircraft manufacturer.
Funds, if any, held from time to time by the Loan Trustee with respect to
any Aircraft, including funds held as the result of an Event of Loss to such
Aircraft or, in the case of a Leased Aircraft, termination of the Lease, if any,
relating thereto, will be invested and reinvested by such Loan Trustee, at the
direction of the related Owner Trustee in the case of the Leased Aircraft or
Continental in the case of the Owned Aircraft, in investments described in the
related Indenture. (Leased Aircraft Indentures, Section 5.09; Owned Aircraft
Indentures, Section 6.06)
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<PAGE> 82
LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The following tables set forth illustrative loan to Aircraft value ratios
for the Equipment Notes issued in respect of Aircraft as of the Regular
Distribution Dates that occur after the scheduled date of original issuance of
such Equipment Notes, assuming that the Equipment Notes in the maximum principal
amount are issued in respect of each such Aircraft. These examples were utilized
by Continental in preparing the Assumed Amortization Schedule, although the
amortization schedule for the Equipment Notes issued with respect to an Aircraft
may vary from such assumed schedule so long as it complies with the Mandatory
Economic Terms. Accordingly, the schedules set forth below may not be applicable
in the case of any particular Aircraft. For example, in the event the final
maturity date of the Equipment Notes for a Boeing 737-524 aircraft were
significantly less than that shown below, the average life of the related
Certificates may be correspondingly reduced, subject to compliance with the
Mandatory Economic Terms. See "Description of the Certificates -- Pool Factors".
The LTV was obtained by dividing (i) the outstanding balance (assuming no
payment default) of such Equipment Notes determined immediately after giving
effect to the payments scheduled to be made on each such Regular Distribution
Date by (ii) the assumed value (the "Assumed Aircraft Value") of the Aircraft
securing such Equipment Notes.
The following tables are based on the assumption (the "Depreciation
Assumption") that the value of each Aircraft set forth opposite the initial
Regular Distribution Date included in each table depreciates by approximately 2%
of the initial appraised value per year until the fifteenth year after the year
of delivery of such Aircraft and by approximately 4% of the initial appraised
value per year thereafter. Other rates or methods of depreciation would result
in materially different loan to Aircraft value ratios, and no assurance can be
given (i) that the depreciation rates and method assumed for the purposes of the
tables are the ones most likely to occur or (ii) as to the actual future value
of any Aircraft. Thus the tables should not be considered a forecast or
prediction of expected or likely loan to Aircraft value ratios, but simply a
mathematical calculation based on one set of assumptions.
<TABLE>
<CAPTION>
BOEING 737-524 BOEING 737-724
---------------------------------------- ----------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT LOAN TO OUTSTANDING AIRCRAFT LOAN TO
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
- ---------------- ----------- -------- ----------- ----------- -------- -----------
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
January 2, 1999 $ 19.38 $ 28.50 68.00% $ 24.00 $ 37.80 63.49%
July 2, 1999 18.11 27.93 64.86 23.52 37.04 63.49
January 2,
2000 17.20 27.93 61.58 23.43 37.04 63.25
January 2,
2001 16.22 27.36 59.30 22.82 36.29 62.89
January 2,
2002 15.18 26.79 56.66 22.18 35.53 62.42
January 2,
2003 14.06 26.22 53.62 21.50 34.78 61.81
January 2,
2004 12.87 25.65 50.16 20.77 34.02 61.06
January 2,
2005 11.59 25.08 46.22 20.00 33.26 60.13
January 2,
2006 10.23 24.51 41.74 19.18 32.51 59.00
January 2,
2007 9.07 23.94 37.90 18.30 31.75 57.65
January 2,
2008 8.49 23.37 36.32 16.43 31.00 53.00
January 2,
2009 7.73 22.80 33.91 16.10 30.24 53.24
January 2,
2010 6.68 22.23 30.05 14.52 29.48 49.26
January 2,
2011 5.37 21.66 24.80 11.44 28.73 39.83
January 2,
2012 3.97 21.09 18.83 9.83 27.97 35.14
January 2,
2013 2.47 20.52 12.05 7.78 27.22 28.58
January 2,
2014 0.87 19.95 4.37 5.58 26.46 21.11
January 2,
2015 0.00 18.81 0.00 3.24 24.95 12.98
January 2,
2016 0.00 0.00 NA 0.73 23.44 3.12
January 2,
2017 0.00 0.00 NA 0.00 21.92 0.00
</TABLE>
S-82
<PAGE> 83
<TABLE>
<CAPTION>
BOEING 737-824 BOEING 757-224
---------------------------------------- ----------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT LOAN TO OUTSTANDING AIRCRAFT LOAN TO
DATE BALANCE VALUE VALUE RATIO BALANCE VALUE VALUE RATIO
- ---------------- ----------- -------- ----------- ----------- -------- -----------
(MILLIONS) (MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
July 2, 1998 -- -- -- $ 39.00 $ 55.87 69.80%
January 2,
1999 $ 28.00 $ 44.65 62.71% 36.74 54.75 67.11
July 2, 1999 28.00 43.76 63.99 -- -- --
January 2,
2000 27.42 43.76 62.67 35.04 53.64 65.33
January 2,
2001 26.80 42.86 62.53 33.00 52.52 62.84
January 2,
2002 24.53 41.97 58.43 30.83 51.40 59.98
January 2,
2003 23.12 41.08 56.28 28.50 50.28 56.69
January 2,
2004 22.02 40.19 54.80 26.02 49.17 52.93
January 2,
2005 21.01 39.29 53.47 23.37 48.05 48.64
January 2,
2006 19.93 38.40 51.90 20.53 46.93 43.75
January 2,
2007 18.78 37.51 50.06 18.32 45.81 39.98
January 2,
2008 17.54 36.61 47.91 16.50 44.70 36.92
January 2,
2009 16.23 35.72 45.43 15.12 43.58 34.70
January 2,
2010 14.58 34.83 41.87 13.00 42.46 30.81
January 2,
2011 13.24 33.93 39.02 10.25 41.34 24.80
January 2,
2012 11.07 33.04 33.51 7.32 40.23 18.20
January 2,
2013 8.74 32.15 27.19 4.18 39.11 10.69
January 2,
2014 6.25 31.26 19.99 0.83 36.87 2.24
January 2,
2015 3.58 29.47 12.15 0.00 34.64 0.00
January 2,
2016 0.73 27.68 2.64 0.00 0.00 NA
January 2,
2017 0.00 25.90 0.00 0.00 0.00 NA
</TABLE>
<TABLE>
<CAPTION>
BOEING 777-224
----------------------------------------
EQUIPMENT
NOTE ASSUMED
OUTSTANDING AIRCRAFT LOAN TO
DATE BALANCE VALUE VALUE RATIO
- ---------------- ----------- -------- -----------
(MILLIONS) (MILLIONS)
<S> <C> <C> <C>
January 2,
1999 $ 80.00 $ 131.07 61.04%
January 2,
2000 78.14 128.45 60.83
January 2,
2001 76.15 125.83 60.52
January 2,
2002 74.04 123.21 60.09
January 2,
2003 71.78 120.58 59.53
January 2,
2004 69.37 117.96 58.81
January 2,
2005 66.81 115.34 57.92
January 2, 2006 64.07 112.72 56.84
January 2,
2007 61.15 110.10 55.54
January 2,
2008 57.22 107.48 53.24
January 2,
2009 54.47 104.86 51.95
January 2,
2010 49.30 102.23 48.22
January 2,
2011 44.92 99.61 45.10
January 2,
2012 33.52 96.99 34.56
January 2,
2013 26.73 94.37 28.32
January 2,
2014 19.47 91.75 21.22
January 2,
2015 11.70 86.51 13.53
January 2,
2016 3.40 81.26 4.19
January 2,
2017 0.00 76.02 0.00
</TABLE>
LIMITATION OF LIABILITY
The Equipment Notes issued with respect to the Leased Aircraft are not
direct obligations of, or guaranteed by, Continental, any Owner Participant or
the Leased Aircraft Trustees or the Owner Trustees in their individual
capacities. None of the Owner Trustees, the Owner Participants or the Leased
Aircraft Trustees, or any affiliates thereof, will be personally liable to any
holder of an Equipment Note or, in the case of the Owner Trustees and the Owner
Participants, to the Leased Aircraft Trustees for any amounts payable under the
Equipment Notes or, except as provided in each Leased Aircraft Indenture, for
any liability under such Leased Aircraft Indenture. All payments of principal
of, premium, if any, and interest on the Equipment
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<PAGE> 84
Notes issued with respect to any Leased Aircraft (other than payments made in
connection with an optional redemption or purchase of Equipment Notes issued
with respect to a Leased Aircraft by the related Owner Trustee or the related
Owner Participant) will be made only from the assets subject to the lien of the
Indenture with respect to such Leased Aircraft or the income and proceeds
received by the related Leased Aircraft Trustee therefrom (including rent
payable by Continental under the Lease with respect to such Leased Aircraft).
The Equipment Notes issued with respect to the Owned Aircraft will be
direct obligations of Continental.
Except as otherwise provided in the Indentures, each Owner Trustee and each
Loan Trustee, in its individual capacity, will not be answerable or accountable
under the Indentures or under the Equipment Notes under any circumstances
except, among other things, for its own willful misconduct or gross negligence.
None of the Owner Participants will have any duty or responsibility under any of
the Leased Aircraft Indentures or the Equipment Notes to the Leased Aircraft
Trustees or to any holder of any Equipment Note.
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will include: (a) in the case of a
Leased Aircraft Indenture, the occurrence of any Lease Event of Default under
the related Lease (other than the failure to make certain indemnity payments and
other payments to the related Owner Trustee or Owner Participant unless a notice
is given by such Owner Trustee that such failure shall constitute an Indenture
Default), (b) the failure by the related Owner Trustee (other than as a result
of a Lease Default or Lease Event of Default), in the case of a Leased Aircraft
Indenture, or Continental, in the case of an Owned Aircraft Indenture, to pay
any interest or principal or premium, if any, when due, under such Indenture or
under any Equipment Note issued thereunder that continues for more than ten
Business Days, in the case of principal, interest or Make-Whole Premium, and, in
all other cases, ten Business Days after the relevant Owner Trustee or Owner
Participant, in the case of a Leased Aircraft Indenture, or Continental, in the
case of an Owned Aircraft Indenture, receives written demand from the related
Loan Trustee or holder of an Equipment Note, (c) the failure by the related
Owner Participant or the related Owner Trustee (in its individual capacity), in
the case of a Leased Aircraft Indenture, to discharge certain liens that
continue after notice and specified cure periods, (d) any representation or
warranty made by the related Owner Trustee or Owner Participant, in the case of
a Leased Aircraft Indenture, or Continental, in the case of an Owned Aircraft
Indenture, in such Indenture, the related Participation Agreement or certain
related documents furnished to the Loan Trustee or any holder of an Equipment
Note pursuant thereto being false or incorrect in any material respect when made
that continues to be material and adverse to the interests of the Loan Trustee
or Note Holders and remains unremedied after notice and specified cure periods,
(e) failure by Continental or the related Owner Trustee or Owner Participant to
perform or observe any covenant or obligation for the benefit of the Loan
Trustee or holders of Equipment Notes under such Indenture or certain related
documents that continues after notice and specified cure periods, (f) the
registration of the related Aircraft ceasing to be effective as a result of the
Owner Participant (in the case of a Leased Aircraft) or Continental (in the case
of an Owned Aircraft) not being a citizen of the United States, as defined in
the Transportation Code (subject to a cure period), (g) with respect to the
Owned Aircraft, the lapse or cancellation of insurance required under the Owned
Aircraft Indenture or (h) the occurrence of certain events of bankruptcy,
reorganization or insolvency of the related Owner Trustee or Owner Participant
(in the case of a Leased Aircraft) or Continental (in the case of the Owned
Aircraft). (Leased Aircraft Indentures, Section 4.02; Owned Aircraft Indenture,
Section 5.01) There will not be cross-default provisions in the Indentures or in
the Leases (unless otherwise agreed between an Owner Participant and
Continental). Consequently, events resulting in an Indenture Default under any
particular Indenture may or may not result in an Indenture Default occurring
under any other Indenture, and a Lease Event of Default under any particular
Lease may or may not constitute a Lease Event of Default under any other Lease.
If Continental fails to make any semiannual basic rental payment due under
any Lease, within a specified period after such failure the applicable Owner
Trustee may furnish to the Leased Aircraft Trustee the amount due on the
Equipment Notes issued with respect to the related Leased Aircraft, together
with any interest thereon on account of the delayed payment thereof, in which
event the Leased Aircraft Trustee and the holders of outstanding Equipment Notes
issued under such Indenture may not exercise any remedies
S-84
<PAGE> 85
otherwise available under such Indenture or such Lease as the result of such
failure to make such rental payment, unless such Owner Trustee has previously
cured three or more immediately preceding semiannual basic rental payment
defaults or, in total, six or more previous semiannual basic rental payment
defaults (or, in the case of certain Owner Participants, six or more immediately
preceding semiannual basic rental payment defaults or, in total, eight or more
previous semiannual basic rental payment defaults). The applicable Owner Trustee
also may cure any other default by Continental in the performance of its
obligations under any Lease that can be cured with the payment of money. (Leased
Aircraft Indentures, Section 4.03)
The holders of a majority in principal amount of the outstanding Equipment
Notes issued with respect to any Aircraft, by notice to the Loan Trustee, may on
behalf of all the holders waive any existing default and its consequences under
the Indenture with respect to such Aircraft, except a default in the payment of
the principal of, or premium or interest on any such Equipment Notes or a
default in respect of any covenant or provision of such Indenture that cannot be
modified or amended without the consent of each holder of Equipment Notes.
