<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration No. 333-34545
INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT TO
COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME A FINAL PROSPECTUS SUPPLEMENT IS DELIVERED. THIS
PRELIMINARY PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 10, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 4, 1997)
[CONTINENTAL AIRLINES LOGO]
1998-2 PASS THROUGH TRUSTS
$187,200,000
PASS THROUGH CERTIFICATES, SERIES 1998-2
Each Pass Through Certificate (collectively, the "Certificates") will represent
a fractional undivided interest in one of the three Continental Airlines 1998-2
Pass Through Trusts (the "Class A Trust", the "Class B Trust" and the "Class C
Trust", and, collectively, the "Trusts") to be formed pursuant to a pass through
trust agreement between Continental Airlines, Inc. ("Continental" or the
"Company") and Wilmington Trust Company (the "Trustee"), as trustee, dated as of
September 25, 1997 (the "Basic Agreement"), and three separate supplements
thereto (each, a "Trust Supplement" and, together with the Basic Agreement,
collectively, the "Pass Through Trust Agreements") relating to such Trusts
between the Company and the Trustee, as trustee under each Trust. Pursuant to
the Intercreditor Agreement (as defined herein), (i) the Certificates of the
Class B Trust will be subordinated in right of payment to the Certificates of
the Class A Trust and (ii) the Certificates of the Class C Trust will be
subordinated in right of payment to the Certificates of the Class B Trust.
Payments of interest on the Certificates to be issued by each Trust will be
supported by a separate liquidity facility for the benefit of the holders of
such Certificates, each such facility to be provided initially by Westdeutsche
Landesbank Girozentrale, acting through its New York branch, in an amount
sufficient to pay interest thereon at the applicable interest rate for such
Certificates on up to three successive semiannual distribution dates.
(Continued on the following page.)
---------------------------------------------------------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE CERTIFICATES, SEE "RISK FACTORS" ON PAGE S-24 HEREIN.
---------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL INTEREST FINAL EXPECTED PUBLIC OFFERING
AMOUNT(1)* RATE DISTRIBUTION DATE* PRICE(1)(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998-2A Certificates $105,797,282 % April 15, 2007 100%
1998-2B Certificates 38,977,946 October 15, 2004 100
1998-2C Certificates 42,424,772 April 15, 2003 100
----------------
Total $187,200,000
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The principal amounts and the final expected distribution dates are
indicative only and subject to change.
(1) Plus accrued interest, if any, from the date of issuance.
(2) The underwriting commission varies by Trust and aggregates $ ,
which constitutes % of the principal amount of the Certificates offered
hereby. The underwriting commissions, fees and certain other expenses
estimated at approximately $ , will be paid by Continental. All
proceeds of the Certificates will be used by the Trusts to purchase the
Equipment Notes.
---------------------------------------------------------------------------
The Certificates are offered by the several Underwriters subject to prior sale,
when, as and if issued by the Trusts, delivered to and accepted by the
Underwriters and subject to certain other conditions. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that the Certificates will be delivered in book-entry
form through the facilities of The Depository Trust Company, against payment
therefor in immediately available funds on or about April , 1998.
CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY DEAN WITTER
The date of this Prospectus Supplement is April , 1998
<PAGE> 2
(Continued from the cover page.)
The property of the Trusts will include, among other things, equipment
notes (the "Equipment Notes") to be issued on a non-recourse basis by the
trustees (each, an "Owner Trustee") of separate owner trusts (each, an "Owner
Trust") in connection with 14 separate leveraged lease transactions to finance a
portion of the purchase price of eight Boeing 737-3T0 aircraft and six McDonnell
Douglas MD-82 aircraft (collectively, the "Aircraft"), which will be leased to
Continental. The Aircraft are currently owned by Continental and will be sold by
it to the Owner Trustee. The Equipment Notes in respect of each Aircraft will be
issued in three series (the "Series A Equipment Notes", the "Series B Equipment
Notes" and the "Series C Equipment Notes"). The Class A Trust, the Class B Trust
and the Class C Trust will purchase the series of Equipment Notes issued with
respect to each Aircraft that has an interest rate equal to the interest rate
applicable to the Certificates to be issued by such Trust. The maturity dates of
the Equipment Notes acquired by each Trust will occur on or before the final
expected distribution date applicable to the Certificates issued by such Trust.
The Equipment Notes issued with respect to each Aircraft will be secured by a
security interest in such Aircraft and by an assignment of the lease relating
thereto, including the right to receive rentals payable with respect to such
Aircraft by Continental. Although neither the Certificates nor the Equipment
Notes are direct obligations of, or guaranteed by, Continental, the amounts
unconditionally payable by Continental for lease of the Aircraft will be
sufficient to pay in full when due all scheduled amounts required to be paid on
the Equipment Notes held in the Trusts.
All of the Equipment Notes held in each Trust will accrue interest at the
applicable rate per annum for the Certificates issued by such Trust, payable on
April 15 and October 15 of each year, commencing on October 15, 1998. Such
interest payments will be distributed to Certificateholders of such Trust on
each such date until the final Distribution Date for such Trust, subject to the
Intercreditor Agreement. See "Description of the Certificates -- General" and
"-- Payments and Distributions".
Scheduled principal payments on the Equipment Notes held in each Trust will
be passed through to the Certificateholders of each such Trust on April 15 and
October 15 in certain years, commencing on April 15, 1999. Such payments will be
made in accordance with the principal repayment schedule set forth below under
"Description of the Certificates -- Pool Factors", subject to the Intercreditor
Agreement.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PASS THROUGH
CERTIFICATES, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE
SHORT COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES WILL BE MADE AGAINST
PAYMENT THEREFOR ON OR ABOUT THAT DATE SPECIFIED IN THE LAST PARAGRAPH OF THE
COVER PAGE OF THIS PROSPECTUS SUPPLEMENT, WHICH WILL BE THE BUSINESS DAY
FOLLOWING THE DATE OF PRICING OF THE CERTIFICATES (SUCH SETTLEMENT CYCLE BEING
HEREIN REFERRED TO AS "T+ "). PURCHASERS OF CERTIFICATES SHOULD NOTE THAT
TRADING OF THE CERTIFICATES ON THE DATE OF PRICING AND THE SUCCEEDING
BUSINESS DAYS MAY BE AFFECTED BY THE T+ SETTLEMENT. SEE "UNDERWRITING".
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary information does not purport to be complete and is
qualified in its entirety by reference to the detailed information appearing
elsewhere in this Prospectus Supplement and the Prospectus accompanying this
Prospectus Supplement (the "Prospectus"). Certain capitalized terms used herein
are defined elsewhere in this Prospectus Supplement on the pages indicated in
the "Index of Terms" appearing as Appendix I to this Prospectus Supplement, and
all cross references herein refer to sections of this Prospectus Supplement
unless otherwise indicated.
SUMMARY OF TERMS OF CERTIFICATES*
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
CERTIFICATES CERTIFICATES CERTIFICATES
---------------- ---------------- ----------------
<S> <C> <C> <C>
Aggregate Face Amount................. $105,797,282 $38,977,946 $42,424,772
Ratings:
Moody's.......................... Aa3 A2 Baa1
Standard & Poor's................ AA+ A+ BBB
Initial Loan to Aircraft Value
(cumulative)(1)..................... 38.0% 52.0% 67.2%
Expected Principal Distribution Window
(in years).......................... 1.0-9.0 1.0-6.5 1.0-5.0
Initial Average Life (in years from
Issuance Date)...................... 6.02 4.47 2.80
Regular Distribution Dates............ April 15 & April 15 & April 15 &
October 15 October 15 October 15
Final Expected Regular Distribution
Date................................ April 15, 2007 October 15, 2004 April 15, 2003
Final Maturity Date................... October 15, 2008 April 15, 2006 October 15, 2004
Minimum Denomination.................. $1,000 $1,000 $1,000
Section 1110 Protection(2)............ Yes Yes Yes
Liquidity Facility Coverage(3)........ 3 semiannual 3 semiannual 3 semiannual
interest interest interest
payments payments payments
Initial Liquidity Facility
Amount(3)........................... $ $ $
</TABLE>
- ---------------
* The aggregate face amount, the initial loan to Aircraft value, the expected
principal distribution window, the initial average life, the final expected
Regular Distribution Date and the Final Maturity Date for each Class of
Certificates are indicative only and subject to change.
(1) Assumes an aggregate appraised Aircraft value of $278,413,900. The appraised
value is only an estimate and reflects certain assumptions. See "Description
of the Aircraft and the Appraisals -- The Appraisals".
(2) The benefits of Section 1110 of the U.S. Bankruptcy Code will be available
to the Loan Trustees.
(3) For each Class of Certificates, the initial amount of the related Liquidity
Facility will cover three consecutive semiannual interest payments (without
regard to any future payments of principal on such Certificates). In
aggregate for the Class A Certificates, the Class B Certificates and the
Class C Certificates, the initial amount of the Liquidity Facilities will be
$ .
S-3
<PAGE> 4
EQUIPMENT NOTES AND THE AIRCRAFT*
Set forth below is certain information about the Equipment Notes to be held
in the Trusts and the Aircraft that will (under the related Indenture) secure
such Equipment Notes:
<TABLE>
<CAPTION>
ORIGINAL
LATEST PRINCIPAL
AIRCRAFT EQUIPMENT AMOUNT OF
REGISTRATION YEAR OF NOTE EQUIPMENT APPRAISED
AIRCRAFT TYPE NUMBER MANUFACTURE MATURITY DATE NOTES VALUE(1)
------------- ------------ ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Boeing 737-3T0............. N14336 1987 April 15, 2007 $14,400,000 $20,793,333
Boeing 737-3T0............. N14337 1987 April 15, 2007 14,400,000 20,793,333
Boeing 737-3T0............. N59338 1987 April 15, 2007 14,400,000 20,843,333
Boeing 737-3T0............. N14341 1987 April 15, 2007 14,400,000 20,897,333
Boeing 737-3T0............. N14342 1987 April 15, 2007 14,400,000 20,897,333
Boeing 737-3T0............. N39343 1987 April 15, 2007 14,400,000 20,897,333
Boeing 737-3T0............. N17344 1987 April 15, 2007 14,400,000 20,900,000
Boeing 737-3T0............. N17345 1987 April 15, 2007 14,400,000 20,900,000
McDonnell Douglas MD-82.... N72821 1986 April 15, 2005 12,000,000 18,040,833
McDonnell Douglas MD-82.... N76823 1986 April 15, 2005 12,000,000 18,065,000
McDonnell Douglas MD-82.... N72829 1987 April 15, 2005 12,000,000 18,681,067
McDonnell Douglas MD-82.... N72830 1987 April 15, 2005 12,000,000 18,681,067
McDonnell Douglas MD-82.... N57837 1987 April 15, 2005 12,000,000 18,999,333
McDonnell Douglas MD-82.... N34838 1987 April 15, 2005 12,000,000 19,024,600
------------
Total $278,413,900
============
</TABLE>
- ---------------
* The principal amounts and maturity dates are indicative only and subject to
change.
(1) The appraised value of each Aircraft set forth above is based upon varying
assumptions and methodologies and reflects the lesser of the average and
median values of such Aircraft as appraised by three independent appraisal
and consulting firms: Aircraft Information Services, Inc. ("AISI"), BK
Associates, Inc. ("BK") and Morten Beyer and Agnew, Inc. ("MBA")
(collectively, the "Appraisers"), each determined as of March 30, 1998. Such
appraised values are intended to reflect the value of the Aircraft without
giving effect to current market conditions. An appraisal is only an estimate
of value and should not be relied upon as a measure of current or future
realizable value. See "Risk Factors -- Risk Factors Relating to the
Certificates and the Offering -- Appraisals and Realizable Value of
Aircraft" and "Description of the Aircraft and the Appraisals".
LOAN TO AIRCRAFT VALUE RATIOS**
The following table sets forth loan to Aircraft value ratios ("LTVs") for
each Class of Certificates as of the date of the consummation of the Offering
(the "Issuance Date") and certain subsequent Regular Distribution Dates. The
LTVs for each Class of Certificates were obtained for each such Regular
Distribution Date by dividing (i) the expected Pool Balance of such Class of
Certificates together in each case with the expected Pool Balance of all other
Classes of Certificates senior in right of payment to such Class of Certificates
under the Intercreditor Agreement determined immediately after giving effect to
the distributions expected to be made on such Regular Distribution Date, by (ii)
the assumed value of all of the Aircraft (the "Assumed Aggregate Aircraft
Value") on such Regular Distribution Date based on the assumptions set forth
below.
- ---------------
** The information relating to periodic Pool Balances and resulting LTVs is
indicative only and subject to change.
S-4
<PAGE> 5
The following table is based on the assumption that the value of each
Aircraft included in the Assumed Aggregate Aircraft Value opposite the Issuance
Date included in the table depreciates by 3% per year until the fifteenth year
after the year of delivery of such Aircraft by the manufacturer, by 4% per year
thereafter until the twentieth year after the year of such delivery and by 5%
per year thereafter. See "Description of the Equipment Notes -- Loan to Value
Ratios of Equipment Notes". Other rates or methods of depreciation would result
in materially different LTVs, and no assurance can be given (i) that the
depreciation rates and method assumed for the purpose of the table are the ones
most likely to occur or (ii) as to the actual future value of any Aircraft.
Thus, the table should not be considered a forecast or prediction of expected or
likely LTVs but simply a mathematical calculation based on one set of
assumptions. In addition, the initial appraised value of each Aircraft was based
upon the lesser of the average and the median value of each Aircraft as
appraised by the Appraisers, as of the respective date of their appraisals. No
assurance can be given that such value represents the realizable value of any
Aircraft. See "Risk Factors -- Risk Factors Relating to the Certificates and the
Offering -- Appraisals and Realizable Value of Aircraft" and "Description of the
Aircraft and the Appraisals -- The Appraisals".
The following table also assumes that no early redemption or default in
payment of principal of any Equipment Notes shall occur and that all of the
Equipment Notes are purchased by the Trustees on the Issuance Date. The
Equipment Notes with respect to an Aircraft are subject to redemption if an
Event of Loss occurs with respect to such Aircraft or if Continental exercises
its right to terminate the related Lease or to refinance the Equipment Notes and
to acceleration or purchase following a Lease Event of Default under the
applicable Lease. See "Description of the Equipment Notes -- Redemption".
The following table is compiled on an aggregate basis, and it should be
noted that since the Equipment Notes will not be cross-collateralized with
respect to the Aircraft, the excess proceeds realized from the disposition of
any particular Aircraft would not be available to offset shortfalls on the
Equipment Notes relating to any other Aircraft. Therefore, upon the occurrence
of an Indenture Default, even if the Aircraft as a group could be sold for more
than the total amounts payable in respect of all of the outstanding Equipment
Notes, if certain Aircraft were sold for less than the total amount payable in
respect of the related Equipment Notes, there would not be sufficient proceeds
to pay all Classes of Certificates in full. See "Description of the Equipment
Notes -- Loan to Value Ratios of Equipment Notes" for the LTVs for the Equipment
Notes issued in respect of individual Aircraft, which may be more relevant in a
default situation than the aggregate values shown in the following table.
<TABLE>
<CAPTION>
ASSUMED CLASS A CLASS B CLASS C
AGGREGATE CERTIFICATES CLASS A CERTIFICATES CLASS B CERTIFICATES CLASS C
AIRCRAFT POOL CERTIFICATES POOL CERTIFICATES POOL CERTIFICATES
DATE VALUE BALANCE LTV BALANCE LTV BALANCE LTV
---- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
April , 1998.......... $278,413,900 $105,797,282 38.0% $38,977,946 52.0% $42,424,772 67.2%
April 15, 1999.......... 265,871,824 101,031,293 38.0 37,222,055 52.0 42,358,775 67.9
April 15, 2000.......... 253,329,748 96,265,304 38.0 35,466,165 52.0 27,408,699 62.8
April 15, 2001.......... 240,787,672 91,499,316 38.0 32,170,914 51.4 12,831,782 56.7
April 15, 2002.......... 225,256,307 85,597,397 38.0 22,002,827 47.8 5,022,738 50.0
April 15, 2003.......... 208,533,539 73,090,782 35.0 14,332,764 41.9 0 NA
April 15, 2004.......... 191,810,771 56,877,859 29.7 3,941,338 31.7 0 NA
April 15, 2005.......... 175,088,003 32,719,932 18.7 0 NA 0 NA
April 15, 2006.......... 95,296,060 16,829,620 17.7 0 NA 0 NA
April 15, 2007.......... 83,463,075 0 NA 0 NA 0 NA
</TABLE>
S-5
<PAGE> 6
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
the Lease Rental Payments, which are assigned by the Owner Trustee. From such
Lease Rental Payments, the Loan Trustee will make Equipment Note Payments on the
Series A Equipment Notes, the Series B Equipment Notes and the Series C
Equipment Notes with respect to all Aircraft to the Subordination Agent. Excess
Rental Payments will be paid by the Loan Trustee to the Lessors. From such
Equipment Note Payments, the Subordination Agent will pay Principal, Premium, if
any, and Interest Distributions to the Pass Through Trustee for the Class A
Trust, the Pass Through Trustee for the Class B Trust and the Pass Through
Trustee for the Class C Trust, who will pay such Principal, Premium, if any, and
Interest Distributions to the Holders of Class A Certificates, the Holders of
Class B Certificates and the Holders of Class C Certificates, respectively. The
Subordination Agent may also receive Advances, if any, and pay Reimbursements,
if any, to the Liquidity Provider.]
- ---------------
(1) Each Aircraft will be subject to a separate Lease and a related Indenture.
(2) The initial amount of the Liquidity Facility for each Class of Certificates
will cover three consecutive semiannual interest payments with respect to
such Class.
S-6
<PAGE> 7
THE OFFERING
Trusts:.................... Each of the Class A Trust, the Class B Trust and
the Class C Trust is to be formed pursuant to the
Basic Agreement and three separate Trust
Supplements to be entered into between the Company
and Wilmington Trust Company as trustee under each
Trust. Each Trust will be a separate entity.
Certificates Offered:...... Pass Through Certificates to be issued by each
Trust, representing fractional undivided interests
in such Trust. The Certificates to be issued by the
Class A Trust, the Class B Trust and the Class C
Trust in the offering contemplated hereby (the
"Offering") are referred to herein as the "Class A
Certificates", the "Class B Certificates" and the
"Class C Certificates", respectively.
Use of Proceeds:........... The proceeds from the sale of the Certificates
offered hereby will be used by the Trustees to
purchase Equipment Notes issued by each Owner
Trustee to finance a portion of the purchase price
of the related Aircraft.
Subordination Agent,
Trustee and Loan
Trustee:................. Wilmington Trust Company will act (i) as
subordination agent under the Intercreditor
Agreement (the "Subordination Agent"), (ii) as
Trustee, paying agent and registrar for the
Certificates of each Trust and (iii) as Loan
Trustee, paying agent and registrar for each series
of Equipment Notes.
Liquidity Provider:........ Westdeutsche Landesbank Girozentrale, acting
through its New York branch (the "Liquidity
Provider"), will provide separate liquidity
facilities for the benefit of the holders of each
Class of Certificates.
Trust Property:............ The property of each Trust (the "Trust Property")
will include (i) subject to the Intercreditor
Agreement, Equipment Notes issued on a non-recourse
basis by each of the Owner Trustees in connection
with each of the 14 separate leveraged lease
transactions, each with respect to one Aircraft, to
finance a portion of the purchase price of such
Aircraft, (ii) the rights of such Trust under the
Intercreditor Agreement (including all monies
receivable in respect of such rights), (iii) all
monies receivable under the Liquidity Facility for
such Trust and (iv) funds from time to time
deposited with the Trustee in accounts relating to
such Trust. The Equipment Notes with respect to
each Aircraft will be issued in three series under
an indenture (each, an "Indenture") between the
applicable Owner Trustee and the indenture trustee
thereunder (the "Loan Trustee"). The Class A Trust,
the Class B Trust and the Class C Trust each will
acquire, pursuant to a Participation Agreement with
respect to each Aircraft (the "Participation
Agreements"), the series of Equipment Notes issued
with respect to each of the Aircraft having an
interest rate equal to the interest rate applicable
to the Certificates to be issued by such Trust. The
maturity dates of the Equipment Notes acquired by
each Trust will occur on or before the final
expected Regular Distribution Date applicable to
the Certificates to be issued by such Trust. The
aggregate original principal amount of the
Equipment Notes to be held in each Trust will be
the same as the aggregate original face amount of
the Certificates to be issued by such Trust.
