<PAGE> 1
File Pursuant to Rule 424(B)(3)
Registration No. 333-61601
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES OR ACCEPT OFFERS TO BUY THESE
SECURITIES PRIOR TO THE TIME THIS PROSPECTUS SUPPLEMENT IS DELIVERED IN FINAL
FORM. THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS SUPPLEMENT (Subject to Completion, Issued October 13, 1998)
(To Prospectus dated August 25, 1998)
$530,086,767
[Logo]
1998-3 Pass Through Trusts
PASS THROUGH CERTIFICATES, SERIES 1998-3
------------------------
Five classes of the Continental Airlines Pass Through Trust Certificates, Series
1998-3, will be issued in this offering: Class A-1, A-2, B, C-1 and C-2. A
separate trust will be established for each class of certificates. The proceeds
from the sale of certificates will initially be held in escrow. The trusts will
use the escrowed funds to acquire equipment notes. The equipment notes will be
issued to finance the acquisition by Continental Airlines of fourteen new Boeing
aircraft scheduled for delivery from December 1998 to April 1999. Payments on
the equipment notes held in each trust will be passed through to the holders of
certificates of such trust.
The equipment notes issued for each aircraft will have a security interest in
such aircraft. Interest on the equipment notes will be payable semiannually on
each May 1 and November 1, beginning May 1, 1999. Principal payments on the
equipment notes held for the Class A-1, B and C-1 certificates are scheduled on
May 1 and November 1 in certain years, beginning on May 1, 1999. The entire
principal of the equipment notes held for the Class A-2 certificates will be
scheduled for payment on November 1, 2008. The entire principal of the equipment
notes held for the Class C-2 certificates will be scheduled for payment on
November 1, 2005.
The Class A-1 and A-2 certificates will rank equally in right of distributions
and will rank senior to the other certificates. The Class B certificates will
rank junior to the Class A-1 and A-2 certificates and will rank senior to the
Class C-1 and C-2 certificates. The Class C-1 and C-2 certificates will rank
equally and will rank junior to the other certificates.
Morgan Stanley Capital Services will provide a liquidity facility for each class
of certificates in an amount sufficient to make three semiannual interest
payments.
------------------------
INVESTING IN THE CERTIFICATES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE S-18.
------------------------
<TABLE>
<CAPTION>
PASS THROUGH PRINCIPAL INTEREST FINAL EXPECTED PUBLIC
CERTIFICATES AMOUNT RATE DISTRIBUTION DATE OFFERING PRICE
------------ --------- -------- ----------------- --------------
<S> <C> <C> <C> <C>
Class A-1 $101,211,695 % May 1, 2018 100%
Class A-2 188,957,196 November 1, 2008 100
Class B 70,953,629 November 1, 2017 100
Class C-1 71,203,760 November 1, 2005 100
Class C-2 97,760,487 November 1, 2005 100
</TABLE>
------------------------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
------------------------
The underwriters will purchase all of the certificates if any are purchased. The
aggregate proceeds from the sale of the certificates will be $ .
Continental will pay the underwriters a commission of $ . Morgan
Stanley & Co. Incorporated expects to deliver the certificates to purchasers on
November , 1998. Interest on the certificates will accrue from the date of
delivery. The certificates will not be listed on any national securities
exchange.
------------------------
MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON
CHASE SECURITIES INC.
DONALDSON, LUFKIN & JENRETTE
SALOMON SMITH BARNEY
October , 1998
<PAGE> 2
PRESENTATION OF INFORMATION
These offering materials consist of two documents: (a) this Prospectus
Supplement, which describes the terms of the certificates that we are currently
offering, and (b) the accompanying Prospectus, which provides general
information about our pass through certificates, some of which may not apply to
the certificates that we are currently offering. The information in this
Prospectus Supplement replaces any inconsistent information included in the
accompanying Prospectus.
We have given certain capitalized terms specific meanings for purposes of
this Prospectus Supplement. The "Index of Terms" attached as Appendix I to this
Prospectus Supplement lists the page in this Prospectus Supplement on which we
have defined each such term.
At varying places in this Prospectus Supplement and the Prospectus, we
refer you to other sections of such documents for additional information by
indicating the caption heading of such other sections. The page on which each
principal caption included in this Prospectus Supplement and the Prospectus can
be found is listed in the Table of Contents below. All such cross references in
this Prospectus Supplement are to captions contained in this Prospectus
Supplement and not in the Prospectus, unless otherwise stated.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary.................. S-5
Summary of Terms of Certificates............. S-5
Equipment Notes and the Aircraft............. S-6
Loan to Aircraft Value Ratios................ S-7
Cash Flow Structure.......................... S-8
The Offering................................. S-9
Summary Financial and Operating Data......... S-15
Risk Factors................................... S-18
Risk Factors Relating to the Company......... S-18
Risk Factors Relating to the Airline
Industry................................... S-20
Risk Factors Relating to the Certificates and
the Offering............................... S-21
Use of Proceeds................................ S-23
The Company.................................... S-24
Domestic Operations.......................... S-24
International Operations..................... S-25
Recent Developments.......................... S-27
Description of the Certificates................ S-28
General...................................... S-28
Subordination................................ S-29
Payments and Distributions................... S-31
Pool Factors................................. S-33
Reports to Certificateholders................ S-35
Indenture Defaults and Certain Rights Upon an
Indenture Default.......................... S-36
Purchase Rights of Certificateholders........ S-38
PTC Event of Default......................... S-38
Merger, Consolidation and Transfer of
Assets..................................... S-39
Modifications of the Pass Through Trust
Agreements and Certain Other Agreements.... S-39
Obligation to Purchase Equipment Notes....... S-42
Possible Issuance of Class D Certificates.... S-44
Liquidation of Original Trusts............... S-45
Termination of the Trusts.................... S-45
The Trustees................................. S-45
Book-Entry; Delivery and Form................ S-45
Description of the Deposit Agreements.......... S-46
General...................................... S-46
Unused Deposits.............................. S-46
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Distribution Upon Occurrence Of Triggering
Event...................................... S-47
Depositary................................... S-47
Description of the Escrow Agreements........... S-48
Description of the Liquidity Facilities........ S-48
General...................................... S-48
Drawings..................................... S-49
Reimbursement of Drawings.................... S-52
Liquidity Events of Default.................. S-53
Liquidity Provider........................... S-54
Description of the Intercreditor Agreement..... S-54
Intercreditor Rights......................... S-54
Priority of Distributions.................... S-56
Voting of Equipment Notes.................... S-59
Addition of Trustee for Class D
Certificates............................... S-60
The Subordination Agent...................... S-60
Description of the Aircraft and the
Appraisals................................... S-60
The Aircraft................................. S-60
The Appraisals............................... S-61
Deliveries of Aircraft....................... S-61
Substitute Aircraft.......................... S-62
Description of the Equipment Notes............. S-62
General...................................... S-63
Subordination................................ S-64
Principal and Interest Payments.............. S-64
Redemption................................... S-64
Security..................................... S-66
Loan to Value Ratios of Equipment Notes...... S-67
Limitation of Liability...................... S-69
Indenture Defaults, Notice and Waiver........ S-69
Remedies..................................... S-71
Modification of Indentures and Leases........ S-73
Owner Participant's Right to Restructure..... S-74
Indemnification.............................. S-74
The Leases and Certain Provisions of the
Owned Aircraft Indentures.................. S-74
Certain U.S. Federal Income Tax Consequences... S-82
General...................................... S-82
(Continued on the next page.)
</TABLE>
S-2
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tax Status of the Trusts..................... S-82
Taxation of Certificateholders Generally..... S-83
Effect of Reallocation of Payments under the
Intercreditor Agreement.................... S-84
Dissolution of Original Trusts and Formation
of New Trusts.............................. S-85
Sale or Other Disposition of the
Certificates............................... S-85
Foreign Certificateholders................... S-85
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Backup Withholding........................... S-86
Certain Delaware Taxes......................... S-86
Certain ERISA Considerations................... S-86
Underwriting................................... S-89
Legal Matters.................................. S-90
Experts........................................ S-90
Index of Terms.............................Appendix I
Appraisal Letters.........................Appendix II
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
The Company.................................... 3
Use of Proceeds................................ 3
Ratio of Earnings to Fixed Charges............. 4
General Outline of Trust Structure............. 4
Description of the Certificates................ 5
General...................................... 5
Book-Entry Registration...................... 6
Payments and Distributions................... 8
Pool Factors................................. 9
Reports to Certificateholders................ 9
Voting of Equipment Notes.................... 10
Events of Default and Certain Rights Upon an
Event of Default........................... 10
Merger, Consolidation and Transfer of
Assets..................................... 12
Modifications of the Basic Agreement......... 12
Modification of Indenture and Related
Agreements................................. 13
Cross-Subordination Issues................... 13
Termination of the Trusts.................... 14
Delayed Purchase of Equipment Notes.......... 14
Liquidity Facility........................... 14
The Trustee.................................. 14
Description of the Equipment Notes............. 15
General...................................... 15
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Principal and Interest Payments.............. 15
Redemption................................... 16
Security..................................... 16
Ranking of Equipment Notes................... 18
Payments and Limitation of Liability......... 18
Defeasance of the Indentures and the
Equipment Notes in Certain Circumstances... 18
Assumption of Obligations by Continental..... 19
Liquidity Facility........................... 19
Intercreditor Issues......................... 19
Certain United States Federal Income Tax
Consequences................................. 20
General...................................... 20
Tax Status of the Trusts..................... 20
Taxation of Certificateholders Generally..... 20
Effect of Subordination of Subordinated
Certificateholders......................... 21
Original Issue Discount...................... 21
Sale or Other Disposition of the
Certificates............................... 21
Foreign Certificateholders................... 22
Backup Withholding........................... 22
ERISA Considerations........................... 22
Plan of Distribution........................... 23
Legal Opinions................................. 24
Experts........................................ 24
</TABLE>
We have not authorized anyone to provide you with information concerning
this offering other than the information contained in this Prospectus Supplement
and the related Prospectus. We are offering to sell certificates and seeking
offers to buy certificates only in jurisdictions where offers and sales are
permitted. The information contained in this Prospectus Supplement and the
related Prospectus is accurate only as of the date of this Prospectus
Supplement, regardless of the time of delivery of this Prospectus Supplement and
the related Prospectus or any sale of certificates.
S-3
<PAGE> 4
(This page intentionally left blank)
S-4
<PAGE> 5
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information from this Prospectus
Supplement and the accompanying Prospectus and may not contain all of the
information that is important to you. For more complete information about the
Certificates and Continental Airlines, you should read this entire Prospectus
Supplement and the accompanying Prospectus, as well as the materials filed with
the Securities and Exchange Commission that are considered to be part of such
Prospectus. See "Incorporation of Certain Documents by Reference" in the
Prospectus.
SUMMARY OF TERMS OF CERTIFICATES*
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS B CLASS C-1 CLASS C-2
CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Aggregate Face Amount........ $101,211,695 $188,957,196 $70,953,629 $71,203,760 $97,760,487
Ratings:
Moody's.................... Aa3 Aa3 A2 Baa1 Baa1
Standard & Poor's.......... AA+ AA+ A+ BBB+ BBB+
Initial Loan to Aircraft
Value (cumulative)(1)...... 35.9% 35.9% 44.6% 65.5% 65.5%
Expected Highest Loan to
Aircraft Value
(cumulative)(2)............ 44.5% 44.5% 52.9% 66.1% 66.1%
Expected Principal
Distribution Window (in
years)..................... 1.5-19.5 10.0 1.5-19.0 0.5-7.0 7.0
Initial Average Life (in
years from Issuance
Date)...................... 13.5 10.0 10.0 4.1 7.0
Regular Distribution Dates... May 1 and May 1 and May 1 and May 1 and May 1 and
November 1 November 1 November 1 November 1 November 1
Final Expected Regular
Distribution Date.......... May 1, 2018 November 1, 2008 November 1, 2017 November 1, 2005 November 1, 2005
Final Maturity Date.......... November 1, 2019 May 1, 2010 May 1, 2019 May 1, 2007 May 1, 2007
Minimum Denomination......... $1,000 $1,000 $1,000 $1,000 $1,000
Section 1110 Protection...... Yes Yes Yes Yes Yes
Liquidity Facility
Coverage................... 3 semiannual 3 semiannual 3 semiannual 3 semiannual 3 semiannual
interest interest interest interest interest
payments payments payments payments payments
</TABLE>
- ------------
* The Classes and amounts of Certificates offered and the terms of such
Certificates are indicative only and subject to change.
(1) These percentages are calculated as of November 1, 1999, the first Regular
Distribution Date after all Aircraft are scheduled to have been delivered.
In making such calculations, we have assumed that all Aircraft are delivered
prior to such date, that the maximum principal amount of Equipment Notes is
issued and that the aggregate appraised Aircraft value is $809,362,667 as of
such date. The appraised value is only an estimate and reflects certain
assumptions. See "Description of the Aircraft and the Appraisals -- The
Appraisals".
(2) See "-- Loan to Aircraft Value Ratios" in this Prospectus Supplement
Summary.
S-5
<PAGE> 6
EQUIPMENT NOTES AND THE AIRCRAFT
Set forth below is certain information about the Equipment Notes expected
to be held in the Trusts and the Aircraft expected to secure such Equipment
Notes:
<TABLE>
<CAPTION>
MAXIMUM
EXPECTED SCHEDULED PRINCIPAL AMOUNT
MANUFACTURER'S REGISTRATION AIRCRAFT DELIVERY OF EQUIPMENT APPRAISED
AIRCRAFT TYPE SERIAL NUMBER NUMBER MONTH(1) NOTES(2) VALUE(3)
- ------------- -------------- ------------ ----------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Boeing 737-724.............. 28936 N29717 January 1999 $26,059,800 $ 38,550,000
Boeing 737-724.............. 28937 N13718 January 1999 26,061,000 38,550,000
Boeing 737-724.............. 28938 N17719 February 1999 26,061,000 38,550,000
Boeing 737-724.............. 28939 N13720 March 1999 26,061,000 38,550,000
Boeing 737-724.............. 28940 N23721 March 1999 26,061,000 38,550,000
Boeing 737-724.............. 28789 N27722 April 1999 26,284,908 38,883,000
Boeing 737-724.............. 28790 N21723 April 1999 26,284,908 38,883,000
Boeing 737-824.............. 28788 N13227 April 1999 31,362,600 46,950,000
Boeing 757-224.............. 29282 N17133 December 1998 38,590,000 56,750,000
Boeing 757-224.............. 29283 N67134 January 1999 38,712,400 56,930,000
Boeing 757-224.............. 29284 N41135 February 1999 38,764,534 57,006,667
Boeing 757-224.............. 29285 N19136 March 1999 38,814,400 57,080,000
Boeing 777-224.............. 29476 N77006 December 1998 88,951,500 131,780,000
Boeing 777-224.............. 29477 N74007 February 1999 89,336,250 132,350,000
</TABLE>
- ------------
(1) The delivery date for any Aircraft may be delayed or accelerated. The
delivery deadline for purposes of this offering is July 31, 1999 (or later
under certain circumstances). See "Description of the Aircraft and the
Appraisals -- Deliveries of Aircraft". Continental has the option to
substitute other aircraft if 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 deadline. See "Description of the Aircraft and the
Appraisals -- Substitute Aircraft".
(2) The actual principal amount issued for an Aircraft may be less depending on
the circumstances of the financing of such Aircraft. 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 the lesser of the
average and median values of such Aircraft as appraised by three independent
appraisal and consulting firms, projected as of the scheduled delivery month
of each Aircraft. Such appraisals are based upon varying assumptions and
methodologies. 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".
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 November 1, 1999 (the first Regular
Distribution Date that occurs after all Aircraft are scheduled to have been
delivered) and each May 1 Regular Distribution Date thereafter. The LTVs for any
Class of Certificates for the period prior to November 1, 1999 are not
meaningful, since during such period all of the Equipment Notes expected to be
acquired by the Trusts and the related Aircraft will not be included in the
calculation. 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. See "Risk Factors -- Risk Factors Relating to the Certificates
and the Offering -- Appraisals and Realizable Value of Aircraft".
<TABLE>
<CAPTION>
ASSUMED OUTSTANDING BALANCE(2) LTV(3)
AGGREGATE -------------------------------------------------------------------- ---------------------------
AIRCRAFT CLASS A-1 CLASS A-2 CLASS B CLASS C-1 CLASS C-2 CLASS A-1 CLASS A-2
DATE VALUE(1) CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ---- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nov. 1, 1999 $809,362,667 $101,211,695 $188,957,196 $70,953,629 $71,193,760 $97,760,487 35.9% 35.9%
May 1, 2000 785,081,787 98,786,569 188,957,196 70,730,222 59,356,482 97,760,487 36.7 36.7
May 1, 2001 760,800,907 96,583,239 188,957,196 70,475,792 48,334,434 97,760,487 37.5 37.5
May 1, 2002 736,520,027 92,575,605 188,957,196 70,221,362 36,965,380 97,760,487 38.2 38.2
May 1, 2003 712,239,147 88,567,971 188,957,196 69,966,932 25,284,894 97,760,487 39.0 39.0
May 1, 2004 687,958,267 83,131,244 188,957,196 69,126,677 13,323,178 97,760,487 39.6 39.6
May 1, 2005 663,677,387 79,256,901 188,957,196 69,126,677 1,724,440 97,760,487 40.4 40.4
May 1, 2006 639,396,507 77,705,774 188,957,196 56,385,593 0 0 41.7 41.7
May 1, 2007 615,115,627 75,905,738 188,957,196 41,474,301 0 0 43.1 43.1
May 1, 2008 590,834,747 74,105,702 188,957,196 27,644,171 0 0 44.5 44.5
May 1, 2009 186,340,000 74,105,702 0 21,947,619 0 0 39.8 NA
May 1, 2010 178,354,000 74,105,702 0 20,282,955 0 0 41.5 NA
May 1, 2011 170,368,000 73,365,410 0 14,947,957 0 0 43.1 NA
May 1, 2012 162,382,000 70,776,042 0 8,814,456 0 0 43.6 NA
May 1, 2013 154,396,000 60,492,627 0 2,381,976 0 0 39.2 NA
May 1, 2014 146,410,000 47,374,893 0 2,381,976 0 0 32.4 NA
May 1, 2015 135,762,000 32,421,276 0 2,381,976 0 0 23.9 NA
May 1, 2016 98,441,500 16,472,063 0 2,381,976 0 0 16.7 NA
May 1, 2017 90,063,500 5,720,788 0 1,029,296 0 0 6.4 NA
May 1, 2018 0 0 0 0 0 0 NA NA
<CAPTION>
LTV(3)
------------------------------------------
CLASS B CLASS C-1 CLASS C-2
DATE CERTIFICATES CERTIFICATES CERTIFICATES
- ---- ------------ ------------ ------------
<S> <C> <C> <C>
Nov. 1, 1999 44.6% 65.5% 65.5%
May 1, 2000 45.7 65.7 65.7
May 1, 2001 46.8 66.0 66.0
May 1, 2002 47.8 66.1 66.1
May 1, 2003 48.8 66.1 66.1
May 1, 2004 49.6 65.7 65.7
May 1, 2005 50.8 65.8 65.8
May 1, 2006 50.5 NA NA
May 1, 2007 49.8 NA NA
May 1, 2008 49.2 NA NA
May 1, 2009 51.5 NA NA
May 1, 2010 52.9 NA NA
May 1, 2011 51.8 NA NA
May 1, 2012 49.0 NA NA
May 1, 2013 40.7 NA NA
May 1, 2014 34.0 NA NA
May 1, 2015 25.6 NA NA
May 1, 2016 19.2 NA NA
May 1, 2017 7.5 NA NA
May 1, 2018 NA NA NA
</TABLE>
- ---------------
* The Classes of Certificates, the Aircraft, the periodic outstanding balances
and the resulting LTVs for each Class of Certificates are indicative only
and subject to change.