(Leased Aircraft Indentures, Section 4.08; Owned Aircraft Indenture, Section
5.06)
REMEDIES
If an Indenture Default occurs and is continuing under an Indenture, the
related Loan Trustee or the holders of a majority in principal amount of the
Equipment Notes outstanding under such Indenture may, subject to the applicable
Owner Participant's or Owner Trustee's right to cure, as discussed above,
declare the principal of all such Equipment Notes issued thereunder immediately
due and payable, together with all accrued but unpaid interest thereon, provided
that in the event of a reorganization proceeding involving Continental
instituted under Chapter 11 of the U.S. Bankruptcy Code, if no other Lease Event
of Default and no other Indenture Default (other than the failure to pay the
outstanding amount of the Equipment Notes which by such declaration shall have
become payable) exists at any time after the consummation of such proceeding,
such declaration will be automatically rescinded without any further action on
the part of any holder of Equipment Notes. The holders of a majority in
principal amount of Equipment Notes outstanding under an Indenture may rescind
any declaration of acceleration of such Equipment Notes at any time before the
judgment or decree for the payment of the money so due shall be entered if (i)
there has been paid to the related Loan Trustee an amount sufficient to pay all
principal, interest, and premium, if any, on any such Equipment Notes, to the
extent such amounts have become due otherwise than by such declaration of
acceleration and (ii) all other Indenture Defaults and incipient Indenture
Defaults with respect to any covenant or provision of such Indenture have been
cured. (Leased Aircraft Indentures, Section 4.04(b); Owned Aircraft Indenture,
Section 5.02(b))
Each Indenture provides that if an Indenture Default under such Indenture
has occurred and is continuing, the related Loan Trustee may exercise certain
rights or remedies available to it under such Indenture or under applicable law,
including (if, in the case of a Leased Aircraft, the corresponding Lease has
been declared in default) one or more of the remedies under such Indenture or,
in the case of a Leased Aircraft, such Lease with respect to the Aircraft
subject to such Lease. If an Indenture Default arises solely by reason of one or
more events or circumstances which constitute a Lease Event of Default, the
related Leased Aircraft Trustee's right to exercise remedies under a Leased
Aircraft Indenture is subject, with certain exceptions, to its having proceeded
to exercise one or more of the dispossessory remedies under the Lease with
respect to such Leased Aircraft; provided that the requirement to exercise one
or more of such remedies under such Lease shall not apply in circumstances where
such exercise has been involuntarily stayed or prohibited by applicable law or
court order for a continuous period in excess of 60 days or such period as may
be specified in Section 1110(a)(1)(A) of the U.S. Bankruptcy Code, plus an
additional period, if any, resulting from (i) the trustee or
debtor-in-possession in such proceeding agreeing to perform its obligations
under such Lease with the approval of the applicable court and its continuous
performance of such Lease under Section 1110(a)(1)(A-B) of the U.S. Bankruptcy
Code or such Leased Aircraft Trustee's consent to an extension of such period,
(ii) such Leased Aircraft Trustee's failure to give any requisite notice, or
(iii) Continental's assumption of such Lease with the approval of the relevant
court and its continuous performance of the Lease as so assumed. See "-- The
Leases and Certain Provisions of the Owned Aircraft Indentures -- Events of
Default under the Leases". Such remedies may be exercised by the related Leased
S-85
<PAGE> 86
Aircraft Trustee to the exclusion of the related Owner Trustee, subject to
certain conditions specified in such Indenture and, subject to the terms of such
Lease. Any Aircraft sold in the exercise of such remedies will be free and clear
of any rights of those parties, including the rights of Continental under the
Lease with respect to such Aircraft; provided that no exercise of any remedies
by the related Leased Aircraft Trustee may affect the rights of Continental
under any Lease unless a Lease Event of Default has occurred and is continuing.
(Leased Aircraft Indentures, Section 4.04; Leases, Section 15) The Owned
Aircraft Indentures will not contain such limitations on the Owned Aircraft
Trustee's ability to exercise remedies upon an Indenture Default under an Owned
Aircraft Indenture.
If a bankruptcy proceeding involving Continental under the U.S. Bankruptcy
Code occurs, all of the rights of the Owner Trustee as lessor under a particular
Lease will be exercised by the Owner Trustee in accordance with the terms
thereof unless (i) during the Section 1110 Period the trustee in such proceeding
or Continental does not assume or agree to perform its obligations under such
Lease, (ii) at any time after assuming or agreeing to perform such obligations,
such trustee or Continental ceases to perform such obligations or (iii) the
related Loan Trustee takes action, or notifies the Owner Trustee that such Loan
Trustee intends to take action, to foreclose the lien of the related Leased
Aircraft Indenture or otherwise commence the exercise of any significant remedy
in accordance with the Leased Aircraft Indenture. The Owner Trustee's exercise
of such rights shall be subject to certain limitations and, in no event, reduce
the amount or change the time of any payment in respect of the Equipment Notes
or adversely affect the validity or enforceability of the lien under the related
Leased Aircraft Indenture.
If the Equipment Notes issued in respect of one Aircraft are in default,
the Equipment Notes issued in respect of the other Aircraft may not be in
default, and, if not, no remedies will be exercisable under the applicable
Indentures with respect to such other Aircraft.
Section 1110 of the U.S. Bankruptcy Code provides in relevant part that the
right of lessors, conditional vendors and holders of security interests with
respect to "equipment" (as defined in Section 1110 of the U.S. Bankruptcy Code)
to take possession of such equipment in compliance with the provisions of a
lease, conditional sale contract or security agreement, as the case may be, is
not affected by (a) the automatic stay provision of the U.S. Bankruptcy Code,
which provision enjoins repossessions by creditors for the duration of the
reorganization period, (b) the provision of the U.S. Bankruptcy Code allowing
the trustee in reorganization to use property of the debtor during the
reorganization period, (c) Section 1129 of the U.S. Bankruptcy Code (which
governs the confirmation of plans of reorganization in Chapter 11 cases) and (d)
any power of the bankruptcy court to enjoin a repossession. Section 1110
provides in relevant part, however, that the right of a lessor, conditional
vendor or holder of a security interest to take possession of an aircraft in the
event of an event of default may not be exercised for 60 days following the date
of commencement of the reorganization proceedings (unless specifically permitted
by the bankruptcy court) and may not be exercised at all if, within such 60-day
period (or such longer period consented to by the lessor, conditional vendor or
holder of a security interest), the trustee in reorganization agrees to perform
the debtor's obligations that become due on or after such date and cures all
existing defaults (other than defaults resulting solely from the financial
condition, bankruptcy, insolvency or reorganization of the debtor). "Equipment"
is defined in Section 1110 of the U.S. Bankruptcy Code, in part, as an aircraft,
aircraft engine, propeller, appliance, or spare part (as defined in Section
40102 of Title 49 of the U.S. Code) that is subject to a security interest
granted by, leased to, or conditionally sold to a debtor that is a citizen of
the United States (as defined in Section 40102 of Title 49 of the U.S. Code)
holding an air carrier operating certificate issued by the Secretary of
Transportation pursuant to chapter 447 of Title 49 of the U.S. Code for aircraft
capable of carrying ten or more individuals or 6,000 pounds or more of cargo.
It is a condition to the Trustee's obligation to purchase Equipment Notes
with respect to each Aircraft that outside counsel to Continental, which is
expected to be Hughes Hubbard & Reed LLP, provide its opinion to the Trustees
that (x) if such Aircraft is a Leased Aircraft, the Owner Trustee, as lessor
under the Lease for such Aircraft, and the Leased Aircraft Trustee, as assignee
of such Owner Trustee's rights under such Lease pursuant to the related Leased
Aircraft Indenture, will be entitled to the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to the airframe and engines comprising such
Aircraft or (y) if such Aircraft is an Owned Aircraft, the Owned Aircraft
Trustee will be entitled to the benefits of Section 1110 with
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<PAGE> 87
respect to the airframe and engines comprising such Owned Aircraft, in each case
so long as Continental continues to be a "citizen of the United States" as
defined in Section 40102 of Title 49 of the U.S. Code holding an air carrier
operating certificate issued by the Secretary of Transportation pursuant to
chapter 447 of Title 49 of the U.S. Code for aircraft capable of carrying ten or
more individuals or 6,000 pounds or more of cargo. For a description of certain
limitations on the Loan Trustee's exercise of rights contained in the Indenture,
see "-- Indenture Defaults, Notice and Waiver".
The opinion of Hughes Hubbard & Reed LLP will not address the possible
replacement of an Aircraft after an Event of Loss in the future, the
consummation of which is conditioned upon the contemporaneous delivery of an
opinion of counsel to the effect that the related Loan Trustee will be entitled
to Section 1110 benefits with respect to such replacement unless there is a
change in law or court interpretation that results in Section 1110 not being
available. See "-- The Leases and Certain Provisions of the Owned Aircraft
Indentures -- Events of Loss". The opinion of Hughes Hubbard & Reed LLP will
also not address the availability of Section 1110 with respect to any possible
sublessee of a Leased Aircraft subleased by Continental or to any possible
lessee of an Owned Aircraft if it is leased by Continental.
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the related Loan Trustee may be applied to reimburse
such Loan Trustee for any tax, expense or other loss incurred by it and to pay
any other amounts due to such Loan Trustee prior to any payments to holders of
the Equipment Notes issued under such Indenture. (Indentures, Section 3.03)
In the event of bankruptcy, insolvency, receivership or like proceedings
involving an Owner Participant, it is possible that, notwithstanding that the
applicable Leased Aircraft is owned by the related Owner Trustee in trust, such
Leased Aircraft and the related Lease and Equipment Notes might become part of
such proceeding. In such event, payments under such Lease or on such Equipment
Notes might be interrupted and the ability of the related Leased Aircraft
Trustee to exercise its remedies under the related Leased Aircraft Indenture
might be restricted, although such Leased Aircraft Trustee would retain its
status as a secured creditor in respect of the related Lease and the related
Leased Aircraft.
MODIFICATION OF INDENTURES AND LEASES
Without the consent of holders of a majority in principal amount of the
Equipment Notes outstanding under any Indenture, the provisions of such
Indenture and any related Lease, Participation Agreement or Trust Agreement may
not be amended or modified, except to the extent indicated below.
Subject to certain limitations, certain provisions of any Leased Aircraft
Indenture, and of the Lease, the Participation Agreement, and the Trust
Agreement related thereto, may be amended or modified by the parties thereto
without the consent of any holders of the Equipment Notes outstanding under such
Indenture. In the case of each Lease, such provisions include, among others,
provisions relating to (i) the return to the related Owner Trustee of the
related Leased Aircraft at the end of the term of such Lease (except to the
extent that such amendment would affect the rights or exercise of remedies under
the Lease) and (ii) the renewal of such Lease and the option of Continental at
the end of the term of such Lease to purchase the related Leased Aircraft so
long as the same would not adversely affect the Note Holders. (Leased Aircraft
Indentures, Section 9.01(a)) In addition, any Indenture may be amended without
the consent of the holders of Equipment Notes to, among other things, cure any
defect or inconsistency in such Indenture or the Equipment Notes issued
thereunder, provided that such change does not adversely affect the interests of
any such holder. (Leased Aircraft Indentures, Section 9.01(c); Owned Aircraft
Indenture, Section 10.01)
Without the consent of the Liquidity Provider and the holder of each
Equipment Note outstanding under any Indenture affected thereby, no amendment or
modification of such Indenture may among other things (a) reduce the principal
amount of, or premium, if any, or interest payable on, any Equipment Notes
issued under such Indenture or change the date on which any principal, premium,
if any, or interest is due and payable, (b) permit the creation of any security
interest with respect to the property subject to the lien of such Indenture,
except as provided in such Indenture, or deprive any holder of an Equipment Note
issued under such Indenture of the benefit of the lien of such Indenture upon
the property subject thereto or (c) modify the percentage of holders of
Equipment Notes issued under such Indenture required to take or approve any
action
S-87
<PAGE> 88
under such Indenture. (Leased Aircraft Indentures, Section 9.01(b); Owned
Aircraft Indenture, Section 10.01(a))
OWNER PARTICIPANT'S RIGHT TO RESTRUCTURE
Certain Owner Participants will have the right, subject to certain
conditions, to restructure the applicable leveraged lease transaction using a
"cross-border lease", a tax lease or head-lease/sublease structure and any other
type of transaction. In no event, however, shall any such restructuring (i)
change the terms and conditions of the rights and obligations of any holder of
Equipment Notes under the relevant Aircraft Operative Agreements or any holder
of Certificates or (ii) expose any such holder to any additional risks. As a
precondition to any such restructuring, the Owner Participant will be obligated
to deliver to the Leased Aircraft Trustee an appropriate officer's certificate
as to the satisfaction of the foregoing conditions and to obtain a written
confirmation from the Rating Agencies prior to the implementation of such
restructuring to the effect that such restructuring will not adversely affect
the ratings of the Certificates.
INDEMNIFICATION
Continental will be required to indemnify each Loan Trustee, each Owner
Participant, each Owner Trustee, the Liquidity Provider, the Subordination
Agent, the Escrow Agent and each Trustee, but not the holders of Certificates,
for certain losses, claims and other matters. Continental will be required under
certain circumstances to indemnify each Owner Participant against the loss of
depreciation deductions and certain other benefits allowable for certain income
tax purposes with respect to the related Leased Aircraft.
THE LEASES AND CERTAIN PROVISIONS OF THE OWNED AIRCRAFT INDENTURES
Each Leased Aircraft will be leased to Continental by the relevant Owner
Trustee under the relevant lease agreement (each, a "Lease"). Each Owned
Aircraft will be owned by Continental.
Lease Term Rentals and Payments
Each Leased Aircraft will be leased separately by the relevant Owner
Trustee to Continental for a term commencing on the date on which the Aircraft
is acquired by the Owner Trustee and expiring on a date not earlier than the
latest maturity date of the relevant Equipment Notes, unless terminated prior to
the originally scheduled expiration date as permitted by the applicable Lease.
The semiannual basic rent payment under each Lease is payable by Continental on
each related Lease Payment Date (or, if such day is not a Business Day, on the
next Business Day), and will be assigned by the Owner Trustee under the
corresponding Leased Aircraft Indenture to provide the funds necessary to make
scheduled payments of principal and interest due from the Owner Trustee on the
Equipment Notes issued under such Indenture. In certain cases, the semiannual
basic rent payments under the Leases may be adjusted, but each Lease provides
that under no circumstances will rent payments by Continental be less than the
scheduled payments on the related Equipment Notes. Any balance of each such
semiannual basic rent payment under each Lease, after payment of amounts due on
the Equipment Notes issued under the Indenture corresponding to such Lease, will
be paid over to the Owner Trustee. (Leases, Section 3; Leased Aircraft
Indentures, Section 3.01)
"Lease Payment Date" means, with respect to each Lease, January 2 or July 2
during the term of such Lease.