S-7
<PAGE> 8
Certificates;
Denominations:........... The Certificates of each Trust will be issued in a
minimum denomination of $1,000 and in integral
multiples thereof. See "Description of the
Certificates -- General".
Regular Distribution
Dates:................... April 15 and October 15, commencing on October 15,
1998.
Special Distribution
Dates:................... Any Business Day on which a Special Payment is to
be distributed.
Record Dates:.............. The fifteenth day preceding a Regular Distribution
Date or a Special Distribution Date.
Distributions:............. All payments of principal, premium (if any) and
interest received by the Trustee on the Equipment
Notes held in each Trust will be distributed by the
Trustee to the holders of the Certificates (the
"Certificateholders") of such Trust, subject to the
provisions of the Intercreditor Agreement. Such
payments of interest are scheduled to be received
by the Trustee of each Trust on April 15 and
October 15 of each year, commencing on October 15,
1998. Payments of principal of the Equipment Notes
are scheduled to be received on April 15 and
October 15 in certain years, commencing on April
15, 1999. Payments of principal, premium (if any)
and interest resulting from the early redemption or
purchase (if any) of the Equipment Notes held in
any Trust will be distributed to the
Certificateholders of such Trust on a Special
Distribution Date after not less than 15 days'
notice to such Certificateholders, subject to the
provisions of the Intercreditor Agreement. For a
discussion of distributions by the Trusts upon an
Indenture Default, see "Description of the
Certificates -- Indenture Defaults and Certain
Rights Upon an Indenture Default".
Purchase Rights of
Certificateholders:...... Upon the occurrence and during the continuation of
a Triggering Event, (i) the Class B
Certificateholders shall have the right to purchase
all, but not less than all, of the Class A
Certificates and (ii) the Class C
Certificateholders shall have the right to purchase
all, but not less than all, of the Class A
Certificates and the Class B Certificates, in each
case at a purchase price equal to the Pool Balance
of the relevant Class or Classes of Certificates
plus accrued and unpaid interest thereon to the
date of purchase without premium but including any
other amounts due to the Certificateholders of such
Class or Classes.
"Triggering Event" means (x) the occurrence of an
Indenture Default under all Indentures resulting in
a PTC Event of Default with respect to the most
senior Class of Certificates then outstanding, (y)
the acceleration of all of the outstanding
Equipment Notes or (z) certain bankruptcy or
insolvency events involving Continental.
"PTC Event of Default" under each Pass Through
Trust Agreement means the failure to pay: (i) the
outstanding Pool Balance of the applicable Class of
Certificates within ten Business Days of the Final
Maturity Date for such Class or (ii) interest due
on such Class of Certificates within ten Business
Days of any Distribution Date (unless the
Subordination Agent shall have made Interest
Drawings, or withdrawals from the Cash Collateral
Accounts for such Class of Certificates, with
respect thereto in an amount sufficient to pay such
S-8
<PAGE> 9
interest and shall have distributed such amount to
the Trustee entitled thereto). The Final Maturity
Date for the Class A Certificates is October 15,
2008, the Class B Certificates is April 15, 2006
and the Class C Certificates is October 15, 2004.
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.
Equipment Notes
(a) Interest:............ The Equipment Notes held in each Trust will accrue
interest at the applicable rate per annum for the
Certificates issued by such Trust set forth on the
cover page of this Prospectus Supplement, payable
on April 15 and October 15 of each year, commencing
on October 15, 1998 and such interest payments will
be passed through to Certificateholders of such
Trust on each such date until the final
Distribution Date for such Certificates, subject to
the Intercreditor Agreement. Interest is calculated
on the basis of a 360-day year consisting of twelve
30-day months. See "Description of the Equipment
Notes -- Principal and Interest Payments".
(b) Principal:........... Scheduled principal payments on the Equipment Notes
held in each Trust will be passed through to the
Certificateholders of each such Trust on April 15
and October 15 in certain years, commencing on
April 15, 1999 subject to the Intercreditor
Agreement. See "Description of the
Certificates -- Pool Factors" and "Description of
the Equipment Notes -- Principal and Interest
Payments".
(c) Redemption and
Purchase:............ (i) The Equipment Notes issued with respect to an
Aircraft will be redeemed in whole upon the
occurrence of an Event of Loss with respect to such
Aircraft if such Aircraft is not replaced by
Continental under the related Lease, at a price
equal to the aggregate unpaid principal thereof,
together with accrued interest thereon to, but not
including, the date of redemption, but without any
premium.
(ii) All of the Equipment Notes issued with respect
to an Aircraft may be redeemed prior to maturity at
a price equal to the aggregate unpaid principal
thereof, together with accrued interest thereon to,
but not including, the date of redemption, plus a
Make-Whole Premium if such redemption is made prior
to the applicable date set forth below (with
respect to any such Series, its "Premium
Termination Date"):
<TABLE>
<CAPTION>
PREMIUM
TERMINATION
SERIES DATE
------ ----
<S> <C>
Series A................................
Series B................................
Series C................................
</TABLE>
See "Description of the Equipment
Notes -- Redemption" for a description of the
manner of computing such Make-Whole Premium and the
circumstances under which the Equipment Notes may
be so redeemed.
S-9
<PAGE> 10
(iii) If, with respect to an Aircraft, (x) one or
more Lease Events of Default have occurred and are
continuing, (y) in the event of a bankruptcy
proceeding involving Continental, (A) during the
Section 1110 Period, the trustee in such proceeding
or Continental does not assume or agree to perform
its obligations under the related Lease or (B) at
any time after assuming or agreeing to perform such
obligations, such trustee or Continental ceases to
perform such obligations such that the stay period
applicable under the U.S. Bankruptcy Code comes to
an end or (z) the Equipment Notes with respect to
such Aircraft have been accelerated or the Loan
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 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 Aircraft may be
purchased by the related Owner Trustee or Owner
Participant on the applicable purchase date at a
price equal to the aggregate unpaid principal
amount thereof, together with accrued and unpaid
interest thereon to, but not including, the
purchase date, but without any premium (provided
that a Make-Whole Premium shall be payable if such
Equipment Notes are to be purchased prior to the
Premium Termination Date applicable thereto
pursuant to clause (x) above when a Lease Event of
Default has occurred and is continuing for less
than 120 days).
(d) Security:............ The Equipment Notes issued with respect to each
Aircraft will be secured by a security interest in
such Aircraft and by an assignment to the related
Loan Trustee of certain of the related Owner
Trustee's rights under the Lease with respect to
such Aircraft, including the right to receive
payments of rent thereunder, with certain
exceptions. The Equipment Notes will not be
cross-collateralized and, consequently, the
Equipment Notes issued in respect of any one
Aircraft are not secured by any of the other
Aircraft or the Leases related thereto. There will
not be cross-default provisions in the Indentures
or in the Leases. Consequently, events resulting in
an Indenture Default under any particular Indenture
may or may not result in an Indenture Default
occurring under any other Indenture, and a Lease
Event of Default under any particular Lease may or
may not constitute a Lease Event of Default under
any other Lease. If the Equipment Notes issued with
respect to one or more Aircraft are in default and
the Equipment Notes issued with respect to the
remaining Aircraft are not in default, no remedies
will be exercisable under the Indentures with
respect to such remaining Aircraft. See
"Description of the Equipment Notes -- Security"
and "-- Indenture Defaults, Notice and Waiver".
Although the Equipment Notes are not obligations
of, or guaranteed by, Continental, the amounts
unconditionally payable by Continental for lease of
the Aircraft will be sufficient to pay in full when
due all scheduled amounts required to be paid on
the Equipment Notes. See "Description of the
Equipment Notes -- General".
S-10
<PAGE> 11
(e) Section 1110
Protection:........ The Loan Trustee with respect to each Indenture
will receive an opinion of Hughes Hubbard & Reed
LLP, counsel to Continental, that the Owner
Trustee, as lessor under the Lease for the Aircraft
subject to such Indenture, and such Loan Trustee,
as assignee of such Owner Trustee's rights under
such Lease pursuant to such Indenture, will be
entitled to the benefits of Section 1110 of the
U.S. Bankruptcy Code with respect to the airframe
and engines comprising such Aircraft. See
"Description of the Equipment Notes -- Remedies"
for a description of such opinion and certain
assumptions and qualifications contained therein.
(f) Ranking:............. Series B Equipment Notes issued in respect of any
Aircraft will be subordinated in right of payment
to Series A Equipment Notes issued in respect of
such Aircraft, and Series C Equipment Notes issued
in respect of such Aircraft will be subordinated in
right of payment to such Series B Equipment Notes.
On each Distribution Date, (i) payments of interest
and principal due on Series A Equipment Notes
issued in respect of an Aircraft will be made prior
to payments of interest and principal due on Series
B Equipment Notes issued in respect of such
Aircraft and (ii) payments of interest and
principal due on such Series B Equipment Notes will
be made prior to payments of interest and principal
due on Series C Equipment Notes issued in respect
of such Aircraft.
Delayed Purchase of
Equipment Notes:......... It is currently anticipated that the Equipment
Notes relating to all of the Aircraft will be
purchased by the Trusts on the Issuance Date. Any
proceeds of the issuance of the Certificates not
immediately used to purchase Equipment Notes (the
Equipment Notes, to the extent not purchased on the
Issuance Date, the "Delayed Delivery Notes") will
be held by the Trustee in an escrow account and
invested in specified investments at the direction
of the Company. If the Company notifies the
applicable Trustee that any such proceeds will not
be used to purchase Delayed Delivery Notes, or if
any such proceeds are not used to purchase Delayed
Delivery Notes on or before April 27, 1998, an
amount equal to such unused proceeds will be
distributed to the Certificateholders after at
least 15 days' prior written notice following the
Company's notice that such funds will not be used
to purchase Delayed Delivery Notes or April 27,
1998, as the case may be. The Company will pay to
the Trustee, and any such distribution with respect
to Delayed Delivery Notes that will not be
purchased by a Trust will include, an amount equal
to the interest that would have accrued on such
Delayed Delivery Notes from the Issuance Date until
the date of such distribution, had such Delayed
Delivery Notes been issued on the Issuance Date. No
premium will be paid with respect to proceeds
attributable to the nonpurchase of Delayed Delivery
Notes. See "Description of Certificates -- Delayed
Purchase of Equipment Notes".
Liquidity Facilities:...... The Liquidity Provider and the Subordination Agent
will enter into a separate revolving credit
agreement (each, a "Liquidity Facility") with
respect to each of the Trusts. Under the Liquidity
Facility with respect to any Trust, the Liquidity
Provider will, if necessary, make advances
("Interest Drawings") in an aggregate amount (the
"Required
S-11
<PAGE> 12
Amount") sufficient to pay interest on the
Certificates of such Trust on up to three
successive semiannual Regular Distribution Dates
(without regard to any future payments of principal
on such Certificates) at the respective interest
rates shown on the cover page of this Prospectus
Supplement for such Certificates (the "Stated
Interest Rates"). The initial Required Amount under
the Liquidity Facilities for the Class A
Certificates, the Class B Certificates and the
Class C Certificates, will be $ , $
and $ , respectively. Interest Drawings
under the relevant Liquidity Facility will be made
promptly after any Regular Distribution Date if,
after giving effect to the subordination provisions
of the Intercreditor Agreement, there are
insufficient funds available to the Subordination
Agent to pay interest on any Class A, B or C
Certificates; provided, however, that on any date
the maximum amount available under the Liquidity
Facility with respect to any Trust to fund any
shortfall in interest due on the Certificates of
such Trust will not exceed the Maximum Available
Commitment under such Liquidity Facility. The
"Maximum Available Commitment" at any time under
each Liquidity Facility is an amount equal to the
then Required Amount of such Liquidity Facility
less the aggregate amount of each Interest Drawing
outstanding under such Liquidity Facility at such
time, provided that following a Downgrade Drawing,
a Final Drawing or a Non-Extension Drawing under a
Liquidity Facility, the Maximum Available
Commitment under such Liquidity Facility shall be
zero. The Liquidity Facility for any Class of
Certificates does not provide for drawings
thereunder to pay for principal of or premium on
the Certificates of such Class, any interest on the
Certificates of such Class in excess of the Stated
Interest Rates, more than three semiannual
installments of interest thereon or principal of or
interest or premium on the Certificates of any
other Class.
Upon each Interest Drawing under any Liquidity
Facility, the Subordination Agent will be obligated
to reimburse (to the extent that the Subordination
Agent has available funds therefor) the Liquidity
Provider for the amount of such drawing. Such
reimbursement obligation and all interest, fees and
other amounts owing to the Liquidity Provider under
each Liquidity Facility or certain other agreements
(the "Liquidity Obligations") will rank pari passu
with the Liquidity Obligations relating to all
other Liquidity Facilities and will rank senior to
the Certificates in right of payment. Upon
reimbursement in full of the Interest Drawings,
together with any accrued interest thereon, under
any Liquidity Facility, the Maximum Available
Commitment under such Liquidity Facility will be
reinstated to the then Required Amount of such
Liquidity Facility; provided that the amount will
not be so reinstated if (i) a Liquidity Event of
Default has occurred and is continuing and (ii)
less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are
Performing Equipment Notes.
"Performing Equipment Note" means an Equipment Note
with respect to which no payment default has
occurred and is continuing (without giving effect
to any acceleration); provided that in the event of
a bankruptcy proceeding involving Continental under
the U.S. Bankruptcy Code, (i) any payment default
existing during the
S-12
<PAGE> 13
60-day period under Section 1110(a)(1)(A) of the
U.S. Bankruptcy Code (or such longer period as may
apply under Section 1110(b) of the U.S. Bankruptcy
Code) (the "Section 1110 Period") shall not be
taken into consideration, unless during the Section
1110 Period the trustee in such proceeding or
Continental refuses to assume or agree to perform
its obligations under the Lease related to such
Equipment Note and (ii) any payment default
occurring after the date of the order of relief in
such proceeding shall not be taken into
consideration if such payment default is cured
under Section 1110(a)(1)(B) of the U.S. Bankruptcy
Code before the later of 30 days after the date of
such default or the expiration of the Section 1110
Period.
If at any time the short-term unsecured debt rating
of the Liquidity Provider issued by either Rating
Agency is lower than the Threshold Rating for any
Class, then the Liquidity Facility for such Class
may be replaced by a facility with a financial
institution having such short term unsecured debt
ratings issued by both Rating Agencies that are
equal to or higher than the Threshold Rating for
such Class. If such Liquidity Facility is not
replaced within ten days after notice of the
downgrading, such Liquidity Facility will be drawn
in full up to the then Maximum Available Commitment
under such Liquidity Facility (the "Downgrade
Drawing") and the proceeds will be deposited into a
cash collateral account (the "Cash Collateral
Account") for the related Class of Certificates and
used for the same purposes and under the same
circumstances and subject to the same conditions as
cash payments of Interest Drawings under such
Liquidity Facility would be used. In addition, the
Intercreditor Agreement will provide for the
replacement or extension of the Liquidity Facility
for any Class of Certificates if it is then
scheduled to expire prior to the date that is
fifteen days after the Final Maturity Date for such
Class. If such Liquidity Facility cannot be so
replaced or extended by the date that is 25 days
prior to the then scheduled expiration date of such
Liquidity Facility, such Liquidity Facility will be
drawn in full up to the then Maximum Available
Commitment thereunder (the "Non-Extension Drawing")
and the proceeds will be deposited in the Cash
Collateral Account for the related Class of
Certificates and used for the same purposes and
under the same circumstances and subject to the
same conditions as cash payments of Interest
Drawings under such Liquidity Facility would be
used. Each Liquidity Facility is scheduled to
expire 364 days after the Issuance Date, from and
including the Issuance Date, subject to annual
extensions by mutual agreement of the Liquidity
Provider and the Subordination Agent.
Upon receipt by the Subordination Agent of a
Termination Notice with respect to any Liquidity
Facility from the Liquidity Provider (given as
described in "Description of the Liquidity
Facilities -- Liquidity Events of Default"), the
Subordination Agent shall request a final drawing
(the "Final Drawing") under such Liquidity Facility
in an amount equal to the then Maximum Available
Commitment thereunder and shall hold the proceeds
thereof in the Cash Collateral Account for the
related Trust to be used for the same purposes and
under the same circumstances, and subject to the
same conditions, as cash payments of Interest
Drawings under such
S-13
<PAGE> 14
Liquidity Facility would be used. All amounts on
deposit in the Cash Collateral Account for any
Trust that are in excess of the Required Amount
will be paid to the Liquidity Provider.
Subject to certain limitations, Continental may, at
its option, arrange for a Replacement Facility to
replace the Liquidity Facility (or any prior
Replacement Facility) for any Trust. If such
Replacement Facility is provided at any time after
a Downgrade Drawing or Non-Extension Drawing under
such Liquidity Facility (or prior Replacement
Facility), the funds on deposit with respect to
such Liquidity Facility (or prior Replacement
Facility) in the Cash Collateral Account for such
Trust will be returned to the liquidity provider
being replaced. The provider of any Replacement
Facility will have the same rights (including,
without limitation, priority distribution rights
and rights as "Controlling Party") under the
Intercreditor Agreement as the replaced initial
Liquidity Provider.
Notwithstanding the subordination provisions of the
Intercreditor Agreement, the holders of the
Certificates to be issued by each Trust will be
entitled to receive and retain the proceeds of
drawings under the Liquidity Facility (and any
Replacement Facility) for such Trust. See
"Description of the Liquidity Facilities".
Intercreditor Agreement
(a) Subordination:....... The Trustees, the Liquidity Provider and the
Subordination Agent will enter into an agreement
(the "Intercreditor Agreement") which will provide
as follows:
(i) All payments made in respect of the Equipment
Notes and certain other payments will be made
to the Subordination Agent, which will
distribute such payments in accordance with
the provisions of paragraphs (ii) and (iii)
below.
(ii) On any Regular Distribution Date or Special
Distribution Date (each, a "Distribution
Date"), so long as no Triggering Event shall
have occurred, all payments received by the
Subordination Agent in respect of the
Equipment Notes and certain other payments
under the related Indenture will be promptly
distributed by the Subordination Agent in the
following order of priority: (1) to the
Liquidity Provider to the extent required to
pay certain Liquidity Obligations; (2) to the
Trustee for the Class A Trust (the "Class A
Trustee") to the extent required to pay
Expected Distributions on the Class A
Certificates; (3) to the Trustee for the
Class B Trust (the "Class B Trustee") to the
extent required to pay Expected Distributions
on the Class B Certificates; (4) to the
Trustee for the Class C Trust (the "Class C
Trustee") to the extent required to pay
Expected Distributions on the Class C
Certificates; and (5) to the Subordination
Agent and each Trustee for the payment of
certain fees and expenses.
"Expected Distributions" means, with respect to
the Certificates of any Trust on any
Distribution Date (the "Current Distribution
Date"), the sum of (x) accrued and unpaid
interest on such Certificates and (y) the
difference between (A) the Pool Balance
S-14
<PAGE> 15
of such Certificates as of the immediately
preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution
Date, the original aggregate face amount of the
Certificates of such Trust), less (if
applicable) the aggregate amount of escrowed
funds for such Class of Certificates as of such
immediately preceding Distribution Date (or, if
the Current Distribution Date is the first
Distribution Date, as of the date of original
issuance of the Certificates of such Class)
thereafter distributed to the holders of such
Certificates (instead of being used to purchase
Delayed Delivery Notes) as described below
under "Description of the
Certificates -- Delayed Purchase of Equipment
Notes" (excluding the interest component of any
such distribution), and (B) the Pool Balance of
such Certificates as of the Current
Distribution Date calculated on the basis that
(i) the principal of the Equipment Notes held
in such Trust has been paid when due (whether
at stated maturity, upon redemption,
prepayment, purchase, acceleration or
otherwise) and such payments have been
distributed to the holders of such Certificates
and (ii) the principal of any Equipment Notes
formerly held in such Trust that have been sold
pursuant to the Intercreditor Agreement has
been paid in full and such payments have been
distributed to the holders of such
Certificates. For purposes of determining the
priority of distributions on account of the
redemption, purchase or prepayment of all of
the Equipment Notes issued pursuant to an
Indenture, clause (x) of the definition of
Expected Distributions shall be deemed to read
as follows: "(x) accrued, due and unpaid
interest on such Certificates together with
(without duplication) accrued and unpaid
interest on a portion of such Certificates
equal to the outstanding principal amount of
the Equipment Notes being redeemed, purchased
or prepaid (immediately prior to such
redemption, purchase or prepayment)".