(1) We have assumed that the initial appraised value of each Aircraft,
determined as described under "-- Equipment Notes and the Aircraft",
declines by approximately 3% per year for the first fifteen years after the
year of delivery of such Aircraft and by approximately 4% per year
thereafter.
(2) In calculating the outstanding balances, we have assumed that the Trusts
will acquire the maximum principal amount of Equipment Notes for all
Aircraft.
(3) The LTVs for each Class of Certificates were obtained for each Regular
Distribution Date by dividing (i) the expected outstanding balance of such
Class together with the expected outstanding balance of all other Classes
equal or senior in right of payment to such Class after giving effect to the
distributions expected to be made on such date, by (ii) the assumed value of
all of the Aircraft on such date based on the assumptions described above.
The outstanding balances and LTVs may change if, among other things, the
aggregate principal amount of the Equipment Notes acquired by the Trusts is
less than the maximum permitted under the terms of this offering or the
amortization of the Equipment Notes differs from the assumed amortization
schedule calculated for purposes of this Prospectus Supplement.
The above table was compiled on an aggregate basis. However, the Equipment
Notes for an Aircraft will not have a security interest in any other Aircraft.
This means that any excess proceeds realized from the sale of an Aircraft or
other exercise of remedies will not be available to cover any shortfalls on the
Equipment Notes relating to any other Aircraft. See "Description of the
Equipment Notes -- Loan to Value Ratios of Equipment Notes" for examples of LTVs
for the Equipment Notes issued in respect of individual Aircraft, which may be
more relevant in a default situation than the aggregate values shown above.
S-7
<PAGE> 8
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 Trustee for
Leased Aircraft and Owned Aircraft (a) the lease rental payments, which are
assigned by the Owner Trustee, on Leased Aircraft and (b) the mortgage payments
on Owned Aircraft. From such lease rental payments and mortgage payments, the
Loan Trustee will make Equipment Note payments on the Series A-1 Equipment
Notes, the Series A-2 Equipment Notes, the Series B Equipment Notes, the Series
C-1 Equipment Notes and the Series C-2 Equipment Notes with respect to all
Aircraft to the Subordination Agent. Excess rental payments will be paid by the
Loan Trustee 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 Class A-1 Trustee, the Class A-2 Trustee, the
Class B Trustee, the Class C-1 Trustee and the Class C-2 Trustee, who will pay
such principal, premium, if any, and interest distributions to the Class A-1
Certificateholders, the Class A-2 Certificateholders, the Class B
Certificateholders, the Class C-1 Certificateholders and the Class C-2
Certificateholders, respectively. The Subordination Agent may also receive
advances, if any, 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 Class A-1
Certificateholders, the Class A-2 Certificateholders, the Class B
Certificateholders, the Class C-1 Certificateholders and the Class C-2
Certificateholders.]
- ------------
(1) Each Aircraft leased to Continental will be subject to a separate Lease and
a related Indenture; each Aircraft owned by Continental will be subject to a
separate Indenture.
(2) The proceeds of the offering of each Class of Certificates will initially be
held in escrow and deposited with the Depositary. The Depositary will hold
such funds as interest-bearing Deposits. Each Trust will withdraw funds from
the Deposits relating to such Trust to purchase Equipment Notes from time to
time as each Aircraft is financed. The scheduled payments of interest on the
Equipment Notes and on the Deposits relating to a Trust, taken together,
will be sufficient to pay accrued interest on the outstanding Certificates
of such Trust. The Liquidity Facilities will not cover interest on the
Deposits.
S-8
<PAGE> 9
THE OFFERING
Certificates Offered....... - Class A-1 Certificates
- Class A-2 Certificates
- Class B Certificates
- Class C-1 Certificates
- Class C-2 Certificates
Each Class of Certificates will represent a
fractional undivided interest in a related Trust.
Use of Proceeds............ The proceeds from the sale of the Certificates of
each Trust will initially be held in escrow and
deposited with the Depositary. Each Trust will
withdraw funds from the escrow relating to such
Trust to acquire Equipment Notes. The Equipment
Notes will be issued to finance the acquisition by
Continental of fourteen new Boeing aircraft
scheduled for delivery from December 1998 to April
1999.
Subordination Agent,
Trustee, Paying Agent and
Loan Trustee............. Wilmington Trust Company
Escrow Agent............... First Security Bank, National Association
Depositary................. Credit Suisse First Boston, New York branch
Liquidity Provider......... Morgan Stanley Capital Services, Inc.
Trust Property............. The property of each Trust will include:
- Equipment Notes acquired by such Trust.
- All monies receivable under the Liquidity
Facility for such Trust.
- Funds from time to time deposited with the
Trustee in accounts relating to such Trust.
Regular Distribution
Dates...................... May 1 and November 1, commencing on May 1, 1999.
Record Dates............... The fifteenth day preceding the related
Distribution Date.
Distributions.............. The Trustee will distribute all payments of
principal, premium (if any) and interest received
on the Equipment Notes held in each Trust to the
holders of the Certificates of such Trust, subject
to the subordination provisions applicable to the
Certificates.
Scheduled payments of principal and interest made
on the Equipment Notes will be distributed on the
applicable Regular Distribution Dates.
Payments of principal, premium (if any) and
interest made on the Equipment Notes resulting from
any early redemption or purchase of such Equipment
Notes will be distributed on a special distribution
date after not less than 15 days' notice to
Certificateholders.
Subordination.............. Distributions on the Certificates will be made in
the following order:
- First, to holders of the Class A-1 and Class A-2
Certificates.
- Second, to the holders of the Class B
Certificates.
- Third, to the holders of the Class C-1 and Class
C-2 Certificates.
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<PAGE> 10
If Continental is in bankruptcy or certain other
specified events have occurred but Continental is
continuing to meet certain of its obligations, the
subordination provisions applicable to the
Certificates permit distributions to be made to
junior Certificates prior to making distributions
in full on the senior Certificates.
Control of Loan Trustee.... The holders of at least a majority of the
outstanding principal amount of Equipment Notes
issued under each Indenture will be entitled to
direct the Loan Trustee under such Indenture in
taking action as long as no Indenture Default is
continuing thereunder. If an Indenture Default is
continuing, subject to certain conditions, the
"Controlling Party" will direct the Loan Trustees
(including in exercising remedies, such as
accelerating such Equipment Notes or foreclosing
the lien on the Aircraft securing such Equipment
Notes).
The Controlling Party will be:
- The Class A-1 Trustee or Class A-2 Trustee,
whichever represents the Class with the larger
principal amount of Certificates outstanding at
the time that the Indenture Default occurs.
- Upon payment of final distributions to the
holders of such larger Class, the other of the
Class A-1 Trustee or Class A-2 Trustee.
- Upon payment of final distributions to the
holders of Class A-1 and A-2 Certificates, the
Class B Trustee.
- Upon payment of final distributions to the
holders of Class B Certificates, the Class C-1
Trustee or Class C-2 Trustee, whichever
represents the Class with the larger principal
amount of Certificates outstanding at such time.
- Upon payment of final distributions to the
holders of such larger Class, the other of the
Class C-1 Trustee or Class C-2 Trustee.
- Under certain circumstances, and notwithstanding
the foregoing, the Liquidity Provider.
In exercising remedies during the nine months after
the earlier of (a) the acceleration of the
Equipment Notes issued pursuant to any Indenture or
(b) the bankruptcy of Continental, the Controlling
Party may not sell such Equipment Notes or the
Aircraft subject to the lien of such Indenture for
less than certain specified minimums or modify
lease rental payments for such Aircraft below a
specified threshold.
Right to Buy Other Classes
of Certificates............ If Continental is in bankruptcy or certain other
specified events have occurred, the
Certificateholders may have the right to buy
certain other Classes of Certificates on the
following basis:
- If the Class A-1 or Class A-2 Certificateholders
are then represented by the Controlling Party,
the Certificateholders of such other Class will
have the right to purchase all of such Class of
Certificates represented by the Controlling
Party.
- The Class B Certificateholders will have the
right to purchase all of the Class A-1 and Class
A-2 Certificates.
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<PAGE> 11
- The Class C-1 and Class C-2 Certificateholders
will have the right to purchase all of the Class
A-1, Class A-2 and Class B Certificates.
- If the Class C-1 or Class C-2 Certificateholders
are then represented by the Controlling Party,
the Certificateholders of such other Class will
have the right to purchase all of such Class of
Certificates represented by the Controlling
Party.
The purchase price in each case described above
will be the outstanding balance of the applicable
Class of Certificates plus accrued and unpaid
interest.
Liquidity Facilities....... Under the Liquidity Facility for each Trust, the
Liquidity Provider will, if necessary, make
advances in an aggregate amount sufficient to pay
interest on the applicable Certificates on up to
three successive semiannual Regular Distribution
Dates at the applicable interest rate for such
Certificates. The Liquidity Facilities cannot be
used to pay any other amount in respect of the
Certificates and will not cover interest payable on
amounts held in escrow as Deposits with the
Depositary.
Notwithstanding the subordination provisions
applicable to the Certificates, 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 for such
Trust.
Upon each drawing under any Liquidity Facility to
pay interest on the Certificates, the Subordination
Agent will reimburse 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 and certain other agreements
will rank equally with comparable obligations
relating to the other Liquidity Facilities and will
rank senior to the Certificates in right of
payment.
Escrowed Funds............. Funds in escrow for the Certificateholders of each
Trust will be held by the Depositary as Deposits
relating to such Trust. Funds may be withdrawn by
the Trustees from time to time to purchase
Equipment Notes prior to the deadline established
for purposes of this offering. On each Regular
Distribution Date, the Depositary will pay interest
accrued on the Deposits relating to such Trust at a
rate per annum equal to the interest rate
applicable to the Certificates issued by such
Trust. The Deposits relating to each Trust and
interest paid thereon will not be subject to the
subordination provisions applicable to the
Certificates. The Deposits cannot be used to pay
any other amount in respect of the Certificates.
Unused Escrowed Funds...... All of the Deposits held in escrow may not be used
to purchase Equipment Notes by the deadline
established for purposes of this offering. This may
occur because of delays in the delivery of
Aircraft, variations in the terms of each Aircraft
financing or other reasons. See "Description of the
Certificates -- Obligation to Purchase Equipment
Notes". If any funds remain as Deposits with
respect to any Trust after such deadline, they will
be withdrawn by the Escrow Agent for such Trust and
distributed, with accrued and unpaid interest, to
the Certificateholders of such Trust after at least
15 days' prior written notice. See "Description of
the Deposit Agreements -- Unused Deposits".
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<PAGE> 12
Obligation to Purchase
Equipment Notes.......... The Trustees will be obligated to purchase the
Equipment Notes issued with respect to each
Aircraft pursuant to the Note Purchase Agreement.
Continental may enter into a leveraged lease
financing or a secured debt financing with respect
to each Aircraft pursuant to forms of financing
agreements attached to the Note Purchase Agreement.
In the case of a Leased Aircraft, the terms of the
financing agreements entered into may differ from
the forms of such agreements described in this
Prospectus Supplement because a third party -- the
Owner Participant -- will provide a portion of the
financing of the Aircraft and may request changes.
However, under the Note Purchase Agreement, the
terms of such financing agreements must (a) contain
the Mandatory Document Terms set forth in the Note
Purchase Agreement and (b) not vary the Mandatory
Economic Terms set forth in the Note Purchase
Agreement. In addition, Continental must (a)
certify to the Trustees that any such modifications
do not materially and adversely affect the
Certificateholders and (b) 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. The Trustees will not be
obligated to purchase Equipment Notes if, at the
time of issuance, Continental is in bankruptcy or
certain other specified events have occurred. See
"Description of the Certificates -- Obligation to
Purchase Equipment Notes".
Equipment Notes
(a) Issuer................. Leased Aircraft. If Continental leases an Aircraft,
the related Equipment Notes will be issued by a
financial institution, acting as Owner Trustee. The
Owner Trustee will not be individually liable for
such Equipment Notes. However, Continental's
scheduled rental obligations under the related
Lease will be in amounts sufficient to pay
scheduled payments on such Equipment Notes.
Owned Aircraft. If Continental purchases an
Aircraft, the related Equipment Notes will be
issued by Continental.
(b) Interest............... The Equipment Notes held in each Trust will accrue
interest at the rate per annum for the Certificates
issued by such Trust set forth on the cover page of
this Prospectus Supplement. Interest will be
payable on May 1 and November 1 of each year,
commencing on the first such date after issuance of
such Equipment Notes. Interest is calculated on the
basis of a 360-day year consisting of twelve 30-day
months.
(c) Principal.............. Amortizing Notes. Principal payments on the Series
A-1, Series B and Series C-1 Equipment Notes are
scheduled on May 1 and November 1 in certain years,
commencing on May 1, 1999.
Bullet Maturity Notes. The entire principal amount
of the Series A-2 Equipment Notes is scheduled to
be paid on November 1, 2008. The entire principal
amount of the Series C-2 Equipment Notes is
scheduled to be paid on November 1, 2005.
(d) Redemption and
Purchase................... Aircraft Event of Loss. If an Event of Loss occurs
with respect to an Aircraft, all of the Equipment
Notes issued with respect to such Aircraft will be
redeemed, unless such Aircraft is replaced by
Continental under the related financing agreements.
The redemption price in such case will
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<PAGE> 13
be the unpaid principal amount of such Equipment
Notes, together with accrued interest, but without
any premium.
Optional Redemption. The issuer of the Equipment
Notes with respect to an Aircraft may elect to
redeem them prior to maturity. The redemption price
in such case will be the unpaid principal amount of
such Equipment Notes, together with accrued
interest plus a Make-Whole Premium. See
"Description of the Equipment Notes -- Redemption".
Purchase by Owner. In the case of a Leased
Aircraft, if a Lease Event of Default is
continuing, the applicable Owner Trustee or Owner
Participant may elect to purchase all of the
Equipment Notes with respect to such Aircraft,
subject to the terms of the applicable Leased
Aircraft Indenture. The purchase price in such case
will be the unpaid principal amount of such
Equipment Notes, together with accrued interest,
but without any premium (provided that a Make-Whole
Premium will be payable under certain circumstances
specified in the Leased Aircraft Indenture). In the
case of an Owned Aircraft, Continental will have no
comparable right to purchase the Equipment Notes
under such circumstances.
(e) 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, in the related Owner Trustee's rights
under the Lease with respect to such Aircraft (with
certain limited exceptions).
The Equipment Notes issued in respect of an
Aircraft will not be secured by any other Aircraft
or Leases. This means that any excess proceeds from
the sale of an Aircraft or other exercise of
remedies with respect to such Aircraft will not be
available to cover any shortfall with respect to
any other Aircraft.
There will not be cross-default provisions in the
Indentures or in the Leases. This means that 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
with respect to the remaining Aircraft.
(f) Section 1110
Protection................. Continental's outside counsel will provide its
opinion to the Trustees that the benefits of
Section 1110 of the U.S. Bankruptcy Code will be
available with respect to the Equipment Notes.
Certain Federal Income Tax
Consequences............. 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............. Each person who acquires a Certificate will be
deemed to have represented that either: (a) no
employee benefit plan assets have been used to
purchase such Certificate or (b) the purchase and
holding of such Certificate are exempt from the
prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 and the
Internal Revenue Code of 1986 pursuant to one or
more prohibited transaction statutory or
administrative exemptions. See "Certain ERISA
Considerations".
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<PAGE> 14
Rating of the
Certificates............... It is a condition to the issuance of the
Certificates that the Certificates be rated by
Moody's and Standard & Poor's not less than the
ratings set forth below:
<TABLE>
<CAPTION>
STANDARD
CERTIFICATES MOODY'S & POOR'S
------------ ------- --------
<S> <C> <C>
Class A-1.............................. Aa3 AA+
Class A-2.............................. Aa3 AA+
Class B................................ A2 A+
Class C-1.............................. Baa1 BBB+
Class C-2.............................. Baa1 BBB+
</TABLE>
A rating is not a recommendation to purchase, hold
or sell Certificates, since 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.
<TABLE>
<CAPTION>
STANDARD
MOODY'S & POOR'S
------- --------
<S> <C> <C> <C>
Rating of the Depositary............. Short Term................................. P-1 A-1+
Threshold Rating for the Liquidity
Provider........................... Short Term
Class A-1 and Class A-2.................. P-1 A-1+
Class B, Class C-1 and Class C-2......... P-1 A-1
</TABLE>
Liquidity Provider
Rating..................... The Liquidity Provider's parent, Morgan Stanley
Dean Witter & Co., meets the threshold ratings
requirement for the Class B, Class C-1 and Class
C-2 Certificates and will guarantee the Liquidity
Provider's obligations under the Liquidity
Facilities. Caisse des Depots et Consignations, a
special national legislative public entity
(establissement public a statut legal special)
governed by the laws of the Republic of France,
meets the threshold ratings requirement for the
Class A-1 and Class A-2 Certificates and will
initially provide support for the Liquidity
Provider's obligations for the Class A-1 Trust and
the Class A-2 Trust.