Semiannual payments of interest on the Equipment Notes issued by
Continental under an Owned Aircraft Indenture are payable January 2 and July 2
of each year, commencing on the first such date after issuance thereof.
Semiannual payments of principal under the Equipment Notes issued by Continental
under an Owned Aircraft Indenture are payable on January 2 and July 2 in certain
years, commencing on January 2, 1999.
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<PAGE> 89
Net Lease; Maintenance
Under the terms of each Lease, Continental's obligations in respect of each
Leased Aircraft will be those of a lessee under a "net lease". Accordingly,
Continental is obligated under each Lease, among other things and at its
expense, to keep each Aircraft duly registered and insured, to pay all costs of
operating the Aircraft and to maintain, service, repair and overhaul the
Aircraft so as to keep it in as good an operating condition as when delivered to
Continental, ordinary wear and tear excepted, and in such condition as required
to maintain the airworthiness certificate for the Aircraft in good standing at
all times. (Leases, Sections 7.1, 8.1 and 11.1 and Annexes C and D) The Owned
Aircraft Indenture imposes comparable maintenance, service and repair
obligations on Continental with respect to the Owned Aircraft. (Owned Aircraft
Indenture, Section 4.02)
Possession, Sublease and Transfer
Each Aircraft may be operated by Continental or, subject to certain
restrictions, by certain other persons. Normal interchange and pooling
agreements customary in the commercial airline industry with respect to any
Engine are permitted. Subleases, in the case of Leased Aircraft, and leases, in
the case of Owned Aircraft, are also permitted to U.S. air carriers and foreign
air carriers that have their principal executive office in certain specified
countries, subject to a reasonably satisfactory legal opinion that, among other
things, such country would recognize (in the case of the Leased Aircraft) Owner
Trustee's title to, and the Loan Trustee's security interest in respect of, the
applicable Aircraft. In addition, a sublessee or lessee may not be subject to
insolvency or similar proceedings at the commencement of such sublease or lease.
(Leases, Section 7, Owned Aircraft Indenture, Section 4.02) Permitted foreign
air carriers are not limited to those based in a country that is a party to the
Convention on the International Recognition of Rights in Aircraft (Geneva 1948)
(the "Convention"). It is uncertain to what extent the relevant Loan Trustee's
security interest would be recognized if an Aircraft is registered or located in
a jurisdiction not a party to the Convention. Moreover, in the case of an
Indenture Default, the ability of the related Loan Trustee to realize upon its
security interest in an Aircraft could be adversely affected as a legal or
practical matter if such Aircraft were registered or located outside the United
States.
Registration
Continental is required to keep each Aircraft duly registered under the
Transportation Code with the FAA, except (in the case of a Leased Aircraft) if
the relevant Owner Trustee or the relevant Owner Participant fails to meet the
applicable citizenship requirements, and to record each Lease (in the case of a
Leased Aircraft) and Indenture and certain other documents under the
Transportation Code. (Leases, Section 7; Owned Aircraft Indenture, Section
4.02(e)) Such recordation of the Indenture and 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 Leased Aircraft subject to such Lease in a country other than the
United States at its own expense in connection with a permitted sublease of the
Aircraft to a permitted foreign air carrier, subject to certain conditions set
forth in the related Participation Agreement. These conditions include a
requirement that 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. (Leases, Section 7.1.2; Participation Agreements, Section
7.6.11) The Owned Aircraft Indentures contain comparable provisions with respect
to registration of the Owned Aircraft in connection with a permitted lease of
the Owned Aircraft. (Owned Aircraft Indenture, Section 4.02(e))
Liens
Continental is required to maintain each Aircraft free of any liens, other
than the rights of the relevant Loan Trustee, the holders of the related
Equipment Notes, Continental and, with respect to a Leased Aircraft, the Owner
Participant and Owner Trustee arising under the applicable Indenture, the Lease
(in the case of a
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Leased Aircraft) or the other operative documents related thereto, and other
than certain limited liens permitted under such documents, including but not
limited to (i) liens for taxes either not yet due or being contested in good
faith by appropriate proceedings; (ii) materialmen's, mechanics' and other
similar liens arising in the ordinary course of business and securing
obligations that either are not yet delinquent for more than 60 days or are
being contested in good faith by appropriate proceedings; (iii) judgment liens
so long as such judgment is discharged or vacated within 60 days or the
execution of such judgment is stayed pending appeal or discharged, vacated or
reversed within 60 days after expiration of such stay; and (iv) any other lien
as to which Continental has provided a bond or other security adequate in the
reasonable opinion of the Owner Trustee; provided that in the case of each of
the liens described in the foregoing clauses (i), (ii) and (iii), such liens and
proceedings do not involve any material risk of the sale, forfeiture or loss of
such Aircraft or the interest of any Participant therein or impair the lien of
the relevant Indenture. (Leases, Section 6; Owned Aircraft Indenture, Section
4.01)
Replacement of Parts; Alterations
Continental is obligated to replace all parts at its expense that may from
time to time be incorporated or installed in or attached to any Aircraft and
that may become lost, damaged beyond repair, worn out, stolen, seized,
confiscated or rendered permanently unfit for use. Continental or any permitted
sublessee has the right, at its own expense, to make such alterations,
modifications and additions with respect to each Aircraft as it deems desirable
in the proper conduct of its business and to remove parts which it deems to be
obsolete or no longer suitable or appropriate for use, so long as such
alteration, modification, addition or removal does not materially diminish the
fair market value, utility, condition or useful life of the related Aircraft or
Engine or invalidate the Aircraft's airworthiness certificate. (Leases, Section
8.1 and Annex C; Owned Aircraft Indenture, Section 4.04(d))
Insurance
Continental is required to maintain, at its expense (or at the expense of a
permitted lessee, in the case of the Owned Aircraft, or a permitted sublessee,
in the case of a Leased Aircraft), all-risk aircraft hull insurance covering
each Aircraft, at all times in an amount not less than, in the case of Leased
Aircraft, the stipulated loss value of such Aircraft (which will exceed the
aggregate outstanding principal amount of the Equipment Notes relating to such
Aircraft, together with accrued interest thereon) or, in the case of Owned
Aircraft, the aggregate outstanding principal amount of the Equipment Notes
relating to such Aircraft together with six months of interest accrued thereon
(the "Debt Balance"). However, after giving effect to self-insurance permitted
as described below, the amount payable under such insurance may be less than
such amounts payable with respect to the Equipment Notes. In the event of a loss
involving insurance proceeds in excess of $3,500,000 per occurrence ($5,000,000
per occurrence in the case of Boeing 757-224 aircraft and $7,500,000 per
occurrence in the case of Boeing 777-224 aircraft), such proceeds up to the
stipulated loss value or Debt Balance, as the case may be, 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 ($5,000,000 per occurrence
in the case of Boeing 757-224 aircraft and $7,500,000 per occurrence in the case
of Boeing 777-224 aircraft) such proceeds will be payable directly to
Continental so long as an Indenture Event of Default does not exist with respect
to the Owned Aircraft Indenture or (in the case of a Leased Aircraft) the Owner
Trustee or Leased Aircraft Trustee has not notified the insurance underwriters
that a Lease Event of Default exists. So long as the loss does not constitute an
Event of Loss, insurance proceeds will be applied to repair or replace the
property. (Leases, Sections 11 and Annex D; Owned Aircraft Indenture, Section
4.06 and Annex B)
In addition, Continental is obligated to maintain comprehensive airline
liability insurance at its expense (or at the expense of a permitted lessee, in
the case of an Owned Aircraft, or a permitted sublessee, in the case of a Leased
Aircraft), including, without limitation, passenger liability, baggage
liability, cargo and mail 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
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airline liability insurance from time to time applicable to aircraft owned or
leased and operated by Continental of the same type and operating on similar
routes as such Aircraft. (Leases, Section 11.1 and Annex D, Owned Aircraft
Indenture, Section 4.06 and Annex B)
Continental is also required to maintain war-risk, hijacking or allied
perils insurance if it (or any permitted sublessee or lessee) operates any
Aircraft, Airframe or Engine in any area of recognized hostilities or if
Continental (or any permitted sublessee or lessee) maintains such insurance with
respect to other aircraft operated on the same international routes or areas on
or in which the Aircraft is operated. (Leases, Annex D, Owned Aircraft
Indenture, Section 4.06 and Annex B)
Continental may self-insure under a program applicable to all aircraft in
its fleet, but the amount of such self-insurance in the aggregate may not exceed
50% of the largest replacement value of any single aircraft in Continental's
fleet or 1 1/2% of the average aggregate insurable value (during the preceding
policy year) of all aircraft on which Continental carries insurance, whichever
is less, unless an insurance broker of national standing shall certify that the
standard among all other major U.S. airlines is a higher level of
self-insurance, in which case Continental may self-insure the Aircraft to such
higher level. In addition, Continental may self-insure to the extent of any
applicable deductible per Aircraft that does not exceed industry standards for
major U.S. airlines. (Leases, Section 11.1 and Annex D, Owned Aircraft
Indenture, Section 4.06 and Annex B)
In respect of each Aircraft, Continental is required to name as additional
insured parties the relevant Loan Trustee and holders of the Equipment Notes and
(in the case of the Leased Aircraft) the relevant Owner Participant and Owner
Trustee, in its individual capacity and as owner of such Aircraft, and the
liquidity provider under all liability, hull and property and war risk,
hijacking and allied perils insurance policies required with respect to such
Aircraft. In addition, the insurance policies will be required to provide that,
in respect of the interests of such additional insured persons, the insurance
shall not be invalidated or impaired by any act or omission of Continental, any
permitted sublessee or any other person. (Leases, Annex D, Owned Aircraft
Indenture, Section 4.06 and Annex B)
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 fifth anniversary occurred of the date on which such Lease commenced, if it
makes a good faith determination that the Leased Aircraft subject to such Lease
is economically obsolete or surplus to its requirements. Continental is required
to give notice of its intention to exercise its right of termination described
in this paragraph at least 90 days prior to the proposed date of termination,
which notice may be withdrawn up to ten Business Days prior to such proposed
date; provided that Continental may give only five such termination notices. In
such a situation, unless the Owner Trustee elects to retain title to such
Aircraft, Continental is required to use commercially reasonable efforts to sell
such Aircraft as an agent for such Owner Trustee, and Owner Trustee will sell
such Aircraft on the date of termination to the highest cash bidder. If such
sale occurs, the Equipment Notes related thereto are required to be prepaid. If
the net proceeds to be received from such sale are less than the termination
value for such Aircraft (which is set forth in a schedule to each Lease),
Continental is required to pay to the applicable Owner Trustee an amount equal
to the excess, if any, of the applicable termination value for such Aircraft
over such net proceeds. Upon payment of termination value for such Aircraft and
an amount equal to the Make-Whole Premium, if any, payable on such date of
payment, together with certain additional amounts, the lien of the relevant
Indenture will be released, the relevant Lease will terminate, and the
obligation of Continental thereafter to make scheduled rent payments under such
Lease will cease. (Leases, Section 9; Leased Aircraft Indentures, Section
2.10(b))
The Owner Trustee has the option to retain title to the Leased Aircraft if
Continental has given a notice of termination under the Lease. In such event,
such Owner Trustee will pay to the applicable Loan Trustee an amount sufficient
to prepay the outstanding Equipment Notes issued with respect to such Aircraft
(including the Make-Whole Premiums), in which case the lien of the relevant
Indenture will be released, the relevant Lease will terminate and the obligation
of Continental thereafter to make scheduled rent payments under such Lease will
cease. (Leases, Section 9; Leased Aircraft Indentures, Sections 2.06 and
2.10(b))
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Events of Loss
If an Event of Loss occurs with respect to the Airframe or the Airframe and
Engines of an Aircraft, Continental must elect within 45 days after such
occurrence either to make payment with respect to such Event of Loss or to
replace such Airframe and any such Engines. Not later than the first Business
Day following the earlier of (i) the 120th day following the date of occurrence
of such Event of Loss, and (ii) the fourth Business Day following the receipt of
the insurance proceeds in respect of such Event of Loss, Continental must either
(i) pay to the applicable Owner Trustee (in the case of a Leased Aircraft) or to
the Owned Aircraft Trustee (in the case of the Owned Aircraft) the stipulated
loss value of such Aircraft (in the case of a Leased Aircraft) or the
outstanding principal amount of the Equipment Notes (in the case of an Owned
Aircraft), together with certain additional amounts, but, in any case, without
any Make-Whole Premium or (ii) unless any Lease Event of Default or failure to
pay basic rent under the relevant Lease (in the case of a Leased Aircraft), an
Indenture Event of Default or failure to pay principal or interest under the
Owned Aircraft Indenture (in the case of the Owned Aircraft) or certain
bankruptcy defaults shall have occurred and is continuing, substitute an
airframe (or airframe and one or more engines, as the case may be) for the
Airframe, or Airframe and Engine(s), that suffered such Event of Loss. (Leases,
Sections 10.1.1 and 10.1.2; Leased Aircraft Indentures, Section 2.10(a); Owned
Aircraft Indenture, Sections 2.10 and 4.05(a))
If Continental elects to replace an Airframe (or Airframe and one or more
Engines, as the case may be) that suffered such Event of Loss, it shall, in the
case of a Leased Aircraft, convey to the related Owner Trustee title to an
airframe (or airframe and one or more engines, as the case may be) or, in the
case of an Owned Aircraft, subject such an airframe (or airframe and one or more
engines) to the lien of the Owned Aircraft Indenture, and such replacement
airframe or airframe and engines must be the same model as the Airframe or
Airframe and Engines to be replaced or an improved model, with a value, utility
and remaining useful life (without regard to hours or cycles remaining until the
next regular maintenance check) at least equal to the Airframe or Airframe and
Engines to be replaced, assuming that such Airframe and such Engines had been
maintained in accordance with the related Lease or Owned Aircraft Indenture, as
the case may be. Continental is also required to provide to the relevant Loan
Trustee and (in the case of a Leased Aircraft) the relevant Owner Trustee and
Owner Participant reasonably acceptable opinions of counsel to the effect, among
other things, that (i) certain specified documents have been duly filed under
the Transportation Code and (ii) such Owner Trustee and Leased Aircraft Trustee
(as assignee of lessor's rights and interests under the Lease), in the case of a
Leased Aircraft, or the Owned Aircraft Trustee, in the case of an Owned
Aircraft, will be entitled to receive the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to any such replacement airframe (unless, as a
result of a change in law or court interpretation, such benefits are not then
available). (Leases, Sections 10.1.3 and 10.3; Owned Aircraft Indenture, Section
4.05(c))
If Continental elects not to replace such Airframe, or Airframe and
Engine(s), then upon payment of the outstanding principal amount of the
Equipment Notes issued with respect to such Aircraft (in the case of an Owned
Aircraft) or the stipulated loss value for such Aircraft (in the case of a
Leased Aircraft), together with all additional amounts then due and unpaid with
respect to such Aircraft, which must be at least sufficient to pay in full as of
the date of payment thereof the aggregate unpaid principal amount under such
Equipment Notes together with accrued but unpaid interest thereon and all other
amounts due and owing in respect of such Equipment Notes, the lien of the
Indenture and (in the case of a Leased Aircraft) the Lease relating to such
Aircraft shall terminate with respect to such Aircraft, the obligation of
Continental thereafter to make the scheduled rent payments (in the case of a
Leased Aircraft) or interest and principal payments (in the case of an Owned
Aircraft) with respect thereto shall cease and (in the case of a Leased
Aircraft) the related Owner Trustee shall transfer all of its right, title and
interest in and to the related Aircraft to Continental. The stipulated loss
value and other payments made under the Leases or the Owned Aircraft Indenture,
as the case may be, by Continental shall be deposited with the applicable Loan
Trustee. Amounts in excess of the amounts due and owing under the Equipment
Notes issued with respect to such Aircraft will be distributed by such Loan
Trustee to the applicable Owner Trustee or to Continental, as the case may be.