(iii) 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: (1) to the Subordination
Agent, each Trustee and certain other parties
in payment of the Administration Expenses and
to the Liquidity Provider in payment of the
Liquidity Obligations; (2) to the
Subordination Agent, each Trustee and each
Certificateholder for certain fees, taxes,
charges and other amounts payable to the
Subordination Agent, any Trustee or any
Certificateholder; (3) to the Class A Trustee
to the extent required to pay Adjusted
Expected Distributions on the Class A
Certificates; (4) to the Class B Trustee to
the extent required to pay Adjusted Expected
Distributions on the Class B Certificates;
and (5) to the Class C Trustee to the extent
required to pay Adjusted Expected
Distributions on the Class C Certificates.
S-15
<PAGE> 16
"Adjusted Expected Distributions" means, with
respect to the Certificates of any Trust on any
Current Distribution Date, the sum of (1) accrued
and unpaid interest on such Certificates and (2)
the greater of:
(A) the difference between (x) the Pool Balance of
such Certificates as of the immediately
preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution
Date, the original aggregate face amount of the
Certificates of such Trust) less (if
applicable) the aggregate amount of escrowed
funds for such Class of Certificates as of such
immediately preceding Distribution Date (or, if
the Current Distribution Date is the first
Distribution Date, as of the date of original
issuance of the Certificates of such Class)
thereafter distributed to the holders of such
Certificates (instead of being used to purchase
Delayed Delivery Notes) as described below
under "Description of the
Certificates -- Delayed Purchase of Equipment
Notes" (excluding the interest component of any
such distribution), and (y) the Pool Balance of
such Certificates as of the Current
Distribution Date calculated on the basis that
(i) the principal of the Equipment Notes other
than Performing Equipment Notes (the
"Non-Performing Equipment Notes") held in such
Trust has been paid in full and such payments
have been distributed to the holders of such
Certificates, (ii) the principal of the
Performing Equipment Notes held in such Trust
has been paid when due (but without giving
effect to any acceleration of Performing
Equipment Notes) and such payments have been
distributed to the holders of such Certificates
and (iii) the principal of any Equipment Notes
formerly held in such Trust that have been sold
pursuant to the Intercreditor Agreement has
been paid in full and such payments have been
distributed to the holders of such
Certificates, and
(B) the amount of the excess, if any, of (i) the
amount described in sub-clause (A)(x) over (ii)
the Aggregate LTV Collateral Amount for such
Class of Certificates for the Current
Distribution Date;
provided that, until the date of the initial LTV
Appraisals, clause (B) shall not apply.
For purposes of calculating Expected Distributions
or Adjusted Expected Distributions with respect to
the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not
been distributed to the Certificateholders of such
Trust (other than such premium or a portion thereof
applied to the payment of interest on the
Certificates of such Trust or the reduction of the
Pool Balance of such Trust) shall be added to the
amount of Expected Distributions or Adjusted
Expected Distributions.
"Aggregate LTV Collateral Amount" for any Class of
Certificates for any Distribution Date means (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.
S-16
<PAGE> 17
"LTV Collateral Amount" of any Aircraft for any
Class of Certificates means, as of any Distribution
Date, the lesser of (i) the LTV Ratio for such
Class of Certificates multiplied by the Appraised
Current Market Value of such Aircraft (or with
respect to any such Aircraft which has suffered an
Event of Loss under and as defined in the relevant
Lease, the amount of the insurance proceeds paid to
the related Loan Trustee in respect thereof to the
extent then held by such Loan Trustee (and/or on
deposit in the Special Payments Account) or payable
to such Loan Trustee in respect thereof) and (ii)
the outstanding principal amount of the Equipment
Notes secured by such Aircraft after giving effect
to any principal payments of such Equipment Notes
on or before such Distribution Date.
"LTV Ratio" means for the Class A Certificates
38.0%, for the Class B Certificates 52.0% and for
the Class C Certificates 67.2%.
"Appraised Current Market Value" of any Aircraft
means the lower of the average and the median of
the most recent three LTV Appraisals of such
Aircraft. After a Triggering Event occurs and any
Equipment Note becomes a Non-Performing Equipment
Note, the Subordination Agent shall obtain LTV
Appraisals for the Aircraft as soon as practicable
and additional LTV Appraisals on or prior to each
anniversary of the date of such initial LTV
Appraisals; provided that if the Controlling Party
reasonably objects to the appraised value of the
Aircraft shown in such LTV Appraisals, the
Controlling Party shall have the right to obtain or
cause to be obtained substitute LTV Appraisals
(including LTV Appraisals based upon physical
inspection of such Aircraft).
"LTV Appraisal" means a current fair market value
appraisal (which may be a "desk-top" appraisal)
performed by any Appraiser or any other nationally
recognized appraiser on the basis of an
arm's-length transaction between an informed and
willing purchaser under no compulsion to buy and an
informed and willing seller under no compulsion to
sell and both having knowledge of all relevant
facts.
(b) Intercreditor
Rights:.............. Pursuant to the Intercreditor Agreement, the
Trustees and the Liquidity Provider will agree
that, with respect to any Indenture at any given
time, the relevant Loan Trustee will be directed
(a) in taking, or refraining from taking, any
action thereunder or with respect to the Equipment
Notes issued thereunder, by the holders of at least
a majority of the outstanding principal amount of
such Equipment Notes as long as no Indenture
Default has occurred and is continuing thereunder
and (b) subject to certain conditions, in taking,
or refraining from taking, any action under such
Indenture (including exercising remedies
thereunder, such as acceleration of such Equipment
Notes or foreclosing the lien on the Aircraft
securing such Equipment Notes), by the Controlling
Party if an Indenture Default under such Indenture
has occurred and is continuing.
"Controlling Party" with respect to any Indenture
means: (x) the Class A Trustee; (y) upon payment of
Final Distributions to the holders of Class A
Certificates, the Class B Trustee; and (z) upon
payment of Final Distributions to the holders of
Class B Certificates, the Class C Trustee. See
"Description of the Certificates --
S-17
<PAGE> 18
Indenture Defaults and Certain Rights Upon an
Indenture Default" for a description of the rights
of the Certificateholders of each Trust to direct
the respective Trustees. Notwithstanding the
foregoing, at any time after 18 months from the
earlier to occur of (x) the date on which the
entire Maximum Available Commitment under any
Liquidity Facility shall have been drawn (for any
reason other than a Downgrade Drawing or a
Non-Extension Drawing) and remain unreimbursed, (y)
the date on which the entire amount of any
Downgrade Drawing or Non-Extension Drawing under
any Liquidity Facility 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, the
liquidity provider(s) holding more than 50% of the
outstanding amount of Liquidity Obligations will
have the right to become the Controlling Party with
respect to such Indenture. For purposes of giving
effect to the foregoing, the Trustees (other than
the Controlling Party) shall irrevocably agree (and
the Certificateholders (other than the
Certificateholders represented by the Controlling
Party) will be deemed to agree by virtue of their
purchase of Certificates) that their voting rights
will be exercised as directed by the Controlling
Party. For a description of certain limitations on
the Controlling Party's rights to exercise
remedies, see "Description of the Equipment
Notes -- Remedies".
"Final Distributions" means, with respect to the
Certificates of any Trust on any Distribution Date,
the sum of (x) the aggregate amount of all accrued
and unpaid interest on such Certificates and (y)
the Pool Balance of such Certificates as of the
immediately preceding Distribution Date. For
purposes of calculating Final Distributions with
respect to the Certificates of any Trust, any
premium paid on the Equipment Notes held in such
Trust which has not been distributed to the
Certificateholders of such Trust (other than such
premium or a portion thereof applied to the payment
of interest on the Certificates of such Trust or
the reduction of the Pool Balance of such Trust)
shall be added to the amount of such Final
Distributions.
(i) Upon the occurrence and during the
continuation of any Indenture Default under
any Indenture, the Controlling Party may
accelerate and sell all (but not less than
all) of the Equipment Notes issued under such
Indenture to any person, subject to the
provisions of paragraph (ii) below. The
proceeds of such sale will be distributed
pursuant to the provisions of the
Intercreditor Agreement.
(ii) So long as any Certificates are outstanding,
during nine months after the earlier of (x)
the acceleration of the Equipment Notes under
any Indenture or (y) the bankruptcy or
insolvency of Continental, without the consent
of each Trustee, (a) no Aircraft subject to
the lien of such Indenture or such Equipment
Notes may be sold, if the net proceeds from
such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment
Notes, and (b) the amount and payment dates of
rentals payable by Continental under the Lease
for such Aircraft may not be adjusted, if, as
a result of such adjustment, the discounted
S-18
<PAGE> 19
present value of all such rentals would be less
than 75% of the discounted present value of the
rentals payable by Continental under such Lease
before giving effect to such adjustment, in each
case, using the weighted average interest rate
of the Equipment Notes outstanding under such
Indenture as the discount rate.
"Minimum Sale Price" means, with respect to any
Aircraft or the Equipment Notes issued in respect
of such Aircraft, at any time, the lesser of (1)
75% of the Appraised Current Market Value of such
Aircraft and (2) the aggregate outstanding
principal amount of such Equipment Notes, plus
accrued and unpaid interest thereon.
Certain Federal Income Tax
Consequences:............ Each Trust will be classified as a grantor trust
for federal income tax purposes. Each Certificate
Owner generally should report on its federal income
tax return its pro rata share of income from the
Equipment Notes and other property held by the
relevant Trust. See "Certain U.S. Federal Income
Tax Consequences".
Certain ERISA
Considerations:.......... In general, employee benefit plans subject to Title
I of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the
"Code") (or entities which may be deemed to hold
the assets of any such Plan) will be eligible to
purchase the Certificates, subject to certain
conditions and the circumstances applicable to such
Plans. Each Plan fiduciary (and each fiduciary for
a governmental or church plan subject to rules
similar to those imposed on Plans under ERISA)
should consult with its legal advisor concerning an
investment in any of the Certificates.
Each person who acquires or accepts a Certificate
or an interest therein, will be deemed by such
acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been
used to purchase such Certificate or an interest
therein or (ii) the purchase and holding of such
Certificate or an interest therein are exempt from
the prohibited transaction restrictions of ERISA
and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
See "Certain ERISA Considerations".
S-19
<PAGE> 20
Rating of the
Certificates:............ It is a condition to the issuance of the
Certificates that the Certificates be rated by
Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. ("Standard &
Poor's", and together with Moody's, the "Rating
Agencies"), not less than the ratings set forth
below. The Company's ability to pay any losses on
investments or interest due with respect to the
funds held by the Trustees in escrow pending any
delayed purchase of Equipment Notes has not been
rated.
<TABLE>
<CAPTION>
STANDARD
CERTIFICATES MOODY'S & POOR'S
------------ ------- --------
<S> <C> <C>
Class A..................................... Aa3 AA+
Class B..................................... A2 A+
Class C..................................... Baa1 BBB
</TABLE>
A rating is not a recommendation to purchase, hold
or sell Certificates, inasmuch as such rating does
not address market price or suitability for a
particular investor. There can be no assurance that
such ratings will not be lowered or withdrawn by a
Rating Agency if, in the opinion of such Rating
Agency, circumstances (including the downgrading of
Continental or the Liquidity Provider) so warrant.
See "Risk Factors -- Risk Factors Relating to the
Certificates and the Offering -- Ratings of the
Certificates".
<TABLE>
<CAPTION>
STANDARD
MOODY'S & POOR'S
------- --------
<S> <C> <C> <C>
Rating of the Liquidity Provider:.... Short Term.................................. P-1 A-1+
Threshold Rating:.................... Short Term
Class A Liquidity Provider.................. P-1 A-1+
Class B Liquidity Provider.................. P-1 A-1+
Class C Liquidity Provider.................. P-1 A-1
</TABLE>
S-20
<PAGE> 21
SUMMARY FINANCIAL AND OPERATING DATA
The following tables summarize certain consolidated financial data and
certain operating data with respect to the Company. The following selected
consolidated financial data for the years ended December 31, 1997, 1996 and 1995
is derived from the audited consolidated financial statements of the Company
incorporated by reference in the Prospectus and the Prospectus Supplement. The
Company's selected consolidated financial data should be read in conjunction
with, and are qualified in their entirety by reference to, such consolidated
financial statements, including the notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997(1) 1996(1) 1995(1)
------- ------- -------
(IN MILLIONS, EXCEPT PER
SHARE DATA AND RATIOS)
<S> <C> <C> <C>
FINANCIAL DATA -- OPERATIONS:
Operating Revenue.......................................... $7,213 $6,360 $5,825
Operating Expenses......................................... 6,497 5,835(2) 5,440(3)
------ ------ ------
Operating Income........................................... 716 525 385
Nonoperating Expense, net.................................. (76) (97) (75)(4)
------ ------ ------
Income before Income Taxes, Minority Interest and
Extraordinary Loss....................................... 640 428 310
Net Income................................................. $ 385 $ 319 $ 224
====== ====== ======
Earnings per Common Share.................................. $ 6.65 $ 5.75 $ 4.07
====== ====== ======
Earnings per Common Share Assuming Full Dilution........... $ 4.99 $ 4.17 $ 3.37
====== ====== ======
Ratio of Earnings to Fixed Charges(5)...................... 2.07 1.81 1.53
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
OPERATING DATA (JET OPERATIONS ONLY):(6)
Revenue passenger miles (millions)(7).................. 47,906 41,914 40,023
Available seat miles (millions)(8)..................... 67,576 61,515 61,006
Passenger load factor(9)............................... 70.9% 68.1% 65.6%
Breakeven passenger load factor(10).................... 60.0% 60.7%(13) 60.8%
Passenger revenue per available seat mile
(cents)(11).......................................... 9.19 8.93 8.20
Operating cost per available seat mile (cents)(12)..... 9.07 8.77(13) 8.36
Average yield per revenue passenger mile (cents)(14)... 12.96 13.10 12.51
Average length of aircraft flight (miles).............. 967 896 836
</TABLE>
(See footnotes on the following page.)
S-21
<PAGE> 22
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------ ------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
FINANCIAL DATA -- BALANCE SHEET:
Assets:
Cash and Cash Equivalents, including restricted cash and
cash equivalents of $15 and $76, respectively(15)......... $1,025 $1,061
Other Current Assets........................................ 703 573
Total Property and Equipment, Net........................... 2,225 1,596
Routes, Gates and Slots, Net................................ 1,425 1,473
Other Assets, Net........................................... 452 503
------ ------
Total Assets...................................... $5,830 $5,206
====== ======
Liabilities and Stockholders' Equity:
Current Liabilities......................................... $2,285 $2,104
Long-Term Debt and Capital Leases........................... 1,568 1,624
Deferred Credits and Other Long-Term Liabilities............ 819 594
Minority Interest(16)....................................... -- 15
Continental-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Convertible
Subordinated Debentures(17)............................... 242 242
Redeemable Preferred Stock(18).............................. -- 46
Common Stockholders' Equity................................. 916 581
------ ------
Total Liabilities and Stockholders' Equity........ $5,830 $5,206
====== ======
</TABLE>
- ---------------
(1) No cash dividends were paid on common stock during the periods shown.
(2) Includes a $128 million fleet disposition charge recorded in 1996
associated primarily with the Company's decision to accelerate the
replacement of its DC-9-30, DC-10-10, 727-200, 737-100, and 737-200
aircraft. In connection with its decision to accelerate the replacement of
such aircraft, the Company wrote down its Stage 2 aircraft inventory, that
is not expected to be consumed through operations, to its estimated fair
value and recorded a provision for costs associated with the return of
leased aircraft at the end of their respective lease terms.
(3) Includes a $20 million cash payment in 1995 by the Company in connection
with a 24-month collective bargaining agreement entered into by the Company
and the Independent Association of Continental Pilots.
(4) Includes a pre-tax gain of $108 million ($30 million after tax) on the
series of transactions by which the Company and its subsidiary, Continental
CRS Interests, Inc., transferred certain assets and liabilities relating to
the computerized reservation business of such subsidiary to a newly-formed
limited liability company and the remaining assets and liabilities were
sold.
(5) For purposes of calculating this ratio, earnings consist of earnings before
taxes, minority interest and extraordinary loss plus interest expense (net
of capitalized interest), the portion of rental expense representative of
interest expense and amortization on previously capitalized interest. Fixed
charges consist of interest expense and the portion of rental expense
representative of interest expense.
(6) Includes operating data for CMI, but does not include operating data for
Express' regional jet operations or turboprop operations.
(7) The number of scheduled miles flown by revenue passengers.
(8) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(9) Revenue passenger miles divided by available seat miles.
S-22
<PAGE> 23
(10) 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 nonrecurring charges and nonoperating items and other special
items.
(11) Passenger revenue divided by available seat miles.
(12) Operating expenses divided by available seat miles.
(13) Excludes a $128 million fleet disposition charge. See Note (2) for
description of the fleet disposition charge.
(14) The average revenue received for each mile a revenue passenger is carried.
(15) Restricted cash and cash equivalents agreements relate primarily to
workers' compensation claims and the terms of certain other agreements.
(16) In July 1997, the Company purchased the minority interest holder's 9%
interest in Air Micronesia, Inc., the parent of CMI.
(17) 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.
(18) Continental redeemed for cash all of the outstanding shares of its Series A
12% Cumulative Preferred Stock in 1997.
S-23
<PAGE> 24
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE CERTIFICATES SHOULD CAREFULLY REVIEW THE
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS AND SHOULD PARTICULARLY CONSIDER THE FOLLOWING MATTERS:
RISK FACTORS RELATING TO THE COMPANY
Leverage and Liquidity
Continental is more leveraged and has significantly less liquidity than
certain of its competitors, several of whom have substantial available lines of
credit and/or significant unencumbered assets. Accordingly, Continental may be
less able than certain of its competitors to withstand a prolonged recession in
the airline industry and may not have as much flexibility to respond to changing
economic conditions or to exploit new business opportunities.
As of December 31, 1997, Continental had approximately $1.9 billion
(including current maturities) of long-term debt and capital lease obligations
and had approximately $1.2 billion of Continental-obligated mandatorily
redeemable preferred securities of subsidiary trust and common stockholders'
equity. In addition, the Equipment Notes to be issued in connection with the
Offering will be carried as indebtedness on Continental's consolidated balance
sheet due to Continental's 75% ownership interest in the Owner Participant with
respect to the Aircraft. Common stockholders' equity reflects the adjustment of
the Company's balance sheet and the recording of assets and liabilities at fair
market value as of April 27, 1993 in accordance with the American Institute of
Certified Public Accountants' Statement of Position 90-7 -- "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). As of
December 31, 1997, Continental had $1.0 billion in cash and cash equivalents
(excluding restricted cash and cash equivalents of $15 million). Continental has
general lines of credit and significant encumbered assets.
For 1997, Continental incurred cash expenditures under operating leases
relating to aircraft of approximately $626 million, compared to $568 million for
1996, and $236 million relating to facilities and other rentals, compared to
$210 million in 1996. Continental expects that its operating lease expenses for
1998 will increase over 1997 amounts. In addition, Continental has capital
requirements relating to compliance with regulations that are discussed below.
See " -- Risk Factors Relating to the Airline Industry -- Regulatory Matters".
In March 1998, the Company announced the conversion of 15 Boeing 737 option
aircraft to 15 Boeing 737-900 firm aircraft and the addition of 25 option
aircraft.