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<PAGE> 15
SUMMARY FINANCIAL AND OPERATING DATA
The following tables summarize certain consolidated financial data and
certain operating data with respect to Continental. The following selected
consolidated financial data for the years ended December 31, 1997, 1996 and 1995
is derived from the audited consolidated financial statements of Continental
incorporated by reference in the Prospectus and should be read in conjunction
therewith. The consolidated financial data of Continental for the three and six
months ended June 30, 1998 and 1997 is derived from the unaudited consolidated
financial statements of Continental incorporated by reference in the Prospectus,
which include all adjustments (consisting solely of normal recurring accruals)
that Continental considers necessary for the fair presentation of the financial
position and results of operations for these periods. Operating results for the
three and six months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
Continental's selected consolidated financial data should be read in conjunction
with, and are qualified in their entirety by reference to, Continental's
consolidated financial statements, including the notes thereto. Continental
recently announced the accelerated retirement of certain aircraft, which
resulted in a charge of $122 million in the third quarter of 1998. See "The
Company -- Recent Developments".
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ----------------- ------------------------------
1998 1997 1998 1997 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(IN MILLIONS OF DOLLARS, EXCEPT OPERATING DATA, PER SHARE DATA AND
RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA -- OPERATIONS:
Operating Revenue................................ $ 2,036 $ 1,786 $ 3,890 $ 3,484 $ 7,213 $6,360 $ 5,825
Operating Expenses............................... 1,756 1,555 3,460 3,107 6,497 5,835(1) 5,440(2)
------- ------- ------- ------- ------- ------- -------
Operating Income................................. 280 231 430 377 716 525 385
Nonoperating Expense, net........................ (5) (23) (18) (45) (76) (97) (75)(3)
------- ------- ------- ------- ------- ------- -------
Income before Income Taxes, Minority Interest and
Extraordinary Charges.......................... 275 208 412 332 640 428 310
Net Income....................................... $ 163 $ 128 $ 244 $ 202 $ 385 $ 319 $ 224
======= ======= ======= ======= ======= ======= =======
Earnings per Common
Share.......................................... $ 2.68 $ 2.22 $ 4.08 $ 3.50 $ 6.65 $ 5.75 $ 4.07
======= ======= ======= ======= ======= ======= =======
Earnings per Common Share Assuming Dilution...... $ 2.06 $ 1.63 $ 3.12 $ 2.58 $ 4.99 $ 4.17 $ 3.37
======= ======= ======= ======= ======= ======= =======
Ratio of Earnings to Fixed
Charges(4)..................................... 2.66x 2.48x 2.26x 2.18x 2.07x 1.81x 1.53x
======= ======= ======= ======= ======= ======= =======
OPERATING DATA (JET OPERATIONS ONLY)(5):
Revenue passenger miles
(millions)(6).................................. 13,675 11,922 25,747 22,813 47,906 41,914 40,023
Available seat miles (millions)(7)............... 18,574 16,486 36,097 32,318 67,576 61,515 61,006
Passenger load factor(8)......................... 73.6% 72.3% 71.3% 70.6% 70.9% 68.1% 65.6%
Breakeven passenger load factor(9)............... 59.0% 57.7% 59.8% 58.3% 60.0% 60.7%(12) 60.8%
Passenger revenue per available seat
mile (cents)(10)............................... 9.39 9.31 9.25 9.30 9.19 8.93 8.20
Operating cost per available seat mile
(cents)(11).................................... 8.85 8.90 8.99 9.08 9.07 8.77(12) 8.36
Average yield per revenue passenger mile
(cents)(13).................................... 12.75 12.87 12.98 13.17 12.96 13.10 12.51
Average length of aircraft flight
(miles)........................................ 1,038 944 1,026 935 967 896 836
</TABLE>
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<PAGE> 16
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
FINANCIAL DATA -- BALANCE SHEET:
Assets:
Cash and Cash Equivalents, including restricted cash and
cash equivalents of $14 and $15, respectively(14)......... $1,067 $1,025
Short-term Investments...................................... 117 --
Other Current Assets........................................ 873 703
Total Property and Equipment, Net........................... 2,834 2,225
Routes, Gates and Slots, Net................................ 1,396 1,425
Other Assets, Net........................................... 368 452
------ ------
Total Assets........................................ $6,655 $5,830
====== ======
Liabilities and Stockholders' Equity:
Current Liabilities......................................... $2,500 $2,285
Long-Term Debt and Capital Leases........................... 2,089 1,568
Deferred Credits and Other Long-Term Liabilities............ 741 819
Continental-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Convertible
Subordinated Debentures(15)............................... 242 242
Common Stockholders' Equity................................. 1,083 916
------ ------
Total Liabilities and Stockholders' Equity.......... $6,655 $5,830
====== ======
</TABLE>
- ------------
(1) Includes a $128 million fleet disposition charge recorded in 1996
associated primarily with Continental'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, Continental wrote down its Stage 2 aircraft inventory that
is not expected to be consumed through operations to its estimated fair
value and recorded a provision for costs associated with the return of
leased aircraft at the end of their respective lease terms.
(2) Includes a $20 million cash payment in 1995 by Continental in connection
with a 24-month collective bargaining agreement entered into by Continental
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 Continental 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) 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 of previously capitalized interest. Fixed
charges consist of interest expense and the portion of rental expense
representative of interest expense. For the periods January 1, 1993 through
April 27, 1993 and April 28, 1993 through December 31, 1993 and for the
year ended December 31, 1994, earnings were not sufficient to cover fixed
charges. Additional earnings of $979 million, $60 million and $667 million,
respectively, would have been required to achieve ratios of earnings to
fixed charges of one to one.
(5) Includes operating data for CMI, but does not include operating data for
Express's regional jet operations or turboprop operations.
(6) The number of scheduled miles flown by revenue passengers.
(7) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(8) Revenue passenger miles divided by available seat miles.
(9) 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.
(10) Passenger revenue divided by available seat miles.
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<PAGE> 17
(11) Operating expenses divided by available seat miles.
(12) Excludes a $128 million fleet disposition charge. See Note (1) for
description of the fleet disposition charge.
(13) The average revenue received for each mile a revenue passenger is carried.
(14) Restricted cash and cash equivalents agreements relate primarily to
workers' compensation claims and the terms of certain other agreements.
(15) The sole assets of such Trust are convertible subordinated debentures, with
an aggregate principal amount of $249 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> 18
RISK FACTORS
RISK FACTORS RELATING TO THE COMPANY
LEVERAGE AND LIQUIDITY
Continental has a higher proportion of debt compared to its equity capital
than some of its principal competitors. In addition, Continental's cash
resources are less than some of its principal competitors. A majority of
Continental's property and equipment is subject to liens securing indebtedness.
Accordingly, Continental may be less able than some of its competitors to
withstand a prolonged recession in the airline industry or respond as flexibly
to changing economic and competitive conditions.
As of June 30, 1998, Continental had:
- $2.3 billion (including current maturities) of long-term debt and capital
lease obligations.
- $1.3 billion of Continental-obligated mandatorily redeemable preferred
securities of subsidiary trust and common stockholders' equity.
- $1.1 billion in cash and cash equivalents (excluding restricted cash and
cash equivalents of $14 million) and $117 million of short-term
investments.
- $225 million available to be drawn under general lines of credit.
Continental has substantial commitments for capital expenditures, including
for the acquisition of new aircraft. As of September 1, 1998, Continental had
agreed to acquire a total of 124 Boeing jet aircraft through 2005. Continental
also has options for additional aircraft (exercisable subject to certain
conditions). The estimated aggregate cost of Continental's firm commitments for
Boeing aircraft is approximately $5.8 billion. We currently plan to finance our
new Boeing aircraft with a combination of enhanced pass through trust
certificates, lease equity and other third party financing, subject to
availability and market conditions. As of September 1, 1998, approximately $631
million in financing had been arranged for such future Boeing deliveries. In
addition, Continental had commitments or letters of intent for backstop
financing for approximately one-third of the anticipated remaining acquisition
cost of such Boeing deliveries.
We expect to finance certain of our capital commitments through operating
leases, which will increase our operating expenses. For 1997, Continental
incurred approximately $626 million of rent expenses under operating leases
relating to aircraft, compared to $568 million for 1996, and approximately $236
million relating to facilities and other rentals, compared to $210 million in
1996. We expect that our operating lease expenses for 1998 will exceed 1997
amounts.
Additional financing will be needed to satisfy Continental's capital
commitments. We cannot predict whether sufficient financing will be available
for capital expenditures not covered by firm financing commitments.
CONTINENTAL'S HISTORY OF OPERATING LOSSES
Continental recorded net income of approximately $244 million in the first
half of 1998, $385 million in 1997, $319 million in 1996 and $224 million in
1995. However, Continental experienced significant operating losses in the
previous eight years. Historically, the financial results of the U.S. airline
industry have been cyclical. We cannot predict whether current favorable
conditions will continue.
AIRCRAFT FUEL
Fuel costs constitute a significant portion of Continental's operating
expenses. Fuel costs were approximately 10.8% of operating expenses for the six
months ended June 30, 1998 and 13.6% for the year ended December 31, 1997. Fuel
prices and supplies are influenced significantly by international political and
economic circumstances. If a fuel supply shortage were to arise from a
disruption of oil imports or otherwise, higher fuel prices or curtailment of
scheduled airline service could result. Significant changes in fuel costs would
materially affect Continental's operating results.
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<PAGE> 19
LABOR MATTERS
In September 1997, we announced our intention to bring all Continental
employees to industry standard wages (the average of the top ten air carriers as
ranked by the DOT, excluding Continental) within 36 months. We expect to phase
in these wage increases over the 36-month period as revenue, interest rates and
rental rates reach industry standards. We estimate that the increased wages will
aggregate approximately $500 million over such 36-month period.
The current status of Continental's and its subsidiaries' principal labor
union agreements is as follows:
- Continental's Pilots. In June 1998, a five-year collective bargaining
agreement, retroactive to October 1997, was ratified by Continental's
pilots. The agreement becomes amendable in October 2002. The Company
began accruing for the increased costs of the new agreement in the fourth
quarter of 1997. We estimate that the increased costs under the new
agreement will be approximately $113 million for 1998.
- Express's Pilots. In June 1998, the pilots at Express, Continental's
subsidiary that operates turboprop and regional jet aircraft, rejected a
new five-year agreement. Express resumed bargaining with the assistance
of the National Mediation Board in the third quarter of 1998. While we
cannot predict the outcome of those negotiations, we believe that they
will not have a material financial impact on the Company.
- Flight Attendants. The flight attendants at Continental, Express and CMI,
Continental's subsidiary based in Guam, are covered by collective
bargaining agreements that become amendable on December 31, 1999,
November 1, 1999, and June 30, 2000, respectively.
- Dispatchers. The Company's dispatchers ratified a new five-year
collective bargaining agreement in June 1998. The agreement becomes
amendable in October 2003.
- Mechanics. Negotiations for an initial collective bargaining agreement
covering Continental's mechanics and related employees began in the fall
of 1997 and are continuing. While we cannot predict the outcome of those
negotiations, we believe that they will not have a material financial
impact on the Company. CMI's mechanics are covered by a collective
bargaining agreement, which becomes amendable March 31, 2001.
RISKS REGARDING CONTINENTAL/NORTHWEST ALLIANCE
On January 26, 1998, Continental and Northwest Airlines, Inc. announced a
long-term global alliance involving extensive code-sharing, frequent flyer
reciprocity and other cooperative activities (the "Northwest Alliance"). In a
related transaction, a Northwest affiliate agreed to acquire from Continental's
principal shareholder securities representing approximately 14% of Continental's
equity and approximately 51% of its voting power.
The Company's ability to implement the Northwest Alliance successfully and
to achieve anticipated benefits are subject to certain risks and uncertainties,
including:
- Competitive pressures, including developments with respect to alliances
among other air carriers.
- Customer reaction to the alliance, including reaction to differences in
product and benefits provided by Continental and Northwest.
- Economic conditions in the principal markets served by Continental and
Northwest.
- Increased costs or other implementation difficulties, including those
caused by employees.
- Our ability to modify certain contracts that restrict certain aspects of
the alliance.
- Disapproval or delay by regulatory authorities or adverse regulatory
developments.
- The outcome of lawsuits commenced by shareholders of the Company
challenging the Northwest Alliance, the transfer of Continental
securities to a Northwest affiliate and certain related matters.
S-19
<PAGE> 20
We cannot predict whether the Company's alliance with Northwest will be
fully and timely implemented or whether the anticipated benefits will be
achieved.
RISK FACTORS RELATING TO THE AIRLINE INDUSTRY
COMPETITION AND INDUSTRY CONDITIONS
The airline industry is highly competitive and susceptible to price
discounting. Carriers have used discount fares to stimulate traffic during
periods of slack demand, to generate cash flow and to increase market share.
Some of Continental's competitors have substantially greater financial resources
or lower cost structures than Continental.
Airline profit levels are highly sensitive to changes in fuel costs, fare
levels and passenger demand. Passenger demand and fare levels have in the past
been influenced by, among other things, the general state of the economy (both
in international regions and domestically), international events, airline
capacity and pricing actions taken by carriers. For example, the operating
results of CMI declined during 1996, 1997 and the first half of 1998 as a result
of the continued weakness of the yen against the dollar, a weak Japanese economy
and increased fuel costs in 1996 and 1997. Domestically, from 1990 to 1993, the
weak U.S. economy, turbulent international events and extensive price
discounting by carriers contributed to unprecedented losses for U.S. airlines.
In the last several years, the U.S. economy has improved and excessive price
discounting has abated. We cannot predict the extent to which these favorable
conditions will continue.
In recent years, the major U.S. airlines have sought to form marketing
alliances with other U.S. and foreign air carriers. Such alliances generally
provide for "code-sharing", frequent flyer reciprocity, coordinated scheduling
of flights of each alliance member to permit convenient connections and other
joint marketing activities. Such arrangements permit an airline to market
flights operated by other alliance members as its own. This increases the
destinations, connections and frequencies offered by the airline, which provides
an opportunity to increase traffic on such airline's segment of flights
connecting with alliance partners. The Northwest Alliance is an example of such
an arrangement, and Continental has existing alliances with numerous other air
carriers. Other major U.S. airlines have alliances or planned alliances more
extensive than Continental's alliances. We cannot predict the extent to which
Continental will benefit from its alliances or be disadvantaged by competing
alliances.
REGULATORY MATTERS
Airlines are subject to extensive regulatory and legal compliance
requirements. These requirements impose substantial costs on airlines. In the
last several years, the United States Federal Aviation Administration (the
"FAA") has issued a number of directives and other regulations relating to the
maintenance and operation of aircraft that have required significant
expenditures. Such FAA requirements cover, 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 in complying with
the FAA's regulations.
Additional laws, regulations, taxes and airport rates and charges have been
proposed from time to time that could significantly increase the cost of airline
operations or reduce revenues. Congress and the Department of Transportation
("DOT") have also proposed the regulation of airlines' competitive responses and
other activities. Restrictions on the ownership and transfer of airline routes
and takeoff and landing slots have also been proposed. The ability of U.S.
carriers to operate international routes is subject to change because the
applicable arrangements between the United States and foreign governments may be
amended from time to time, or because appropriate slots or facilities are not
made available. We cannot provide assurances that laws or regulations enacted in
the future will not adversely affect the Company.
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YEAR 2000
Computerized systems are essential to the Company's operations. Many
computer programs in use around the world use only two digits to identify the
applicable year and do not take account of the change in century that will occur
in the year 2000. If this problem is not corrected, computer applications could
fail or create mistakes. As a result, the Company has implemented a Year 2000
project to ensure that the Company's computer systems will function properly in
the year 2000 and thereafter. Our Year 2000 project should be completed in early
1999, and we believe that the year 2000 issue will not pose significant
operational problems for our own computer systems.
We have also contacted our significant suppliers and vendors with whom our
systems interface or upon whom our business depends. We are working with these
parties to minimize the extent to which our business will be vulnerable to their
failure to remediate their year 2000 issues. The Company's business is also
dependent upon certain governmental agencies, such as the FAA, that provide
essential services to the aviation industry. We cannot predict whether the
systems of such third parties on which the Company's business relies (including
those of the FAA) will be modified on a timely basis.
The Company's business, financial condition and results of operations could
be materially adversely affected if our systems or those operated by other
parties on which our business depends fail to operate properly beyond 1999.
RISK FACTORS RELATING TO THE CERTIFICATES AND THE OFFERING
APPRAISALS AND REALIZABLE VALUE OF AIRCRAFT
Three independent appraisal and consulting firms have prepared appraisals
of the Aircraft. Letters summarizing such appraisals are annexed to this
Prospectus Supplement as Appendix II. Such appraisals are based on varying
assumptions and methodologies, which differ among the appraisers, and were
prepared without physical inspection of the Aircraft. Appraisals that are based
on other assumptions and methodologies may result in valuations that are
materially different from those contained in such appraisals. See "Description
of the Aircraft and the Appraisals -- The Appraisals".
An appraisal is only an estimate of value. It does not indicate the price
at which an Aircraft may be purchased from the Aircraft manufacturer. Nor should
an appraisal be relied upon as a measure of realizable value. The proceeds
realized upon a sale of any Aircraft may be less than its appraised value. In
particular, the appraisals of the Aircraft are estimates of values as of future
delivery dates. The value of an Aircraft if remedies are exercised under the
applicable Indenture will depend on market and economic conditions, the supply
of similar 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 would be sufficient to satisfy in
full payments due on the Certificates.
PRIORITY OF DISTRIBUTIONS; SUBORDINATION
Certain Classes of Certificates are subordinated to other Classes in rights
to distributions. See "Description of the Certificates -- Subordination".
Consequently, a payment default under any Equipment Note or a Triggering Event
may cause the distribution to more senior Classes of Certificates of payments
received from payment on one or more junior series of Equipment Notes. If this
should occur, the interest accruing on the remaining Equipment Notes would be
less than the interest accruing on the remaining Certificates. This is because
the remaining Certificates of the junior Classes accrue interest at a higher
rate than the remaining Equipment Notes, which include series applicable to the
senior Classes bearing interest at a lower rate. 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.
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CONTROL OVER COLLATERAL; SALE OF COLLATERAL
If an Indenture Default is continuing, subject to certain conditions, the
Loan Trustee under such Indenture will be directed by the "Controlling Party" in
exercising remedies under such Indenture, including accelerating the applicable
Equipment Notes or foreclosing the lien on the Aircraft securing such Equipment
Notes. See "Description of the Certificates -- Indenture Defaults and Certain
Rights Upon an Indenture Default".