(Leases, Section 10.1.2; Leased Aircraft Indentures, Sections 2.06 and 3.02;
Owned Aircraft Indenture, Sections 2.10, 3.02 and 4.05(a)(ii))
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If an Event of Loss occurs with respect to an Engine alone, Continental
will be required to replace such Engine within 60 days after the occurrence of
such Event of Loss with another engine, free and clear of all liens (other than
certain permitted liens). Such replacement engine shall be the same make and
model as the Engine to be replaced, or an improved model, suitable for
installation and use on the Airframe, and having a value, utility and remaining
useful life (without regard to hours or cycles remaining until overhaul) at
least equal to the Engine to be replaced, assuming that such Engine had been
maintained in accordance with the relevant Lease or the Owned Aircraft
Indenture, as the case may be. (Leases, Section 10.2; Owned Aircraft Indenture,
Section 4.05)
An "Event of Loss" with respect to an Aircraft, Airframe or any Engine
means any of the following events with respect to such property: (i) the
destruction of such property, damage to such property beyond economic repair or
rendition of such property permanently unfit for normal use; (ii) the actual or
constructive total loss of such property or any damage to such property or
requisition of title or use of such property which results in an insurance
settlement with respect to such property on the basis of a total loss or a
constructive or compromised total loss; (iii) any theft, hijacking or
disappearance of such property for a period of 180 consecutive days or more;
(iv) any seizure, condemnation, confiscation, taking or requisition of title to
such property by any governmental entity or purported governmental entity (other
than a U.S. government entity or an entity of the country of registration of the
relevant Aircraft) for a period exceeding 180 consecutive days or, if earlier,
at the end of the term of such Lease (in the case of a Leased Aircraft); (v) in
the case of any Leased Aircraft, any seizure, condemnation, confiscation, taking
or requisition of use of such property by any U.S. government entity (or
governmental entity of the country of registration of the relevant Aircraft)
that continues until the 30th day after the last day of the term of the relevant
Lease (unless the Owner Trustee shall have elected not to treat such event as an
Event of Loss); (vi) as a result of any law, rule, regulation, order or other
action by the FAA or any governmental entity, the use of such property in the
normal course of Continental's business of passenger air transportation is
prohibited for 180 consecutive days, unless Continental, prior to the expiration
of such 180-day period, shall have undertaken and shall be diligently carrying
forward steps which are necessary or desirable to permit the normal use of such
property by Continental, but in any event if such use shall have been prohibited
for a period of two consecutive years, provided that no Event of Loss shall be
deemed to have occurred if such prohibition has been applicable to Continental's
entire U.S. registered fleet of similar property and Continental, prior to the
expiration of such two-year period, shall have conformed at least one unit of
such property in its fleet to the requirements of any such law, rule,
regulation, order or other action and commenced regular commercial use of the
same and shall be diligently carrying forward, in a manner which does not
discriminate against applicable property in so conforming such property, steps
which are necessary or desirable to permit the normal use of such property by
Continental, but in any event if such use shall have been prohibited for a
period of three years or, in the case of the Leased Aircraft, such use shall be
prohibited at the expiration of the term of the relevant Lease; or (vii) with
respect to any Engine, any divestiture of title to such Engine in connection
with pooling or certain other arrangements shall be treated as an Event of Loss.
(Leases, Section 7.2.6 and Annex A; Owned Aircraft Indenture, Annex A)
Renewal and Purchase Options
At the end of the term of each Lease after final maturity of the related
Equipment Notes and subject to certain conditions, Continental will have certain
options to renew such Lease for additional limited periods. In addition,
Continental will have the right at the end of the term of each Lease to purchase
the Aircraft subject thereto for an amount to be calculated in accordance with
the terms of such Lease. (Leases, Section 17)
In addition, Continental may have the right to purchase an Aircraft from
the applicable Owner Trustee and assume, as direct obligations of Continental,
the Equipment Notes issued with respect to such Aircraft. In such case, the
Leased Aircraft Indenture relating to such Equipment Notes will be amended and
restated to be substantially the same as an Owned Aircraft Indenture. See
"Certain U.S. Federal Income Tax Consequences -- Taxation of Certificateholders
Generally -- Trusts Classified as Grantor Trusts" for a discussion of certain
tax consequences of such purchase and assumption.
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Events of Default under the Leases
Lease Events of Default under each Lease include, among other things, (i)
failure by Continental to make any payment of basic rent, stipulated loss value
or termination value under such Lease within ten Business Days after the same
shall have become due, or failure by Continental to pay any other amount due
under such Lease or under any other related operative document within ten
Business Days from and after the date of any written notice from the Owner
Trustee or Loan Trustee of the failure to make such payment when due; (ii)
failure by Continental to make any excluded payment (as defined) within ten
Business Days after written notice that such failure constitutes a Lease Event
of Default is given by the relevant Owner Participant to Continental and the
relevant Loan Trustee; (iii) failure by Continental to carry and maintain
insurance on and in respect of the Aircraft, Airframe and Engines, in accordance
with the provisions of such Lease; (iv) failure by Continental to perform or
observe in any material respect any other covenant or agreement to be performed
or observed by it under such Lease or the related Participation Agreement or
certain other related operative documents (other than the related tax indemnity
agreement between Continental and the Owner Participant), and such failure shall
continue unremedied for a period of 30 days after written notice of such failure
by the applicable Owner Trustee or Loan Trustee unless such failure is capable
of being corrected and Continental shall be diligently proceeding to correct
such failure, in which case there shall be no Lease Event of Default unless and
until such failure shall continue unremedied for a period of 270 days after the
receipt of such notice; (v) any representation or warranty made by Continental
in such Lease or the related Participation Agreement or in certain other related
operative documents (other than in the related tax indemnity agreement between
Continental and the Owner Participant) shall prove to have been untrue or
inaccurate in any material respect at the time made, such representation or
warranty is material at the time in question and the same shall remain uncured
(to the extent of the adverse impact thereof) for more than 30 days after the
date of written notice thereof to Continental; and (vi) the occurrence of
certain voluntary events of bankruptcy, reorganization or insolvency of
Continental or the occurrence of involuntary events of bankruptcy,
reorganization or insolvency which shall continue undismissed, unvacated or
unstayed for a period of 90 days. (Leases, Section 14)
Indenture Events of Default under the Owned Aircraft Indenture are
discussed above under "-- Indenture Defaults, Notice and Waiver".
Remedies Exercisable upon Events of Default under the Lease
If a Lease Event of Default has occurred and is continuing, the applicable
Owner Trustee may (or, so long as the Indenture shall be in effect, the
applicable Loan Trustee may, subject to the terms of the Indenture) exercise one
or more of the remedies provided in such Lease with respect to the related
Aircraft. These remedies include the right to repossess and use or operate such
Aircraft, to rescind or terminate such Lease, to sell or re-lease such Aircraft
free and clear of Continental's rights, except as set forth in the Lease, and
retain the proceeds, and to require Continental to pay, as liquidated damages
any due and unpaid basic rent plus an amount equal to, at such Owner Trustee's
(or, subject to the terms of the relevant Leased Aircraft Indenture, the Leased
Aircraft Trustee's) option, either (i) the excess of the present value of all
unpaid rent during the remainder of the term of such Lease over the present
value of the fair market rental value of such Aircraft for the remainder of the
term of such Lease or, (ii) the excess of the stipulated loss value of such
Aircraft over the fair market sales value of such Aircraft or, if such Aircraft
has been sold, the net sales proceeds from the sale of such Aircraft. (Leases,
Section 15; Leased Aircraft Indentures, Section 4.04) If the Loan Trustee has
validly terminated such Lease, the Loan Trustee may not sell or lease or
otherwise afford the use of such Aircraft to Continental or any of its
affiliates. (Leased Aircraft Indentures, Section 4.04(a))
Remedies under the Owned Aircraft Indentures are discussed above under
"-- Remedies".
Transfer of Owner Participant Interests
Subject to certain restrictions, each Owner Participant may transfer all or
any part of its interest in the related Leased Aircraft. (Participation
Agreements, Section 10.1.1)
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary describes all material generally applicable U.S.
federal income tax consequences to Certificateholders of the purchase, ownership
and disposition of the Certificates offered hereby and in the opinion of Hughes
Hubbard & Reed LLP, special tax counsel to Continental ("Tax Counsel"), is
accurate in all material respects with respect to the matters discussed therein.
This summary supplements (and, to the extent inconsistent therewith, replaces)
the summary of U.S. federal income tax consequences set forth in the Prospectus.
Except as otherwise specified, the summary is addressed to beneficial owners of
Certificates ("U.S. Certificateholders") that are citizens or residents of the
United States, corporations, partnerships or other entities created or organized
in or under the laws of the United States or any state therein, estates the
income of which is subject to U.S. federal income taxation regardless of its
source, or trusts that meet the following two tests: (a) a U.S. court is able to
exercise primary supervision over the administration of the trust and (b) one or
more U.S. fiduciaries have the authority to control all substantial decisions of
the trust ("U.S. Persons") that will hold the Certificates as capital assets.
This summary does not address the tax treatment of U.S. Certificateholders that
may be subject to special tax rules, such as banks, insurance companies, dealers
in securities or commodities, tax-exempt entities, holders that will hold
Certificates as part of a straddle or holders that have a "functional currency"
other than the U.S. Dollar, nor, except as specifically indicated, does it
address the tax treatment of U.S. Certificateholders that do not acquire
Certificates at the public offering price as part of the initial offering. The
summary does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a decision to purchase Certificates. This
summary does not describe any tax consequences arising under the laws of any
state, locality or taxing jurisdiction other than the United States.
The summary is based upon the tax laws and practice of the United States as
in effect on the date of this Prospectus Supplement, as well as judicial and
administrative interpretations thereof (in final or proposed form) available on
or before such date. All of the foregoing are subject to change, which change
could apply retroactively. Prospective investors should note that no rulings
have been sought from the U.S. Internal Revenue Service (the "IRS") with respect
to the tax consequences described below, and no assurance can be given that the
IRS will not take contrary positions. The Trusts are not indemnified for any
U.S. federal income taxes that may be imposed upon them, and the imposition of
any such taxes on a Trust could result in a reduction in the amounts available
for distribution to the Certificateholders of such Trust. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE CERTIFICATES.
TAX STATUS OF THE TRUSTS
In the opinion of Tax Counsel, while there is no authority addressing the
characterization of entities that are similar to the Trusts in all material
respects, each of the Original Trusts should be classified as a grantor trust
for U.S. federal income tax purposes. If, as may be the case, the Original
Trusts are not classified as grantor trusts, they will, in the opinion of Tax
Counsel, be classified as partnerships for U.S. federal income tax purposes and
will not be classified as publicly traded partnerships taxable as corporations
provided that at least 90% of each Original Trust's gross income for each
taxable year of its existence is "qualifying income" (which is defined to
include, among other things, interest income, gain from the sale or disposition
of capital assets held for the production of interest income, and income derived
with respect to a business of investing in securities). Tax Counsel believes
that income derived by the Original Trusts from the Note Purchase Agreement and
the Equipment Notes will constitute qualifying income and that the Original
Trusts therefore will meet the 90% test, assuming that the Original Trusts
operate in accordance with the terms of the Pass Through Trust Agreements and
other agreements to which they are parties. In the opinion of Tax Counsel, the
Successor Trusts will be classified as grantor trusts.
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TAXATION OF CERTIFICATEHOLDERS GENERALLY
Trusts Classified as Grantor Trusts
Assuming that a Trust is classified as a grantor trust, a U.S.
Certificateholder will be treated as owning its pro rata undivided interest in
the relevant Deposits and each of the Equipment Notes, the Trust's contractual
rights and obligations under the Note Purchase Agreement, and any other property
held by the Trust. Accordingly, each U.S. Certificateholder's share of interest
paid on Equipment Notes will be taxable as ordinary income, as it is paid or
accrued, in accordance with such U.S. Certificateholder's method of accounting
for U.S. federal income tax purposes, and a U.S. Certificateholder's share of
premium, if any, paid on redemption of an Equipment Note will be treated as
capital gain. It is not clear whether any Deposit Make-Whole Premium will be
ordinary income or capital gain. The Deposits will likely be subject to the
original issue discount and contingent payment rules, with the result that a
U.S. Certificateholder will be required to include interest income from a
Deposit using the accrual method of accounting regardless of its normal method
and with a possible slight deferral in the timing of income recognition as
compared to holding a single debt instrument with terms comparable to a
Certificate. Any amounts received by a Trust under a Liquidity Facility in order
to make interest payments will be treated for U.S. federal income tax purposes
as having the same characteristics as the payments they replace.