As of March 18, 1998, the Company had firm commitments with The Boeing
Company ("Boeing") to take delivery of a total of 154 jet aircraft (including 15
Boeing 737 option aircraft which were converted to 15 Boeing 737-900 firm
aircraft in March 1998) during the years 1998 through 2005 with options for
additional aircraft (exercisable subject to certain conditions). These aircraft
will replace older, less efficient Stage 2 aircraft and allow for growth of
operations. The estimated aggregate cost of the Company's firm commitments for
the Boeing aircraft is approximately $6.7 billion. As of March 18, 1998, the
Company had completed or had third party commitments for a total of
approximately $1.6 billion in financing for its future Boeing deliveries, and
had commitments or letters of intent from various sources for backstop financing
for approximately one-third of the anticipated remaining acquisition cost of
such Boeing deliveries. The Company currently plans on financing the new Boeing
aircraft with a combination of enhanced equipment trust certificates, lease
equity and other third party financing, subject to availability and market
conditions. However, further financing will be needed to satisfy the Company's
capital commitments for other aircraft and aircraft-related expenditures such as
engines, spare parts, simulators and related items. There can be no assurance
that sufficient financing will be available for all aircraft and other capital
expenditures not covered by firm financing commitments. Deliveries of new Boeing
aircraft are expected to increase aircraft rental, depreciation and interest
costs while generating cost savings in the areas of maintenance, fuel and pilot
training.
S-24
<PAGE> 25
Continental's History of Operating Losses
Although Continental recorded net income of $385 million in 1997, $319
million in 1996 and $224 million in 1995, it had experienced significant
operating losses in the previous eight years. In the long term, Continental's
viability depends on its ability to sustain profitable results of operations.
Aircraft Fuel
Since fuel costs constitute a significant portion of Continental's
operating costs (approximately 13.6% and 13.3% for the years ended December 31,
1997 and 1996, respectively), significant changes in fuel costs would materially
affect the Company's operating results. Fuel prices continue to be susceptible
to international events, and the Company cannot predict near or longer-term fuel
prices. The Company enters into petroleum option contracts to provide some
short-term protection (generally three to six months) against a sharp increase
in jet fuel prices. In the event of a fuel supply shortage resulting from a
disruption of oil imports or otherwise, higher fuel prices or curtailment of
scheduled service could result.
Labor Matters
In April 1997, collective bargaining agreement negotiations began with the
Independent Association of Continental Pilots ("IACP") to amend both the
Continental Airlines pilots contract (which became amendable in July 1997) and
Express pilots contract (which became amendable in October 1997). In February
1998, a five-year collective bargaining agreement with the Continental Airlines
pilots was announced by the Company and the IACP. In March 1998, Express also
announced a five-year collective bargaining agreement with its pilots. These
agreements are subject to approval by the IACP board of directors and
ratification by the Continental and Express pilots. The Company began accruing
for the increased costs of a tentative agreement reached in November 1997 in the
fourth quarter of 1997. The Company estimates that such accrual will be
approximately $113 million for 1998. The Company's mechanics and related
employees recently voted to be represented by the International Brotherhood of
Teamsters (the "Teamsters"). The Company does not believe that the Teamsters'
union representation will be material to the Company. In September 1997, the
Company announced that it intends to bring all employees to industry standard
wages (the average of the top ten air carriers as ranked by the Department of
Transportation, excluding Continental) within 36 months. The announcement
further stated that wage increases will be phased in over the 36-month period as
revenue, interest rates and rental rates reach industry standards. The Company
estimates that the increased wages will aggregate approximately $500 million
over the 36-month period.
Certain Tax Matters
At December 31, 1997, the Company had estimated net operating loss
carryforwards ("NOLs") of $1.7 billion for federal income tax purposes that will
expire through 2009 and federal investment tax credit carryforwards of $45
million that will expire through 2001. As a result of the change in ownership of
the Company on April 27, 1993, the ultimate utilization of the Company's NOLs
and investment tax credits could be limited. Reflecting this possible
limitation, the Company recorded a valuation allowance of $617 million at
December 31, 1997.
The Company had, as of December 31, 1997, deferred tax assets aggregating
$1.1 billion, including $631 million of NOLs. Realization of a substantial
portion of the Company's remaining NOLs will require the completion by April 27,
1998 of transactions resulting in recognition of built-in gains for federal
income tax purposes. The Company has consummated several such transactions
resulting in a $62 million reduction in reorganization value in excess of
amounts allocable to identifiable assets. The Company may consummate one or more
additional built-in gain transactions by April 27, 1998.
As a result of NOLs, the Company will not pay United States federal income
taxes (other than alternative minimum tax) until it has recorded approximately
an additional $515 million of taxable income following December 31, 1997.
Section 382 of the Internal Revenue Code ("Section 382")
S-25
<PAGE> 26
imposes limitations on a corporation's ability to utilize NOLs if it experiences
an "ownership change". In general terms, an ownership change may result from
transactions increasing the ownership of certain stockholders in the stock of a
corporation by more than 50 percentage points over a three-year period. In the
event that an ownership change should occur, utilization of Continental's NOLs
would be subject to an annual limitation under Section 382 determined by
multiplying the value of the Company's stock at the time of the ownership change
by the applicable long-term tax-exempt rate (which is 5.04% for April 1998). Any
unused annual limitation may be carried over to later years, and the amount of
the limitation may under certain circumstances be increased by the built-in
gains in assets held by the Company at the time of the change that are
recognized in the five-year period after the change. Under current conditions,
if an ownership change were to occur, Continental's annual NOL utilization would
be limited to approximately $179 million per year other than through the
recognition of future built-in gain transactions.
The Company announced on January 26, 1998 that Air Partners, L.P., a
limited partnership ("Air Partners"), the holder of approximately 14% of the
Company's equity and approximately 51% of its voting power (after giving effect
to the exercise of warrants), had entered into an agreement to dispose of its
interest in the Company to an affiliate of Northwest Airlines, Inc.
("Northwest"). Based on information currently available to the Company, the
Company does not believe that such disposition by Air Partners will result in an
ownership change for purposes of Section 382.
Continental Micronesia
Because the majority of CMI's traffic originates in Japan, its results of
operations are substantially affected by the Japanese economy and changes in the
value of the yen as compared to the dollar. Appreciation of the yen against the
dollar during 1994 and 1995 increased CMI's profitability, while a decline of
the yen against the dollar in 1996 and 1997 have reduced CMI's profitability. As
a result of the continued weakness of the yen against the dollar, a weak
Japanese economy and increased fuel costs, CMI's operating earnings have
declined during 1996 and 1997 and are not expected to improve materially absent
a significant improvement in these factors.
To reduce the potential negative impact on CMI's dollar earnings, CMI, from
time to time, purchases average rate options as a hedge against a portion of its
expected net yen cash flow position. Such options historically have not had a
material effect on the Company's results of operations or financial condition.
Any significant and sustained decrease in traffic or yields (including due to
the value of the yen) to and from Japan could materially adversely affect
Continental's consolidated profitability.
Principal Stockholder
As of December 31, 1997, Air Partners held approximately 9% of the common
equity interest and 39% of the general voting power of the Company. If all the
remaining warrants held by Air Partners had been exercised on December 31, 1997,
approximately 14% of the common equity interest and 51% of the general voting
power of the Company would have been held by Air Partners. Various provisions in
the Company's Certificate of Incorporation and Bylaws currently provide Air
Partners with the right to elect one-third of the directors in certain
circumstances; these provisions could have the effect of delaying, deferring or
preventing a change in the control of the Company. On January 26, 1998, the
Company announced that Air Partners had entered into an agreement to dispose of
its interest in the Company to an affiliate of Northwest. See "The
Company -- Recent Developments -- Continental/Northwest Alliance and Related
Agreements".
Risks Regarding Continental/Northwest Alliance
On January 26, 1998, the Company and Northwest announced a long-term global
alliance (the "Northwest Alliance") involving schedule coordination, frequent
flyer reciprocity, executive lounge access, airport facility coordination, code
sharing, the formation of a joint venture among the two carriers and KLM Royal
Dutch Airlines ("KLM") with respect to their respective trans-Atlantic services,
S-26
<PAGE> 27
cooperation regarding other alliance partners of the two carriers and regional
alliance development, certain coordinated sales programs, preferred reservations
displays and other activities. See "The Company -- Recent
Developments -- Continental/Northwest Alliance and Related Agreements".
Successful implementation of the alliance and the achievement and timing of
the anticipated synergies by the Company are subject to certain risks and
uncertainties, some of which are beyond the control of the Company, including
(a) competitive pressures, including developments with respect to existing and
potential future competitive alliances; (b) customer perception of and
acceptance of the alliance, including product differences and benefits provided;
(c) whether the Northwest pilots approve those aspects of the alliance requiring
their approval, and the timing thereof; (d) potential adverse developments with
respect to regional economic performance; (e) costs or difficulties in
implementing the alliance being greater than expected, including those caused by
the Company's or Northwest's workgroups; (f) contractual impediments to the
implementation by the Company of certain aspects of the alliance; and (g)
non-approval or delay by regulatory authorities or possible adverse regulatory
decisions or changes. There can be no assurance that the alliance will be fully
and timely implemented or continued, or that the anticipated synergies will not
be delayed or will be achieved.
Corporate Governance Agreement
The Company announced on January 26, 1998 that Air Partners, the holder of
approximately 14% of the Company's equity and approximately 51% of its voting
power (after giving effect to the exercise of warrants), had entered into an
agreement to dispose of its interest in the Company to an affiliate of Northwest
(the "Air Partners Transaction"). See "The Company -- Recent Developments --
Continental/Northwest Alliance and Related Agreements". In connection with the
Air Partners Transaction, the Company has entered into a corporate governance
agreement with certain affiliates of Northwest, designed to assure the
independence of the Company's board of directors and management during the
six-year period of the governance agreement. During the term of the governance
agreement, the securities of the Company beneficially owned by Northwest and its
affiliates will be deposited into a voting trust and generally voted as
recommended by the Company's board of directors (a majority of whom must be
independent directors as defined in the agreement) or in the same proportion as
the votes cast by other holders of the Company's voting securities. However,
pursuant to the governance agreement, those shares may be voted as directed by
the Northwest affiliate in connection with certain matters, including with
respect to mergers and certain other change in control matters and the issuance
of capital stock representing in excess of 20% of the voting power of the
Company prior to issuance requiring a stockholder vote. In addition, in
connection with the election of directors, those shares shall be voted for the
election of the independent directors; provided that with respect to elections
of directors in respect of which any person other than the Company is soliciting
proxies, the shares may be voted, at the election of Northwest's affiliate,
either as recommended by the Company's board of directors or in the same
proportion as the votes cast by other holders of the Company's voting
securities. As a result of the provisions of the corporate governance agreement,
the ability of the Company to engage in a change in control transaction other
than with Northwest or an affiliate thereof, or to issue significant amounts of
capital stock under certain circumstances, is limited.
Shareholder Litigation
Following the announcement of the Northwest Alliance, the Air Partners
Transaction and the related corporate governance agreement between the Company
and certain affiliates of Northwest (collectively, the "Northwest Transaction"),
to the Company's knowledge as of March 18, 1998, six separate lawsuits were
filed against the Company and its Directors and certain other parties (the
"Shareholder Litigation"). The complaints in the Shareholder Litigation, which
were filed in the Court of Chancery of the State of Delaware in and for New
Castle County and seek class certification, and which have been consolidated
under the caption In re Continental Airlines, Inc. Shareholder Litigation,
generally allege that the Company's Directors improperly accepted the Northwest
Transaction in violation of their fiduciary duties owed to the public
shareholders of the Company. They further allege that Delta Air
S-27
<PAGE> 28
Lines, Inc. submitted a proposal to purchase the Company which, in the
plaintiffs' opinion, was superior to the Northwest Transaction. The Shareholder
Litigation seeks, inter alia, to enjoin the Northwest Transaction and the award
of unspecified damages to the plaintiffs.
While there can be no assurance that the Shareholder Litigation will not
result in a delay in the implementation of any aspect of the Northwest
Transaction, or the enjoining of the Northwest Transaction, the Company believes
the Shareholder Litigation to be without merit and intends to defend it
vigorously.
RISK FACTORS RELATING TO THE AIRLINE INDUSTRY
Industry Conditions and Competition
The airline industry is highly competitive and susceptible to price
discounting. The Company has in the past both responded to discounting actions
taken by other carriers and initiated significant discounting actions itself.
Continental's competitors include carriers with substantially greater financial
resources (and in certain cases, lower cost structures), as well as smaller
carriers with low cost structures. Airline profit levels are highly sensitive
to, and during recent years have been severely impacted by, changes in fuel
costs, fare levels (or "average yield") and passenger demand. Passenger demand
and yields have been affected by, among other things, the general state of the
economy, international events and actions taken by carriers with respect to
fares. From 1990 to 1993, these factors contributed to the domestic airline
industry's incurring unprecedented losses. Although fare levels have increased
subsequently, fuel costs have also increased significantly. In addition,
significant industry-wide discounts could be reimplemented at any time, and the
introduction of broadly available, deeply discounted fares by a major United
States airline would likely result in lower yields for the entire industry and
could have a material adverse effect on the Company's operating results.
The airline industry has consolidated in past years as a result of mergers
and liquidations and may further consolidate in the future. Among other effects,
such consolidation has allowed certain of Continental's major competitors to
expand (in particular) their international operations and increase their market
strength. Furthermore, the emergence in recent years of several new carriers,
typically with low cost structures, has further increased the competitive
pressures on the major United States airlines. In many cases, the new entrants
have initiated or triggered price discounting. Aircraft, skilled labor and gates
at most airports continue to be readily available to start-up carriers.
Competition with new carriers or other low cost competitors on Continental's
routes could negatively impact Continental's operating results.
Regulatory Matters
In the last several years, the United States Federal Aviation
Administration (the "FAA") has issued a number of maintenance directives and
other regulations relating to, among other things, retirement of older aircraft,
security measures, collision avoidance systems, airborne windshear avoidance
systems, noise abatement, commuter aircraft safety and increased inspections and
maintenance procedures to be conducted on older aircraft. The Company expects to
continue incurring expenses for the purpose of complying with the FAA's noise,
aging aircraft and other regulations. In addition, several airports have
recently sought to increase substantially the rates charged to airlines, and the
ability of airlines to contest such increases has been restricted by federal
legislation, Department of Transportation regulations and judicial decisions.
Management believes that the Company benefited significantly from the
expiration of the aviation trust fund tax (the "ticket tax") on December 31,
1995. The ticket tax was reinstated on August 27, 1996, expired again on
December 31, 1996 and was reinstated again on March 7, 1997. In July 1997,
Congress passed tax legislation reimposing and significantly modifying the
ticket tax. The legislation includes the imposition of new excise tax and
segment fee tax formulas to be phased in over a multi-year period, an increase
in the international departure tax and the imposition of a new arrivals tax, and
the extension of the ticket tax to cover items such as the sale of frequent
flyer miles. Management
S-28
<PAGE> 29
believes that the ticket tax has a negative impact on the Company, although
neither the amount of such negative impact directly resulting from the
reimposition of the ticket tax, nor the benefit previously realized by its
expiration, can be precisely determined.
Additional laws and regulations have been proposed from time to time that
could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations have
also been considered that would prohibit or restrict the ownership and/or
transfer of airline routes or takeoff and landing slots. Also, the availability
of international routes to United States carriers is regulated by treaties and
related agreements between the United States and foreign governments that are
amendable. Continental cannot predict what laws, regulations and amendments may
be adopted or their impact, and there can be no assurance that laws, regulations
and amendments currently proposed or enacted in the future will not adversely
affect the Company.
Seasonal Nature of Airline Business
Due to the greater demand for air travel during the summer months, revenue
in the airline industry in the third quarter of the year is generally
significantly greater than revenue in the first quarter of the year and
moderately greater than revenue in the second and fourth quarters of the year
for the majority of air carriers. Continental's results of operations generally
reflect this seasonality, but have also been impacted by numerous other factors
that are not necessarily seasonal, including the extent and nature of
competition from other airlines, fare wars, excise and similar taxes, changing
levels of operations, fuel prices, foreign currency exchange rates and general
economic conditions.
Other
While the Company has implemented a Year 2000 project to ensure that its
computer systems will function properly in the year 2000 and thereafter, the
Company's business is dependent upon certain governmental organizations or
entities, such as the FAA, that provide essential aviation industry
infrastructure. There can be no assurance that the systems of such third parties
(including those of the FAA) will be modified to function properly in the year
2000 on a timely basis. The Company's business, financial condition or results
of operations could be materially adversely affected by the failure of systems
operated by other parties to operate properly beyond 1999. To the extent
possible, the Company will be developing and executing contingency plans
designed to allow continued operation in the event of failure of third parties'
systems.
RISK FACTORS RELATING TO THE CERTIFICATES AND THE OFFERING
Appraisals and Realizable Value of Aircraft
Appraisals in respect of the Aircraft (without physical inspection thereof)
have been prepared by AISI, BK and MBA, and such appraisals are based on varying
assumptions and methodologies which differ among the Appraisers. The Appraisers
have delivered letters summarizing their respective reports, copies of which are
annexed to this Prospectus Supplement as Appendix II. See "Description of the
Aircraft and the Appraisals -- The Appraisals". The appraised value of each
Aircraft and, accordingly, the initial aggregate Aircraft value as referred to
herein, is based upon the lesser of the average and median value of such
Aircraft as appraised by the Appraisers. Appraisals that are based on different
assumptions and methodologies may result in valuations that are materially
different from those contained in the appraisals of the Appraisers. Such
appraised values are intended to reflect the value of the Aircraft without
giving effect to current market conditions.
An appraisal is only an estimate of value and should not in any event be
relied upon as a measure of current or future realizable value; the proceeds
realized upon a sale of any Aircraft may be less than the appraised value
thereof. The value of the Aircraft in the event of the exercise of remedies
under the applicable Indenture will depend on market and economic conditions,
the supply of aircraft, the availability of buyers, the condition of the
Aircraft and other factors. Accordingly, there can be no assurance that the
proceeds realized upon any such exercise of remedies with respect to the
S-29
<PAGE> 30
Equipment Notes and the Aircraft pursuant to the applicable Pass Through Trust
Agreement and the applicable Indenture would be sufficient to satisfy in full
payments due on the Certificates.
Priority of Distributions; Subordination
Certain provisions of the Intercreditor Agreement, which provides for the
subordination of the Class B Certificates to the Class A Certificates and the
subordination of the Class C Certificates to the Class B Certificates, may
result in the holders of the subordinated Classes of Certificates receiving less
than the full amount due to them after the occurrence of a payment default under
any Equipment Note or a Triggering Event, even if all of the Equipment Notes
eventually are paid in full.
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity Provider will be parties, on each
Distribution Date, so long as no Triggering Event shall have occurred, all
payments in respect of Equipment Notes received by the Subordination Agent will
be distributed in the following order: (1) to the Liquidity Provider to the
extent required to pay certain Liquidity Obligations; (2) to the Class A Trustee
to the extent required to pay Expected Distributions on the Class A
Certificates; (3) to the Class B Trustee to the extent required to pay Expected
Distributions on the Class B Certificates; (4) to the Class C Trustee to the
extent required to pay Expected Distributions on the Class C Certificates; and
(5) to the Subordination Agent and each Trustee for the payment of certain fees
and expenses.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order: (1) to the Subordination Agent, each Trustee and certain
other parties in payment of the Administration Expenses and to the Liquidity
Provider in payment of the Liquidity Obligations; (2) to the Subordination
Agent, each Trustee and each Certificateholder for certain fees, taxes, charges
and other amounts payable to the Subordination Agent, any Trustee or any
Certificateholder; (3) to the Class A Trustee to the extent required to pay
Adjusted Expected Distributions on the Class A Certificates; (4) to the Class B
Trustee to the extent required to pay Adjusted Expected Distributions on the
Class B Certificates; and (5) to the Class C Trustee to the extent required to
pay Adjusted Expected Distributions on the Class C Certificates.
Accordingly, the priority of distributions after a payment default under
any Equipment Note or a Triggering Event will have the effect in certain
circumstances of requiring the distribution to more senior Classes of
Certificates of payments received in respect of one or more junior series of
Equipment Notes. If this should occur, the interest accruing on the remaining
Equipment Notes would in the aggregate be less than the interest accruing on the
remaining Certificates because such Certificates include a relatively greater
proportion of junior Classes with relatively higher interest rates. As a result
of this possible interest shortfall, the holders of one or more junior Classes
of Certificates may not receive the full amount due to them after a payment
default under any Equipment Note even if all Equipment Notes are eventually paid
in full.