The Controlling Party will be:
- The Class A-1 Trustee or Class A-2 Trustee, whichever represents the
Class with the larger principal amount of Certificates outstanding at the
time that the Indenture Default occurs.
- Upon payment of final distributions to the holders of such larger Class,
the other of the Class A-1 Trustee or Class A-2 Trustee.
- Upon payment of final distributions to the holders of Class A-1 and A-2
Certificates, the Class B Trustee.
- Upon payment of final distributions to the holders of Class B
Certificates, the Class C-1 Trustee or Class C-2 Trustee, whichever
represents the Class with the larger principal amount of Certificates
outstanding at such time.
- Upon payment of final distributions to the holders of such larger Class,
the other of the Class C-1 Trustee or Class C-2 Trustee.
- Under certain circumstances, and notwithstanding the foregoing, the
Liquidity Provider.
During the continuation of any Indenture Default, the Controlling Party may
accelerate and sell the Equipment Notes issued under such Indenture, subject to
certain limitations. See "Description of the Intercreditor
Agreement -- Intercreditor Rights -- Sale of Equipment Notes or Aircraft". The
market for Equipment Notes during 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 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.
RATINGS OF THE CERTIFICATES
It is a condition to the issuance of the Certificates that the Class A-1
and A-2 Certificates be rated not lower than Aa3 by Moody's and AA+ by Standard
& Poor's, the Class B Certificates be rated not lower than A2 by Moody's and A+
by Standard & Poor's and the Class C-1 and C-2 Certificates be rated not lower
than Baa1 by Moody's and BBB+ by Standard & Poor's. A rating is not a
recommendation to purchase, hold or sell Certificates, since such rating does
not address market price or suitability for a particular investor. A rating may
not remain for any given period of time and may 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
provisions applicable to the Certificates. Standard & Poor's has indicated that
its rating applies to a unit consisting of Certificates representing the Trust
Property and Escrow Receipts initially representing undivided interests in
certain rights to $530,086,767 of Deposits. Amounts deposited under the Escrow
Agreements are not property of Continental and are not entitled to the benefits
of Section 1110 of the U.S. Bankruptcy Code. Neither the Certificates nor the
Escrow Receipts may be separately assigned or transferred.
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UNUSED ESCROWED FUNDS
Under certain circumstances, all of the funds held in escrow as Deposits
may not be used to purchase Equipment Notes by the deadline established for
purposes of this offering. See "Description of the Deposit Agreements -- Unused
Deposits". If any funds remain as Deposits with respect to any Trust after such
deadline, they will be withdrawn by the Escrow Agent for such Trust and
distributed, with accrued and unpaid interest but without any premium, to the
Certificateholders of such Trust. 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-1 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-1 Certificates as compared to the other Certificates. See "Description
of the Deposit Agreements -- Unused Deposits".
LIMITED ABILITY TO RESELL THE CERTIFICATES
Prior to this offering, there has been no public market for the
Certificates. Neither Continental nor any Trust intends to apply for listing of
the Certificates on any securities exchange or otherwise. The underwriters may
assist in resales of the Certificates, but they are not required to do so. A
secondary market for the Certificates may not develop. If a secondary market
does develop, it might not continue or it might not be sufficiently liquid to
allow you to resell any of your Certificates.
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 Airlines, Inc. ("Continental" or the "Company") is a major
United States air carrier engaged in the business of transporting passengers,
cargo and mail. Continental is the fifth largest United States airline (as
measured by revenue passenger miles in the first eight months of 1998) and,
together with its wholly owned subsidiaries, Continental Express, Inc.
("Express") and Continental Micronesia, Inc. ("CMI"), serves 207 airports
worldwide. As of September 1, 1998, Continental flew to 126 domestic and 81
international destinations and offered additional connecting service through
alliances with domestic and foreign carriers. Continental directly serves 13
European cities and is one of the leading airlines providing service to Mexico
and Central America, serving more destinations there than any other United
States airline. Through its Guam hub, CMI 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 domestic hubs is located in a large business and population
center, contributing to a high volume of "origin and destination" traffic.
NEWARK
As of September 1, 1998, Continental operated 59% (256 departures) of
average daily jet departures (excluding regional jets) and, together with
Express, accounted for 61% (371 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 25% of all average daily
departures, while the next largest carrier, US Airways, and its commuter
affiliate accounted for 15% of all average daily departures.
HOUSTON
As of September 1, 1998, Continental operated 80% (340 departures) of
average daily jet departures (excluding regional jets) and, together with
Express, accounted for 84% (501 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 (excluding
regional jets) from Houston.
CLEVELAND
As of September 1, 1998, Continental operated 52% (95 departures) of
average daily jet departures (excluding regional jets) and, together with
Express, accounted for 66% (254 departures) of all average daily departures from
Cleveland Hopkins International Airport. The next largest carrier, US Airways,
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 new-generation turboprop aircraft and regional jets
under the name "Continental Express". The turboprop aircraft average
approximately seven years of age and seat 64 passengers or less while the
regional jets average less than one year of age and seat 50 passengers. In
addition, Express recently announced the accelerated retirement of certain
turboprop aircraft and an order to purchase 25 ERJ-135, 37-seat regional jets.
See "-- Recent Developments".
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As of September 1, 1998, Express served 12 destinations from Newark
International Airport (3 by regional jet), 21 destinations from George Bush
Intercontinental Airport (3 by regional jet) and 32 destinations from Cleveland
(3 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 regional jets
provide greater comfort and enjoy better customer acceptance than its turboprop
aircraft. The regional jets 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:
- In January 1998, Continental announced it had entered into a long-term
global alliance with Northwest. The Northwest Alliance is expected to
include the placing by each carrier of its code on substantially all of
the flights of the other, and reciprocal frequent flyer programs and
executive lounge access. Significant other joint marketing activities
will be undertaken, while preserving the separate identities of the
carriers. See "Risk Factors -- Risk Factors Relating to the
Company -- Risks Regarding Continental/Northwest Alliance".
- 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 68 city-pairs and
allow Continental to link additional destinations to its route network
and derive additional traffic from America West's distribution strength
in cities where Continental has less sales presence. The sharing of
facilities and employees by Continental and America West in their
respective key markets has resulted in significant cost savings.
- 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 in July 1997 on flights connecting in four cities in
the eastern United States and offers connections for Continental
passengers to 9 cities in the Northeastern and mid-Atlantic regions of
the United States.
- Continental and CMI entered into a cooperative marketing agreement with
Hawaiian Airlines that began October 1, 1997 on flights connecting in
Honolulu.
INTERNATIONAL OPERATIONS
Continental serves destinations throughout Europe, Mexico, Central and
South America and the Caribbean and has extensive operations in the western
Pacific conducted by CMI. As measured by available seat miles for the first
eight months of 1998, approximately 29.6% of Continental's jet operations were
dedicated to international traffic. As of September 1, 1998, the Company offered
133 weekly departures to 13 European cities and marketed service to 21 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, Continental has non-stop service to 13
European cities, four Canadian cities, two Mexican cities, two Central American
cities, six South American cities and five Caribbean destinations, and markets
numerous other
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destinations through code-sharing arrangements with foreign carriers. In
addition, Continental announced plans to commence non-stop service to Tokyo in
November 1998, and Zurich and Brussels in 1999.
The Company's Houston hub is the focus of its operations in Mexico and
Central America. Continental currently flies non-stop from Houston to 14 cities
in Mexico, every country in Central America, four cities in South America, two
Caribbean destinations, three cities in Canada and two cities in Europe. In
addition, Continental announced plans to commence non-stop service to Tokyo in
January 1999.
Continental also flies to Toronto from its hub in Cleveland and has
announced service to London, subject to government approvals.
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.
From its hub operations based on the island of Guam, CMI provides service to
nine cities in Japan, more than any other United States carrier, as well as
other Pacific Rim destinations, including Taiwan, the Philippines, Hong Kong,
Australia, New Caledonia 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.
CMI is the principal air carrier in the Micronesian Islands, where it
pioneered scheduled air service in 1968. CMI's route system is linked to the
United States market through Honolulu, which CMI serves non-stop from both Tokyo
and Guam. CMI and Continental also maintain a code-sharing agreement and
coordinate schedules on certain flights from the west coast of the United States
to Honolulu, and from Honolulu to Guam and Tokyo, to facilitate travel from the
United States into CMI's route system. CMI recently announced the accelerated
retirement of certain of its aircraft. See "-- Recent Developments".
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. 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. The Company
believes that the Northwest Alliance will enhance its ability to attract foreign
alliance partners. See "Risk Factors -- Risk Factors Relating to the
Company -- Risks Regarding Continental/Northwest Alliance".
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 by strengthening the Company's position in large, local
(non-connecting) markets 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. Route
authorities necessary 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, Transavia, CSA Czech Airlines, British Midland, China Airlines, EVA
Airways Corporation, an airline based in Taiwan (which commenced March 30,
1998), Virgin Atlantic Airways ("Virgin") (which commenced February 2, 1998),
Viacao Aerea Sao Paulo ("VASP") (which commenced July 1, 1998) and Air France
(which commenced June 19, 1998), and is in the process of implementing a
code-share agreement and other joint marketing and service agreements with
Compania Panamena de Aviacion, S.A. ("COPA"), 49% of the common equity of which
is owned by the Company. Upon receipt of government approval, Continental will
commence code-sharing arrangements with Aeroservicios Carabobo S.A. (Aserca), a
Venezuelan carrier, and
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Air Aruba. In addition, the Northwest Alliance contemplates formation of a joint
venture with KLM, a Dutch carrier. Continental has entered into joint marketing
agreements with Air China and Aerolineas Centrales de Colombia (ACES), for which
government approval has not yet been sought.
Certain of Continental's code-sharing agreements involve block-space
arrangements (pursuant to which the carriers agree to share capacity and bear
economic risk for blocks of seats on certain routes). Alitalia has agreed to
purchase blocks of seats on Continental flights between Newark and Rome and
Milan. VASP has agreed to purchase blocks of seats on Continental flights
between Newark and Rio de Janeiro and Sao Paulo. Continental and Air France
purchase blocks of seats on each other's flights between Houston and Newark and
Paris. Continental and Virgin exchange blocks of seats on each other's flights
between Newark and London. Continental's agreement with Virgin also includes the
purchase by Continental of blocks of seats on eight other routes flown by Virgin
between the United Kingdom and 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 sale by Continental's principal shareholder of its Continental equity
securities agreed upon in connection with the Northwest Alliance 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
On August 11, 1998, the Company announced that CMI plans to accelerate the
retirement of its four Boeing 747 aircraft in April 1999 and its remaining
thirteen Boeing 727 aircraft by December 2000. The Boeing 747s will be replaced
by DC-10-30s and the Boeing 727s will be replaced with a reduced number of
Boeing 737s. In addition, Express will accelerate the retirement of certain
turboprop aircraft by December 2000, including its fleet of 32 EMB-120 aircraft,
as regional jets are acquired to replace turboprops. CMI's fleet retirement
decisions will result in a nonrecurring charge of $65 million ($41 million after
tax), and Express' fleet retirement decisions will result in a nonrecurring
charge of $57 million ($36 million after tax). The combined charge was $122
million ($77 million after tax) and was recorded in the third quarter of 1998.
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DESCRIPTION OF THE CERTIFICATES
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 accompanying this Prospectus Supplement (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
Each Pass Through Certificate (collectively, the "Certificates") will
represent a fractional undivided interest in one of the five Continental
Airlines 1998-3 Pass Through Trusts (the "Class A-1 Trust", the "Class A-2
Trust", the "Class B Trust", the "Class C-1 Trust" and the "Class C-2 Trust",
and, collectively, the "Trusts"). The Trusts will be formed pursuant to a pass
through trust agreement between Continental and Wilmington Trust Company, as
trustee (the "Trustee"), dated as of September 25, 1997 (the "Basic Agreement"),
and five separate supplements thereto (each, a "Trust Supplement" and, together
with the Basic Agreement, collectively, the "Pass Through Trust Agreements")
relating to such Trusts between Continental and the Trustee, as trustee under
each Trust. The Certificates to be issued by the Class A-1 Trust, the Class A-2
Trust, the Class B Trust, the Class C-1 Trust and the Class C-2 Trust are
referred to herein as the "Class A-1 Certificates", the "Class A-2
Certificates", the "Class B Certificates", the "Class C-1 Certificates" and the
"Class C-2 Certificates".
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 (the "Trust Property") will consist of:
- 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.
- The rights of such Trust to acquire Equipment Notes under the Note
Purchase Agreement.
- 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.
- The rights of such Trust under the Intercreditor Agreement (including all
monies receivable in respect of such rights).
- All monies receivable under the Liquidity Facility for such Trust.
- Funds from time to time deposited with the Trustee in accounts relating
to such Trust.
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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". Certificates 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)
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
holders of the Certificates (the "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
The subordination terms of the Certificates vary depending upon whether a
"Triggering Event" has occurred. "Triggering Event" means (x) the occurrence of
an Indenture Default under all Indentures resulting in a PTC Event of Default
with respect to the most senior Class of Certificates then outstanding, (y) the
acceleration of all of the outstanding Equipment Notes (provided that during the
Delivery Period the aggregate principal amount thereof exceeds $300 million) or
(z) certain bankruptcy or insolvency events involving Continental.
BEFORE A TRIGGERING EVENT
On each 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 Equipment Notes and certain other payments under the related
Indenture will be distributed under the Intercreditor Agreement in the following
order:
- To the Liquidity Provider to the extent required to pay the Liquidity
Expenses.
- To the Liquidity Provider to the extent required to pay interest accrued
on the Liquidity Obligations.
- 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 the two preceding clauses) and, if applicable, to
replenish each Cash Collateral Account up to the Required Amount.
- To the trustee for the Class A-1 Trust (the "Class A-1 Trustee") and the
trustee for the Class A-2 Trust (the "Class A-2 Trustee") to the extent
required to pay Expected Distributions on the Class A-1 Certificates and
the Class A-2 Certificates. If available funds are insufficient to pay an
Expected Distribution to each such Class in full, available funds will be
distributed to each of the Class A-1 Trustee and Class A-2 Trustee in the
same proportion as such Trustee's proportionate share of such Expected
Distributions.
- 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.
- To the trustee for the Class C-1 Trust (the "Class C-1 Trustee") and the
trustee for the Class C-2 Trust (the "Class C-2 Trustee") to the extent
required to pay Expected Distributions on the Class C-1 Certificates and
the Class C-2 Certificates. If available funds are insufficient to pay an
Expected Distribution to each such Class in full, available funds will be
distributed to each of the Class C-1 Trustee and Class C-2 Trustee in the
same proportion as such Trustee's proportionate share of the aggregate
amount of such Expected Distributions.
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<PAGE> 30
- If Class D Certificates have been issued (see "-- Possible Issuance of
Class D Certificates"), 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 for other Classes of
Certificates) on the Class D Certificates.
- To the Subordination Agent and each Trustee for the payment of certain
fees and expenses.
AFTER A TRIGGERING EVENT
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:
- To the Subordination Agent, any Trustee, any Certificateholder and the
Liquidity Provider to the extent required to pay Administration Expenses.
- To the Liquidity Provider to the extent required to pay the Liquidity
Expenses.
- To the Liquidity Provider to the extent required to pay interest accrued
on the Liquidity Obligations.
- To the Liquidity Provider to the extent required to pay the outstanding
amount of all Liquidity Obligations and, 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 is applicable).
- To the Subordination Agent, any Trustee or any Certificateholder to the
extent required to pay certain fees, taxes, charges and other amounts
payable.
- To the Class A-1 Trustee and the Class A-2 Trustee to the extent required
to pay Adjusted Expected Distributions on the Class A-1 Certificates and
the Class A-2 Certificates. If available funds are insufficient to pay an
Adjusted Expected Distribution to each such Class in full, available
funds will be distributed to each of the Class Trustee A-1 and Class A-2
Trustee in the same proportion as such Trustee's proportionate share of
the aggregate amount of such Adjusted Expected Distributions.
- To the Class B Trustee to the extent required to pay Adjusted Expected
Distributions on the Class B Certificates.
- To the Class C-1 Trustee and the Class C-2 Trustee to the extent required
to pay Adjusted Expected Distributions on the Class C-1 Certificates and
the Class C-2 Certificates. If available funds are insufficient to pay an
Adjusted Expected Distribution to each such Class in full, available
funds will be distributed to each of the Class C-1 Trustee and Class C-2
Trustee in the same proportion as such Trustee's proportionate share of
the aggregate amount of such Adjusted Expected Distributions.
- 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.
Payments in respect of the Deposits relating to a Trust and monies drawn
under a Liquidity Facility will not be subject to the subordination provisions
of the Intercreditor Agreement.
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<PAGE> 31
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 May 1 and November 1 of each year, commencing
on May 1, 1999 (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 Series A-1, B and C-1 Equipment Notes are
scheduled to be received by the Trustee on May 1 and November 1 in certain years
depending upon the terms of the Equipment Notes held in such Trust. The entire
principal amount of the Series A-2 Equipment Notes is scheduled for payment on
November 1, 2008. The entire principal amount of the Series C-2 Equipment Notes
is scheduled for payment on November 1, 2005.
Scheduled payments of interest on the Deposits and of interest or principal
on the Equipment Notes are herein referred to as "Scheduled Payments", and May 1
and November 1 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-1 Certificates is November
1, 2019, for the Class A-2 Certificates is May 1, 2010, for the Class B
Certificates is May 1, 2019, for the Class C-1 Certificates is May 1, 2007 and
for the Class C-2 Certificates is May 1, 2007.
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 its proportionate share, based upon its
fractional interest in such Trust, 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
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<PAGE> 32
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.
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"). Any such distribution will be 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 (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"). However, if such date is
within ten days before or after a Regular Distribution Date, 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, 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); Trust
Supplements, Section 3.01; 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
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<PAGE> 33
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.