An Owner Participant's conveyance of its interest in an owner trust should
not constitute a taxable event to U.S. Certificateholders. However, if
Continental were to assume an Owner Trust's obligations under the related
Equipment Notes upon a purchase of a Leased Aircraft by Continental, such
assumption would be treated for federal income tax purposes as a taxable
exchange by U.S. Certificateholders of the Equipment Notes for "new" Equipment
Notes resulting in the recognition of taxable gain or loss equal to the
difference between the U.S. Certificateholder's adjusted basis in its interest
in the Equipment Note and the amount realized on such exchange (except to the
extent attributable to accrued interest, which would be taxable as interest
income if not previously included in income). For this purpose the amount
realized (and the issue price of the "new" Equipment Note) likely would be equal
to the fair market value of the U.S. Certificateholder's pro rata share of the
respective Equipment Note at such time if the Equipment Notes are "publicly
traded" within the meaning of applicable regulations and otherwise would be
equal to their principal amount (or, under certain circumstances, a lesser
imputed principal amount).
In the case of a subsequent purchaser of a Certificate, the purchase price
for the Certificate should be allocated among the relevant Deposits and the
assets held by the relevant Trust (including the Equipment Notes and the rights
and obligations under the Note Purchase Agreement with respect to Equipment
Notes not theretofore issued) in accordance with their relative fair market
values at the time of purchase. Any portion of the purchase price allocable to
the right and obligation under the Note Purchase Agreement to acquire an
Equipment Note should be included in the purchaser's basis in its share of the
Equipment Note when issued. Although the matter is not entirely clear, in the
case of a purchaser after initial issuance of the Certificates but prior to the
Delivery Period Termination Date, if the purchase price reflects a "negative
value" associated with the obligation to acquire an Equipment Note pursuant to
the Note Purchase Agreement being burdensome under conditions existing at the
time of purchase (e.g., as a result of the interest rate on the unissued
Equipment Notes being below market at the time of purchase of a Certificate),
such negative value probably would be added to such purchaser's basis in its
interest in the Deposits and the remaining assets of the Trust and reduce such
purchaser's basis in its share of the Equipment Notes when issued. The preceding
two sentences do not apply to purchases of Certificates following the Delivery
Period Termination Date.
A U.S. Certificateholder who is treated as purchasing an interest in a
Deposit or an Equipment Note at a market discount (generally, at a cost less
than its remaining principal amount) that exceeds a statutorily defined de
minimis amount will be subject to the "market discount" rules of the Code. These
rules provide, in part, that gain on the sale or other disposition of a debt
instrument with a term of more than one year and partial principal payments
(including partial redemptions) on such a debt instrument are treated as
ordinary income to the extent of accrued but unrecognized market discount. The
market discount rules also provide for deferral of interest deductions with
respect to debt incurred to purchase or carry a debt instrument that has market
discount. A U.S. Certificateholder who purchases an interest in a Deposit or an
Equipment Note at a
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premium may elect to amortize the premium as an offset to interest income on the
Deposit or Equipment Note under rules prescribed by the Code and Treasury
regulations promulgated under the Code.
Each U.S. Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding Trust as provided in Section 162 or 212 of the Code.
Certain fees and expenses, including fees paid to the Trustee and the Liquidity
Provider, will be borne by parties other than the Certificateholders. It is
possible that such fees and expenses will be treated as constructively received
by the Trust, in which event a U.S. Certificateholder will be required to
include in income and will be entitled to deduct its pro rata share of such fees
and expenses. If a U.S. Certificateholder is an individual, estate or trust, the
deduction for such holder's share of such fees or expenses will be allowed only
to the extent that all of such holder's miscellaneous itemized deductions,
including such holder's share of such fees and expenses, exceed 2% of such
holder's adjusted gross income. In addition, in the case of U.S.
Certificateholders who are individuals, certain otherwise allowable itemized
deductions will be subject generally to additional limitations on itemized
deductions under applicable provisions of the Code.
Original Trusts Classified as Partnerships
If an Original Trust is classified as a partnership (and not as a publicly
traded partnership taxable as a corporation) for U.S. federal income tax
purposes, income or loss with respect to the assets held by the Trust will be
calculated at the Trust level but the Trust itself will not be subject to U.S.
federal income tax. A U.S. Certificateholder would be required to report its
share of the Trust's items of income and deduction on its tax return for its
taxable year within which the Trust's taxable year (which should be a calendar
year) ends as well as income from its interest in the relevant Deposits. A U.S.
Certificateholder's basis in its interest in the Trust would be equal to its
purchase price therefor (including its share of any funds withdrawn from the
Depositary and used to purchase Equipment Notes), plus its share of the Trust's
net income, minus its share of any net losses of the Trust, and minus the amount
of any distributions from the Trust. In the case of an original purchaser of a
Certificate that is a calendar year taxpayer, income or loss generally should be
the same as it would be if the Trust were classified as a grantor trust, except
that income or loss would be reported on an accrual basis even if the U.S.
Certificateholder otherwise uses the cash method of accounting. A subsequent
purchaser, however, generally would be subject to tax on the same basis as an
original holder with respect to its interest in the Original Trust, and would
not be subject to the market discount rules or the bond premium rules during the
duration of the Original Trust.
EFFECT OF SUBORDINATION OF CLASS B AND CLASS C CERTIFICATEHOLDERS
In the event that the Class B Trust or the Class C Trust (such Trusts being
the "Subordinated Trusts" and the related Certificates being the "Subordinated
Certificates") receives less than the full amount of the receipts of interest,
principal or premium paid with respect to the Equipment Notes held by it (any
shortfall in such receipts being the "Shortfall Amounts") because of the
subordination of the Equipment Notes held by such Trust under the Intercreditor
Agreement, the corresponding owners of beneficial interests in the Subordinated
Certificates (the "Subordinated Certificateholders") would probably be treated
for federal income tax purposes as if they had (1) received as distributions
their full share of such receipts, (2) paid over to the relevant preferred class
of Certificateholders an amount equal to their share of such Shortfall Amount,
and (3) retained the right to reimbursement of such amounts to the extent of
future amounts payable to such Subordinated Certificateholders with respect to
such Shortfall Amount.
Under this analysis, (1) Subordinated Certificateholders incurring a
Shortfall Amount would be required to include as current income any interest or
other income of the corresponding Subordinated Trust that was a component of the
Shortfall Amount, even though such amount was in fact paid to the relevant
preferred class of Certificateholders, (2) a loss would only be allowed to such
Subordinated Certificateholders when their right to receive reimbursement of
such Shortfall Amount becomes worthless (i.e., when it becomes clear that funds
will not be available from any source to reimburse such loss), and (3)
reimbursement of such Shortfall Amount prior to such a claim of worthlessness
would not be taxable income to Subordinated Certificateholders because such
amount was previously included in income. These results should not significantly
affect the inclusion of income for Subordinated Certificateholders on the
accrual method of
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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.
DISSOLUTION OF ORIGINAL TRUSTS AND FORMATION OF NEW TRUSTS
Assuming that the Original Trusts are classified as grantor trusts, the
dissolution of an Original Trust and distribution of interests in the related
Successor Trust will not be a taxable event to U.S. Certificateholders, who will
continue to be treated as owing their shares of the property transferred from
the Original Trust to the Successor Trust. If the Original Trusts are classified
as partnerships, a U.S. Certificateholder will be deemed to receive its share of
the Equipment Notes and any other property transferred by the Original Trust to
the Successor Trust in liquidation of its interest in the Original Trust in a
non-taxable transaction. In such case, the U.S. Certificateholder's basis in the
property so received will be equal to its basis in its interest in the Original
Trust, allocated among the various assets received based upon their bases in the
hands of the Original Trusts and any unrealized appreciation or depreciation in
value in such assets, and the U.S. Certificateholder's holding period for the
Equipment Notes and other property will include the Original Trust's holding
period.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of a Certificate, a U.S.
Certificateholder generally will recognize capital gain or loss (subject to the
possible recognition of ordinary income under the market discount rules) equal
to the difference between the amount realized on the disposition (other than any
amount attributable to accrued interest which will be taxable as ordinary income
and any amount attributable to any Deposits) and the U.S. Certificateholder's
adjusted tax basis in the Note Purchase Agreement, Equipment Notes and any other
property held by the corresponding Trust. Any gain or loss will be long-term
capital gain or loss to the extent attributable to property held by the Trust
for more than one year. In the case of individuals, estates and trusts, the
maximum rate of tax on net long-term capital gains generally is 20%, except that
a maximum rate of 28% applies to property held for more than one year but not
more than 18 months. Any gain with respect to an interest in a Deposit likely
will be treated as ordinary income. Notwithstanding the foregoing, if the
Original Trusts are classified as partnerships, gain or loss with respect to an
interest in an Original Trust will be calculated and characterized by reference
to the U.S. Certificateholder's adjusted tax basis and holding period for its
interest in the Original Trust.
FOREIGN CERTIFICATEHOLDERS
Subject to the discussion of backup withholding below, payments of
principal and interest on the Equipment Notes to, or on behalf of, any
beneficial owner of a Certificate that is not a U.S. Person (a "Non-U.S.
Certificateholder") will not be subject to U.S. federal withholding tax;
provided, in the case of interest, that (i) such Non-U.S. Certificateholder does
not actually or constructively own 10% or more of the total combined voting
power of all classes of Continental or any Owner Participant or any transferee
of such Owner Participant's interest in the relevant owner trust, (ii) such
Non-U.S. Certificateholder is not a controlled foreign corporation for U.S. tax
purposes that is related to Continental or any Owner Participant or any
transferee of such Owner Participant's interest in the relevant owner trust and
(iii) either (A) the Non-U.S. Certificateholder certifies, under penalties of
perjury, that it is not a U.S. Person and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the Certificate certifies, under penalties of
perjury, that such statement has been received from the Non-U.S.
Certificateholder by it or by another financial institution and furnishes the
payor with a copy thereof. The IRS issued final regulations on October 6, 1997
which modify the certification requirements described in clause (iii) with
respect to certain payments made after December 31, 1998. While Tax Counsel
believes that the Deposit Make-Whole Premium should not be subject to U.S.
withholding tax, it is possible that such withholding tax would apply at a rate
of 30% or such lower rate as provided by an applicable tax treaty.
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
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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 Richards, Layton & Finger, Wilmington,
Delaware, counsel to the Trustee, under currently applicable law, assuming that
the Trusts will not be taxable as corporations, but, rather, will be classified
as grantor trusts under subpart E, Part I of Subchapter J of the Code or as
partnerships under Subchapter K of the Code, (i) the Trusts will not be subject
to any tax (including, without limitation, net or gross income, tangible or
intangible property, net worth, capital, franchise or doing business tax), fee
or other governmental charge under the laws of the State of Delaware or any
political subdivision thereof and (ii) Certificateholders that are not residents
of or otherwise subject to tax in Delaware will not be subject to any tax
(including, without limitation, net or gross income, tangible or intangible
property, net worth, capital, franchise or doing business tax), fee or other
governmental charge under the laws of the State of Delaware or any political
subdivision thereof as a result of purchasing, holding (including receiving
payments with respect to) or selling a Certificate.
Neither the Trusts nor the Certificateholders will be indemnified for any
state or local taxes imposed on them, and the imposition of any such taxes on a
Trust could result in a reduction in the amounts available for distribution to
the Certificateholders of such Trust. In general, should a Certificateholder or
any Trust be subject to any state or local tax which would not be imposed if the
Trustee were located in a different jurisdiction in the United States, the
Trustee will resign and a new Trustee in such other jurisdiction will be
appointed.
CERTAIN ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans subject to
Title I of ERISA ("ERISA Plans"), and on those persons who are fiduciaries with
respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA's
general fiduciary requirements, including, but not limited to, the requirement
of investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code, such
as individual retirement accounts (together with ERISA Plans, "Plans")) and
certain persons (referred to as "parties in interest" or "disqualified persons")
having certain relationships to such Plans, unless a statutory or administrative
exemption is applicable to the transaction. A party in interest or disqualified
person who engages in a prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code.
The Department of Labor has promulgated a regulation, 29 CFR Section
2510.3-101 (the "Plan Asset Regulation"), describing what constitutes the assets
of a Plan with respect to the Plan's investment in an entity for purposes of
ERISA and Section 4975 of the Code. Under the Plan Asset Regulation, if a Plan
invests (directly or indirectly) in a Certificate, the Plan's assets will
include both the Certificate and an undivided interest in each of the underlying
assets of the corresponding Trust, including the Equipment Notes held by such
Trust, unless it is established that equity participation in the Trust by
benefit plan investors (including but not limited to Plans and entities whose
underlying assets include Plan assets by reason of an employee benefit plan's
investment in the entity) is not "significant" within the meaning of the Plan
Asset
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Regulation. In this regard, the extent to which there is equity participation in
a particular Trust by, or on behalf of, employee benefit plans will not be
monitored. If the assets of a Trust are deemed to constitute the assets of a
Plan, transactions involving the assets of such Trust could be subject to the
prohibited transaction provisions of ERISA and Section 4975 of the Code unless a
statutory or administrative exemption is applicable to the transaction.
The fiduciary of a Plan that proposes to purchase and hold any Certificates
should consider, among other things, whether such purchase and holding may
involve (i) the direct or indirect extension of credit to a party in interest or
a disqualified person, (ii) the sale or exchange of any property between a Plan
and a party in interest or a disqualified person, and (iii) the transfer to, or
use by or for the benefit of, a party in interest or a disqualified person, of
any Plan assets. Such parties in interest or disqualified persons could include,
without limitation, Continental and its affiliates, the Owner Participants, the
Underwriters, the Trustees, the Escrow Agent, the Depositary, the Owner Trustees
and the Liquidity Provider. In addition, whether or not the assets of a Trust
are deemed to be Plan assets under the Plan Asset Regulation, if Certificates
are purchased by a Plan and Certificates of a subordinate Class are held by a
party in interest or a disqualified person with respect to such Plan, the
exercise by the holder of the subordinate Class of Certificates of its right to
purchase the senior Classes of Certificates upon the occurrence and during the
continuation of a Triggering Event could be considered to constitute a
prohibited transaction unless a statutory or administrative exemption were
applicable. Depending on the identity of the Plan fiduciary making the decision
to acquire or hold Certificates on behalf of a Plan, Prohibited Transaction
Class Exemption ("PTCE") 91-38 (relating to investments by bank collective
investment funds), PTCE 84-14 (relating to transactions effected by a "qualified
professional asset manager"), PTCE 95-60 (relating to investments by an
insurance company general account), PTCE 96-23 (relating to transactions
directed by an in-house professional asset manager) or PTCE 90-1 (relating to
investments by insurance company pooled separate accounts) (collectively, the
"Class Exemptions") could provide an exemption from the prohibited transaction
provisions of ERISA and Section 4975 of the Code. However, there can be no
assurance that any of these Class Exemptions or any other exemption will be
available with respect to any particular transaction involving the Certificates.