Control over Collateral; Sale of Collateral
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Provider will agree that, with respect to any Indenture at any given time, the
Loan Trustee will be directed (a) in taking, or refraining from taking, any
action thereunder, by the holders of at least a majority of the outstanding
principal amount of the Equipment Notes issued thereunder as long as no
Indenture Default has occurred and is continuing thereunder and (b) subject to
certain conditions, in exercising remedies under such Indenture (including
acceleration of such Equipment Notes or foreclosing the lien on the Aircraft
securing such Equipment Notes) insofar as an Indenture Default has occurred and
is continuing under such Indenture, by the Controlling Party. See "Description
of the Certificates -- Indenture Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the Certificateholders of each Trust
to direct the respective Trustee. Notwithstanding the foregoing, at any time
after 18 months from the earlier to occur of (x) the date on which the entire
available amount under any Liquidity Facility shall have been
S-30
<PAGE> 31
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 under any Liquidity Facility 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, the liquidity provider(s)
holding more than 50% of the outstanding amount of Liquidity Obligations will
have the right to elect to become the Controlling Party with respect to such
Indenture. For purposes of giving effect to the foregoing, the Trustees (other
than the Controlling Party) shall irrevocably agree (and the Certificateholders
(other than the Certificateholders represented by the Controlling Party) will be
deemed to agree by virtue of their purchase of Certificates) that their voting
rights will be exercised as directed by the Controlling Party. For a description
of certain limitations on the Controlling Party's rights to exercise remedies,
see "Description of the Equipment Notes -- Remedies".
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions described in the last sentence of this paragraph, sell all (but not
less than all) of the Equipment Notes issued under such Indenture to any person.
The market for Equipment Notes at the time of the existence of any Indenture
Default may be very limited, and there can be no assurance as to the price at
which they could be sold. If the Controlling Party sells any such Equipment
Notes for less than their outstanding principal amount, certain
Certificateholders will receive a smaller amount of principal distributions than
anticipated and will not have any claim for the shortfall against Continental,
any Owner Trustee, any Owner Participant or any Trustee. So long as any
Certificates are outstanding, during nine months after the earlier of (x) the
acceleration of the Equipment Notes under any Indenture and (y) the bankruptcy
or insolvency of Continental, without the consent of each Trustee, (a) no
Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes, and (b) the amount and payment
dates of rentals payable by Continental under the Lease for such Aircraft may
not be adjusted, if, as a result of such adjustment, the discounted present
value of all such rentals would be less than 75% of the discounted present value
of the rentals payable by Continental under such Lease before giving effect to
such adjustment, in each case, using the weighted average interest rate of the
Equipment Notes issued under such Indenture as the discount rate.
The Equipment Notes will not be cross-collateralized and, consequently,
proceeds from the sale of an Aircraft in excess of the amounts due on Equipment
Notes related to such Aircraft will not be available to cover losses, if any, on
any other Equipment Notes.
Ratings of the Certificates
It is a condition to the issuance of the Certificates that the Class A
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 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, inasmuch as such rating does not address
market price or suitability for a particular investor. There is no assurance
that a rating will remain for any given period of time or that a rating will not
be lowered or withdrawn entirely by a Rating Agency if in its judgment
circumstances in the future (including the downgrading of Continental or the
Liquidity Provider) so warrant. The rating of the Certificates is based
primarily on the default risk of the Equipment Notes, the availability of the
Liquidity Facility for the benefit of holders of the Certificates, the
collateral value provided by the Aircraft relating to the Equipment Notes and
the subordination in right of payment under the Intercreditor Agreement of the
Class B Certificates to the Class A Certificates and of the Class C Certificates
to the Class B Certificates. Continental's ability to pay any losses on
investment or interest due with respect to the Certificates in excess of
interest payable on the Equipment Notes and earnings on funds held by the
Trustees in escrow pending delayed purchase of the Equipment Notes has not been
rated.
S-31
<PAGE> 32
Absence of a Public Market for the Certificates
Prior to the Offering of the Certificates, there has been no public market
for the Certificates and neither Continental nor any Trust intends to apply for
listing of the Certificates on any securities exchange or otherwise. Continental
has been advised by the Underwriters that each of them presently intends to make
a market in the Certificates, as permitted by applicable laws and regulations,
after consummation of the Offering. None of the Underwriters is obligated,
however, to make a market in the Certificates and any such market-making
activity may be discontinued at any time without notice at the sole discretion
of each Underwriter. There can be no assurance as to the liquidity of the public
market for the Certificates or that any active public market for the
Certificates will develop or continue. If an active public market does not
develop or continue, the market price and liquidity of the Certificates may be
adversely affected.
USE OF PROCEEDS
The Aircraft are currently owned by Continental. The proceeds from the sale
of the Certificates being offered hereby will be used to purchase Equipment
Notes issued by each Owner Trustee to finance a portion of the purchase price
with respect to the purchase by such Owner Trustee of the applicable Aircraft.
Any proceeds not used on the Issuance Date to purchase Equipment Notes will be
held in escrow by the Trustees until applied to purchase Equipment Notes on or
prior to April 27, 1998, and if not so applied, will be returned to the
Certificateholders. See "Description of the Certificates -- Delayed Purchase of
Equipment Notes". As a result of Continental's indirect 75% ownership in the
initial Owner Participant, the Equipment Notes to be issued in connection with
the Offering will be carried as indebtedness on Continental's consolidated
balance sheet.
S-32
<PAGE> 33
THE COMPANY
Continental is a major United States air carrier engaged in the business of
transporting passengers, cargo and mail. Continental is the fifth largest United
States airline (as measured by 1997 revenue passenger miles) and, together with
its wholly owned subsidiaries, Continental Express, Inc. ("Express") and
Continental Micronesia, Inc. ("CMI"), each a Delaware corporation, serves 191
airports worldwide. As of March 1, 1998, Continental flew to 125 domestic and 66
international destinations and offered additional connecting service through
alliances with domestic and foreign carriers. Continental directly serves 10
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. Continental currently flies to seven cities in South America.
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 ("Newark International"), George Bush
Intercontinental Airport ("Bush Intercontinental") in Houston and Hopkins
International Airport ("Hopkins International") in Cleveland. In addition, as
part of the Northwest Alliance, Continental's system will connect with
Northwest's hubs in Minneapolis, Detroit and Memphis. See "-- Recent
Developments -- Continental/Northwest Alliance and Related Agreements". 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 March 1, 1998, Continental operated 58% (244 departures) of the
average daily jet departures (excluding regional jets) and, together with
Express, 59% (354 departures) of all average daily departures (jet, regional jet
and turboprop) from Newark International. Considering the three major airports
serving New York City (Newark International, LaGuardia and John F. Kennedy),
Continental and Express accounted for 24% of all average daily departures, while
the next largest carrier, USAirways, Inc., and its commuter affiliate accounted
for 15% of all average daily departures.
Houston
As of March 1, 1998, Continental operated 80% (333 departures) of the
average daily jet departures (excluding regional jets) and, together with
Express, 84% (479 departures) of all average daily departures from Bush
Intercontinental. Southwest Airlines Co. ("Southwest") also has a significant
share of the Houston market through Hobby Airport. Considering both Bush
Intercontinental and Hobby Airport, Continental operated 58% and Southwest
operated 26% of all average daily jet departures (excluding regional jets) from
Houston.
Cleveland
As of March 1, 1998, Continental operated 55% (98 departures) of the
average daily jet departures (excluding regional jets) and, together with
Express, 67% (247 departures) of all average daily departures from Hopkins
International. The next largest carrier, Southwest, accounted for 6% of all
average daily departures.
Continental Express
Continental's jet service at each of its domestic hub cities is coordinated
with Express, which operates new-generation turboprop aircraft and regional jets
under the name "Continental Express".
S-33
<PAGE> 34
The turboprop aircraft average approximately five 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 September 1996, Express placed a firm order for 25 Embraer ERJ-145
regional jets, with options for an additional 175 aircraft exercisable through
2008. In June 1997, Express exercised its option to order 25 of such option
aircraft and expects to confirm its order for an additional 25 of its remaining
150 option aircraft by August 1998. Express took delivery of 18 of the aircraft
through December 31, 1997 and will take delivery of the remaining 32 aircraft
through the third quarter of 1999. The Company expects to account for all of
these aircraft as operating leases. Express began service with its regional jets
in Cleveland in April 1997.
As of March 1, 1998, Express served 19 destinations from Newark
International (eight by regional jet), 21 destinations from Bush
Intercontinental (two by regional jet) and 36 destinations from Hopkins
International (seven by regional jet). In addition, commuter feed traffic is
currently provided by other code-sharing partners.
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. Express' new ERJ-145 regional jets provide greater comfort
and enjoy better customer acceptance than its turboprop aircraft. These 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:
- On January 26, 1998, Continental announced it had entered into a
long-term global alliance with Northwest. See "-- Recent
Developments -- Continental/Northwest Alliance and Related Agreements".
- Continental has entered into a series of agreements with America West
Airlines, Inc. ("America West"), including agreements related to
code-sharing and ground handling, which have created substantial
benefits for both airlines. These code-sharing agreements cover 73
city-pairs and allow Continental to link additional destinations to its
route network. The sharing of facilities and employees by Continental
and America West in their respective key markets has resulted in
significant cost savings.
- Currently, SkyWest Airlines, Inc., a commuter operator, provides
Continental access to five additional markets in California through Los
Angeles.
- Continental has entered into a code-sharing agreement 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 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 ten 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.
S-34
<PAGE> 35
INTERNATIONAL OPERATIONS
Continental serves destinations throughout Europe, Mexico, the Caribbean,
Central and South America and has extensive operations in the western Pacific
conducted by CMI. Continental's revenue from international operations has
increased each of the last three years and, as measured by 1997 available seat
miles, approximately 31.4% of Continental's jet operations were dedicated to
international traffic. As of March 1, 1998, the Company offered 112 weekly
departures to ten European cities and marketed service to six other cities
through code-sharing agreements. Continental is one of the leading airlines
providing service to Mexico and Central America, serving more destinations there
than any other United States airline. Recently, the Company was tentatively
awarded route authority to fly to Tokyo from both its Newark and Houston hubs
receiving a total of 14 frequencies per week for the two cities. Initially, the
Company will use seven frequencies per week at its Newark hub with daily
non-stop service scheduled to begin in November 1998. The Company will begin
daily non-stop service to Tokyo from Houston in December 1998.
The Company's Newark hub is a significant international gateway. From
Newark, the Company serves 10 European and two Canadian cities, and markets
service to Amsterdam, Prague and certain other destinations in Canada, the
United Kingdom and Europe through code-sharing arrangements with other foreign
carriers. Continental recently announced new non-stop service, subject to
government approval, between Newark and Dublin and Shannon, Ireland (effective
June 1998), and between Newark and Glasgow, Scotland (effective July 1998). The
Company also has code-sharing agreements and joint marketing arrangements with
other foreign carriers, which management believes are important to Continental's
ability to compete effectively as an international airline. See "-- Foreign
Carrier Alliances".
The Company also has non-stop service to two Mexican cities, six Caribbean
destinations and four South American cities from Newark. Continental recently
received authority from the Department of Transportation to begin service
between Newark and Santiago, Chile. The service is scheduled to begin in May
1998.
The Company's Houston hub is the focus of its operations in Mexico and
Central America. Continental currently flies from Houston to 11 cities in
Mexico, every country in Central America and five cities in South America
including new service from Houston to Caracas, Venezuela which commenced in
December 1997. Continental recently announced four new international routes out
of Houston to three cities in Mexico (Tampico, Veracruz and Merida) and Calgary,
Canada, all of which are scheduled to begin in the second quarter of 1998.
Continental also flies non-stop from Houston to London, Paris, Vancouver and
Toronto.
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 six
cities in Japan, more than any other United States carrier, as well as other
Pacific Rim destinations, including Taiwan, the Philippines, Hong Kong 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.
S-35
<PAGE> 36
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.
Management believes that developing a network of international alliance
partners will better leverage the Company's hub assets by attracting high-yield
flow traffic and result in improved returns to the Company. In addition,
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, Air Canada, Transavia Airlines, CSA Czech Airlines, Business Air,
China Airlines, EVA Airways Corporation, an airline based in Taiwan (scheduled
to commence March 30, 1998) and Virgin Atlantic Airways ("Virgin") (which
commenced February 2, 1998).
Alitalia and Continental code-share between points in the United States and
Italy, with Alitalia placing its code on Continental flights between Newark and
Rome and Milan, and between Newark and seven U.S. cities and Mexico City.
Continental's agreement with Alitalia involves a block-space arrangement
pursuant to which the carriers agree to share capacity and bear economic risk
for blocks of seats on certain routes.
Continental's agreement with Virgin is a code-share arrangement containing
block-space commitments involving the carriers' Newark-London routes and eight
other routes flown by Virgin between the United Kingdom and the United States.
Continental and Air Canada (and its subsidiaries) continue to code-share on
six cross-border routes under agreements that expire in April 1998, where
Continental places its code on 18 Air Canada flights per day and Air Canada
places its code on six Continental flights per day. Continental and Air Canada
provide ground handling and other services for each other at certain locations
in the United States and Canada. Continental does not anticipate renewing its
agreement with Air Canada.
In addition, the Company has also entered into joint marketing agreements
with other airlines, all of which are currently subject to government approval.
Some of these agreements will involve block-space provisions which management
believes are important to Continental's ability to compete as an international
airline. In October 1996, Continental announced a block-space agreement with Air
France which contemplates a future code-share arrangement on certain flights
between Newark and Charles de Gaulle Airport ("CDG") and Houston and CDG. In
August 1997, Continental announced a code-share agreement with Aerolineas
Centrales de Colombia.
In connection with the Continental/Northwest Alliance, subject to
government approvals, code-sharing will commence with the Company and Northwest.
See "-- Recent Developments -- Continental/Northwest Alliance and Related
Agreements". Many of the Company's international alliance agreements provide
that a party may terminate the agreement upon a change of control of the other
party. If the Air Partners Transaction is consummated, certain of the Company's
international alliance partners will have the right to terminate their alliance
relationship with the Company. Based on discussions with such partners, the
Company believes that none of its partners will exercise such right.
S-36
<PAGE> 37
Continental recently entered into a code-share agreement with VASP, a
Brazilian carrier, whereby Continental will place its code on VASP flights
between Sao Paulo and both Miami and Los Angeles, as well as 13 cities in
Brazil, and VASP will place its code on flights between Newark and Sao Paulo and
Rio de Janeiro, as well as 19 other cities in the United States and Canada
subject to government approvals. Continental's agreement with VASP involves a
block-space arrangement pursuant to which VASP has agreed to purchase, and bear
economic risk for, a block of seats on Continental's flights in the
Newark-Brazil market.
The Company anticipates entering into other code-sharing, joint marketing
and block-space agreements in 1998, which may include the Company undertaking
the financial commitment to purchase seats from other carriers.
RECENT DEVELOPMENTS
Continental/Northwest Alliance and Related Agreements
On January 26, 1998, the Company announced that, in connection with the Air
Partners Transaction, the Company had entered into a long-term global alliance
with Northwest involving schedule coordination, frequent flyer reciprocity,
executive lounge access, airport facility coordination, code-sharing, the
formation of a joint venture among the two carriers and KLM with respect to
their trans-Atlantic services, cooperation regarding other alliance partners of
the two carriers and regional alliance development, certain coordinated sales
programs, preferred reservations displays and other activities.
The Northwest Alliance is expected to be phased in over a multi-year
period. A significant portion of the alliance activities will commence promptly.
Code-sharing will commence, subject to governmental approvals, with the Company
initially placing its designator code on all of Northwest's international
flights (other than its trans-Atlantic flights) and those Northwest domestic
flights which create international connecting itineraries to and from Latin
America. Thereafter, subject to governmental approval and approval by
Northwest's pilots under their collective bargaining agreement, (i) Northwest
and the Company anticipate entering into a joint venture among themselves and
KLM with respect to their respective trans-Atlantic flights, (ii) Northwest
anticipates placing its designator code on substantially all of the Company's
other international flights, and (iii) Northwest and the Company each anticipate
placing their respective designator codes on substantially all of the other
carrier's domestic flights.
The Company estimates that the alliance, when fully phased in over a
three-year period, will generate in excess of $500 million in additional annual
pre-tax operating income for the carriers, and anticipates that approximately
45% of such pre-tax operating income will accrue to the Company. The Company
believes that a significant portion of the alliance synergies allocable to the
Company can be achieved even without the activities which are subject to
approval of Northwest's pilots.
The Company also announced on January 26, 1998 that Air Partners, the
holder of approximately 14% of the Company's equity and approximately 51% of its
voting power (after giving effect to the exercise of warrants), had entered into
an agreement to dispose of its interest in the Company to an affiliate of
Northwest. The Air Partners Transaction is subject to, among other matters,
governmental approval and expiration of applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. The agreement also extends
to an affiliate of Air Partners a right of first offer to purchase certain
shares of Class A common stock of the Company to be acquired by Northwest or its
affiliates if such entities intend to dispose of those securities prior to the
fifth anniversary of the closing of the Air Partners Transaction.
In connection with the Air Partners Transaction, the Company entered into a
corporate governance agreement with certain affiliates of Northwest (the
"Northwest Parties") designed to assure the independence of the Company's board
and management during the six-year term of the governance agreement. Under the
corporate governance agreement, as amended, the Northwest Parties have
S-37
<PAGE> 38
agreed not to beneficially own voting securities of the Company in excess of
50.1% of the fully diluted voting power of the Company's voting securities,
subject to certain exceptions involving third party acquisitions or tender
offers for 15% or more of the voting power of the Company's voting securities
and a limited exception permitting a one-time ownership of approximately 50.4%
of the fully-diluted voting power. The Northwest Parties have agreed to deposit
all voting securities of the Company beneficially owned by them in a voting
trust with an independent voting trustee requiring that such securities be voted
(i) on all matters other than the election of directors, either as recommended
by the Company's board of directors (a majority of whom must be independent
directors as defined in the agreement) or in the same proportion as the votes
cast by other holders of voting securities, and (ii) in the election of
directors, for the election of independent directors nominated by the board of
directors; provided, that in the event of a merger or similar business
combination or a recapitalization, liquidation or similar transaction, a sale of
all or substantially all of the Company's assets, or an issuance of voting
securities which would represent more than 20% of the voting power of the
Company prior to issuance, or any amendment of the Company's charter or by-laws
that would materially and adversely affect Northwest, the shares may be voted as
directed by the Northwest Party owning such shares, and if a third party is
soliciting proxies in connection with an election of directors, the shares may
be voted at the option of such Northwest Party either as recommended by the
Company's board of directors or in the same proportion as the votes cast by the
other holders of voting securities.
The Northwest Parties have also agreed to certain restrictions on the
transfer of voting securities owned by them, have agreed not to seek to affect
or influence the Company's board of directors or the control of the management
of the Company or the business, operations, affairs, financial matters or
policies of the Company or to take certain other actions, and have agreed to
take all actions as are necessary to cause independent directors to at all times
constitute at least a majority of the Company's board of directors. The Company
has agreed to cause one designee of a Northwest Party reasonably acceptable to
the board of directors to be appointed to the Company's board, and has agreed to
grant preemptive rights to a Northwest Party with respect to certain issuances
of Class A common stock and Class B common stock. The Northwest Parties have
agreed that certain specified actions, together with any material transaction
between the Company and Northwest or its affiliates, including any modifications
or waivers of the corporate governance agreement and the alliance agreement, may
not be taken without the prior approval of a majority of the board of directors
of the Company, including the affirmative vote of a majority of the independent
directors. The governance agreement also provides for the Company to adopt a
shareholder rights plan with reasonably customary terms and conditions, with an
acquiring person threshold of 15% and with appropriate exceptions for the
Northwest Parties for actions permitted by and taken in compliance with the
corporate governance agreement.
The corporate governance agreement provides that, if after three years
Northwest's pilots have not consented to those portions of the alliance
agreement requiring their consent and the Company, at its election, then chooses
to terminate the alliance agreement, the Northwest Parties can elect either to
dispose of their shares in the Company or negotiate with a committee of
independent directors of the Company regarding a merger. If a merger agreement
cannot be reached within six months of the establishment of the committee,
certain appraisal procedures are specified. If upon completion of the appraisal
procedures, Northwest is unwilling to enter into a merger agreement at the value
for the shares not held by the Northwest Parties determined by such appraisal
procedures, then the Northwest Parties must sell their voting securities, and if
the Company and the committee are unwilling to approve a merger agreement at
such value, then the corporate governance agreement (except for certain
provisions requiring continuing independent directors and approval by a majority
of such independent directors of material transactions between the Company and
Northwest and its affiliates) will expire.