If any 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 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 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 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 Distribution Date. Notice of the Pool Factor and the Pool Balance for
each Trust will be mailed to Certificateholders of such Trust on each
Distribution Date. (Trust Supplements, Section 3.02)
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<PAGE> 34
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 the Class
A-1, B or C-1 Trust and the resulting Pool Factors with respect to such Trust
may differ from those set forth below, since the amortization schedule for the
Series A-1, B or C-1 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 the case of the Class A-2 and Class C-2 Trusts, the
scheduled date for payment of principal of the applicable Equipment Notes may
not be changed under the Mandatory Economic Terms. However, the scheduled
distribution of principal payments for any Trust would be affected if any
Equipment Notes held in such Trust are redeemed or purchased or if a default in
payment on such Equipment Notes occurred. Accordingly, the aggregate principal
amortization schedule applicable to a Trust and the resulting Pool Factors may
differ from those set forth in the following table.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS B
------------------------ ------------------------- ------------------------
SCHEDULED EXPECTED SCHEDULED EXPECTED SCHEDULED EXPECTED
PRINCIPAL POOL PRINCIPAL POOL PRINCIPAL POOL
DATE PAYMENTS FACTOR PAYMENTS FACTOR PAYMENTS FACTOR
- ------------------------ ------------- -------- -------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
May 1, 1999............. $ 0.00 $ 0.00 $ 0.00
November 1, 1999........ 0.00 0.00 0.00
May 1, 2000............. 2,425,126.08 0.00 223,406.67
November 1, 2000........ 1,169,418.98 0.00 0.00
May 1, 2001............. 1,033,911.00 0.00 254,430.00
November 1, 2001........ 2,751,899.81 0.00 0.00
May 1, 2002............. 1,255,734.19 0.00 254,430.00
November 1, 2002........ 2,736,905.50 0.00 0.00
May 1, 2003............. 1,270,728.50 0.00 254,430.00
November 1, 2003........ 2,938,941.43 0.00 0.00
May 1, 2004............. 2,497,785.49 0.00 840,255.58
November 1, 2004........ 3,874,342.94 0.00 0.00
May 1, 2005............. 0.00 0.00 0.00
November 1, 2005........ 0.00 0.00 5,696,551.81
May 1, 2006............. 1,551,126.75 0.00 7,044,532.20
November 1, 2006........ 677,263.58 0.00 6,819,867.51
May 1, 2007............. 1,122,772.42 0.00 8,091,424.81
November 1, 2007........ 1,349,161.30 0.00 5,925,979.65
May 1, 2008............. 450,874.70 0.00 7,904,149.81
November 1, 2008........ 0.00 188,957,195.56 5,696,551.81
May 1, 2009............. 0.00 0.00 0.00
November 1, 2009........ 0.00 0.00 0.00
May 1, 2010............. 0.00 0.00 1,664,663.86
November 1, 2010........ 0.00 0.00 2,268,447.81
May 1, 2011............. 740,292.10 0.00 3,066,550.89
November 1, 2011........ 601,362.32 0.00 3,232,111.21
May 1, 2012............. 1,988,005.91 0.00 2,901,389.63
November 1, 2012........ 0.00 0.00 1,494,539.62
May 1, 2013............. 10,283,414.61 0.00 4,937,939.81
November 1, 2013........ 0.00 0.00 0.00
May 1, 2014............. 13,117,734.79 0.00 0.00
November 1, 2014........ 0.00 0.00 0.00
May 1, 2015............. 14,953,616.72 0.00 0.00
November 1, 2015........ 0.00 0.00 0.00
May 1, 2016............. 15,949,212.54 0.00 0.00
November 1, 2016........ 0.00 0.00 0.00
May 1, 2017............. 10,751,274.97 0.00 1,352,680.02
November 1, 2017........ 0.00 0.00 1,029,296.44
May 1, 2018............. 5,720,788.39 0.00 0.00
<CAPTION>
CLASS C-1 CLASS C-2
------------------------ -------------------------
SCHEDULED EXPECTED SCHEDULED EXPECTED
PRINCIPAL POOL PRINCIPAL POOL
DATE PAYMENTS FACTOR PAYMENTS FACTOR
- ------------------------ ------------- -------- -------------- --------
<S> <C> <C> <C> <C>
May 1, 1999............. $ 10,000.00 $ 0.00
November 1, 1999........ 0.00 0.00
May 1, 2000............. 11,837,278.43 0.00
November 1, 2000........ 0.00 0.00
May 1, 2001............. 11,022,047.99 0.00
November 1, 2001........ 347,005.50 0.00
May 1, 2002............. 11,022,047.99 0.00
November 1, 2002........ 616,045.40 0.00
May 1, 2003............. 11,064,441.07 0.00
November 1, 2003........ 495,342.30 0.00
May 1, 2004............. 11,466,373.53 0.00
November 1, 2004........ 576,690.02 0.00
May 1, 2005............. 11,022,047.99 0.00
November 1, 2005........ 1,724,440.04 97,760,487.27
May 1, 2006............. 0.00 0.00
November 1, 2006........ 0.00 0.00
May 1, 2007............. 0.00 0.00
November 1, 2007........ 0.00 0.00
May 1, 2008............. 0.00 0.00
November 1, 2008........ 0.00 0.00
May 1, 2009............. 0.00 0.00
November 1, 2009........ 0.00 0.00
May 1, 2010............. 0.00 0.00
November 1, 2010........ 0.00 0.00
May 1, 2011............. 0.00 0.00
November 1, 2011........ 0.00 0.00
May 1, 2012............. 0.00 0.00
November 1, 2012........ 0.00 0.00
May 1, 2013............. 0.00 0.00
November 1, 2013........ 0.00 0.00
May 1, 2014............. 0.00 0.00
November 1, 2014........ 0.00 0.00
May 1, 2015............. 0.00 0.00
November 1, 2015........ 0.00 0.00
May 1, 2016............. 0.00 0.00
November 1, 2016........ 0.00 0.00
May 1, 2017............. 0.00 0.00
November 1, 2017........ 0.00 0.00
May 1, 2018............. 0.00 0.00
</TABLE>
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<PAGE> 35
The Pool Factor and Pool Balance of each Trust will be recomputed if there
has been an early redemption, purchase, or default in the payment of principal
or interest in respect of one or more of the Equipment Notes held in a Trust, as
described in "-- Indenture Defaults and Certain Rights Upon an Indenture
Default" and "Description of the Equipment Notes -- Redemption", or a special
distribution attributable to unused Deposits after the Delivery Period
Termination Date or the occurrence of a Triggering Event, as described in
"Description of the Deposit Agreements". If the principal payments scheduled for
May 1, 1999 are changed, notice thereof will be mailed to the Certificateholders
by no later than April 15, 1999. In the event of (i) any other 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, except as to the amounts described in items (a) and (f) below):
(a) 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.
(b) The amount of such distribution under the Pass Through Trust
Agreement allocable to principal and the amount allocable to premium, if
any.
(c) The amount of such distribution under the Pass Through Trust
Agreement allocable to interest.
(d) The amount of such distribution under the Escrow Agreement
allocable to interest.
(e) The amount of such distribution under the Escrow Agreement
allocable to unused Deposits, if any.
(f) 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 (a), (b), (c), (d) and (e) 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> 36
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 more than one Trust, a continuing
Indenture Default under such Indenture would affect the Equipment Notes held by
each such Trust. There are no cross-default provisions in the Indentures or in
the Leases (unless otherwise agreed between an Owner Participant and
Continental, which Continental does not expect). 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 all of the Equipment Notes 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> 37
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, 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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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:
- If the Class A-1 or Class A-2 Certificateholders are then represented by
the Controlling Party, the Certificateholders of such other Class will
have the right to purchase all of such Class of Certificates represented
by the Controlling Party.
- The Class B Certificateholders will have the right to purchase all of the
Class A-1 and Class A-2 Certificates.
- The Class C-1 and Class C-2 Certificateholders will have the right to
purchase all of the Class A-1, Class A-2 and Class B Certificates.
- If the Class C-1 or Class C-2 Certificateholders are then represented by
the Controlling Party, the Certificateholders of such other Class will
have the right to purchase all of such Class of Certificates represented
by the Controlling Party.
- If the Class D Certificates are issued, the Class D Certificateholders
will have the right to purchase all of the Class A-1, Class A-2, Class B,
Class C-1 and Class C-2 Certificates.
In each case the purchase price will be 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.
Such purchase right may be exercised by any Certificateholder of the Class or
Classes entitled to such right. In each case, if prior to the end of the ten-day
notice period, any other Certificateholder of the same Class (or, in the case of
a purchase right exercisable by the Class C-1 and Class C-2 Certificateholders,
any Certificateholder of the other relevant 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 (or, in the case of a purchase right
exercisable by the Class C-1 and Class C-2 Certificateholders, pro rata based on
the fractional interest in the relevant Trust held by each Certificateholder
multiplied by the Pool Balance of such Trust). (Trust Supplements, Section 4.01)
PTC EVENT OF DEFAULT
A Pass Through Certificate Event of Default (a "PTC Event of Default")
under each Pass Through Trust Agreement means the failure to pay:
- The outstanding Pool Balance of the applicable Class of Certificates
within ten Business Days of the Final Maturity Date for such Class.
- 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 Account for
such Class of Certificates, with respect thereto in an aggregate amount
sufficient to pay such interest and shall have distributed such amount to
the Trustee entitled thereto). (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.
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<PAGE> 39
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:
- The surviving successor or transferee corporation shall be validly
existing under the laws of the United States or any state thereof or the
District of Columbia.
- The surviving successor or transferee corporation shall 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.
- The surviving successor or transferee corporation shall 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.
- 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.
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 (which term shall include for purposes of the following
clauses, in the case of the Liquidity Facility for the Class A-1 Trust or the
Class A-2 Trust, the support facility in respect of such Liquidity Facility
described below), without the consent of the holders of any of the Certificates
of such Trust:
- 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.
- 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.
- 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
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<PAGE> 40
Facility; or, as provided in the Intercreditor Agreement, to give effect
to or provide for a Replacement Facility or, in the case of the Liquidity
Facility for the Class A-1 Trust or the Class A-2 Trust, the replacement
of such Liquidity Facility by the support facility for such Liquidity
Facility described below.
- 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.
- 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.
- 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.
In each case, such modification or supplement may 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 Internal Revenue Code of 1986, as amended (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, 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
(or, in the case of the Liquidity Facility for the Class A-1 Trust or the
Liquidity Facility for the Class A-2 Trust, the support facility for such
Liquidity Facility described below) 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 (or, in the case of the Liquidity
Facility for the Class A-1 Trust or the Liquidity Facility for the Class A-2
Trust, the support facility for such Liquidity Facility described below). No
such amendment or supplement may, without the consent of the holder of each
Certificate so affected thereby:
- 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 right of any Certificateholder of such
Trust to institute suit for the enforcement of any such payment when due.
- 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.
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<PAGE> 41
- Alter the priority of distributions specified in the Intercreditor
Agreement in a manner materially adverse to such Certificateholders.
- 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.
- 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.
- 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:
- 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.
- 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.
- 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):
- 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.
- 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
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<PAGE> 42
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 a note purchase agreement (the "Note Purchase Agreement"). Under
the Note Purchase Agreement, Continental agrees to finance each Aircraft in the
manner provided therein. Continental will have the option of entering into a
leveraged lease financing or a secured debt financing with respect to each
Aircraft.
- If Continental chooses to enter into a leveraged lease financing with
respect to an Aircraft (such Aircraft, a "Leased Aircraft"), the Note
Purchase Agreement provides for the relevant parties to enter into a
participation agreement (each, a "Participation Agreement"), a Lease and
an indenture (each, a "Leased Aircraft Indenture") relating to the
financing of such Leased Aircraft.
- If Continental chooses to enter into a secured debt financing with
respect to an Aircraft (such Aircraft, an "Owned Aircraft"), the Note
Purchase Agreement provides for the relevant parties to enter into a
participation agreement (each, a "Participation Agreement") and an
indenture (each, an "Owned Aircraft Indenture", and together with the
other Owned Aircraft Indentures and the Leased Aircraft Indentures, the
"Indentures") 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 "Description of the Equipment Notes". However,
under the Note Purchase Agreement, the terms of such agreements are required to
(a) contain the Mandatory Document Terms and (b) not vary the Mandatory Economic
Terms. In addition, Continental is obligated (a) to certify to the Trustees that
any such modifications do not materially and adversely affect the
Certificateholders and (b) 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:
- The aggregate principal amount of all the Equipment Notes issued with
respect to an Aircraft shall 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".
- 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
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<PAGE> 43
Summary -- Equipment Notes and the Aircraft" under the column "Appraised
Value"), shall not exceed the percentages set forth in the following
table:
<TABLE>
<CAPTION>
SERIES A-1 SERIES A-2 SERIES B SERIES C-1 SERIES C-2
EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT EQUIPMENT
AIRCRAFT TYPE NOTES NOTES NOTES NOTES NOTES
------------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Boeing 737-724................ 44.7% 44.7% 55.7% 67.6% 67.6%
Boeing 737-824................ 44.2 44.2 55.0 66.8 66.8
Boeing 757-224................ 45.0 45.0 56.0 68.0 68.0
Boeing 777-224................ 44.7 44.7 55.6 67.5 67.5
</TABLE>
- 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) shall 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 the table
directly above.
- The initial average life of the Series A-1, B and C-1 Equipment Notes for
any Aircraft shall not extend beyond 14.5 years, 12.5 years and 5.5
years, respectively, from the Issuance Date.
- 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-1
Certificates, the Class B Certificates and the Class C-1 Certificates
shall not be more than 13.8 years, 10.3 years and 4.4 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).
- The final expected distribution date of each Class of Certificates shall
be as set forth on the cover page of this Prospectus Supplement.
- The final maturity date of the Series A-2 Equipment Notes shall be
November 1, 2008 and of the Series C-2 Equipment Notes shall be November
1, 2005, and there shall be no scheduled amortization of such Equipment
Notes.
- 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.
- As of the Delivery Period Termination Date (assuming Equipment Notes are
acquired by the Trusts for all of the Aircraft), (a) the aggregate
principal amount of the Series A-2 Equipment Notes shall equal the
original face amount of the Class A-2 Certificates and (b) the aggregate
principal amount of the Series C-2 Equipment Notes shall equal the
original face amount of the Class C-2 Certificates.
- 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.
- The payment dates for the Equipment Notes and basic rent under the Leases
must be May 1 and November 1.
- 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.
- 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.
- (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
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<PAGE> 44
expenses, in each case shall 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.
- 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 Aircraft, which will be funded from sources other than this
offering (the "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 1998-3 Pass Through
Trust (the "Class D Trust"). 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. If Series D Equipment Notes
are issued to other than the Class D Trust,
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such Series D Equipment Notes will nevertheless be subject to provisions of the
Intercreditor Agreement that allow the Controlling Party, during the continuance
of an Indenture Default, to direct the Loan Trustee in taking action under the
applicable Indenture. See "Description of the Intercreditor Agreement".
LIQUIDATION OF ORIGINAL TRUSTS
On the earlier of (i) the first Business Day after July 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 (such
Business Day, the "Transfer Date"), each of the Trusts established on the
Issuance Date (the "Original Trusts") will transfer and assign all of its assets
and rights to a newly created successor trust (each, 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
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
be applicable with respect to the Successor Trusts. If for any reason such
transfer, assignment and assumption cannot be effected to any Successor Trust,
the related Original Trust will continue in existence until it is effected. The
Original Trusts may be treated as partnerships for U.S. federal income tax
purposes. The Successor Trusts will, in the opinion of Tax Counsel, be treated
as grantor trusts. See "Certain U.S. Federal Income Tax Consequences".
TERMINATION OF THE TRUSTS
The obligations of Continental and the applicable Trustee with respect to a
Trust will terminate upon the distribution to Certificateholders of such Trust
of all amounts required to be distributed to them pursuant to the applicable
Pass Through Trust Agreement and the disposition of all property held in such
Trust. The applicable Trustee will send to each Certificateholder of such Trust
notice of the termination of such Trust, the amount of the proposed final
payment and the proposed date for the distribution of such final payment for
such Trust. The final distribution to any Certificateholder of such Trust will
be made only upon surrender of such Certificateholder's Certificates at the
office or agency of the applicable Trustee specified in such notice of
termination. (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
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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
the Escrow Agreements, the Depositary will establish separate accounts into
which the proceeds of the Offering attributable to Certificates of the
applicable Trust will be deposited (each, a "Deposit") on behalf of such Escrow
Agent. Pursuant to the Deposit Agreement with respect to each Trust (each, a
"Deposit Agreement"), 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 737-724,
737-824 and certain 757-224 Aircraft (but
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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 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 and
distributed, with accrued and unpaid interest thereon but without premium, to
the Certificateholders of such Trust after at least 15 days' prior written
notice. 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-1 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-1 Certificates as
compared to the other 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 (the
"Depositary"). Credit Suisse First Boston (or "CSFB") is a Swiss bank and is one
of the largest banking institutions in the world, with total consolidated assets
of approximately Sfr 453 billion ($315 billion) and total consolidated
shareholders' equity of approximately Sfr 11.3 billion ($7.8 billion), in each
case as of December 31, 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.
CSFB 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.
CSFB has long-term unsecured debt ratings of Aa3 from Moody's Investors
Service, Inc. ("Moody's") and AA from Standard & Poor's Ratings Services, a
division of the McGraw-Hill Companies, Inc. ("Standard & Poor's", and together
with Moody's, the "Rating Agencies") and short-term unsecured debt ratings of
P-1 from Moody's and A-1+ from Standard & Poor's. On October 2, 1998, Moody's
placed on review for possible downgrade its rating of CSFB's long-term unsecured
debt and confirmed its rating of CSFB's short-term unsecured debt.
CSFB'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, 1997 may be obtained from CSFB 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 and paying
agent agreements (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.
First Security Bank, N.A., as escrow agent in respect of each Trust (the
"Escrow Agent"), Wilmington Trust Company, as paying agent on behalf of the
Escrow Agent in respect of each Trust (the "Paying Agent"), each Trustee and the
Underwriters will enter into a separate Escrow Agreement for the benefit of the
Certificateholders of each Trust as holders of the Escrow Receipts affixed
thereto (in such capacity, a "Receiptholder"). The cash proceeds of the offering
of Certificates of each Trust will be deposited on behalf of the Escrow Agent
(for the benefit of Receiptholders) with the Depositary as Deposits relating to
such Trust. Each Escrow Agent shall permit the Trustee of the related Trust to
cause funds to be withdrawn from such Deposits on or prior to the Delivery
Period Termination Date to such Trustee to purchase the related Equipment Notes
pursuant to the Note Purchase Agreement. In addition, the Escrow Agent shall
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. The Paying Agent shall
deposit interest on Deposits and any unused Deposits withdrawn by the Escrow
Agent in the related Paying Agent Account. The Paying Agent shall distribute
these amounts on a Regular Distribution Date or Special Distribution Date, as
appropriate.