Governmental plans and certain church plans, while not subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of ERISA and Section 4975 of the Code, may nevertheless be subject to
state or other federal laws that are substantially similar to the foregoing
provisions of ERISA and the Code. Fiduciaries of any such plans should consult
with their counsel before purchasing any Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase any
Certificates should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 of the Code to such an investment, and to confirm that such
purchase and holding will not constitute or result in a non-exempt prohibited
transaction or any other violation of an applicable requirement of ERISA.
In addition to the Class Exemptions referred to above, an individual
exemption may apply to the purchase, holding and secondary market sale of Class
A Certificates by Plans, provided that certain specified conditions are met. In
particular, the Department of Labor has issued individual administrative
exemptions to the Underwriters which are substantially the same as the
administrative exemption issued to Morgan Stanley & Co. Incorporated, Prohibited
Transaction Exemption 90-24 et al. (55 Fed. Reg. 20,548 (1990)), as amended (the
"Underwriter Exemption"). The Underwriter Exemption generally exempts from the
application of certain, but not all, of the prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Code certain transactions relating
to the initial purchase, holding and subsequent secondary market sale of pass
through certificates which represent an interest in a trust that holds secured
credit instruments that bear interest or are purchased at a discount in
transactions by or between business entities (including equipment notes secured
by leases) and certain other assets, provided that certain conditions set forth
in the Underwriter Exemption are satisfied.
The Underwriter Exemption sets forth a number of general and specific
conditions which must be satisfied for a transaction involving the initial
purchase, holding or secondary market sale of certificates representing a
beneficial ownership interest in a trust to be eligible for exemptive relief
thereunder. In
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particular, the Underwriter Exemption requires that the acquisition of
certificates by a Plan be on terms that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party; the rights
and interests evidenced by the certificates not be subordinated to the rights
and interests evidenced by other certificates of the same trust estate; the
certificates at the time of acquisition by the Plan be rated in one of the three
highest generic rating categories by Moody's, Standard & Poor's, Duff & Phelps
Inc. or Fitch Investors Service, Inc.; and the investing Plan be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act.
In addition, the trust corpus generally must be invested in qualifying
receivables, such as the Equipment Notes, but may not in general include a
pre-funding account (except for a limited amount of pre-funding which is
invested in qualifying receivables within a limited period of time following the
closing not to exceed three months).
With respect to the investment restrictions set forth in the Underwriter
Exemption, an investment in a Certificate will evidence both an interest in the
respective Original Trust as well as an interest in the Deposits held in escrow
by an Escrow Agent for the benefit of the Certificateholder. Under the terms of
the Escrow Agreement, the proceeds from the Offering of the Certificates of each
Class will be paid over by the Underwriters to the Depositary on behalf of the
Escrow Agent (for the benefit of such Certificateholders as the holders of the
Escrow Receipts) and will not constitute property of the Original Trusts. Under
the terms of each Escrow Agreement, the Escrow Agent will be irrevocably
instructed to enter into the Deposit Agreements with the Depositary and to
effect withdrawals upon the receipt of appropriate notice from the relevant
Trustee so as to enable such Trustee to purchase the identified Equipment Notes
on the terms and conditions set forth in the Note Purchase Agreement. Interest
on the Deposits relating to each Trust will be paid to the Certificateholders of
such Trust as Receiptholders through a Paying Agent appointed by the Escrow
Agent. Pending satisfaction of such conditions and withdrawal of such Deposits,
the Escrow Agent's rights with respect to the Deposits will remain plan assets
subject to the fiduciary responsibility and prohibited transaction provisions of
ERISA and Section 4975 of the Code.
There can be no assurance that the Department of Labor would determine that
the Underwriter Exemption would be applicable to Class A Certificates in these
circumstances. In particular, the Department of Labor might assert that the
escrow arrangement is tantamount to an impermissible pre-funding rendering the
Underwriter Exemption inapplicable. In addition, even if all of the conditions
of the Underwriter Exemption are satisfied with respect to the Class A
Certificates, no assurance can be given that the Exemption would apply with
respect to all transactions involving the Class A Certificates or the assets of
the Class A Trust. In particular, it appears that the Underwriter Exemption
would not apply to the purchase by Class B Certificateholders or Class C
Certificateholders of Class A Certificates in connection with the exercise of
their rights upon the occurrence and during the continuance of a Triggering
Event. Therefore, the fiduciary of a Plan considering the purchase of a Class A
Certificate should consider the availability of the exemptive relief provided by
the Underwriter Exemption, as well as the availability of any other exemptions
that may be applicable, such as the Class Exemptions.
The Underwriter Exemption does not apply to the Class B or Class C
Certificates. Therefore, the fiduciary of a Plan considering the purchase of a
Class B or Class C Certificate should consider the availability of other
exemptions, such as the Class Exemptions.
Each person who acquires or accepts a Certificate or an interest therein,
will be deemed by such acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been used to purchase such
Certificate or an interest therein or (ii) the purchase and holding of such
Certificate or an interest therein are exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
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UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated as of February , 1998 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters") have severally but not jointly
agreed with the Company to purchase from the Trustee the following respective
principal amounts of the Class A, Class B and Class C Certificates:
<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>
Credit Suisse First Boston
Corporation........................ $ $ $
Morgan Stanley & Co. Incorporated....
Chase Securities Inc. ...............
----------- ----------- -----------
Total...................... $485,605,000 $150,371,000 $136,542,000
=========== =========== ===========
</TABLE>
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 the Certificates if any are
purchased. The Underwriting Agreement provides that, in the event of a default
by an Underwriter, in certain circumstances the purchase commitments of
non-defaulting Underwriters may be increased or the Underwriting Agreement may
be terminated.
Continental has been advised by the Underwriters that the Underwriters
propose to offer all or part of the Certificates directly to the public at the
public offering price per Certificate designation set forth on the cover page of
this Prospectus Supplement and may offer a portion of the Certificates to
dealers at a price which represents a concession not in excess of the amounts
set forth below for the respective designations of the Certificates. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of the amounts set forth below for the respective designations of the
Certificates for certain dealers. After the initial public offering, the public
offering prices and such concessions and discounts may be varied by the
Underwriters.
<TABLE>
<CAPTION>
PASS THROUGH CONCESSION REALLOWANCE
CERTIFICATE DESIGNATION TO DEALERS CONCESSION
---------------------------------------------- ---------- -----------
<S> <C> <C>
1998-1A....................................... % %
1998-1B.......................................
1998-1C.......................................
</TABLE>
The Certificates are a new issue of securities with no established trading
market. The Underwriters have advised Continental that one or more of them
intend to act as a market maker for the Certificates. However, the Underwriters
are not obligated to do so and may discontinue any market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Certificates.
Continental has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act of 1933 (the
"Securities Act"), or contribute to payments which the Underwriters may be
required to make in respect thereof.
Credit Suisse First Boston, New York Branch, the Depositary, is an
affiliate of Credit Suisse First Boston Corporation. From time to time, several
of the Underwriters or their affiliates perform investment banking and advisory
services for, and provide general financing and banking services to, Continental
and its affiliates. In particular, The Chase Manhattan Bank, an affiliate of
Chase Securities Inc., is a lender to Continental under several loan agreements.
It is expected that delivery of the Certificates will be made against
payment therefor on or about the date specified in the last paragraph of the
cover page of this Prospectus Supplement, which will be the
business day following the date of pricing of the Certificates. Under Rule
15c6-1 of the U.S. Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, trades in the secondary market generally are
required to settle in three business days, unless the parties to any such trade
expressly
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agree otherwise. Accordingly, purchasers who wish to trade Certificates on the
date of pricing or the next
succeeding business days will be required, by virtue of the fact that the
Certificates initially will settle in T+ , to specify an alternate settlement
cycle at the time of any such trade to prevent a failed settlement. Purchasers
of Certificates who wish to trade Certificates on the date of pricing or the
next succeeding business days should consult their own advisor.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the Certificates in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriters to reclaim a
selling concession from a syndicate member when the Certificates originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Certificates
to be higher than it would otherwise be in the absence of such transactions.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Certificates in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities' regulatory authorities in each province
where trades of the Certificates are effected. Accordingly, any resale of the
Certificates in Canada must be made in accordance with applicable securities
laws which will vary depending on the relevant jurisdiction, and which may
require resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the Certificates.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Certificates in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Certificates without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
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NOTICE OF BRITISH COLUMBIA RESIDENTS
A purchaser of Certificates to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Certificates acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Certificates acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Certificates should consult their own legal and tax
advisors with respect to the tax consequence of an investment in the
Certificates in their particular circumstances and with respect to the
eligibility of the Certificates for investment by the purchaser under relevant
Canadian legislation.
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
Milbank, Tweed, Hadley & McCloy, New York, New York. Milbank, Tweed, Hadley &
McCloy will rely on the opinion of Richards, Layton & Finger, Wilmington,
Delaware, counsel for Wilmington Trust Company, as Trustee, as to matters of
Delaware law relating to the Pass Through Trust Agreements.
EXPERTS
The consolidated financial statements (including financial statement
schedules) of Continental Airlines, Inc. appearing in Continental Airlines,
Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1996,
incorporated by reference in the Prospectus accompanying this Prospectus
Supplement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon. Such consolidated financial statements are
incorporated therein in reliance upon such reports of Ernst & Young LLP given
upon the authority of such firm as experts in accounting and auditing.
The references to AISI, BK and MBA, and to their respective appraisal
reports, dated as of February 5, January 29 and February 5, 1998, 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-104
<PAGE> 105
APPENDIX I -- INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Adjusted Expected Distributions...... S-23
Administration Expenses.............. S-72
Aggregate LTV Collateral Amount...... S-24
Air Partners......................... S-33
Air Partners Transaction............. S-34
Aircraft............................. S-1
Aircraft Operative Agreements........ S-60
AISI................................. S-6
America West......................... S-42
APB 15............................... S-30
Appraised Current Market Value....... S-24
Appraisers........................... S-6
Assumed Aggregate Aircraft Value..... S-7
Assumed Aircraft Value............... S-82
Assumed Amortization Schedule........ S-51
Assumed Appraised Value.............. S-59
Average Life Date.................... S-81
Base Rate............................ S-68
Basic Agreement...................... S-1
BK................................... S-6
Boeing............................... S-31
Branch............................... S-64
Business Day......................... S-51
Cash Collateral Account.............. S-20
CDG.................................. S-44
Cede................................. S-62
Certificate Account.................. S-50
Certificate Owner.................... S-62
Certificateholders................... S-12
Certificates......................... S-1
Class A Certificates................. S-10
Class A Trust........................ S-1
Class A Trustee...................... S-21
Class B Certificates................. S-10
Class B Trust........................ S-1
Class B Trustee...................... S-21
Class C Certificates................. S-10
Class C Trust........................ S-1
Class C Trustee...................... S-21
Class D Certificates................. S-12
Class D Trust........................ S-12
Class D Trustee...................... S-21
Class Exemptions..................... S-100
CMI.................................. S-41
Code................................. S-26
Commission........................... S-47
Company.............................. S-1
Continental.......................... S-1
Controlling Party.................... S-25
Convention........................... S-89
CSFB................................. S-64
Current Distribution Date............ S-22
Debt Balance......................... S-90
default.............................. S-55
Delivery Period...................... S-1
Delivery Period Termination Date..... S-2
Deposit.............................. S-1
Deposit Agreement.................... S-1
Deposit Make-Whole Premium........... S-63
Depositary........................... S-1
Depreciation Assumption.............. S-82
disqualified persons................. S-99
Distribution Date.................... S-21
Downgrade Drawing.................... S-20
DTC.................................. S-62
DTC Participants..................... S-62
EPS.................................. S-30
Equipment Notes...................... S-1
ERISA................................ S-26
ERISA Plans.......................... S-99
Escrow Agent......................... S-1
Escrow Agreement..................... S-1
Escrow Receipts...................... S-10
EVA.................................. S-45
Event of Loss........................ S-93
Excusable Delay...................... S-77
Expected Distributions............... S-25
Express.............................. S-41
FAA.................................. S-35
Final Distributions.................. S-25
Final Drawing........................ S-20
Final Maturity Date.................. S-49
financial institution................ S-98
Gulfstream........................... S-42
H.15(519)............................ S-80
IACP................................. S-32
Indenture Default.................... S-54
Indentures........................... S-11
Intercreditor Agreement.............. S-21
Interest Drawings.................... S-18
IRS.................................. S-95
Issuance Date........................ S-20
</TABLE>
I-1
<PAGE> 106
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
KLM.................................. S-33
Lease................................ S-88
Lease Event of Default............... S-54
Lease Payment Date................... S-88
Leased Aircraft...................... S-1
Leased Aircraft Indenture............ S-11
Leased Aircraft Trustee.............. S-11
LIBOR................................ S-68
Liquidity Event of Default........... S-69
Liquidity Expenses................... S-71
Liquidity Facility................... S-18
Liquidity Obligations................ S-20
Liquidity Provider................... S-11
Loan Trustees........................ S-11
LTV Appraisal........................ S-24
LTV Collateral Amount................ S-24
LTV Ratio............................ S-24
LTVs................................. S-7
Make-Whole Premium................... S-80
Maximum Amount....................... S-63
Maximum Available Commitment......... S-19
MBA.................................. S-6
Minimum Sale Price................... S-26
Moody's.............................. S-27
most recent H.15(519)................ S-81
New Trustee.......................... S-3
NOLs................................. S-32
Non-Extension Drawing................ S-20
Non-Performing Equipment Notes....... S-23
Non-U.S. Certificateholder........... S-98
Northwest............................ S-33
Northwest Alliance................... S-44
Northwest Parties.................... S-45
Northwest Transaction................ S-34
Note Holders......................... S-60
Note Purchase Agreement.............. S-11
Offering............................. S-10
Original Trustee..................... S-3
Original Trusts...................... S-3
Owned Aircraft....................... S-1
Owned Aircraft Indenture............. S-11
Owned Aircraft Trustee............... S-11
Owner Participant.................... S-18
Owner Trustee........................ S-1
Par Redemption Amount................ S-2
Participation Agreement.............. S-15
parties in interest.................. S-99
Pass Through Trust Agreements........ S-1
Paying Agent......................... S-10
Paying Agent Account................. S-50
Performing Equipment Note............ S-19
Plan Asset Regulation................ S-99
Plans................................ S-99
Pool Balance......................... S-51
Pool Factor.......................... S-51
Prospectus........................... S-5
PTC Event of Default................. S-13
PTCE................................. S-100
Rating Agencies...................... S-27
Receiptholder........................ S-65
Regular Distribution Dates........... S-49
Remaining Weighted Average Life...... S-81
Replacement Facility................. S-66
Required Amount...................... S-18
Scheduled Payments................... S-49
Section 382.......................... S-32
Section 1110 Period.................. S-20
Securities Act....................... S-102
Series A Equipment Notes............. S-2
Series B Equipment Notes............. S-2
Series C Equipment Notes............. S-2
Series D Equipment Notes............. S-2
SFAS 128............................. S-30
Shareholder Lawsuits................. S-34
Shortfall Amounts.................... S-97
SOP 90-7............................. S-31
Southwest............................ S-41
Special Distribution Date............ S-50
Special Payment...................... S-50
Special Payments Account............. S-50
Standard & Poor's.................... S-27
Stated Interest Rates................ S-19
Subordinated Certificateholders...... S-97
Subordinated Certificates............ S-97
Subordinated Trusts.................. S-97
Subordination Agent.................. S-10
Substitute Aircraft.................. S-77
Successor Trust...................... S-3
T+................................... S-3
Tax Counsel.......................... S-95
Teamsters............................ S-32
Termination Notice................... S-69
Threshold Rating..................... S-67
ticket tax........................... S-35
Transfer Date........................ S-3
Transportation Code.................. S-56
</TABLE>
I-2
<PAGE> 107
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Treasury Yield....................... S-80
Triggering Event..................... S-13
Trust Agreements..................... S-78
Trust Indenture Act.................. S-57
Trust Property....................... S-11
Trust Supplement..................... S-1
Trustee.............................. S-1
Trusts............................... S-1
U.S. Certificateholders.............. S-95
U.S. Persons......................... S-95
Underwriter Exemption................ S-100
Underwriters......................... S-102
Underwriting Agreement............... S-102
Virgin............................... S-43
</TABLE>
I-3
<PAGE> 108
(This page intentionally left blank)
<PAGE> 109
APPENDIX II - APPRAISAL LETTERS
[AISI LOGO]
05 February 1998
Continental Airlines
2929 Allen Parkway
Houston, TX 77019
Subject: AISI Report No.: A8S012BVO
AISI Sight Unseen New Aircraft Base Value Appraisal, Four B737-500,
Six B737-700, Seven B737-800, Five B757-200ER and Two B777-200IGW
Aircraft.