The corporate governance agreement will otherwise expire after the sixth
anniversary of the date of closing of the Air Partners Transaction, or if
earlier, upon the date that the Northwest Parties cease to beneficially own
voting securities representing at least 10% of the fully diluted voting power of
the Company's voting securities. Upon a termination of the above described terms
of the governance agreement, the Northwest Parties must nonetheless take such
actions as are necessary to cause the
S-38
<PAGE> 39
Company's board of directors to at all times include at least five directors who
are independent of and otherwise unaffiliated with Northwest or the Company and
their respective affiliates, and any material transaction between the Company
and Northwest or its affiliates, or relating to the governance agreement or the
alliance agreement, may not be taken without prior approval thereof by a
majority vote of the independent directors.
The alliance agreement provides that if after four years the Company has
not entered into a code-share with KLM or is not legally able (but for
aeropolitical restrictions) to enter into a new trans-Atlantic joint venture
with KLM and Northwest and place its airline code on certain Northwest flights,
Northwest can elect to (i) cause good faith negotiations among the Company, KLM
and Northwest as to the impact, if any, on the contribution to the joint venture
resulting from the absence of the code-share, and the Company will reimburse the
joint venture for the amount of any loss until it enters into a code-share with
KLM, or (ii) terminate (subject to cure rights of the Company) after one year's
notice any or all of such alliance agreement and any or all of the agreements
contemplated thereunder.
S-39
<PAGE> 40
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Basic Agreement and three
separate Trust Supplements. The following summary describes all material terms
of the Certificates and supplements (or, to the extent inconsistent therewith,
replaces) the description of the general terms and provisions of the
Certificates set forth in the Prospectus. The summary does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Basic Agreement, which was filed with the Securities and Exchange
Commission (the "Commission") as an exhibit to the Company's Current Report on
Form 8-K dated September 25, 1997, and to all of the provisions of the
Certificates, the Trust Supplements 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.
Except as otherwise indicated, the following summary relates to each of the
Trusts and the Certificates issued by each Trust. The terms and conditions
governing each of the Trusts will be substantially the same, except as described
under "-- Subordination" below and except that the principal amount and
scheduled principal repayments of the Equipment Notes held by each Trust and the
interest rate and maturity date of the Equipment Notes held by each Trust will
differ. The references to Sections in parentheses in the following summary are
to the relevant Sections of the Basic Agreement unless otherwise indicated.
GENERAL
The Certificates of each Trust will be issued in fully registered form only
and will be subject to the provisions described below under "-- Book Entry;
Delivery and Form". (Section 3.01) Each Certificate will represent a fractional
undivided interest in the Trust created by the Basic Agreement and the
applicable Trust Supplement pursuant to which such Certificate is issued.
(Section 2.01) The Trust Property of each Trust will consist of (i) subject to
the Intercreditor Agreement, Equipment Notes issued on a non-recourse basis by
each of the Owner Trustees in connection with each of the 14 separate leveraged
lease transactions, each with respect to one Aircraft, to finance a portion of
the purchase price of such Aircraft, (ii) the rights of such Trust under the
Intercreditor Agreement (including all monies receivable in respect of such
rights), (iii) all monies receivable under the Liquidity Facility for such Trust
and (iv) funds from time to time deposited with the Trustee in accounts relating
to such Trust. Certificates will represent fractional undivided interests in the
related Trust and will be issued only in minimum denominations of $1,000 or
integral multiples thereof, except that one Certificate of each Trust may be
issued in a different denomination. (Section 3.01)
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.
SUBORDINATION
Pursuant to the Intercreditor Agreement to which the Trustees, the
Subordination Agent and the Liquidity Provider will be parties, on each
Distribution Date, so long as no Triggering Event shall have occurred (whether
or not continuing), all payments received by the Subordination Agent in respect
of Equipment Notes and certain other payments under the related Indenture will
be distributed under the Intercreditor Agreement in the following order: (1) to
the Liquidity Provider to the extent required to pay certain Liquidity
Obligations; (2) to the Class A Trustee to the extent required to pay Expected
Distributions on the Class A Certificates; (3) to the Class B Trustee to the
extent required to pay Expected Distributions on the Class B Certificates; (4)
to the Class C Trustee to the extent required to pay Expected Distributions on
the Class C Certificates; and (5) to the Subordination Agent and each Trustee
for the payment of certain fees and expenses.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed
S-40
<PAGE> 41
under the Intercreditor Agreement in the following order: (1) to the
Subordination Agent, each Trustee and certain other parties in payment of the
Administration Expenses and to the Liquidity Provider in payment of the
Liquidity Obligations; (2) to the Subordination Agent, each Trustee and each
Certificateholder for certain fees, taxes, charges and other amounts payable to
the Subordination Agent, any Trustee or any Certificateholder; (3) to the Class
A Trustee to the extent required to pay Adjusted Expected Distributions on the
Class A Certificates; (4) to the Class B Trustee to the extent required to pay
Adjusted Expected Distributions on the Class B Certificates; and (5) to the
Class C Trustee to the extent required to pay Adjusted Expected Distributions on
the Class C Certificates.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
The priority of distributions after a payment default under any Equipment
Note or a Triggering Event will have the effect in certain circumstances of
requiring the distribution to more senior Classes of Certificates of payments
received in respect of one or more junior series of Equipment Notes. If this
should occur, the interest accruing on the remaining Equipment Notes would, in
the aggregate, be less than the interest accruing on the remaining Certificates
because such Certificates include a relatively greater proportion of junior
Classes with relatively higher interest rates. As a result of this possible
interest shortfall, the holders of one or more junior Classes of Certificates
may not receive the full amount due to them after a Triggering Event even if all
Equipment Notes are eventually paid in full.
PAYMENTS AND DISTRIBUTIONS
Payments of principal, premium (if any) and interest on the Equipment Notes
or with respect to other Trust Property held in each Trust will be distributed
by the Trustee to Certificateholders of such Trust on the date receipt of such
payment is confirmed, except in the case of certain types of Special Payments.
The Equipment Notes held in each Trust will accrue interest at the
applicable rate per annum for Certificates to be issued by such Trust set forth
on the cover page of this Prospectus Supplement, payable on April 15 and October
15 of each year, commencing on October 15, 1998. Such interest payments will be
distributed to Certificateholders of such Trust on each such date until the
final Distribution Date for such Trust, subject to the Intercreditor Agreement.
Interest is calculated on the basis of a 360-day year consisting of twelve
30-day months. Payments of interest applicable to the Certificates to be issued
by each of the Trusts will be supported by a separate Liquidity Facility to be
provided by the Liquidity Provider for the benefit of the holders of such
Certificates in an aggregate amount sufficient to pay interest thereon at the
Stated Interest Rate for such Trust on up to three successive Regular
Distribution Dates (without regard to any future payments of principal on such
Certificates). The Liquidity Facility for any Class of Certificates does not
provide for drawings thereunder to pay for principal of or premium on the
Certificates of such Class, any interest on the Certificates of such Class in
excess of the Stated Interest Rates, more than three semiannual installments of
interest thereon or, notwithstanding the subordination provisions of the
Intercreditor Agreement, principal of or interest or premium on the Certificates
of any other Class. Therefore, only the holders of the Certificates to be issued
by a particular Trust will be entitled to receive and retain the proceeds of
drawings under the Liquidity Facility for such Trust. See "Description of the
Liquidity Facilities".
Payments of principal of the Equipment Notes held in each Trust are
scheduled to be received by the Trustee on April 15 and October 15 in certain
years depending upon the terms of the Equipment Notes held in such Trust,
commencing on April 15, 1999. Scheduled payments of interest or principal on the
Equipment Notes are herein referred to as "Scheduled Payments", and April 15 and
October 15 of each year are herein referred to as "Regular Distribution Dates".
See "Description of the Equipment
S-41
<PAGE> 42
Notes -- Principal and Interest Payments". The "Final Maturity Date" for the
Class A Certificates is October 15, 2008 for the Class B Certificates is April
15, 2006 and for the Class C Certificates is October 15, 2004.
The Trustee of each Trust will distribute, subject to the Intercreditor
Agreement, on each Regular Distribution Date to the Certificateholders of such
Trust all Scheduled Payments received in respect of Equipment Notes held on
behalf of such Trust, the receipt of which is confirmed by the Trustee on such
Regular Distribution Date. Each Certificateholder of each Trust will be entitled
to receive a pro rata share of any distribution in respect of Scheduled Payments
of principal or interest on Equipment Notes held on behalf of such Trust,
subject to the Intercreditor Agreement. Each such distribution of Scheduled
Payments will be made by the applicable Trustee to the Certificateholders of
record of the relevant Trust on the record date applicable to such Scheduled
Payment subject to certain exceptions. (Sections 4.01 and 4.02) If a Scheduled
Payment is not received by the applicable Trustee on a Regular Distribution Date
but is received within five days thereafter, it will be distributed on the date
received to such holders of record. If it is received after such five-day
period, it will be treated as a Special Payment and distributed as described
below.
Any payment in respect of, or any proceeds of, any Equipment Note or the
Trust Indenture Estate under (and as defined in) any Indenture other than a
Scheduled Payment (each, a "Special Payment") will be distributed on, in the
case of an early redemption or a purchase of any Equipment Note, the date of
such early redemption or purchase (which shall be a Business Day), and otherwise
on the Business Day specified for distribution of such Special Payment pursuant
to a notice delivered by each Trustee as soon as practicable after the Trustee
has received funds for such Special Payment (each a "Special Distribution
Date"), subject to the Intercreditor Agreement. Each Trustee will mail a notice
to the Certificateholders of the applicable Trust stating the scheduled Special
Distribution Date, the related record date, the amount of the Special Payment
and the reason for the Special Payment. In the case of a redemption or purchase
of the Equipment Notes held in the related Trust or the occurrence of a
Triggering Event, such notice will be mailed not less than 15 days prior to the
date such Special Payment is scheduled to be distributed, and in the case of any
other Special Payment, such notice will be mailed as soon as practicable after
the Trustee has confirmed that it has received funds for such Special Payment.
(Section 4.02(c)) Each distribution of a Special Payment, other than a final
distribution, on a Special Distribution Date for any Trust will be made by the
Trustee to the Certificateholders of record of such Trust on the record date
applicable to such Special Payment. (Section 4.02(b)) See "-- Indenture Defaults
and Certain Rights Upon an Indenture Default" and "Description of the Equipment
Notes -- Redemption".
Each Pass Through Trust Agreement requires that the Trustee establish and
maintain, for the related Trust and for the benefit of the Certificateholders of
such Trust, one or more non-interest bearing accounts (the "Certificate
Account") for the deposit of payments representing Scheduled Payments received
by such Trustee. Each Pass Through Trust Agreement requires that the Trustee
establish and maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more accounts (the "Special Payments
Account") for the deposit of payments representing Special Payments received by
such Trustee, which shall be non-interest bearing except in certain
circumstances where the Trustee may invest amounts in such account in certain
permitted investments. Pursuant to the terms of each Pass Through Trust
Agreement, the Trustee is required to deposit any Scheduled Payments relating to
the applicable Trust received by it in the Certificate Account of such Trust and
to deposit any Special Payments so received by it in the Special Payments
Account of such Trust. (Section 4.01) All amounts so deposited will be
distributed by the Trustee on a Regular Distribution Date or a Special
Distribution Date, as appropriate. (Section 4.02)
The final distribution for each Trust will be made only upon presentation
and surrender of the Certificates for such Trust at the office or agency of the
Trustee specified in the notice given by the Trustee of such final distribution.
The Trustee will mail such notice of the final distribution to the
Certificateholders of such Trust, specifying the date set for such final
distribution and the amount of such
S-42
<PAGE> 43
distribution. (Section 11.01) Distributions in respect of Certificates issued in
global form will be made as described in "-- Book Entry; Delivery and Form"
below.
If any Regular Distribution Date or Special Distribution Date is a
Saturday, Sunday or other day on which commercial banks are authorized or
required to close in New York, New York, Houston, Texas, Wilmington, Delaware,
or Salt Lake City, Utah (any other day being a "Business Day"), distributions
scheduled to be made on such Regular Distribution Date or Special Distribution
Date will be made on the next succeeding Business Day without additional
interest.
POOL FACTORS
The "Pool Balance" for 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 such
Certificates other than payments made in respect of interest or premium thereon
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 the payment of
principal, if any, on the Equipment Notes or other Trust Property held in such
Trust and the distribution thereof to be made on such Distribution Date.
(Section 1.01)
The "Pool Factor" for the Certificates issued by any Trust as of any date
is the quotient (rounded to the seventh decimal place) computed by dividing (i)
the Pool Balance of the Certificates of such Trust at such date by (ii) the
original aggregate face amount of such Certificates. The Pool Factor for the
Certificates issued by any Trust as of any Distribution Date shall be computed
after giving effect to the payment of principal, if any, on the Equipment Notes
or other Trust Property held in such Trust and the distribution thereof to be
made on that date. (Section 1.01) The Pool Factor for each Trust will be
1.0000000 on the date of issuance of the Certificates; thereafter, the Pool
Factor for each Trust will decline as described herein to reflect reductions in
the Pool Balance of such Trust. The amount of a Certificateholder's pro rata
share of the Pool Balance of a Trust can be determined by multiplying the par
value of the holder's Certificate of such Trust by the Pool Factor for such
Trust as of the applicable Regular Distribution Date or Special Distribution
Date. Notice of the Pool Factor and the Pool Balance for each Trust will be
mailed to Certificateholders of such Trust on each Regular Distribution Date and
Special Distribution Date. (Section 4.03)
S-43
<PAGE> 44
As of the Issuance Date, assuming that no early redemption, purchase or
default in the payment of principal of any Equipment Notes shall occur and that
all of the Equipment Notes are purchased by the Trustees on or prior to April
27, 1998 as described below under "-- Delayed Purchase of Equipment Notes", the
Scheduled Payments of principal of the Equipment Notes held in each Trust, and
the resulting Pool Factors for each Trust after taking into account each such
Scheduled Payment, will be as set forth below:*
<TABLE>
<CAPTION>
1998-2A 1998-2B 1998-2C
TRUST TRUST TRUST
EQUIPMENT 1998-2A EQUIPMENT 1998-2B EQUIPMENT 1998-2C
NOTES TRUST NOTES TRUST NOTES TRUST
SCHEDULED EXPECTED SCHEDULED EXPECTED SCHEDULED EXPECTED
PAYMENTS OF POOL PAYMENTS OF POOL PAYMENTS OF POOL
DATE PRINCIPAL FACTOR PRINCIPAL FACTOR PRINCIPAL FACTOR
---- ----------- ----------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
April , 1998.......... $ 0 1.0000000 $ 0 1.0000000 $ 0 1.0000000
October 15, 1998........ 0 1.0000000 0 1.0000000 0 1.0000000
April 15, 1999.......... 4,765,989 0.9549517 1,755,891 0.9549517 65,997 0.9984444
October 15, 1999........ 2,382,994 0.9324275 877,945 0.9324275 7,333,752 0.8255795
April 15, 2000.......... 2,382,994 0.9099034 877,945 0.9099034 7,616,324 0.6460541
October 15, 2000........ 2,382,994 0.8873792 877,945 0.8873792 7,907,804 0.4596582
April 15, 2001.......... 2,382,994 0.8648551 2,417,306 0.8253620 6,669,113 0.3024596
October 15, 2001........ 2,950,960 0.8369625 5,012,792 0.6967561 3,815,810 0.2125167
April 15, 2002.......... 2,950,960 0.8090699 5,155,294 0.5644943 3,993,234 0.1183916
October 15, 2002........ 4,637,156 0.7652393 3,778,288 0.4675603 4,014,056 0.0237758
April 15, 2003.......... 7,869,459 0.6908569 3,891,776 0.3677147 1,008,681 0.0000000
October 15, 2003........ 8,025,823 0.6149965 5,095,242 0.2369935 0 0.0000000
April 15, 2004.......... 8,187,101 0.5376117 5,296,183 0.1011171 0 0.0000000
October 15, 2004........ 9,915,585 0.4438892 3,941,338 0.0000000 0 0.0000000
April 15, 2005.......... 14,242,342 0.3092701 0 0.0000000 0 0.0000000
October 15, 2005........ 7,831,368 0.2352477 0 0.0000000 0 0.0000000
April 15, 2006.......... 8,058,944 0.1590742 0 0.0000000 0 0.0000000
October 15, 2006........ 8,293,715 0.0806817 0 0.0000000 0 0.0000000
April 15, 2007.......... 8,535,905 0.0000000 0 0.0000000 0 0.0000000
</TABLE>
- ---------------
* The information relating to scheduled payments of principal and expected Pool
Factors is indicative only and is subject to change.
INDENTURE DEFAULTS AND CERTAIN RIGHTS UPON AN INDENTURE DEFAULT
An event of default under an Indenture (an "Indenture Default") will
include an event of default under the related Lease (a "Lease Event of
Default"). See "Description of the Equipment Notes -- Indenture Defaults, Notice
and Waiver". Since the Equipment Notes issued under an Indenture will be held in
each Trust, a continuing Indenture Default under such Indenture would affect the
Equipment Notes held by each Trust. There are no cross-default provisions in the
Indentures or in the Leases. Consequently, events resulting in an Indenture
Default under any particular Indenture may or may not result in an Indenture
Default under any other Indenture, and a Lease Event of Default under any
particular Lease may or may not constitute a Lease Event of Default under any
other Lease. If an Indenture Default occurs in fewer than all of the Indentures,
notwithstanding the treatment of Equipment Notes issued under any Indenture
under which an Indenture Default has occurred, payments of principal and
interest on the Equipment Notes issued pursuant to Indentures with respect to
which an Indenture Default has not occurred will continue to be distributed to
the holders of the Certificates as originally scheduled, subject to the
Intercreditor Agreement. See "Description of the Intercreditor
Agreement -- Priority of Distributions".
With respect to each Aircraft, the applicable Owner Trustee and Owner
Participant will, under the related Indenture, have the right under certain
circumstances to cure Indenture Defaults that result from the occurrence of a
Lease Event of Default under the related Lease. If the Owner Trustee or the
Owner Participant exercises any such cure right, the Indenture Default will be
deemed to have been cured.
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential
S-44
<PAGE> 45
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, any member of the Owner Participant or any Trustee.
Any amount, other than Scheduled Payments received on a Regular
Distribution Date or within five days thereafter, distributed to the Trustee of
any Trust by the Subordination Agent on account of any Equipment Note or Trust
Indenture Estate under (and as defined in) any Indenture held in such Trust
following an Indenture Default will be deposited in the Special Payments Account
for such Trust and will be distributed to the Certificateholders of such Trust
on a Special Distribution Date. (Sections 4.01 and 4.02) In addition, if,
following an Indenture Default under any Indenture, the applicable Owner
Participant or Owner Trustee exercises its option to redeem or purchase the
outstanding Equipment Notes issued under such Indenture, the price paid by such
Owner Participant or Owner Trustee for the Equipment Notes issued under such
Indenture and distributed to such Trust by the Subordination Agent will be
deposited in the Special Payments Account for such Trust and will be distributed
to the Certificateholders of such Trust on a Special Distribution Date.