Upon receipt by the Depositary of the cash proceeds from this Offering, the
Escrow Agent will issue one or more escrow receipts ("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, in the case of the Liquidity Facilities for the Class A-1 Trust
and the Class A-2 Trust, the support facility for such Liquidity Facility
described below) 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 revolving credit
agreement (each, a "Liquidity Facility") with the Subordination Agent with
respect to each of the Trusts. Under each Liquidity Facility, the Liquidity
Provider will, if necessary, make one or more advances ("Interest Drawings") to
the Subordination Agent in an aggregate amount (the "Required Amount")
sufficient to pay interest on the related Certificates on up to three
consecutive semiannual Regular Distribution Dates at the respective interest
rates shown on the cover page of this Prospectus Supplement for such
Certificates (the "Stated Interest Rates"). If interest payment defaults occur
which exceed the amount covered by or available under the Liquidity Facility for
any
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Trust, the Certificateholders of such Trust will bear their allocable share of
the deficiencies to the extent that there are no other sources of funds.
Although Morgan Stanley Capital Services, Inc. ("MSCS") 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.
The obligations of MSCS to make advances under each Liquidity Facility will
be guaranteed by Morgan Stanley Dean Witter & Co. ("MSDW"). In the case of the
Liquidity Facility for the Class A-1 or Class A-2 Certificates, MSCS will be
replaced (without recourse to MSCS or MSDW) by Caisse des Depots et
Consignations ("CDC") if MSCS and MSDW fail to make any advance requested under
such Liquidity Facility or certain bankruptcy or insolvency events occur with
respect to MSCS or MSDW. Upon such replacement, MSCS will not be obligated to
make any further advance under such Liquidity Facility. At any time when the
short-term unsecured debt ratings of MSDW are at or above the Threshold Ratings
for the Class A-1 and Class A-2 Certificates, MSCS may, with the consent of CDC,
terminate such support obligations of CDC.
DRAWINGS
The aggregate amount available under the Liquidity Facility for each Trust
at November 1, 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 November 1, 1999, is paid,
will be as follows:
<TABLE>
<CAPTION>
TRUST AVAILABLE AMOUNT
----- ----------------
<S> <C>
Class A-1............................ $
Class A-2............................ $
Class B.............................. $
Class C-1............................ $
Class C-2............................ $
</TABLE>
Except as otherwise provided below, the Liquidity Facility for each Trust
will enable the Subordination Agent to make Interest Drawings thereunder
promptly on or 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 "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 (or, in the case of the Class
A-1 Trust or Class A-2 Trust, under either the Liquidity Facility or the CDC
support facility for such Trust), 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 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 a Liquidity Provider reduces by the same amount the Maximum
Available Commitment under the related Liquidity Facility, subject to
reinstatement as hereinafter described. With respect to any Interest Drawings,
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
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in respect of interest on the Certificates of such Trust will be reinstated to
an amount not to exceed the then Required Amount of the related Liquidity
Facility. However, 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))
"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, (a) any payment default existing
during the 60-day period under Section 1110(a)(1)(A) of the U.S. Bankruptcy Code
(or such longer period as may apply under Section 1110(b) of the U.S. Bankruptcy
Code) (the "Section 1110 Period") shall not be taken into consideration, unless
during the Section 1110 Period the trustee in such proceeding or Continental
refuses to assume or agree to perform its obligations under the Lease related to
such Equipment Note (in the case of a Leased Aircraft) or under the Owned
Aircraft Indenture related to such Equipment Note (in the case of an Owned
Aircraft), and (b) 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.
The CDC support facility for the Class A-1 Trust or the Class A-2 Trust may
be replaced by a replacement support facility if the short-term unsecured debt
rating of CDC then issued by either Rating Agency is lower than the Threshold
Rating for the relevant Class, unless CDC is replaced by another entity meeting
the Threshold Rating for such Class or MSDW then meets the Threshold Rating for
such Class and certain other conditions are met. The Liquidity Facility for the
Class B Trust, the Class C-1 Trust or the Class C-2 Trust may be replaced by a
Replacement Facility if the short-term unsecured debt rating of MSDW then issued
by either Rating Agency is lower than the Threshold Rating for the relevant
Class or certain other events occur (which adversely affect the enforceability
or validity of MSDW's obligations under its guaranty). If MSCS terminates the
support obligations of CDC with respect to the Liquidity Facility for the Class
A-1 Trust or the Class A-2 Trust, then the immediately preceding sentence, as
opposed to the first sentence, of this paragraph shall apply to such Trust. In
the event that such Liquidity Facility (or support facility, as the case may be)
is not replaced with a Replacement Facility (or replacement support facility, as
the case may be) within ten days after notice of the downgrading or certain
other events, as applicable, and as otherwise provided in the Intercreditor
Agreement, such Liquidity Facility (or support facility, as the case may be)
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. (Liquidity Facilities,
Section 2.02(c); CDC support facilities, Section 2.02(c); Intercreditor
Agreement, Section 3.6(c))
A "Replacement Facility" for any Liquidity Facility will mean an
irrevocable liquidity facility (or liquidity facilities) in substantially the
form of the replaced Liquidity Facility, including reinstatement provisions, or
in such other form (which may include a letter of credit) as shall permit the
Rating Agencies to confirm in writing their respective ratings then in effect
for the Certificates (before downgrading of such ratings, if any, as a result of
the downgrading of the Liquidity Provider), in a face amount (or in an aggregate
face amount) equal to the amount of interest payable on the Certificates of such
Trust (at the Stated Interest Rate for such Trust, and without regard to
expected future principal payments) on the 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
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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. Comparable provisions apply to the replacement of a CDC
support facility.
"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-1 Liquidity
Facility and the Class A-2 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
B Liquidity Facility, the Class C-1 Liquidity Facility and the Class C-2
Liquidity Facility.
The Liquidity Facility for each Trust provides that the Liquidity
Provider's obligations thereunder will expire on the earliest of:
- 364 days after the initial issuance date of the Certificates (the
"Issuance Date") (counting from, and including, the Issuance Date).
- 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.
- 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.
- The fifth Business Day following receipt by the Subordination Agent of a
Termination Notice from such Liquidity Provider (see "-- Liquidity Events
of Default").
- 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. However, 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. Comparable provisions apply to the CDC support facilities.
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. So long as the CDC support facility for the Class A-1 Trust or
the Class A-2 Trust shall remain outstanding, the Intercreditor Agreement also
will provide for the replacement of such support facility if it is scheduled to
expire earlier than 15 days after the Final Maturity Date for the Certificates
of such Trust and such support facility is not extended at least 25 days prior
to its then scheduled expiration date, unless MSDW then meets the Threshold
Rating for such Class and certain other conditions are met. If such Liquidity
Facility (or support facility, as the case may be) is not so extended or
replaced by the 25th day prior to its then scheduled expiration date, such
Liquidity Facility (or support facility, as the case may be) will be drawn in
full up to the then Maximum Available Commitment under such Liquidity Facility
(the "Non-Extension Drawing"). However, if at any time a Non-Extension Drawing
may be made under both the Liquidity Facility for the Class A-1 Trust or Class
A-2 Trust, as the case may be, and the related CDC support facility, such
Non-Extension Drawing shall be made only under such support facility. The
proceeds of the Non-Extension Drawing will be deposited in the Cash Collateral
Account for the related Class of Certificates 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); CDC support 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
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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. Comparable provisions apply to the
replacement of the CDC support facilities. (Intercreditor Agreement, Section
3.6(e))
Upon receipt by the Subordination Agent of a Termination Notice from the
Liquidity Provider, the Subordination Agent shall request a final drawing (a
"Final Drawing") under the related Liquidity Facility in an amount equal to the
then Maximum Available Commitment thereunder. The Subordination Agent will hold
the proceeds of the Final Drawing in the Cash Collateral Account for the related
Trust as cash collateral to be used for the same purposes and under the same
circumstances, and subject to the same conditions, as cash payments of Interest
Drawings under such Liquidity Facility would be used. (Liquidity Facilities,
Section 2.02(d); Intercreditor Agreement, Section 3.6(i))
Drawings under any Liquidity Facility will be made by delivery by the
Subordination Agent of a certificate in the form required by such Liquidity
Facility. Upon receipt of such a certificate, the relevant Liquidity Provider is
obligated to make payment of the drawing requested thereby in immediately
available funds. Upon payment by any Liquidity Provider of the amount specified
in any drawing under any Liquidity Facility, such Liquidity Provider will be
fully discharged of its obligations under such Liquidity Facility with respect
to such drawing and will not thereafter be obligated to make any further
payments under such Liquidity Facility in respect of such drawing to the
Subordination Agent or any other person.
REIMBURSEMENT OF DRAWINGS
The Subordination Agent must reimburse amounts drawn under any Liquidity
Facility (or CDC support facility) by reason of an Interest Drawing, Final
Drawing, Downgrade Drawing or Non-Extension Drawing and interest thereon, but
only to the extent that the Subordination Agent has funds available therefor.
The following provisions apply comparably with respect to the CDC support
facilities.
INTEREST DRAWINGS AND FINAL DRAWINGS
Amounts drawn by reason of an Interest Drawing or Final Drawing will be
immediately due and payable, together with interest on the amount of such
drawing. From the date of the drawing to (but excluding) the third business day
following the applicable Liquidity Provider's receipt of the notice of such
Interest Drawing, interest will accrue at the Base Rate plus 1.75% per annum.
Thereafter, interest will accrue at LIBOR for the applicable Interest Period
plus 1.75% per annum. In the case of the Final Drawing, however, 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.
"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
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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.
DOWNGRADE DRAWINGS AND NON-EXTENSION DRAWINGS
The amount drawn under any Liquidity Facility by reason of a Downgrade
Drawing or a Non-Extension Drawing will be treated as follows:
- Such amount will be released on any Distribution Date to the Liquidity
Provider to the extent that such amount exceeds the Required Amount.
- 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.
- 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 .325% 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, the Base Rate) plus 1.75%
per annum.
LIQUIDITY EVENTS OF DEFAULT
Events of Default under each Liquidity Facility (each, a "Liquidity Event
of Default") will consist of:
- The acceleration of all the Equipment Notes (provided, that if such
acceleration occurs during the Delivery Period, the aggregate principal
amount thereof exceeds $300 million).
- 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 such
Liquidity Facility (a "Termination Notice"). The Termination Notice will have
the following consequences:
- The related Liquidity Facility will expire on the fifth Business Day
after the date on which such Termination Notice is received by the
Subordination Agent.
- The Subordination Agent will promptly request, and the Liquidity Provider
will make, a Final Drawing thereunder in an amount equal to the then
Maximum Available Commitment thereunder.
- Any Drawing remaining unreimbursed as of the date of termination will be
automatically converted into a Final Drawing under such Liquidity
Facility.
- All amounts owing to the Liquidity Provider automatically will be
accelerated.
Notwithstanding the foregoing, the Subordination Agent will be obligated to
pay amounts owing to the Liquidity Provider only to the extent of funds
available therefor after giving effect to the payments in accordance with the
provisions set forth under "Description of the Intercreditor
Agreement -- Priority of Distributions". (Liquidity Facilities, Section 6.01)
Upon the circumstances described below under "Description of the Intercreditor
Agreement -- Intercreditor Rights", a Liquidity Provider may become the
Controlling Party with respect to the exercise of remedies under the Indentures.
(Intercreditor Agreement, Section 2.6(c))
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LIQUIDITY PROVIDER
The initial liquidity provider will be MSCS (the "Liquidity Provider").
MSCS, a subsidiary of MSDW, commenced operation in August 1985. MSCS was
established to conduct, primarily as principal, an interest rate, currency and
equity derivatives products business. MSCS also engages in a variety of other
related transactions.
MSDW, the guarantor of MSCS's obligations under its Liquidity Facilities,
is a global financial services firm. MSDW has long-term unsecured debt ratings
of A1 from Moody's and A+ from Standard & Poor's and short-term unsecured debt
ratings of P-1 from Moody's and A-1 from Standard & Poor's. MSDW files reports,
proxy statements and other information with the Commission pursuant to the
information requirements of the Securities Exchange Act of 1934. Such
information can be inspected and copied at the public reference facilities of
the Commission, or electronically accessed through the Internet, as described in
the Prospectus under "Available Information".
CDC is a special national legislative public entity (establissement public
a statut legal special) governed by the laws of the Republic of France. CDC
conducts domestic and international financial and banking activities and other
business. CDC has long-term unsecured debt ratings of Aaa from Moody's and AAA
from Standard & Poor's and short-term unsecured debt ratings of P-1 from Moody's
and A-1+ from Standard & Poor's. CDC's headquarters is at 56 rue de Lille, 75356
Paris 07 SP.
The description of MSCS, MSDW and CDC above has been provided by the
respective parties. None of MSCS, MSDW or CDC, however, has been involved in the
preparation of or accepts 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 "Intercreditor Agreement") among the Trustees, the
Liquidity Provider, Wilmington Trust Company, as subordination agent (the
"Subordination Agent"), and any holder of Class D Equipment Notes, if issued.
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
Each Loan Trustee will be directed in taking, or refraining from taking,
any action thereunder or with respect to the Equipment Notes issued under such
Indenture, by the holders of at least a majority of the outstanding principal
amount of the Equipment Notes issued under such Indenture, 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. For so long as the Subordination Agent is the registered
holder of the Equipment Notes, the Subordination Agent will act with respect to
the preceding sentence in accordance with the directions of the Trustees for
whom the Equipment Notes issued under such Indenture are held as Trust Property,
to the extent constituting, in the aggregate, directions with respect to the
required principal amount of Equipment Notes.
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), each Loan Trustee will be
directed in taking, or refraining from taking, any action thereunder or with
respect to the Equipment Notes issued under the related Indenture, including
acceleration of such Equipment Notes or foreclosing the lien on the related
Aircraft, by the Controlling Party, subject to the limitations described
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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.
The "Controlling Party" will be:
- The Class A-1 Trustee or Class A-2 Trustee, whichever represents the
Class with the larger principal amount of Certificates outstanding at the
time that the Indenture Default occurs.
- Upon payment of Final Distributions to the holders of such larger Class,
the other of the Class A-1 Trustee or Class A-2 Trustee.
- Upon payment of Final Distributions to the holders of Class A-1 and A-2
Certificates, the Class B Trustee.
- Upon payment of Final Distributions to the holders of Class B
Certificates, the Class C-1 Trustee or Class C-2 Trustee, whichever
represents the Class with the larger principal amount of Certificates
outstanding at such time.
- Upon payment of Final Distributions to the holders of such larger Class,
the other of the Class C-1 Trustee or Class C-2 Trustee.
- Under certain circumstances, and notwithstanding the foregoing, the
Liquidity Provider, as discussed in the next paragraph.
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, (y) the date on which the entire amount of any
Downgrade Drawing or Non-Extension Drawing shall have been withdrawn from the
relevant Cash Collateral Account to pay interest on the relevant Class of
Certificates and remain unreimbursed and (z) the date on which all Equipment
Notes shall have been accelerated (provided that if such acceleration occurs
prior to the Delivery Period Termination Date, the aggregate principal amount
thereof exceeds $300 million), the liquidity provider with 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 rights of the Controlling Party, 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".
"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.
SALE OF EQUIPMENT NOTES OR AIRCRAFT
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the immediately following sentence, sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person. So long
as any
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Certificates are outstanding, during nine months after the earlier of (x) the
acceleration of the Equipment Notes under any Indenture and (y) the bankruptcy
or insolvency of Continental, without the consent of each Trustee, 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. In addition, with respect to any Leased
Aircraft, the amount and payment dates of rentals payable by Continental under
the related Lease may not be adjusted during this nine-month period, 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.
"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. The Minimum Sale Price for such Aircraft and the discounted
present value of all rentals shall be determined using the weighted average
interest rate of the Equipment Notes outstanding under such Indenture as the
discount rate.
PRIORITY OF DISTRIBUTIONS
BEFORE A TRIGGERING EVENT
So long as no Triggering Event shall have occurred (whether or not
continuing), all 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:
- To the Liquidity Provider to the extent required to pay the Liquidity
Expenses.
- To the Liquidity Provider to the extent required to pay interest accrued
on the Liquidity Obligations.
- 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 the two preceding clauses) and/or, if applicable, to
replenish each Cash Collateral Account up to the Required Amount.
- To the Class A-1 Trustee and the Class A-2 Trustee to the extent required
to pay Expected Distributions on the Class A-1 Certificates and the Class
A-2 Certificates. If available funds are insufficient to pay an Expected
Distribution to each such Class in full, available funds will be
distributed to each of the Class A-1 Trustee and Class A-2 Trustee in the
same proportion as such Trustee's proportionate share of the aggregate
amount of such Expected Distributions.
- To the Class B Trustee to the extent required to pay Expected
Distributions on the Class B Certificates.
- To the Class C-1 Trustee and the Class C-2 Trustee to the extent required
to pay Expected Distributions on the Class C-1 Certificates and the Class
C-2 Certificates. If available funds are insufficient to pay an Expected
Distribution to each such Class in full, available funds will be
distributed to each of the Class C-1 Trustee and Class C-2 Trustee in the
same proportion as such Trustee's proportionate share of the aggregate
amount of such Expected Distributions.
- 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.
- To the Subordination Agent and each Trustee for the payment of certain
fees and expenses.
"Liquidity Obligations" means the obligations to reimburse or to pay the
Liquidity Provider all principal, interest, fees and other amounts owing to it
under each Liquidity Facility or certain other agreements.
"Liquidity Expenses" means the Liquidity Obligations other than any
interest accrued thereon or the principal amount of any drawing under the
Liquidity Facilities.
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"Expected Distributions" means, with respect to the Certificates of any
Trust on any Distribution Date (the "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
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 (1) of the definition of Expected Distributions shall be
deemed to read as follows: "(1) 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)".
AFTER A TRIGGERING EVENT
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:
- 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 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").
- To the Liquidity Provider to the extent required to pay the Liquidity
Expenses.
- To the Liquidity Provider to the extent required to pay interest accrued
on the Liquidity Obligations.
- 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 is applicable).
- To the Subordination Agent, any Trustee or any Certificateholder to the
extent required to pay certain fees, taxes, charges and other amounts
payable.
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- To the Class A-1 Trustee and the Class A-2 Trustee to the extent required
to pay Adjusted Expected Distributions on the Class A-1 Certificates and
the Class A-2 Certificates. If available funds are insufficient to pay an
Adjusted Expected Distribution to each such Class in full, available
funds will be distributed to each of the Class A-1 Trustee and Class A-2
Trustee in the same proportion as such Trustee's proportionate share of
the aggregate amount of such Adjusted Expected Distributions.
- To the Class B Trustee to the extent required to pay Adjusted Expected
Distributions on the Class B Certificates.