Dear Gentlemen:
In response to your request, Aircraft Information Services, Inc. (AISI) is
pleased to offer Continental Airlines our opinion of the sight unseen base
market value of various new aircraft scheduled to be delivered from the
manufacturer to Continental Airlines during 1998 as listed and defined in
Table I.
1. METHODOLOGY AND DEFINITIONS
The method used by AISI in its valuation of the Aircraft was based both on a
review of information and Aircraft specifications supplied by Continental
Airlines and also on a review of present and past market conditions, various
expert opinions (such as aircraft brokers and financiers) and information
contained in AISI's databases that help determine aircraft availability and
price data and thus arrive at the appraised base values for the new aircraft to
be delivered to Continental Airlines.
The historical standard term of reference for commercial aircraft value has
been 'half-life fair market value' of an 'average' aircraft. However, 'fair
market value' could mean a fair value in the given market or a value in a
hypothetical 'fair' or balanced market, and the two definitions are not
equivalent. Recently, the term 'base value' has been created to describe the
theoretical balanced market condition and to avoid the potentially misleading
term 'fair market value' which has now become synonymous with the term 'current
market value' or a 'fair' value in the actual current market. AISI value
definitions are consistent with those of the International Society of Transport
Aircraft Trading (ISTAT) of 01 January 1994; AISI is a member of that
organization and employs an ISTAT Certified Senior Aircraft Appraiser.
AISI defines a 'base value' as that of a transaction between equally willing
and informed buyer and seller, neither under compulsion to buy or sell, for a
single unit cash transaction with no hidden value or liability, and with supply
and demand of the sale item roughly in balance.
Headquarters, 23232 Peralta Drive, Suite 115, Laguna Hills, CA 92653
Tel: 714-830-0101 Fax: 714-830-1101
<PAGE> 110
[AISI Logo]
05 February 1998
AISI File No. A8S012BVO
Page -2-
Base values are typically given for aircraft in 'new' condition, 'average
half-life' condition, or in a specifically described condition unique to a
single aircraft at a specific time. An 'average' aircraft is an operable
airworthy aircraft in average physical condition and with average accumulated
flight hours and cycles, with clear title and standard unrestricted certificate
of airworthiness, and registered in an authority which does not represent a
penalty to aircraft value or liquidity, with no damage history and with
inventory configuration and level of modification which is normal for its
intended use and age. AISI assumes average condition unless otherwise specified
in this report. 'Half-life' condition assumes that every component or
maintenance service which has a prescribed interval that determines its service
life, overhaul interval or interval between maintenance services, is at a
condition which is one-half of the total interval. It should be noted that AISI
and ISTAT value definitions apply to a transaction involving a single aircraft,
and that transactions involving more than one aircraft are often executed at
considerable and highly variable discounts to a single aircraft price, for a
variety of reasons relating to an individual buyer or seller.
AISI defines a 'current market value' or 'fair market value' as that value
which reflects the real market conditions, whether at, above or below the base
value conditions. Assumption of a single unit sale and definitions of aircraft
condition, buyer/seller qualifications and type of transaction remain unchanged
from that of base value. Current market value takes into consideration the
status of the economy in which the aircraft is used, the status of supply and
demand for the particular aircraft type, the value of recent transactions and
the opinions of informed buyers and sellers. Current market value assumes that
there is no short term time constraint to buy or sell.
AISI encourages the use of base values to consider historical trends, to
establish a consistent baseline for long term value comparisons and future
value considerations, or to consider how actual market values vary from
theoretical base values. Base values are less volatile than current market
values and tend to diminish regularly with time. Base values are normally
inappropriate to determine near term values. AISI encourages the use of current
market values to consider the probable near term value of an aircraft.
2. VALUATION
Following is AISI's opinion of the base market value for the subject aircraft
on their respective scheduled delivery dates in current USDollars. Valuations
are presented in Table I subject to the assumptions, definitions and
disclaimers herein.
<PAGE> 111
[AISI LOGO]
05 February 1998
AISI File No. A8S012BVO
Page -3-
Unless otherwise agreed by Aircraft Information Services, Inc. (AISI) in
writing, this report shall be for the sole use of the client/addressee. This
report is offered as a fair and unbiased assessment of the subject aircraft.
AISI has no past, present, or anticipated future interest in the subject
aircraft. The conclusions and opinions expressed in this report are based on
published information, information provided by others, reasonable
interpretations and calculations thereof and are given in good faith. Such
conclusions and opinions are judgments that reflect conditions and values which
are current at the time of this report. The values and conditions reported upon
are subject to any subsequent change. AISI shall not be liable to any party for
damages arising out of reliance or alleged reliance on this report, or for any
parties action or failure to act as a result of reliance or alleged reliance on
this report.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
/s/ Fred F. Bearden
- -----------------------------------
Fred F. Bearden
President
FB/JDM/jm
<PAGE> 112
[AISI LOGO]
Table I - AISI File No. A8S012BVO - 05 February 1998
CONTINENTAL AIRLINES FLEET
NEW DELIVERY BASE VALUATION
<TABLE>
<CAPTION>
New
Tail Serial Base Value
Aircraft Delivery Numbers Numbers Engine MTOW Then $
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
B737-524 Sep-98 N14664 28925 CFM56-3B1 133,500 34.48
B737-524 Sep-98 N13665 28926 CFM56-3B1 133,500 34.48
B737-524 Oct-98 N14667 28927 CFM56-3B1 133,500 34.56
B737-524 Oct-98 N14668 28928 CFM56-3B1 133,500 34.56
B737-724 Aug-98 N54711 28782 CFM56-7B24 153,000 41.11
B737-724 Aug-98 N15712 28783 CFM56-7B24 153,000 41.11
B737-724 Aug-98 N16713 28784 CFM56-7B24 153,000 41.11
B737-724 Sep-98 N33714 28785 CFM56-7B24 153,000 41.21
B737-724 Oct-98 N24715 28786 CFM56-7B24 153,000 41.31
B737-724 Nov-98 N13716 28787 CFM56-7B24 153,000 41.41
B737-824 Oct-98 N18220 28929 CFM56-7B26 172,500 45.80
B737-824 Nov-98 N12221 28930 CFM56-7B26 172,500 45.91
B737-824 Dec-98 N34222 28931 CFM56-7B26 172,500 46.02
B737-824 Dec-98 N18223 28932 CFM56-7B26 172,500 46.02
B737-824 Dec-98 N24224 28933 CFM56-7B26 172,500 46.02
B737-824 Dec-98 N12225 28934 CFM56-7B26 172,500 46.02
B737-824 Dec-98 N26226 28935 CFM56-7B26 172,500 46.02
B757-224ER Feb-98 N48127 28968 RB211-535E4B 250,000 59.60
B757-224ER Mar-98 N17128 27567 RB211-535E4B 250,000 59.75
B757-224ER Mar-98 N29129 28969 RB211-535E4B 250,000 59.75
B757-224ER Apr-98 N19130 28970 RB211-535E4B 250,000 59.89
B757-224ER Jun-98 N33132 28972 RB211-535E4B 250,000 60.19
B777-224 IGW Nov-98 N78004 27580 GE90 648,000 134.37
B777-224 IGW Dec-98 N78005 27581 GE90 648,000 134.70
</TABLE>
AIRCRAFT SPECIFICATIONS HAVE BEEN PROVIDED BY CONTINENTAL AIRLINES
<PAGE> 113
BK Associates, Inc. [LOGO]
1295 Northern Boulevard
Manhasset, New York 11030
(516) 365-6272 - Fax (516) 365-6287
January 29, 1998
CONTINENTAL AIRLINES
2929 Allen Parkway
Houston, TX 77019
Gentlemen:
In response to your request, BK Associates, Inc. is pleased to provide this
opinion on the Base Value as of their respective delivery dates on each of four
B737-524, six B737-724, seven B737-824, five B757,224 and two B777-224IGW
aircraft (Aircraft), which will be delivered to Continental Airlines between
February 1998 and December 1998. The Aircraft are further identified in the
conclusions of this letter by maximum takeoff weight, engine model, serial
number and registration.
Set forth below is a summary of the methodology, considerations and assumptions
utilized in this appraisal.
CURRENT FAIR MARKET VALUE
According to the International Society of Transport Aircraft Trading's (ISTAT)
definition of FMV, to which BK Associates subscribes, the quoted FMV is the
Appraiser's opinion of the most likely trading price that may be generated for
an aircraft under the market circumstances that are perceived to exist at the
time in question. The FMV assumes that the aircraft is valued for its highest
and best use, that the parties to the hypothetical sale transaction are willing,
able, prudent and knowledgeable, and under no unusual pressure for a prompt
sale, and that the transaction would be negotiated in an open and unrestricted
market on an arm's length basis, for cash or equivalent consideration, and given
an adequate amount of time for effective exposure to prospective buyers, which
BK Associates considers to be 12 to 18 months.
BASE VALUE
Base value is the Appraiser's opinion of the underlying economic value of an
aircraft in an open, unrestricted, stable market environment with a reasonable
balance of supply and demand, and assumes full consideration of its "highest and
best use". An aircraft's base value is founded in the historical trend of values
and in the projection of future value trends and presumes an arm's length, cash
transaction between willing, able and knowledgeable parties, acting prudently,
with an absence of duress and with a reasonable period of time available for
marketing.
<PAGE> 114
BK Associates, Inc.
Continental Airlines, Inc.
January 29, 1998
Page 2
VALUE METHODOLOGY
Fair market valuations are determined based upon one of three methods:
comparable recent sales, replacement cost or rate of return to investor. In this
appraisal, BK used the comparable sales method, which is the most common method,
in determining the base values of the Aircraft. This method uses industry data
to ascertain the prices realized in recent sales of comparable models. The fair
market value of the base Aircraft is based on BK's familiarity with the aircraft
type, its earnings potential in commercial service, its knowledge of its
capabilities and the uses to which it will be put worldwide, its knowledge of
the marketing of used aircraft, and the factors effecting the fair market value
of such aircraft, and on its knowledge of the asking, offered and transaction
prices for similar competitive, and alternative equipment, as well as
transactions and negotiations involving basically identical aircraft. These
realizations, however, which reflect the market supply and demand at the time of
sale, are subject to minor adjustments for other conditions existing at the time
of the appraisal. In this respect, we consider the market for B757, B777 and
B737 aircraft to be in reasonable balance at this time, and thus, the FMV is
equal to the base value. In addition, values were adjusted for engine type and
maximum gross takeoff weights (MGTOW).
LIMITING CONDITIONS AND ASSUMPTIONS
BK has neither inspected the Aircraft nor their maintenance records but relied
upon information supplied by you and from BK's own database. In determining the
base value of an aircraft, the following assumptions apply to the aircraft:
1. Unless it is new, the aircraft has half-time remaining to its
next major overhauls or scheduled shop visit on its airframe,
engines, landing gear and auxiliary power unit.
2. The aircraft is in compliance under Federal Aviation
Administration approved airline maintenance program, with all
airworthiness directives, mandatory modifications and applicable
service bulletins currently up to industry standard.