(Sections 4.01 and 4.02)
Any funds representing payments received with respect to any defaulted
Equipment Notes, or the proceeds from the sale of any Equipment Notes, held by
the Trustee in the Special Payments Account for such Trust will, to the extent
practicable, be invested and reinvested by such Trustee in certain permitted
investments pending the distribution of such funds on a Special Distribution
Date. (Section 4.04) Such permitted investments are defined as obligations of
the United States or agencies or instrumentalities thereof for the payment of
which the full faith and credit of the United States is pledged and which mature
in not more than 60 days or such lesser time as is required for the distribution
of any such funds on a Special Distribution Date. (Section 1.01)
Each Pass Through Trust Agreement provides that the Trustee of 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
S-45
<PAGE> 46
proceeding to exercise any right or power under such Pass Through Trust
Agreement at the request of such Certificateholders. (Section 7.03(e))
Subject to certain qualifications set forth in each Pass Through Trust
Agreement and to the Intercreditor Agreement, the Certificateholders of each
Trust holding Certificates evidencing fractional undivided interests aggregating
not less than a majority in interest in such Trust shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee with respect to such Trust or pursuant to the terms of
the Intercreditor Agreement, or exercising any trust or power conferred on such
Trustee under such Pass Through Trust Agreement or the Intercreditor Agreement,
including any right of such Trustee as Controlling Party under the Intercreditor
Agreement or as holder of the Equipment Notes. (Section 6.04)
In certain cases, the holders of the Certificates of a Trust evidencing
fractional undivided interests aggregating not less than a majority in interest
of such Trust may on behalf of the holders of all the Certificates of such Trust
waive any past "event of default" under such Trust (i.e., any Indenture Default
under any Indenture pursuant to which Equipment Notes held by such Trust were
issued) and its consequences or, if the Trustee of such Trust is the Controlling
Party, may direct the Trustee to instruct the applicable Loan Trustee to waive
any past Indenture Default and its consequences and thereby annul any direction
given by such holders or Trustee to such Loan Trustee with respect thereto,
except (i) a default in the deposit of any Scheduled Payment or Special Payment
or in the distribution thereof, (ii) a default in payment of the principal,
premium, if any, or interest with respect to any of the Equipment Notes and
(iii) a default in respect of any covenant or provision of the Pass Through
Trust Agreement that cannot be modified or amended without the consent of each
Certificateholder of such Trust affected thereby. (Section 6.05) Each Indenture
will provide that, with certain exceptions, the holders of the majority in
aggregate unpaid principal amount of the Equipment Notes issued thereunder may
on behalf of all such holders waive any past default or Indenture Default
thereunder. Notwithstanding such provisions of the Indentures, pursuant to the
Intercreditor Agreement, only the Controlling Party will be entitled to waive
any such past default or Indenture Default.
PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event, with
ten days' written notice to the Trustee and each Certificateholder of the same
Class, (i) the Class B Certificateholders will have the right to purchase all,
but not less than all, of the Class A Certificates and (ii) the Class C
Certificateholders will have the right to purchase all, but not less than all,
of the Class A Certificates and the Class B Certificates, in each case at a
purchase price equal to the Pool Balance of the relevant Class or Classes of
Certificates plus accrued and unpaid interest thereon to the date of purchase,
without premium, but including any other amounts then due and payable to the
Certificateholders of such Class or Classes. In each case, if prior to the end
of the ten-day notice period, any other Certificateholder of the same Class
notifies the purchasing Certificateholder that the other Certificateholder wants
to participate in such purchase, then such other Certificateholder may join with
the purchasing Certificateholder to purchase the Certificates pro rata based on
the interest in the Trust held by each Certificateholder. (Trust Supplements,
Section 3.01)
PTC EVENT OF DEFAULT
A "PTC Event of Default" is defined under the Pass Through Trust Agreements
as the failure to pay: (i) the outstanding Pool Balance of the applicable Class
of Certificates within ten Business Days of the Final Maturity Date for such
Class or (ii) interest due on such Class of Certificates within ten Business
Days of any Distribution Date (unless the Subordination Agent shall have made
Interest Drawings, or withdrawals from the Cash Collateral Accounts for such
Class of Certificates, with respect thereto in an aggregate amount sufficient to
pay such interest and shall have distributed such amount to the Trustee entitled
thereto). (Section 1.01) Any failure to make expected principal distributions
with respect to any Class of Certificates on any Regular Distribution Date
(other than the Final Maturity Date) will not constitute a PTC Event of Default
with respect to such Certificates. A PTC Event of Default with respect
S-46
<PAGE> 47
to the most senior outstanding Class of Certificates resulting from an Indenture
Default under all Indentures will constitute a Triggering Event. See
"Description of the Intercreditor Agreement -- Priority of Distributions" for a
discussion of the consequences of the occurrence of a Triggering Event.
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Continental will be prohibited from consolidating with or merging into any
other corporation or transferring substantially all of its assets as an entirety
to any other corporation unless (i) the surviving successor or transferee
corporation shall (a) be validly existing under the laws of the United States or
any state thereof or the District of Columbia, (b) be a "citizen of the United
States" (as defined in Title 49 of the United States Code relating to aviation
(the "Transportation Code")) holding an air carrier operating certificate issued
by the Secretary of Transportation pursuant to Chapter 447 of Title 49, United
States Code, if, and so long as, such status is a condition of entitlement to
the benefits of Section 1110 of the Bankruptcy Code, and (c) expressly assume
all of the obligations of Continental contained in the Basic Agreement and any
Trust Supplement, the Indentures, the Participation Agreements and the Leases,
and any other operative documents; and (ii) Continental shall have delivered a
certificate and an opinion or opinions of counsel indicating that such
transaction, in effect, complies with such conditions. In addition, after giving
effect to such transaction, no Lease Event of Default shall have occurred and be
continuing. (Section 5.02; Leases, Section 13.2)
The Basic Agreement, the Trust Supplements, 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 Intercreditor Agreement or any
Liquidity Facility, without the consent of the holders of any of the
Certificates of such Trust, (i) to evidence the succession of another
corporation to Continental and the assumption by such corporation of
Continental's obligations under such Pass Through Trust Agreement, (ii) to add
to the covenants of Continental for the benefit of holders of such Certificates
or to surrender any right or power conferred upon Continental in such Pass
Through Trust Agreement, the Intercreditor Agreement or any Liquidity Facility,
(iii) to correct or supplement any provision of such Pass Through Trust
Agreement, the Intercreditor 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
Intercreditor Agreement or any Liquidity Facility, provided that such action
shall not materially adversely affect the interests of the holders of such
Certificates; to correct any mistake in such Pass Through Trust Agreement, the
Intercreditor Agreement or any Liquidity Facility; or, as provided in the
Intercreditor Agreement, to give effect to or provide for a Replacement
Facility, (iv) to comply with any requirement of the Commission, any applicable
law, rules or regulations of any exchange or quotation system on which the
Certificates are listed, or any regulatory body, (v) to modify, eliminate or add
to the provisions of such Pass Through Trust Agreement, the Intercreditor
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 Intercreditor Agreement or any Liquidity Facility such
other provisions as may be expressly permitted by the Trust Indenture Act, and
(vi) to evidence and provide for the acceptance of appointment under such Pass
Through Trust Agreement, the Intercreditor 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 Intercreditor Agreement or any Liquidity
S-47
<PAGE> 48
Facility as shall be necessary to provide for or facilitate the administration
of the Trusts under the Basic Agreement by more than one Trustee, provided that
in each case, such modification or supplement does not adversely affect the
status of the Trust as a grantor trust under Subpart E, Part I of Subchapter J
of Chapter 1 of Subtitle A of the Code for U.S. federal income tax purposes.
(Section 9.01)
Each Pass Through Trust Agreement also contains provisions permitting the
execution, with the consent of the holders of the Certificates of the related
Trust evidencing fractional undivided interests aggregating not less than a
majority in interest of such Trust, and with the consent of the applicable Owner
Trustee (such consent not to be unreasonably withheld), of amendments or
supplements adding any provisions to or changing or eliminating any of the
provisions of such Pass Through Trust Agreement, the Intercreditor Agreement or
any Liquidity Facility to the extent applicable to such Certificateholders or of
modifying the rights and obligations of such Certificateholders under such Pass
Through Trust Agreement, the Intercreditor Agreement or any Liquidity Facility,
except that no such amendment or supplement may, without the consent of the
holder of each Certificate so affected thereby, (a) reduce in any manner the
amount of, or delay the timing of, any receipt by the Trustee of payments with
respect to the Equipment Notes held in such Trust or distributions in respect of
any Certificate related to such Trust, or change the date or place of any
payment in respect of any Certificate, or make distributions payable in coin or
currency other than that provided for in such Certificates, or impair the right
of any Certificateholder of such Trust to institute suit for the enforcement of
any such payment when due, (b) permit the disposition of any Equipment Note held
in such Trust, except as provided in such Pass Through Trust Agreement, or
otherwise deprive such Certificateholder of the benefit of the ownership of the
applicable Equipment Notes, (c) alter the priority of distributions specified in
the Intercreditor Agreement in a manner materially adverse to such
Certificateholders, (d) reduce the percentage of the aggregate fractional
undivided interests of the Trust provided for in such Pass Through Trust
Agreement, the consent of the holders of which is required for any such
supplemental trust agreement or for any waiver provided for in such Pass Through
Trust Agreement, (e) modify any of the provisions relating to the rights of the
Certificateholders in respect of the waiver of events of default or receipt of
payment or (f) adversely affect the status of any Trust as a grantor trust under
Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A of the Code for
U.S. federal income tax purposes. (Section 9.02)
In the event that a Trustee, as holder (or beneficial owner through the
Subordination Agent) of (or, with respect to any Delayed Delivery Notes as
described in "-- Delayed Purchase of Equipment Notes", below, prospective
purchaser of) any Equipment Notes in trust for the benefit of the
Certificateholders of the relevant Trust or as Controlling Party under the
Intercreditor Agreement, receives (directly or indirectly through the
Subordination Agent) a request for a consent to any amendment, modification,
waiver or supplement under any Indenture, any Participation Agreement, any
Lease, any Equipment Note or any other related document, the Trustee shall
forthwith send a notice of such proposed amendment, modification, waiver or
supplement to each Certificateholder of the relevant Trust as of the date of
such notice. The Trustee shall request from the Certificateholders a direction
as to (a) whether or not to take or refrain from taking (or direct the
Subordination Agent to take or refrain from taking) any action which a holder of
(or, with respect to any such Delayed Delivery Notes, prospective purchaser of)
such Equipment Note or the Controlling Party has the option to direct, (b)
whether or not to give or execute (or direct the Subordination Agent to give or
execute) any waivers, consents, amendments, modifications or supplements as a
holder of (or, with respect to any such Delayed Delivery Notes, prospective
purchaser of) such Equipment Note or as Controlling Party and (c) how to vote
(or direct the Subordination Agent to vote) any Equipment Note (or, with respect
to any such Delayed Delivery Note, its commitment to acquire such Delayed
Delivery Note) if a vote has been called for with respect thereto. Provided such
a request for Certificateholder direction shall have been made, in directing any
action or casting any vote or giving any consent as the holder of any Equipment
Note (or in directing the Subordination Agent in any of the foregoing), (i)
other than as Controlling Party, the Trustee shall vote for or give consent to
any such action with respect to such Equipment Note (or Delayed Delivery Note)
in the same proportion as that of (x) the aggregate face amount of all
Certificates actually voted in favor of or for giving consent to such action by
such direction of Certificateholders to (y) the aggregate face
S-48
<PAGE> 49
amount of all outstanding Certificates of the relevant Trust and (ii) as the
Controlling Party, the Trustee shall vote as directed in such Certificateholder
direction by the Certificateholders evidencing fractional undivided interests
aggregating not less than a majority in interest in the relevant Trust. For
purposes of the immediately preceding sentence, a Certificate shall have been
"actually voted" if the Certificateholder has delivered to the Trustee an
instrument evidencing such Certificateholder's consent to such direction prior
to one Business Day before the Trustee directs such action or casts such vote or
gives such consent. Notwithstanding the foregoing, but subject to certain rights
of the Certificateholders under the relevant Pass Through Trust Agreement and
subject to the Intercreditor Agreement, the Trustee may, in its own discretion
and at its own direction, consent and notify the relevant Loan Trustee of such
consent (or direct the Subordination Agent to consent and notify the relevant
Loan Trustee of such consent) to any amendment, modification, waiver or
supplement under the relevant Indenture, any relevant Equipment Note (or Delayed
Delivery Note), any Participation Agreement, any Lease or any other related
document, if an Indenture Default under any Indenture shall have occurred and be
continuing, or if such amendment, modification, waiver or supplement will not
materially adversely affect the interests of the Certificateholders. (Section
10.01)
DELAYED PURCHASE OF EQUIPMENT NOTES
It is currently anticipated that the Equipment Notes relating to all of the
Aircraft will be purchased by the Trusts on the Issuance Date. In the event that
on the Issuance Date any portion of the proceeds from the sale of the
Certificates is not used to purchase the Equipment Notes issuable under any
Indenture, such Delayed Delivery Notes may be purchased by the Trustees at any
time on or prior to April 27, 1998. In such event, the Trustees will deposit in
an escrow account to be maintained as part of the related Trust such proceeds
not used to purchase Equipment Notes pending the purchase of such Delayed
Delivery Notes. Such proceeds will be invested in certain specified investments
at the direction of the Company, and the Company will be responsible for any
losses of principal with respect to such investments. Any earnings on such
investments received from time to time by the applicable Trustee shall be
promptly distributed to the Company. If the Company notifies the applicable
Trustee that any such proceeds will not be used to purchase Delayed Delivery
Notes, or if any proceeds of the issuance of the Certificates are not used to
purchase Delayed Delivery Notes on or before April 27, 1998, an amount equal to
such unused proceeds will be distributed to the Certificateholders after at
least 15 days' prior written notice following the Company's notice that such
funds will not be used to purchase Delayed Delivery Notes or April 27, 1998, as
the case may be. The Company will pay to the Trustee, and any such distribution
with respect to Delayed Delivery Notes that will not be purchased by a Trust
will include, an amount equal to the interest that would have accrued on such
Delayed Delivery Notes from the Issuance Date until the date of such
distribution, had such Delayed Delivery Notes been issued on the Issuance Date.
No premium will be paid with respect to proceeds attributable to the nonpurchase
of Delayed Delivery Notes. On the first Regular Distribution Date the Company
will pay to the Trustee of each Trust an amount equal to the interest that would
have accrued on any Delayed Delivery Notes, if any, purchased after the Issuance
Date, if such Delayed Delivery Notes had been purchased on the Issuance Date,
from the Issuance Date to, but not including, the date of the purchase of such
Delayed Delivery Notes by such Trustee. (Section 2.02(b))
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
S-49
<PAGE> 50
in accounts of the DTC Participants, thereby eliminating the need for physical
movement of certificates. DTC Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Interests in a global certificate may also be held through the Euroclear System
and Cedel Bank societe anonyme. See "Description of the
Certificates -- Book-Entry Registration" in the Prospectus for a discussion of
the book-entry procedures applicable to the Certificates and the limited
circumstances under which definitive certificates may be issued for the
Certificates.
So long as such book-entry procedures are applicable, no person acquiring
an interest in such Certificates ("Certificate Owner") will be entitled to
receive a certificate representing such person's interest in such Certificates.
Unless and until definitive certificates are issued under the limited
circumstances described in the Prospectus, all references to actions by
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants, and all references herein to distributions, notices, reports
and statements to Certificateholders shall refer, as the case may be, to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of such Certificates, or to DTC Participants for distribution to
Certificate Owners in accordance with DTC procedures.
DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes all material terms of the Liquidity
Facilities and certain provisions of the Intercreditor Agreement relating to the
Liquidity Facilities. The summary supplements (and, to the extent inconsistent
therewith, replaces) the description of the general terms and provisions
relating to the Liquidity Facilities and the Intercreditor Agreement set forth
in the Prospectus. The summary does not purport to be complete and is qualified
in its entirety by reference to all of the provisions of the Liquidity
Facilities and the Intercreditor Agreement, each of which will be filed as an
exhibit to a Current Report on Form 8-K to be filed by Continental with the
Commission. The provisions of the Liquidity Facilities are substantially
identical except as otherwise indicated.
GENERAL
The Liquidity Provider will enter into a separate Liquidity Facility with
the Subordination Agent with respect to the Certificates of each of the Trusts
pursuant to which the Liquidity Provider will make one or more advances to the
Subordination Agent to pay interest on such Certificates subject to certain
limitations. The Liquidity Facility for each Trust is intended to enhance the
likelihood of timely receipt by the Certificateholders of such Trust of the
interest payable on the Certificates of such Trust at the Stated Interest Rate
therefor on up to three consecutive semiannual Regular Distribution Dates. If
interest payment defaults occur which exceed the amount covered by or available
under the Liquidity Facility for any Trust, the Certificateholders of such Trust
will bear their allocable share of the deficiencies to the extent that there are
no other sources of funds. Although Westdeutsche Landesbank Girozentrale, acting
through its New York branch, is the initial Liquidity Provider for each of the
Trusts, it may be replaced by one or more other entities with respect to such
Trusts under certain circumstances. Therefore, the liquidity provider for each
Trust may differ.
DRAWINGS
The initial amount available under the Liquidity Facilities for the Class A
Trust, the Class B Trust and the Class C Trust will be $ , $ ,
and $ , respectively. Except as otherwise provided below, the Liquidity
Facility for each Trust will enable the Subordination Agent to make Interest
Drawings thereunder promptly after any Regular Distribution Date to pay interest
then due and payable on the Certificates of such Trust at the Stated Interest
Rate for such Trust to the extent that the amount, if any, available to the
Subordination Agent on such Regular Distribution Date is not sufficient to pay
S-50
<PAGE> 51
such interest; provided, however, that the maximum amount available to be drawn
under the Liquidity Facility with respect to any Trust on any Regular
Distribution Date to fund any shortfall of interest on Certificates of such
Trust will not exceed the then Maximum Available Commitment under such Liquidity
Facility. The Liquidity Facility for any Class of Certificates does not provide
for drawings thereunder to pay for principal of or premium on the Certificates
of such Class, 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)
Each payment by the Liquidity Provider under each Liquidity Facility
reduces by the same amount the Maximum Available Commitment under such Liquidity
Facility, subject to reinstatement as hereinafter described. With respect to any
Interest Drawings under the Liquidity Facility for any Trust, upon reimbursement
of the Liquidity Provider in full for the amount of such Interest Drawings plus
interest thereon, the Maximum Available Commitment under such Liquidity Facility
in respect of interest on the Certificates of such Trust will be reinstated to
an amount not to exceed the then Required Amount of such Liquidity Facility;
provided, however, that such Liquidity Facility will not be so reinstated at any
time if (i) a Liquidity Event of Default shall have occurred and be continuing
and (ii) less than 65% of the then aggregate outstanding principal amount of all
Equipment Notes are Performing Equipment Notes. With respect to any other
drawings under such Liquidity Facility, amounts available to be drawn thereunder
are not subject to reinstatement. The Required Amount of the Liquidity Facility
for any Trust will be automatically reduced from time to time to an amount equal
to the next three successive interest payments due on the Certificates of such
Trust (without regard to expected future payment of principal of such
Certificates) at the Stated Interest Rate for such Trust. (Liquidity Facilities,
Section 2.04(a); Intercreditor Agreement, Section 3.6(j))
If at any time the short-term unsecured debt rating of the Liquidity
Provider then issued by either Rating Agency is lower than the Threshold Rating
for any Class, then the Liquidity Facility for such Class may be replaced by a
Replacement Facility. In the event that such Liquidity Facility is not replaced
with a Replacement Facility within ten days after notice of the downgrading and
as otherwise provided in the Intercreditor Agreement, the Subordination Agent
will request the Downgrade Drawing in an amount equal to the then Maximum
Available Commitment thereunder and will hold the proceeds thereof in the Cash
Collateral Account for such Trust as cash collateral to be used for the same
purposes and under the same circumstances as cash payments of Interest Drawings
under such Liquidity Facility would be used. (Liquidity Facilities, Section
2.02(c); Intercreditor Agreement, Section 3.6(c))
A "Replacement Facility" for any Liquidity Facility will mean an
irrevocable liquidity facility (or liquidity facilities) in substantially the
form of the replaced Liquidity Facility, including reinstatement provisions, or
in such other form (which may include a letter of credit) as shall permit the
Rating Agencies to confirm in writing their respective ratings then in effect
for the Certificates (before downgrading of such ratings, if any, as a result of
the downgrading of the Liquidity Provider), in a face amount (or in an aggregate
face amount) equal to the amount of interest payable on the Certificates of such
Trust (at the Stated Interest Rate for such Trust, and without regard to
expected future principal payments) on the three Regular Distribution Dates
following the date of replacement of such Liquidity Facility and issued by a
person (or persons) having unsecured short-term debt ratings issued by both
Rating Agencies which are equal to or higher than the Threshold Rating for the
relevant Class. (Intercreditor Agreement, Section 1.1) The provider of any
Replacement Facility will have the same rights (including, without limitation,
priority distribution rights and rights as "Controlling Party") under the
Intercreditor Agreement as the initial liquidity provider.
"Threshold Rating" means the short-term unsecured debt rating of P-1 by
Moody's and A-1+ by Standard & Poor's, in the case of the Class A Liquidity
Facility and the Class B Liquidity Facility, and the short-term unsecured debt
rating of P-1 by Moody's and A-1 by Standard & Poor's, in the case of the Class
C Liquidity Facility.