- To the Class C-1 Trustee and the Class C-2 Trustee to the extent required
to pay Adjusted Expected Distributions on the Class C-1 Certificates and
the Class C-2 Certificates. If available funds are insufficient to pay an
Adjusted Expected Distribution to each such Class in full, available
funds will be distributed to each of the Class C-1 Trustee and Class C-2
Trustee in the same proportion as such holder's proportionate share of
the aggregate amount of such Adjusted Expected Distributions.
- 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 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
(the amount described in this clause (i), the "Current Pool Balance"), 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.
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"Aggregate LTV Collateral Amount" for any Class of Certificates for any
Distribution Date means the product of (A)(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, multiplied by (B)(i) in the case of the Class A-1 Certificates
or Class A-2 Certificates, a fraction the numerator of which equals the Current
Pool Balance for the Class A-1 Certificates or Class A-2 Certificates, as the
case may be, and the denominator of which equals the aggregate Current Pool
Balance for the Class A-1 Certificates and Class A-2 Certificates, (ii) in the
case of the Class B Certificates, 1.0, and (iii) in the case of the Class C-1
Certificates or Class C-2 Certificates, a fraction the numerator of which equals
the Current Pool Balance for the Class C-1 Certificates or Class C-2
Certificates, as the case may be, and the denominator of which equals the
aggregate Current Pool Balance for the Class C-1 Certificates and Class C-2
Certificates.
"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-1 Certificates %, for the Class A-2
Certificates %, for the Class B Certificates %, for the Class C-1
Certificates % and for the Class C-2 Certificates %.
"Appraised Current Market Value" of any Aircraft means the lower of the
average and the median of the most recent three LTV Appraisals of such Aircraft.
After a Triggering Event occurs and any Equipment Note becomes a Non-Performing
Equipment Note, the Subordination Agent shall obtain LTV Appraisals 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.
The foregoing provisions apply comparably with respect to the CDC support
facilities.
VOTING OF EQUIPMENT NOTES
In the event that the Subordination Agent, as the registered holder of any
Equipment Note, receives a request for its consent to any amendment,
modification, consent or waiver under such Equipment Note or the related
Indenture (or, if applicable, the related Lease, the related Participation
Agreement or other related document), (i) if no Indenture Default shall have
occurred and be continuing with respect to such Indenture, the Subordination
Agent shall request instructions from the Trustee(s) and shall vote or consent
in accordance with the directions of such Trustee(s) and (ii) if any Indenture
Default (which, in the case of any Leased Aircraft Indenture, has not been cured
by the applicable Owner Trustee or Owner Participant) shall
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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)
DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft consist of seven Boeing 737-724 aircraft, one Boeing 737-824
aircraft, four Boeing 757-224 aircraft and two Boeing 777-224 aircraft
(collectively, the "Aircraft"), all of which will be newly delivered by the
manufacturer at or about 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 737-724 AIRCRAFT
The Boeing 737-724 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 the CFM International, Inc. CFM56-7B24.
BOEING 737-824 AIRCRAFT
The Boeing 737-824 aircraft is a medium-range aircraft with a seating
capacity of approximately 155 passengers. The engine type utilized on
Continental's 737-824 aircraft is the CFM International, Inc. CFM56-7B26.
BOEING 757-224 AIRCRAFT
The Boeing 757-224 aircraft is a medium-range aircraft with a seating
capacity of approximately 183 passengers. The engine type utilized on
Continental's 757-224 is the Rolls-Royce RB211-535E4B.
BOEING 777-224 AIRCRAFT
The Boeing 777-224 aircraft is a long-range aircraft with a seating
capacity of approximately 283 passengers. The engine type utilized on
Continental's 777-224 is the General Electric GE90-90B.
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<PAGE> 61
THE APPRAISALS
The table below sets forth the appraised values of the Aircraft, as
determined by Aircraft Information Services, Inc. ("AISI"), AvSolutions, Inc.
("AS") and Morton Beyer and Agnew, Inc. ("MBA"), independent aircraft appraisal
and consulting firms (the "Appraisers").
<TABLE>
<CAPTION>
EXPECTED SCHEDULED APPRAISED VALUE
REGISTRATION MANUFACTURER'S DELIVERY ------------------------------------------
AIRCRAFT TYPE NUMBER SERIAL NUMBER MONTH(1) AISI AS MBA
- ------------- ------------ -------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Boeing 737-724................ N29717 28936 January 1999 $ 40,030,000 $ 38,550,000 $ 38,100,000
Boeing 737-724................ N13718 28937 January 1999 40,030,000 38,550,000 38,100,000
Boeing 737-724................ N17719 28938 February 1999 40,120,000 38,550,000 38,200,000
Boeing 737-724................ N13720 28939 March 1999 40,200,000 38,550,000 38,250,000
Boeing 737-724................ N23721 28940 March 1999 40,200,000 38,550,000 38,250,000
Boeing 737-724................ N27722 28789 April 1999 40,280,000 38,883,000 38,300,000
Boeing 737-724................ N21723 28790 April 1999 40,280,000 38,883,000 38,300,000
Boeing 737-824................ N13227 28788 April 1999 49,580,000 46,950,000 45,300,000
Boeing 757-224................ N17133 29282 December 1998 60,920,000 57,530,000 51,800,000
Boeing 757-224................ N67134 29283 January 1999 61,040,000 57,850,000 51,900,000
Boeing 757-224................ N41135 29284 February 1999 61,170,000 57,850,000 52,000,000
Boeing 757-224................ N19136 29285 March 1999 61,290,000 57,850,000 52,100,000
Boeing 777-224................ N77006 29476 December 1998 137,060,000 131,780,000 129,900,000
Boeing 777-224................ N74007 29477 February 1999 137,690,000 132,350,000 130,400,000
</TABLE>
- ------------
(1) The actual delivery date for any Aircraft may be subject to delay or
acceleration. See "-- Deliveries of Aircraft".
For purposes of the foregoing chart, AISI, AS and MBA each was asked to
provide its opinion as to the appraised value of each Aircraft 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. It is not indicative of the
price at which an aircraft may be purchased from the manufacturer. Nor should it
be relied upon as a measure of realizable value. The proceeds realized upon a
sale of any Aircraft may be less than its appraised value. 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 such Equipment Notes or the Certificates.
DELIVERIES OF AIRCRAFT
The Aircraft are scheduled for delivery under Continental's purchase
agreements with The Boeing Company ("Boeing") from December 1998 through April
1999. 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 announced that it is experiencing delays in deliveries of Aircraft.
Continental cannot predict whether adjustments in such schedule will be
required.
The Note Purchase Agreement provides that the delivery period (the
"Delivery Period") will expire on July 31, 1999, subject to extension if the
Equipment Notes relating to all of the Aircraft (or Substitute
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<PAGE> 62
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) December 31, 1999. In addition, if
a labor strike occurs at Boeing prior to the scheduled expiration of the
Delivery Period, the expiration date of the Delivery Period will be extended by
the number of days that such strike continued in effect.
If delivery of any Aircraft is delayed by more than 30 days after the month
scheduled for delivery or beyond July 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 but without 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 July 31, 1999, Continental
may identify for delivery a substitute aircraft (each, together with the
substitute aircraft referred to below, a "Substitute Aircraft") therefor meeting
the following conditions:
- A Substitute Aircraft must be a Boeing 737-700, 737-800, 757-200 or
777-200 aircraft manufactured after the Issuance Date.
- 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.
- Continental will be obligated to obtain written confirmation from each
Rating Agency that substituting such Substitute Aircraft for the replaced
Aircraft will not result in a withdrawal, suspension or downgrading of
the ratings of any Class of Certificates.
DESCRIPTION OF THE EQUIPMENT NOTES
The following summary describes all material terms of the Equipment Notes
and supplements (and, to the extent inconsistent therewith, replaces) the
description of the general terms and provisions relating to the Equipment Notes,
the Indentures, the Leases, the Participation Agreements, the trust agreements
under 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 secured debt financing with
respect to each Aircraft.
- If Continental chooses to enter into a leveraged lease financing with
respect to an Aircraft, the Note Purchase Agreement provides for the
relevant parties to enter into a Participation Agreement, a Lease
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<PAGE> 63
and a Leased Aircraft Indenture (among other documents) relating to the
financing of such Leased Aircraft.
- If Continental chooses to enter into a secured debt financing with
respect to an Aircraft, the Note Purchase Agreement provides for the
relevant parties to enter into 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. 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. This is
because a third party -- the owner participant that will be the beneficial owner
of the Leased Aircraft (the "Owner Participant") -- will provide a portion of
the financing of such Aircraft and may request changes. 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
Equipment notes will be issued in up to five series with respect to each
Aircraft (the "Series A-1 Equipment Notes", the "Series A-2 Equipment Notes",
the "Series B Equipment Notes", the "Series C-1 Equipment Notes", the "Series
C-2 Equipment Notes", and, collectively, the "Equipment Notes"). Continental may
elect to issue a sixth series of Equipment Notes with respect to an Aircraft
(the "Series D Equipment Notes"), 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 (each, an
"Owner Trustee"), and Wilmington Trust Company, as indenture trustee thereunder
(each, a "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 indenture trustee thereunder (each,
an "Owned Aircraft Trustee" and, together with the other Owned Aircraft Trustees
and the Leased Aircraft Trustees, the "Loan Trustees"). 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, Continental will be obligated
to make or cause to be made rental and other payments to the related Leased
Aircraft Trustee on behalf of the related Owner Trustee, which rental and other
payments will be at least sufficient to pay in full when due all payments
required to be made on the Equipment Notes issued with respect to such Leased
Aircraft. The Equipment Notes issued with respect to the Leased Aircraft are
not, however, direct obligations of, or guaranteed by, Continental.
Continental's rental obligations under each Lease and Continental's obligations
under the Equipment Notes issued with respect to each Owned Aircraft will be
general obligations of Continental.
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<PAGE> 64
SUBORDINATION
The Indentures provide for the following subordination provisions
applicable to the Equipment Notes:
- Series A-1 and Series A-2 Equipment Notes issued in respect of an
Aircraft will rank equally in right of payment and will rank senior to
other Equipment Notes issued in respect of such Aircraft.
- Series B Equipment Notes issued in respect of an Aircraft will rank
junior in right of payment to the Series A-1 and Series A-2 Equipment
Notes issued in respect of such Aircraft and will rank senior to the
Series C-1, Series C-2 and, if applicable, Series D Equipment Notes
issued in respect of such Aircraft.
- Series C-1 Equipment Notes and Series C-2 Equipment Notes issued in
respect of an Aircraft will rank equally in right of payment, will rank
junior to the Series A-1, Series A-2 and Series B Equipment Notes issued
in respect of such Aircraft and, if Series D Equipment Notes are issued
in respect of such Aircraft, senior to such Series D Equipment Notes.
- If Continental elects to issue Series D Equipment Notes with respect to
an Aircraft, they will be subordinated in right of payment to the Series
A-1, A-2, B, C-1 and C-2 Equipment Notes issued with respect to 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 May 1 and November 1 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 Series A-1, Series B and Series C-1
Equipment Notes will be made on May 1 and November 1 in certain years. The
entire principal amount of the Series A-2 Equipment Notes is scheduled to be
paid on November 1, 2008. The entire principal amount of the Series C-2
Equipment Notes is scheduled to be paid on November 1, 2005. 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)
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
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<PAGE> 65
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, "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 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
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<PAGE> 66
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
LEASED AIRCRAFT
The Equipment Notes issued with respect to each Leased Aircraft will be
secured by:
- 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.
- A mortgage to such Leased Aircraft Trustee of such Aircraft, subject to
the rights of Continental under such Lease.
- 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 issued in respect of any one Aircraft will
not be secured by any of the other Aircraft or Leases (except in certain cases,
if any, where the related Owner Participant and Continental shall agree to
cross-collateralization). Accordingly, any excess proceeds from the exercise of
remedies with respect to the Equipment Notes relating to an Aircraft will not be
available to cover any shortfall with respect to any other Aircraft.
OWNED AIRCRAFT
The Equipment Notes issued with respect to each Owned Aircraft will be
secured by:
- A mortgage to the Owned Aircraft Trustee of such Aircraft.
- An assignment to the Owned Aircraft Trustee of certain of Continental's
rights under its purchase agreement with the Aircraft manufacturer.
CASH
Cash, 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
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<PAGE> 67
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)
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 Leased Aircraft and Owned Aircraft
as of the May 1 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 Series A-1,
Series B and Series C-1 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 Series A-1, Series B or Series C-1 Equipment Notes for a
Boeing 737-724 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 3%
of the initial appraised value per year for the first 15 years 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>
LEASED AIRCRAFT
- -------------------------------------------------------------------------------------
BOEING 737-724
--------------------------------------
EQUIPMENT
NOTE ASSUMED
OUTSTANDING AIRCRAFT LOAN TO
DATE BALANCE VALUE VALUE RATIO
- ---- ----------- ---------- -----------
(MILLIONS) (MILLIONS)
<S> <C> <C> <C>
November 1, 1999............................. $24.00 $38.55 62.3%
May 1, 2000.................................. 23.65 37.39 63.2
May 1, 2001.................................. 23.00 36.24 63.5
May 1, 2002.................................. 22.36 35.08 63.7
May 1, 2003.................................. 21.60 33.92 63.7
May 1, 2004.................................. 19.72 32.77 60.2
May 1, 2005.................................. 19.40 31.61 61.4
May 1, 2006.................................. 16.92 30.45 55.6
May 1, 2007.................................. 15.85 29.30 54.1
May 1, 2008.................................. 15.31 28.14 54.4
May 1, 2009.................................. 14.13 26.99 52.4
May 1, 2010.................................. 13.29 25.83 51.5
May 1, 2011.................................. 12.59 24.67 51.0
May 1, 2012.................................. 11.62 23.52 49.4
May 1, 2013.................................. 9.26 22.36 41.4
May 1, 2014.................................. 7.13 21.20 33.6
May 1, 2015.................................. 4.93 19.66 25.1
May 1, 2016.................................. 2.59 18.12 14.3
May 1, 2017.................................. 0.51 16.58 3.1
May 1, 2018.................................. 0.00 0.00 NA
</TABLE>
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<TABLE>
<CAPTION>
LEASED AIRCRAFT
- -----------------------------------------------------------------------------------------------------------------------
BOEING 757-224 BOEING 777-224
-------------------------------------- --------------------------------------
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>
November 1, 1999...................... $34.69 $56.75 61.1% $80.00 $132.35 60.4%
May 1, 2000........................... 33.08 55.05 60.1 78.83 128.38 61.4
May 1, 2001........................... 33.08 53.35 62.0 77.66 124.41 62.4
May 1, 2002........................... 31.97 51.64 61.9 75.45 120.44 62.6
May 1, 2003........................... 30.79 49.94 61.6 73.24 116.47 62.9
May 1, 2004........................... 29.52 48.24 61.2 71.04 112.50 63.1
May 1, 2005........................... 28.18 46.54 60.6 68.57 108.53 63.2
May 1, 2006........................... 25.11 44.83 56.0 58.13 104.56 55.6
May 1, 2007........................... 24.15 43.13 56.0 55.93 100.59 55.6
May 1, 2008........................... 23.20 41.43 56.0 53.72 96.62 55.6
May 1, 2009........................... 19.18 39.73 48.3 48.62 92.65 52.5
May 1, 2010........................... 19.18 38.02 50.4 48.62 88.67 54.8
May 1, 2011........................... 16.78 36.32 46.2 46.35 84.70 54.7
May 1, 2012........................... 13.84 34.62 40.0 42.52 80.73 52.7
May 1, 2013........................... 10.70 32.92 32.5 33.64 76.76 43.8
May 1, 2014........................... 7.36 31.21 23.6 28.14 72.79 38.7
May 1, 2015........................... 3.80 28.94 13.1 21.15 67.50 31.3
May 1, 2016........................... 0.00 0.00 NA 13.68 62.20 22.0
May 1, 2017........................... 0.00 0.00 NA 5.72 56.91 10.1
May 1, 2018........................... 0.00 0.00 NA 0.00 0.00 NA
</TABLE>
<TABLE>
<CAPTION>
OWNED AIRCRAFT
- -----------------------------------------------------------------------------------------------------------------------
BOEING 737-724 BOEING 737-824
-------------------------------------- --------------------------------------
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>
November 1, 1999...................... $26.06 $38.55 67.6% $31.41 $46.95 66.9%
May 1, 2000........................... 25.28 37.39 67.6 30.47 45.54 66.9
May 1, 2001........................... 24.50 36.24 67.6 29.52 44.13 66.9
May 1, 2002........................... 23.71 35.08 67.6 28.58 42.72 66.9
May 1, 2003........................... 22.93 33.92 67.6 27.64 41.32 66.9
May 1, 2004........................... 22.15 32.77 67.6 26.70 39.91 66.9
May 1, 2005........................... 21.37 31.61 67.6 25.76 38.50 66.9
May 1, 2006........................... 14.60 30.45 47.9 17.65 37.09 47.6
May 1, 2007........................... 13.79 29.30 47.1 16.66 35.68 46.7
May 1, 2008........................... 12.98 28.14 46.1 15.68 34.27 45.7
May 1, 2009........................... 0.00 0.00 NA 0.00 0.00 NA
</TABLE>
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<TABLE>
<CAPTION>
OWNED AIRCRAFT
- -----------------------------------------------------------------------------------------------------------------------
BOEING 757-224 BOEING 777-224
-------------------------------------- --------------------------------------
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>
November 1, 1999...................... $38.71 $56.93 68.0% $88.95 $131.78 67.5%
May 1, 2000........................... 37.55 55.22 68.0 86.28 127.83 67.5
May 1, 2001........................... 36.39 53.51 68.0 83.61 123.87 67.5
May 1, 2002........................... 35.23 51.81 68.0 80.95 119.92 67.5
May 1, 2003........................... 34.07 50.10 68.0 78.28 115.97 67.5
May 1, 2004........................... 32.91 48.39 68.0 75.61 112.01 67.5
May 1, 2005........................... 31.74 46.68 68.0 72.94 108.06 67.5
May 1, 2006........................... 21.69 44.97 48.2 49.91 104.11 47.9
May 1, 2007........................... 20.49 43.27 47.4 47.15 100.15 47.1
May 1, 2008........................... 19.30 41.56 46.4 44.38 96.20 46.1
May 1, 2009........................... 0.00 0.00 NA 0.00 0.00 NA
</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 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:
- 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).
- 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
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Continental, in the case of an Owned Aircraft Indenture, receives written
demand from the related Loan Trustee or holder of an Equipment Note.