3. The interior of the aircraft is in a standard configuration for
its specific type, with the buyer furnished equipment and
options of the types and models generally accepted and utilized
in the industry.
<PAGE> 115
BK Associates, Inc. [LOGO]
Continental Airlines, Inc.
January 29, 1998
Page 3
4. The aircraft is in current flight operations.
5. The aircraft is sold for cash without seller financing.
6. The Aircraft is in average or better condition.
7. There is no accident damage.
CONCLUSIONS
Based on the above methodology, considerations and assumptions, and since they
are all new and not yet in service, it is our opinion that the current base
value of each aircraft as of its delivery date are as follows:
<TABLE>
<CAPTION>
Base Val.
Date Reg. Serial on Del.
Type of Del. Engine MTOW (lbs). No. Number ($ Mils)
- -------- ------- --------- ----------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
B737-524 09/98 CFM56-3B1 133,500 N14664 28925 28.50
B737-524 09/98 CFM56-3B1 133,500 N13665 28926 28.50
B737-524 10/98 CFM56-3B1 133,500 N14667 28927 23.60
B737-524 10/98 CFM56-3B1 133,500 N14668 28928 28.60
B737-724 08/98 CFM56-7B24 153,000 N54711 28782 37.80
B737-724 08/98 CFM56-7B24 153,000 N15712 28783 37.80
B737-724 08/98 CFM56-7B24 153,000 N16713 28784 37.80
B737-724 09/98 CFM56-7B24 153,000 N33714 28785 37.90
B737-724 10/98 CFM56-7B24 153,000 N24715 28786 38.00
B737-724 11/98 CFM56-7B24 153,000 N13716 28787 38.00
B737-824 10/98 CFM56-7B26 172,500 N18220 28929 43.50
B737-824 11/98 CFM56-7B26 172,500 N12221 28930 43.50
B737-824 12/98 CFM56-7B26 172,500 N34222 28931 43.50
B737-824 12/98 CFM56-7B26 172,500 N18223 28932 43.50
B737-824 12/98 CFM56-7B26 172,500 N24224 28933 43.50
B737-824 12/98 CFM56-7B26 172,500 N12225 28934 43.50
B737-824 12/98 CFM56-7B26 172,500 N26226 28935 43.50
</TABLE>
<PAGE> 116
BK Associates, Inc. [LOGO]
Continental Airlines, Inc.
January 29, 1998
Page 4
<TABLE>
<CAPTION>
Base Val.
Date Reg. Serial on Del.
Type of Del. Engine MTOW (lbs). No. Number ($ Mils)
- -------- ------- --------- ----------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
B757-224 02/98 RB211-535E4B 250,000 N48127 28968 54.35
B757-224 03/98 RB211-535E4B 250,000 N17128 27567 54.45
B757-224 03/98 RB211-535E4B 250,000 N29129 28969 54.45
B757-224 04/98 RB211-535E4B 250,000 N19130 28970 54.45
B757-224 06/98 RB211-535E4B 250,000 N33132 28972 54.65
B777-224IGW 11/98 GE90 648,000 N78004 27580 127.00
B777-224IGW 12/98 GE90 648,000 N78005 27581 127.00
</TABLE>
BK Associates, Inc. has no present or contemplated future interest in the
Aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation and the time and budget constraints imposed by the client. It is
not given as a recommendation, or as an inducement, for any financial
transaction and further, BK Associates, Inc. assumes no responsibility or legal
liability for any action taken or not taken by the addressee, or any other
party, with regard to the appraised equipment. By accepting this appraisal, the
addressee agrees that BK Associates, Inc. shall bear no such responsibility or
legal liability. This appraisal is prepared for the use of the addressee and
shall not be provided to other parties without the express consent of the
addressee.
Sincerely yours,
BK ASSOCIATES, INC.
/s/ John F. Keitz
--------------------------------
John F. Keitz
President
ISTAT Senior Certified Appraiser
JFK/kf
<PAGE> 117
February 5, 1998
Continental Airlines, Inc.
2929 Allen Parkway
Houston, TX 77019
Gentlemen:
Pursuant to your request, Morten Beyer & Agnew (MBA) has set forth its opinion
regarding the Base Values of twenty-four aircraft (as described in Schedule I
herein) being delivered new from the manufacturer to Continental Airlines
during 1998. More specifically, our mandate is to render our opinion on this
date as to the value of the aircraft on their delivery dates.
There are several terms used to describe the "value" of an aircraft. MBA uses
the definitions of various value terms as promulgated by the International
Society of Transport Aircraft Trading (ISTAT), a not-for-profit organization of
some 500 members who have an interest in the commercial aviation industry. The
membership consists of management level personnel from banks, leasing
companies, airlines, appraisers, brokers, manufacturers, etc. ISTAT has also
established standards for appraisal practice and a code of ethics for those
members certified by the Society as appraisers. To attain certification members
must meet rigid educational and experience requirements and must successfully
complete written examinations. Morten Beyer of MBA is an ISTAT Certified Senior
Appraiser and provides oversight of all appraisals issued by MBA.
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
1
[MBA LOGO]
<PAGE> 118
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 transactions would be negotiated in an open and
unrestricted market on an arm's length basis, for cash or equivalent
consideration and given an adequate amount of time for effective exposure to
prospective buyers. Fair Market Value is synonymous to MV and Current Fair
Market Value is synonymous with CMV because the criteria typically used in those
documents that use the term "fair" reflect the same criteria set forth in the
above definition of Market Value.
Base Value (BV) contains the same elements as MV except the market conditions
are always assumed to be in a reasonable state of equilibrium. Base values are
related to long term trends, and may or may not reflect the actual current value
of the aircraft in question. Base values are founded in the historical values of
aircraft and are usually used for analysis of historic values or for future
value projections.
The values set forth herein are Base Values. Base Values are provided for each
aircraft, identified by aircraft type and tail numbers taking into account the
expected month of delivery to Continental.
The expected delivery period for the aircraft that are the subject of this
report begins in February, 1998, and terminates in December, 1998. As of the
date of this report, we foresee no events that may cause us to revise
valuations. However, unforeseen circumstances can occur with little or no
warning, and if changed circumstances justify it, MBA would revise its
valuations accordingly.
All of the aircraft included in this appraisal are new aircraft with scheduled
delivery dates starting in February, 1998. The types of aircraft that are the
subject of this report are all
2
[MBA LOGO]
<PAGE> 119
considered to be effective competitors in the industry for years to come, and
they all meet or exceed Stage III noise level standards.
The Boeing 737-500 was first built in 1989, and there are currently 334 in
service with 35 operators and another 49 on order. It is the truncated version
of the 737-300/400 series and offers a lower cost per aircraft mile. Because of
its smaller capacity, its unit costs as measured by the cost per available seat
mile are higher. Although we consider the aircraft to be a competitive one, it
suffers from the fact that aircraft that are smaller versions of larger aircraft
have historically not been as efficient as aircraft that are originally designed
as smaller machines.
The Boeing 737-700 is Boeing's newest entry into the advanced technology market
to compete with Airbus A319/320/321 series machines. The aircraft entered
service in December, 1997, with the launch customer, Southwest Airlines. There
were 318 unfilled orders as of December. We expect that this aircraft will be
very popular with the airlines and will have a long production run.
The Boeing 737-800 is the largest member of the new (third) generation of the
737 family, and the first aircraft is due to enter service with Hapag-Lloyd in
April, 1998. Designed to replace the -400, it is 108 inches longer and has
typical two-class seating of 160 and a high density seating if 189. There are
299 unfilled orders for the 737-800 as of December, 1997.
The Boeing 757-200 first entered the industry in 1982. There are currently 782
aircraft delivered and 133 on order. These numbers include the 200, 200M, 200PF,
and 300 versions.
The Boeing 777-200 has been in service since May 15, 1995 with United Airlines
which is by far its largest operator. There are 104 in service with 14 operators
(as of December 31, 1997), with another 260 aircraft on order.
3
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<PAGE> 120
Four of the five aircraft types covered in this appraisal have higher maximum
take-off weights than MBA considers standard for the type. We have, therefore,
increased our normal Base Values by $50 per pound of higher take-off weight. The
adjustment is based on the difference between the appraised aircraft and the
weight MBA ascribes to the aircraft as a standard weight. This is usually the
base MTOW but can be higher as is the case with the 757-200 to which MBA
ascribes a standard purchase MTOW of 240,000 pounds. These increases are as
follows:
<TABLE>
<CAPTION>
AIRCRAFT TYPE HIGHER MTOW INCREASED VALUE
------------- ----------- ---------------
(lbs.)
<S> <C> <C>
B-737-500 18,500 $ 930,000
B-737-700 20,000 1,000,000
B-737-800 17,000 850,000
B-757-200 10,000 500,000
</TABLE>
In the case of the 777-200 IGW, MBA values the aircraft at the maximum MTOW as
standard and reduces the value based on the certificate purchase weight. In the
case of this appraisal MBA was specifically requested to appraise the 777-200
aircraft at the highest MTOW, that being 648,000.
SUMMARY
MBA appraises the base fair market value of the twenty-four aircraft as set
forth in the exhibit following as of the dates of their scheduled delivery to
Continental Airlines at a total of $1,194,240,000, with the individual aircraft
values set forth by their respective tail number.
4
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<PAGE> 121
This report has been prepared for the exclusive use of Continental Airlines and
Credit Suisse and shall not be provided to other parties by MBA without the
express consent of Continental and Credit Suisse.
MBA certifies that this report has been independently prepared and that it fully
and accurately reflects MBA's opinion, as of the date of this report, of the
values set forth herein. MBA further certifies that it does not have, and does
not expect to have, any financial interest in the subject or similar aircraft.
This report represents MBA's opinion as to the subject aircraft, and is intended
to be advisory only, in nature. Therefore, MBA assumes no responsibility or
legal liability for any actions taken, or not taken, by Continental or any other
party with regard to the subject aircraft. By accepting this report, all parties
agree that MBA shall bear no such responsibility or legal liability.
Sincerely,
/s/ Morten S. Beyer
---------------------------------
Morten S. Beyer
Chairman & CEO
[MBA LOGO]
5
<PAGE> 122
BASE VALUE APPRAISAL OF LISTED AIRCRAFT
UPON DELIVERY DURING 1998 TO
CONTINENTAL AIRLINES, INC.
(US Dollars in Thousands)
<TABLE>
<CAPTION>
Expected MTOW Base
Aircraft Type Engine Delivery Date Tail No. (lb.) Value
- ------------- ------------ ------------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
B-737-524 CFM56-3B1 September 1998 N14664 133,500 $ 27,670
B-737-524 CFM56-3B1 September 1998 N13665 133,500 27,670
B-737-524 CFM56-3B1 October 1998 N14667 133,500 27,730
B-737-524 CFM56-3B1 October 1998 N14668 133,500 27,730
B-737-724 CFM56-7B24 August 1998 N54711 153,000 37,530
B-737-724 CFM56-7B24 August 1998 N15712 153,000 37,530
B-737-724 CFM56-7B24 August 1998 N16713 153,000 37,530
B-737-724 CFM56-7B24 September 1998 N33714 153,000 37,600
B-737-724 CFM56-7B24 October 1998 N24715 153,000 37,680
B-737-724 CFM56-7B24 November 1998 N13716 153,000 37,750
B-737-824 CFM56-7B26 October 1998 N18220 172,500 44,660
B-737-824 CFM56-7B26 November 1998 N12221 172,500 44,750
B-737-824 CFM56-7B26 December 1998 N34222 172,500 44,840
B-737-824 CFM56-7B26 December 1998 N18223 172,500 44,840
B-737-824 CFM56-7B26 December 1998 N24224 172,500 44,840
B-737-824 CFM56-7B26 December 1998 N12225 172,500 44,840
B-737-824 CFM56-7B26 December 1998 N26226 172,500 44,840
B-757-224 ETOPS RB211-535E4B February 1998 N48127 250,000 55,870
B-757-224 ETOPS RB211-535E4B March 1998 N17128 250,000 55,980
B-757-224 ETOPS RB211-535E4B March 1998 N29129 250,000 55,980
B-757-224 ETOPS RB211-535E4B April 1998 N19130 250,000 56,100
B-757-224 ETOPS RB211-535E4B June 1998 N33132 250,000 56,330
B-777-224 IGW GE90 November 1998 N78004 648,000 131,740
B-777-224 IGW GE90 December 1998 N78005 648,000 132,110
Total $1,194,240
</TABLE>
6
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<PAGE> 123
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND IF GIVEN OR MADE SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CONTINENTAL,
THE TRUSTS OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF CONTINENTAL SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Prospectus Supplement Summary........ S-5
Risk Factors......................... S-31
Use of Proceeds...................... S-40
The Company.......................... S-41
Description of the Certificates...... S-47
Description of the Deposit
Agreements......................... S-62
Description of the Escrow
Agreements......................... S-65
Description of the Liquidity
Facilities......................... S-65
Description of the Intercreditor
Agreement.......................... S-69
Description of the Aircraft and the
Appraisals......................... S-75
Description of the Equipment Notes... S-78
Certain U.S. Federal Income Tax
Consequences....................... S-95
Certain Delaware Taxes............... S-99
Certain ERISA Considerations......... S-99
Underwriting......................... S-102
Notice To Canadian Residents......... S-103
Legal Matters........................ S-104
Experts.............................. S-104
Index of Terms....................... Appendix I
Appraisal Letters.................... Appendix II
PROSPECTUS
Available Information................ 2
Incorporation of Certain Documents by
Reference.......................... 2
The Company.......................... 3
Use of Proceeds...................... 3
Ratio of Earnings to Fixed Charges... 3
General Outline of Trust Structure... 4
Description of the Certificates...... 4
Description of the Equipment Notes... 14
Certain United States Federal Income
Tax Consequences................... 20
ERISA Considerations................. 22
Plan of Distribution................. 22
Legal Opinions....................... 24
Experts.............................. 24
</TABLE>
============================================================
[CONTINENTAL AIRLINES LOGO]
$772,518,000
Pass Through Certificates
Series 1998-1
PROSPECTUS SUPPLEMENT
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY DEAN WITTER
CHASE SECURITIES INC.
- ------------------------------------------------------------