- 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.
- 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.
- 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.
- 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).
- With respect to the Owned Aircraft, the lapse or cancellation of
insurance required under the Owned Aircraft Indenture.
- 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 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)
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<PAGE> 71
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
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
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<PAGE> 72
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 ("Section 1110") 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) 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:
- The automatic stay provision of the U.S. Bankruptcy Code, which provision
enjoins repossessions by creditors for the duration of the reorganization
period.
- The provision of the U.S. Bankruptcy Code allowing the trustee in
reorganization to use property of the debtor during the reorganization
period.
- Section 1129 of the U.S. Bankruptcy Code (which governs the confirmation
of plans of reorganization in Chapter 11 cases).
- 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, 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 with
respect to the airframe and engines comprising such Aircraft or (y) if such
Aircraft is an Owned Aircraft, the Owned Aircraft Trustee will be entitled to
the benefits of Section 1110 with respect to the airframe and engines comprising
such Owned Aircraft, in each case so long as Continental continues to be a
"citizen of the United States" as defined in Section 40102 of Title 49 of the
U.S. Code holding an air carrier operating certificate issued by the Secretary
of Transportation pursuant to chapter 447 of Title 49 of the U.S. Code for
aircraft capable of carrying 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
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<PAGE> 73
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.
The U.S. District Court for the District of Colorado recently issued
opinions arising from the bankruptcy proceedings of Western Pacific Airlines,
Inc. relating to Section 1110. The decisions held that, once an airline debtor
reaffirms its obligations and cures its defaults under an aircraft lease within
the prescribed period in accordance with Section 1110, the lessor under such
lease is not entitled to repossess the aircraft under Section 1110 if the
airline subsequently defaults under such lease. The opinion of Hughes Hubbard &
Reed LLP will state that, in such firm's opinion, the District Court cases were
incorrectly decided, since they are contrary to the plain language of Section
1110 that requires the cure of any default (other than certain defaults relating
to the bankruptcy proceedings) and are not limited to defaults occurring at the
commencement of the bankruptcy proceeding. Moreover, such opinion of Hughes
Hubbard & Reed LLP will state that, in such firm's opinion, such District Court
cases are contrary to the clear intent of Congress in enacting Section 1110,
since they would substantially eliminate the benefit of Section 1110 by giving
no effect to rights of repossession under Section 1110 after the initial
reaffirmance and cure. Certain parties in the Western Pacific case have appealed
the decisions.
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
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<PAGE> 74
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 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, May 1 or November 1
during the term of such Lease.
Semiannual payments of interest on the Equipment Notes issued by
Continental under an Owned Aircraft Indenture are payable May 1 and November 1
of each year, commencing on the first such date after issuance thereof. Payments
of principal of the Equipment Notes issued by Continental under an Owned
Aircraft Indenture will be payable on May 1 and November 1 in certain years or
in full on final maturity.
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<PAGE> 75
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
Airframe or 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:
- The destruction of such property, damage to such property beyond economic
repair or rendition of such property permanently unfit for normal use.
- 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.
- Any theft, hijacking or disappearance of such property for a period of
180 consecutive days or more.
- 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).
- 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).
- 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.
- 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)
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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.
EVENTS OF DEFAULT UNDER THE LEASES
Lease Events of Default under each Lease include, among other things:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
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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 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. 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) 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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<PAGE> 84
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 REALLOCATION OF PAYMENTS UNDER THE INTERCREDITOR AGREEMENT
In the event that the Class B Trust, the Class C-1 Trust or the Class C-2
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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<PAGE> 85
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.
Similar treatment would apply if the Class A-1 Trust, the Class A-2 Trust,
the Class C-1 Trust or the Class C-2 Trust receives less than the full amount of
the receipts of interest, principal or premium paid with respect to the
Equipment Notes held by it because of the provisions in the Intercreditor
Agreement requiring that distributions be allocated on a pro rata basis between
Trusts of equal seniority.
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 owning 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 Trust 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%. 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, 1999.
S-85
<PAGE> 86
Any capital gain realized upon the sale, exchange, retirement or other
disposition of a Certificate or upon receipt of premium paid on an Equipment
Note by a Non-U.S. Certificateholder will not be subject to U.S. federal income
or withholding taxes if (i) such gain is not effectively connected with a U.S.
trade or business of the holder and (ii) in the case of an individual, such
holder is not present in the United States for 183 days or more in the taxable
year of the sale, exchange, retirement or other disposition or receipt.
BACKUP WITHHOLDING
Payments made on the Certificates and proceeds from the sale of
Certificates will not be subject to a backup withholding tax of 31% unless, in
general, the Certificateholder fails to comply with certain reporting procedures
or otherwise fails to establish an exemption from such tax under applicable
provisions of the Code.
CERTAIN DELAWARE TAXES
The Trustee is a Delaware banking corporation with its corporate trust
office in Delaware. In the opinion of 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
The Employee Retirement Income Security Act of 1974, as amended ("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
S-86
<PAGE> 87
undivided interest in each of the underlying assets of the corresponding Trust,
including the Equipment Notes held by such Trust, unless it is established that
equity participation in the Trust by benefit plan investors (including but not
limited to Plans and entities whose underlying assets include Plan assets by
reason of an employee benefit plan's investment in the entity) is not
"significant" within the meaning of the Plan Asset Regulation. In this regard,
the extent to which there is equity participation in a particular Trust by, or
on behalf of, employee benefit plans will not be monitored. If the assets of a
Trust are deemed to constitute the assets of a Plan, transactions involving the
assets of such Trust could be subject to the prohibited transaction provisions
of ERISA and Section 4975 of the Code unless a statutory or administrative
exemption is applicable to the transaction.
The fiduciary of a Plan that proposes to purchase and hold any Certificates
should consider, among other things, whether such purchase and holding may
involve (i) the direct or indirect extension of credit to a party in interest or
a disqualified person, (ii) the sale or exchange of any property between a Plan
and a party in interest or a disqualified person, and (iii) the transfer to, or
use by or for the benefit of, a party in interest or a disqualified person, of
any Plan assets. Such parties in interest or disqualified persons could include,
without limitation, Continental and its affiliates, the 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-1 Certificates and Class A-2 Certificates by Plans, provided that certain
specified conditions are met. In particular, the Department of Labor has issued
individual administrative exemptions to the Underwriters which are substantially
the same as the administrative exemption issued to Morgan Stanley & Co.
Incorporated, Prohibited Transaction Exemption 90-24 (55 Fed. Reg. 20,548
(1990)), as amended (the "Underwriter Exemption"). The Underwriter Exemption
generally exempts from the application of certain, but not all, of the
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Code certain transactions relating to the initial purchase, holding and
subsequent secondary market sale of pass through certificates which represent an
interest in a trust that holds 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.
S-87
<PAGE> 88
The Underwriter Exemption sets forth a number of general and specific
conditions which must be satisfied for a transaction involving the initial
purchase, holding or secondary market sale of certificates representing a
beneficial ownership interest in a trust to be eligible for exemptive relief
thereunder. In particular, the Underwriter Exemption requires that the
acquisition of certificates by a Plan be on terms that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an unrelated
party; the rights and interests evidenced by the certificates not be
subordinated to the rights and interests evidenced by other certificates of the
same trust estate; the certificates at the time of acquisition by the Plan be
rated in one of the three highest generic rating categories by Moody's, Standard
& Poor's, Duff & Phelps Inc. or Fitch Investors Service, Inc.; and the investing
Plan be an accredited investor as defined in Rule 501(a)(1) of Regulation D of
the Commission under the Securities Act of 1933, as amended.
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-1 Certificates and
Class A-2 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-1 Certificates and Class A-2 Certificates, no assurance can be
given that the Exemption would apply with respect to all transactions involving
the Class A-1 Certificates or the Class A-2 Certificates or the assets of the
Class A-1 Trust or the Class A-2 Trust. In particular, it appears that the
Underwriter Exemption would not apply to the purchase by Class B
Certificateholders, Class C-1 Certificateholders or Class C-2 Certificateholders
of Class A-1 Certificates or Class A-2 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-1 Certificate or Class A-2 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, Class C-1 or Class
C-2 Certificates. Therefore, the fiduciary of a Plan considering the purchase of
a Class B, Class C-1 or Class C-2 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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<PAGE> 89
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among Continental and the Underwriters listed
below (the "Underwriters") relating to the Certificates, Continental has agreed
to cause each Trust to sell to each of the Underwriters, and each of such
Underwriters has severally agreed to purchase the respective aggregate amounts
of Certificates set forth after their names below. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions precedent and that the Underwriters will be obligated to purchase all
of the Certificates if any Certificates are purchased thereunder.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 CLASS A-2 CLASS B CLASS C-1 CLASS C-2
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Morgan Stanley & Co.
Incorporated............... $ $ $ $ $
Credit Suisse First Boston
Corporation................
Chase Securities Inc. .......
Donaldson, Lufkin & Jenrette
Securities Corporation.....
Salomon Smith Barney Inc.....
------------ ------------ ----------- ----------- -----------
Total.............. $101,211,695 $188,957,196 $70,953,629 $71,203,760 $97,760,487
============ ============ =========== =========== ===========
</TABLE>
The Underwriters have advised Continental that the Underwriters propose
initially to offer the Certificates of each Class to the public at the public
offering price for such Class set forth on the cover page of this Prospectus
Supplement, and to certain dealers at such price less a concession not in excess
of the amounts for each respective Class set forth below. The Underwriters may
allow, and such dealers may reallow, a concession to certain other dealers not
in excess of the amounts for the respective Class set forth below. After the
initial public offering, the public offering prices and such concessions may be
changed.
<TABLE>
<CAPTION>
PASS THROUGH CONCESSION REALLOWANCE
CERTIFICATE DESIGNATION TO DEALERS CONCESSION
----------------------- ---------- -----------
<S> <C> <C>
1998-3A-1............................................. % %
1998-3A-2.............................................
1998-3B...............................................
1998-3C-1.............................................
1998-3C-2.............................................
</TABLE>
Continental does not intend to apply for the listing of the Certificates on
a national securities exchange, but has been advised by the Underwriters that
they presently intend to make a market in the Certificates, as permitted by
applicable laws and regulations. No Underwriter is obligated, however, to make a
market in the Certificates, and any such market-making may be discontinued at
any time at the sole discretion of such Underwriter. Accordingly, no assurance
can be given as to the liquidity of, or trading markets for, the Certificates.
The Underwriting Agreement provides that Continental will reimburse the
Underwriters for certain expenses and will indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
Morgan Stanley Capital Services, Inc., as Liquidity Provider, and Morgan
Stanley Dean Witter & Co., the guarantor of the Liquidity Provider's obligations
under the Liquidity Facilities, are affiliates of Morgan Stanley & Co.
Incorporated. 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.,
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<PAGE> 90
and Credit Suisse First Boston, an affiliate of Credit Suisse First Boston
Corporation, are lenders to Continental.
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 (such settlement
cycle being herein referred to as "T+ "). Pursuant to Rule 15c6-1 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 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.
In order to facilitate the offering of the Certificates, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Certificates. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Certificates for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Certificates, the Underwriters may bid for, and purchase,
Certificates in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing
Certificates in the Offering, if the syndicate repurchases previously
distributed Certificates in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Certificates above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
LEGAL MATTERS
The validity of the Certificates is being passed upon for Continental by
Hughes Hubbard & Reed LLP, New York, New York, and for the Underwriters by
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
schedule) of Continental Airlines, Inc. appearing in Continental Airlines,
Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1997 have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein and incorporated by reference in the Prospectus
accompanying this Prospectus Supplement. Such consolidated financial statements
are incorporated therein by reference 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, AS and MBA, and to their respective appraisal
reports, dated as of August 27, 1998 (revised October 1, 1998), October 1, 1998
and October 1, 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.
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<PAGE> 91
APPENDIX I -- INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjusted Expected Distributions... S-58
Administration Expenses........... S-57
Aggregate LTV Collateral Amount... S-59
Aircraft.......................... S-60
Aircraft Operative Agreements..... S-44
AISI.............................. S-61
America West...................... S-25
Appraised Current Market Value.... S-59
Appraisers........................ S-61
AS................................ S-61
Assumed Aircraft Value............ S-67
Assumed Amortization Schedule..... S-34
Assumed Appraised Value........... S-42
Average Life Date................. S-66
Base Rate......................... S-52
Basic Agreement................... S-28
Boeing............................ S-61
Branch............................ S-47
Business Day...................... S-33
Cash Collateral Account........... S-50
CDC............................... S-49
Cede.............................. S-45
Certificate Account............... S-32
Certificate Owner................. S-46
Certificateholders................ S-29
Certificates...................... S-28
Class A-1 Certificates............ S-28
Class A-1 Trust................... S-28
Class A-1 Trustee................. S-29
Class A-2 Certificates............ S-28
Class A-2 Trust................... S-28
Class A-2 Trustee................. S-29
Class B Certificates.............. S-28
Class B Trust..................... S-28
Class B Trustee................... S-29
Class C-1 Certificates............ S-28
Class C-1 Trust................... S-28
Class C-1 Trustee................. S-29
Class C-2 Certificates............ S-28
Class C-2 Trust................... S-28
Class C-2 Trustee................. S-29
Class D Certificates.............. S-44
Class D Trust..................... S-44
Class D Trustee................... S-30
Class Exemptions.................. S-87
CMI............................... S-24
Code.............................. S-40
Commission........................ S-28
Company........................... S-24
Continental....................... S-24
</TABLE>
<TABLE>
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<S> <C>
Controlling Party................. S-55
Convention........................ S-75
COPA.............................. S-26
CSFB.............................. S-47
Current Distribution Date......... S-57
Current Pool Balance.............. S-58
Debt Balance...................... S-76
default........................... S-37
Delivery Period................... S-61
Delivery Period Termination
Date............................ S-47
Deposit........................... S-46
Deposit Agreement................. S-46
Depositary........................ S-47
Depreciation Assumption........... S-67
disqualified persons.............. S-86
Distribution Date................. S-29
DOT............................... S-20
Downgrade Drawing................. S-50
DTC............................... S-45
DTC Participants.................. S-45
Equipment Notes................... S-63
ERISA............................. S-86
ERISA Plans....................... S-86
Escrow Agent...................... S-48
Escrow Agreements................. S-48
Escrow Receipts................... S-48
Event of Loss..................... S-79
Excusable Delay................... S-61
Expected Distributions............ S-57
Express........................... S-24
FAA............................... S-20
Final Distributions............... S-55
Final Drawing..................... S-52
Final Maturity Date............... S-31
financial institution............. S-85
Gulfstream........................ S-25
H.15(519)......................... S-65
Indenture Default................. S-36
Indentures........................ S-42
Intercreditor Agreement........... S-54
Interest Drawings................. S-48
IRS............................... S-82
Issuance Date..................... S-51
Lease............................. S-74
Lease Event of Default............ S-36
Lease Payment Date................ S-74
Leased Aircraft................... S-42
Leased Aircraft Indenture......... S-42
Leased Aircraft Trustee........... S-63
LIBOR............................. S-52
</TABLE>
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<TABLE>
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<S> <C>
Liquidity Event of Default........ S-53
Liquidity Expenses................ S-56
Liquidity Facility................ S-48
Liquidity Obligations............. S-56
Liquidity Provider................ S-54
Loan Trustees..................... S-63
LTV Appraisal..................... S-59
LTV Collateral Amount............. S-59
LTV Ratio......................... S-59
LTVs.............................. S-7
Make-Whole Premium................ S-65
Mandatory Document Terms.......... S-44
Mandatory Economic Terms.......... S-42
Maximum Available Commitment...... S-49
MBA............................... S-61
Minimum Sale Price................ S-56
Moody's........................... S-47
most recent H.15(519)............. S-66
MSCS.............................. S-49
MSDW.............................. S-49
New Trustee....................... S-45
Non-Extension Drawing............. S-51
Non-Performing Equipment Notes.... S-58
Non-U.S. Certificateholder........ S-85
Northwest Alliance................ S-19
Note Holders...................... S-43
Note Purchase Agreement........... S-42
Offering.......................... S-44
Original Trustee.................. S-45
Original Trusts................... S-45
Owned Aircraft.................... S-42
Owned Aircraft Indenture.......... S-42
Owned Aircraft Trustee............ S-63
Owner Participant................. S-63
Owner Trustee..................... S-63
Participation Agreement........... S-42
parties in interest............... S-86
Pass Through Trust Agreements..... S-28
Paying Agent...................... S-48
Paying Agent Account.............. S-32
Performing Equipment Note......... S-50
Plan Asset Regulation............. S-86
Plans............................. S-86
Pool Balance...................... S-33
Pool Factor....................... S-33
Prospectus........................ S-28
PTC Event of Default.............. S-38
PTCE.............................. S-87
Rating Agencies................... S-47
</TABLE>
<TABLE>
<CAPTION>
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<S> <C>
Receiptholder..................... S-48
Regular Distribution Dates........ S-31
Remaining Weighted Average Life... S-66
Replacement Facility.............. S-50
Required Amount................... S-48
Scheduled Payments................ S-31
Section 1110...................... S-72
Section 1110 Period............... S-50
Series A-1 Equipment Notes........ S-63
Series A-2 Equipment Notes........ S-63
Series B Equipment Notes.......... S-63
Series C-1 Equipment Notes........ S-63
Series C-2 Equipment Notes........ S-63
Series D Equipment Notes.......... S-63
Shortfall Amounts................. S-84
Southwest......................... S-24
Special Distribution Date......... S-32
Special Payment................... S-32
Special Payments Account.......... S-32
Standard & Poor's................. S-47
Stated Interest Rates............. S-48
Subordinated Certificateholders... S-84
Subordinated Certificates......... S-84
Subordinated Trusts............... S-84
Subordination Agent............... S-54
Substitute Aircraft............... S-62
Successor Trust................... S-45
T+................................ S-90
Tax Counsel....................... S-82
Termination Notice................ S-53
Threshold Rating.................. S-51
Transfer Date..................... S-45
Transportation Code............... S-39
Treasury Yield.................... S-65
Triggering Event.................. S-29
Trust Agreements.................. S-62
Trust Indenture Act............... S-40
Trust Property.................... S-28
Trust Supplement.................. S-28
Trustee........................... S-28
Trusts............................ S-28
U.S. Certificateholders........... S-82
U.S. Persons...................... S-82
Underwriter Exemption............. S-87
Underwriters...................... S-89
Underwriting Agreement............ S-89
VASP.............................. S-26
Virgin............................ S-26
</TABLE>
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