S-51
<PAGE> 52
The Liquidity Facility for each Trust provides that the Liquidity
Provider's obligations thereunder will expire on the earliest of (i) 364 days
after the Issuance Date (counting from, and including, the Issuance Date); (ii)
the date on which the Subordination Agent delivers to such Liquidity Provider a
certification that all of the Certificates of such Trust have been paid in full;
(iii) the date on which the Subordination Agent delivers to such Liquidity
Provider a certification that a Replacement Facility has been substituted for
such Liquidity Facility; (iv) the fifth Business Day following receipt by the
Subordination Agent of a Termination Notice from such Liquidity Provider (see
"-- Liquidity Events of Default"); and (v) the date on which no amount is or may
(by reason of reinstatement) become available for drawing under such Liquidity
Facility. Each Liquidity Facility provides that the scheduled expiration date
thereof may be extended for additional 364-day periods by mutual agreement of
the Liquidity Provider and the Subordination Agent.
The Intercreditor Agreement will provide for the replacement of the
Liquidity Facility for any Trust if it is scheduled to expire earlier than 15
days after the Final Maturity Date for the Certificates of such Trust, if such
Liquidity Facility is not extended at least 25 days prior to its then scheduled
expiration date. If such Liquidity Facility is not so extended or replaced by
the 25th day prior to its then scheduled expiration date, the Subordination
Agent shall request the Non-Extension Drawing in an amount equal to the then
Maximum Available Commitment thereunder and hold the proceeds thereof in the
Cash Collateral Account for such Trust as cash collateral to be used for the
same purposes and under the same circumstances, and subject to the same
conditions, as cash payments of Interest Drawings under such Liquidity Facility
would be used. (Liquidity Facilities, Section 2.02(b); Intercreditor Agreement,
Section 3.6(d))
Subject to certain limitations, Continental may, at its option, arrange for
a Replacement Facility at any time to replace the liquidity facility for any
Trust (including without limitation any Replacement Facility described in the
following sentence). In addition, if any liquidity provider shall determine not
to extend any liquidity facility, then such liquidity provider may, at its
option, arrange for a Replacement Facility to replace such liquidity facility
during the period no earlier than 40 days and no later than 25 days prior to the
then scheduled expiration date of such liquidity facility. After a Downgrade
Drawing the Liquidity Provider may arrange for a replacement liquidity provider
to issue and deliver a Replacement Facility at any time after such Downgrade
Drawing so long as such Downgrade Drawing has not been reimbursed in full to the
Liquidity Provider. If any Replacement Facility is provided at any time after a
Downgrade Drawing or a Non-Extension Drawing under any Liquidity Facility, the
funds with respect to such liquidity facility on deposit in the Cash Collateral
Account for such Trust will be returned to the liquidity provider being
replaced. (Intercreditor Agreement, Sections 3.6(c) and (e))
The Intercreditor Agreement provides that, upon receipt by the
Subordination Agent of a Termination Notice with respect to any Liquidity
Facility from the Liquidity Provider (given as described in "-- Liquidity Events
of Default"), the Subordination Agent shall request a Final Drawing under such
Liquidity Facility in an amount equal to the then Maximum Available Commitment
thereunder and will hold the proceeds thereof in the Cash Collateral Account for
the related Trust as cash collateral to be used for the same purposes and under
the same circumstances, and subject to the same conditions, as cash payments of
Interest Drawings 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.
S-52
<PAGE> 53
REIMBURSEMENT OF DRAWINGS
Amounts drawn under any Liquidity Facility by reason of an Interest Drawing
or the Final Drawing will be immediately due and payable, together with interest
on the amount of such drawing, with respect to the period from the date of its
borrowing to (but excluding) the third business day following the applicable
Liquidity Provider's receipt of the notice of such Interest Drawing, at the Base
Rate plus 1.75% per annum, and thereafter, at LIBOR for the applicable interest
period plus 1.75% per annum, provided that, in the case of the Final Drawing,
the Subordination Agent may convert the Final Drawing into a Drawing bearing
interest at the Base Rate plus 1.75% per annum on the last day of an Interest
Period for such Drawing; provided, further, that the Subordination Agent will be
obligated to reimburse such amounts only to the extent that the Subordination
Agent has funds available therefor.
"Base Rate" means a fluctuating interest rate per annum in effect from time
to time, which rate per annum shall at all times be equal to (a) the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or, if such day is not a business day, for the next preceding business day)
by the Federal Reserve Bank of New York, or if such rate is not so published for
any day that is a business day, the average of the quotations for such day for
such transactions received by the Liquidity Provider from three Federal funds
brokers of recognized standing selected by it, plus (b) one-quarter of one
percent ( 1/4 of 1%).
"LIBOR" means, with respect to any interest period, the average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the rates per annum at
which deposits in dollars are offered to major banks in the London interbank
market at approximately 11:00 A.M. (London time) two business days before the
first day of such interest period in an amount approximately equal to the
principal amount of the advance to which such interest period is to apply and
for a period of time comparable to such interest period.
The amount drawn under any Liquidity Facility for any Trust by reason of a
Downgrade Drawing or a Non-Extension Drawing will be treated as follows: (i)
such amount will be released on any Distribution Date to the Liquidity Provider
to the extent that such amount exceeds the Required Amount; (ii) any portion of
such amount withdrawn from the Cash Collateral Account for such Certificates to
pay interest on such Certificates will be treated in the same way as Interest
Drawings; and (iii) the balance of such amount will be invested in Eligible
Investments. A Downgrade Drawing under any of the Liquidity Facilities (other
than any portion thereof applied to the payment of interest on the Certificates)
will bear interest (x) subject to clause (z) below, during the period from the
date of its borrowing to (but excluding) the then scheduled expiration date of
such Liquidity Facility, in an amount equal to the investment earnings on
amounts deposited in the Cash Collateral Account attributable to such Liquidity
Facility plus .325% per annum (until the first anniversary of the Issuance Date)
or .35% per annum (after the first anniversary of the Issuance Date) on the
outstanding amount from time to time of such Downgrade Drawing (excluding any
portion thereof applied to the payment of interest on the Certificates), (y)
subject to clause (z) below, from and after the then scheduled expiration date
of such Liquidity Facility, at a rate equal to LIBOR for the applicable interest
period plus .40% per annum on the outstanding amount from time to time of such
Downgrade Drawing, and (z) from and after the date, if any, on which it is
converted into a Final Drawing as described below under "-- Liquidity Events of
Default", at a rate equal to LIBOR for the applicable interest period (or, as
described in the third preceding paragraph, the Base Rate) plus 1.75% per annum;
provided that the Subordination Agent will be obligated to pay such amount only
to the extent that the Subordination Agent has funds available therefor. A
Non-Extension Drawing under any of the Liquidity Facilities (other than any
portion thereof applied to the payment of interest on the Certificates) will
bear interest (1) during the period from the date of its borrowing to (but
excluding) the date, if any, on which it is converted into a Final Drawing as
described below under "-- Liquidity Events of Default", at a rate equal to LIBOR
for the applicable interest period plus .40% per annum on the outstanding amount
from time to time of such Non-Extension Drawing, and (2) thereafter, at a rate
equal to LIBOR for the applicable interest period (or, as described in the third
preceding paragraph, the Base Rate) plus 1.75% per annum; provided that the
Subordination Agent will be obligated to pay such
S-53
<PAGE> 54
amount only to the extent that the Subordination Agent has funds available
therefor. (Liquidity Facilities, Sections 2.06 and 3.07)
LIQUIDITY EVENTS OF DEFAULT
Events of Default under each Liquidity Facility (each, a "Liquidity Event
of Default") will consist of: (i) the acceleration of all the Equipment Notes
and (ii) certain bankruptcy or similar events involving Continental. (Liquidity
Facilities, Section 1.01)
If (i) any Liquidity Event of Default under any Liquidity Facility has
occurred and is continuing and (ii) less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes, the
Liquidity Provider may, in its discretion, give a notice of termination of the
related Liquidity Facility (a "Termination Notice") the effect of which will be
to cause (i) such Liquidity Facility to expire on the fifth Business Day after
the date on which such Termination Notice is received by the Subordination
Agent, (ii) the Subordination Agent to promptly request, and the Liquidity
Provider to make, a Final Drawing thereunder in an amount equal to the then
Maximum Available Commitment thereunder, (iii) any Drawing remaining
unreimbursed as of the date of termination to be automatically converted into a
Final Drawing under such Liquidity Facility, and (iv) all amounts owing to the
Liquidity Provider automatically to become accelerated. Notwithstanding the
foregoing, the Subordination Agent will be obligated to pay amounts owing to the
Liquidity Provider only to the extent of funds available therefor after giving
effect to the payments in accordance with the provisions set forth under
"Description of the Intercreditor Agreement -- Priority of Distributions".
(Liquidity Facilities, Section 6.01) Upon the circumstances described below
under "Description of the Intercreditor Agreement -- Intercreditor Rights", a
Liquidity Provider may become the Controlling Party with respect to the exercise
of remedies under the Indentures. (Intercreditor Agreement, Section 2.6(c))
LIQUIDITY PROVIDER
The initial Liquidity Provider for each Trust will be Westdeutsche
Landesbank Girozentrale, a public law banking institution organized under the
laws of North Rhine-Westphalia, Germany, acting through its New York branch.
Westdeutsche Landesbank Girozentrale has short-term debt ratings of P-1 from
Moody's and A-1+ from Standard & Poor's.
DESCRIPTION OF THE INTERCREDITOR AGREEMENT
The following summary describes all material provisions of the
Intercreditor Agreement. The summary supplements (and, to the extent
inconsistent therewith, replaces) the description of the general terms and
provisions relating to the Intercreditor Agreement set forth in the Prospectus.
The summary does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the Intercreditor Agreement, which will be
filed as an exhibit to a Current Report on Form 8-K to be filed by Continental
with the Commission.
INTERCREDITOR RIGHTS
Controlling Party
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Provider will agree that, with respect to any Indenture at any given time, the
Loan Trustee will be directed (a) in taking, or refraining from taking, any
action thereunder or with respect to the Equipment Notes issued under such
Indenture, by the holders of at least a majority of the outstanding principal
amount of the Equipment Notes issued under such Indenture (provided that, for so
long as the Subordination Agent is the registered holder of the Equipment Notes,
the Subordination Agent will act with respect to this clause (a) in accordance
with the directions of the Trustees (in the case of each such Trustee, with
respect to the Equipment Notes issued under such Indenture and held as Trust
Property of such Trust) constituting, in the aggregate, directions with respect
to such principal amount of Equipment Notes), so long as no Indenture Default
S-54
<PAGE> 55
(which has not been cured by the applicable Owner Trustee or Owner Participant)
shall have occurred and be continuing thereunder, and (b) after the occurrence
and during the continuance of an Indenture Default under such Indenture (which
has not been cured by the applicable Owner Trustee or Owner Participant), in
taking, or refraining from taking, any action thereunder or with respect to the
Equipment Notes issued under such Indenture, including exercising remedies
thereunder or with respect to such Equipment Notes (including acceleration of
such Equipment Notes or foreclosing the lien on the Aircraft securing such
Equipment Notes), by the Controlling Party, subject to the limitations described
below. See "Description of the Certificates -- Indenture Defaults and Certain
Rights Upon an Indenture Default" for a description of the rights of the
Certificateholders of each Trust to direct the respective Trustees.
"Controlling Party" with respect to any Indenture means: (x) the Class A
Trustee; (y) upon payment of Final Distributions to the holders of Class A
Certificates, the Class B Trustee; and (z) upon payment of Final Distributions
to the holders of Class B Certificates, the Class C Trustee. See "Description of
the Certificates -- Indenture Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the Certificateholders of each Trust
to direct the respective Trustees. Notwithstanding the foregoing, at any time
after 18 months from the earlier to occur of (x) the date on which the entire
Maximum Available Commitment under any Liquidity Facility shall have been drawn
(for any reason other than a Downgrade Drawing or a Non-Extension Drawing) and
remain unreimbursed, (y) the date on which the entire amount of any Downgrade
Drawing or Non-Extension Drawing under any Liquidity Facility 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, the liquidity provider(s)
holding more than 50% of the outstanding amount of Liquidity Obligations will
have the right to become the Controlling Party with respect to such Indenture.
For purposes of giving effect to the foregoing, the Trustees (other than the
Controlling Party) shall irrevocably agree (and the Certificateholders (other
than the Certificateholders represented by the Controlling Party) will be deemed
to agree by virtue of their purchase of Certificates) that the Subordination
Agent, as record holder of the Equipment Notes, shall exercise its voting rights
in respect of the Equipment Notes as directed by the Controlling Party.
(Intercreditor Agreement, Section 2.6) For a description of certain limitations
on the Controlling Party's rights to exercise remedies, see "Description of the
Equipment Notes -- Remedies".
Sale of Equipment Notes or Aircraft
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the immediately following sentence, sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person. So long
as any Certificates are outstanding, during nine months after the earlier of (x)
the acceleration of the Equipment Notes under any Indenture and (y) the
bankruptcy or insolvency of Continental, without the consent of each Trustee,
(a) no Aircraft subject to the lien of such Indenture or such Equipment Notes
may be sold, if the net proceeds from such sale would be less than the Minimum
Sale Price for such Aircraft or such Equipment Notes, and (b) the amount and
payment dates of rentals payable by Continental under the Lease for such
Aircraft may not be adjusted, if, as a result of such adjustment, the discounted
present value of all such rentals would be less than 75% of the discounted
present value of the rentals payable by Continental under such Lease before
giving effect to such adjustment, in each case, using the weighted average
interest rate of the Equipment Notes outstanding under such Indenture as the
discount rate.
The Subordination Agent may from time to time during the continuance of an
Indenture Default (and before the occurrence of a Triggering Event) commission
LTV Appraisals with respect to an Aircraft at the request of the Controlling
Party. (Intercreditor Agreement, Section 4.1(a)(iii))
S-55
<PAGE> 56
PRIORITY OF DISTRIBUTIONS
On any Distribution Date, so long as no Triggering Event shall have
occurred, all payments received by the Subordination Agent in respect of the
Equipment Notes and certain other payments under the related Indenture will be
promptly distributed by the Subordination Agent in the following order of
priority:
(i) to the Liquidity Provider to the extent required to pay the
Liquidity Obligations (other than any interest accrued thereon or the
principal amount of any Drawing) (the "Liquidity Expenses");
(ii) to the Liquidity Provider to the extent required to pay interest
accrued on the Liquidity Obligations;
(iii) to the Liquidity Provider to the extent required to pay or
reimburse the Liquidity Provider for certain Liquidity Obligations (other
than amounts payable pursuant to clauses (i) and (ii) above) and/or, if
applicable, to replenish each Cash Collateral Account up to the Required
Amount;
(iv) to the Class A Trustee to the extent required to pay Expected
Distributions on the Class A Certificates;
(v) to the Class B Trustee to the extent required to pay Expected
Distributions on the Class B Certificates;
(vi) to the Class C Trustee to the extent required to pay Expected
Distributions on the Class C Certificates; and
(vii) to the Subordination Agent and each Trustee for the payment of
certain fees and expenses.
"Expected Distributions" means, with respect to the Certificates of any
Trust on any Current Distribution Date, the sum of (x) accrued and unpaid
interest on such Certificates and (y) the difference between (A) the Pool
Balance of such Certificates as of the immediately preceding Distribution Date
(or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), less (if
applicable) the aggregate amount of escrowed funds for such Class of
Certificates as of such immediately preceding Distribution Date (or, if the
Current Distribution Date is the first Distribution Date, as of the date of
original issuance of the Certificates of such Class) thereafter distributed to
the holders of such Certificates (instead of being used to purchase Delayed
Delivery Notes) as described below under "Description of the
Certificates -- Delayed Purchase of Equipment Notes" (excluding the interest
component of any such distribution), and (B) the Pool Balance of such
Certificates as of the Current Distribution Date calculated on the basis that
(i) the principal of the Equipment Notes held in such Trust has been paid when
due (whether at stated maturity, upon redemption, prepayment, purchase,
acceleration or otherwise) and such payments have been distributed to the
holders of such Certificates and (ii) the principal of any Equipment Notes
formerly held in such Trust that have been sold pursuant to the Intercreditor
Agreement has been paid in full and such payments have been distributed to the
holders of such Certificates. For purposes of determining the priority of
distributions on account of the redemption, purchase or prepayment of all of the
Equipment Notes issued pursuant to an Indenture, clause (x) of the definition of
Expected Distributions shall be deemed to read as follows: "(x) accrued, due and
unpaid interest on such Certificates together with (without duplication) accrued
and unpaid interest on a portion of such Certificates equal to the outstanding
principal amount of the Equipment Notes being redeemed, purchased or prepaid
(immediately prior to such redemption, purchase or prepayment)".
Subject to the terms of the Intercreditor Agreement, upon the occurrence of
a Triggering Event and at all times thereafter, all funds received by the
Subordination Agent in respect of the Equipment Notes
S-56
<PAGE> 57
and certain other payments will be promptly distributed by the Subordination
Agent in the following order of priority:
(i) to the Subordination Agent, any Trustee, any Certificateholder and
the Liquidity Provider to the extent required to pay certain out-of-pocket
costs and expenses actually incurred by the Subordination Agent or any
Trustee or to reimburse any Certificateholder or the Liquidity Provider in
respect of payments made to the Subordination Agent or any Trustee in
connection with the protection or realization of the value of the Equipment
Notes or the Trust Indenture Estate under (and as defined in) any Indenture
(collectively, the "Administration Expenses");
(ii) to the Liquidity Provider to the extent required to pay the
Liquidity Expenses;
(iii) to the Liquidity Provider to the extent required to pay interest
accrued on the Liquidity Obligations;
(iv) to the Liquidity Provider to the extent required to pay the
outstanding amount of all Liquidity Obligations and/or, if applicable, with
respect to any particular Liquidity Facility, unless (x) less than 65% of
the aggregate outstanding principal amount of all Equipment Notes are
Performing Equipment Notes and a Liquidity Event of Default shall have
occurred and is continuing under such Liquidity Facility or (y) a Final
Drawing shall have occurred under such Liquidity Facility, to replenish the
Cash Collateral Account with respect to such Liquidity Facility up to the
Required Amount for the related Class of Certificates (less the amount of
any repayments of Interest Drawings under such Liquidity Facility while
sub-clause (x) of this clause (iv) is applicable);
(v) to the Subordination Agent, any Trustee or any Certificateholder
to the extent required to pay certain fees, taxes, charges and other
amounts payable;
(vi) to the Class A Trustee to the extent required to pay Adjusted
Expected Distributions on the Class A Certificates;
(vii) to the Class B Trustee to the extent required to pay Adjusted
Expected Distributions on the Class B Certificates; and
(viii) to the Class C Trustee to the extent required to pay Adjusted
Expected Distributions on the Class C Certificates.
"Adjusted Expected Distributions" means, with respect to the Certificates
of any Trust on any Current Distribution Date, the sum of (1) accrued and unpaid
interest on such Certificates and (2) the greater of:
(A) the difference between (x) the Pool Balance of such Certificates
as of the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, the original aggregate
face amount of the Certificates of such Trust) less (if applicable) the
aggregate amount of escrowed funds for such Class of Certificates as of
such immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, as of the date of
original issuance of the Certificates of such Class) thereafter distributed
to the holders of such Certificates (instead of being used to purchase
Delayed Delivery Notes) as described below under "Description of the
Certificates -- Delayed Purchase of Equipment Notes" (excluding the
interest component of any such distribution), and (y) the Pool Balance of
such Certificates as of the Current Distribution Date calculated on the
basis that (i) the principal of the 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, and
S-57
<PAGE> 58
(B) the amount of the excess, if any, of (i) the amount described in
sub-clause (A)(x), over (ii) the Aggregate LTV Collateral Amount for such
Class of Certificates for the Current Distribution Date;
provided that, until the date of the initial LTV Appraisals, clause (B) shall
not apply.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
"Aggregate LTV Collateral Amount" for any Class of Certificates for any
Distribution Date means (i) the sum of the applicable LTV Collateral Amounts for
each Aircraft, minus (ii) the Pool Balance for each Class of Certificates, if
any, senior to such Class, after giving effect to any distribution of principal
on such Distribution Date with respect to such senior Class or Classes.
"LTV Collateral Amount" of any Aircraft for any Class of Certificates
means, as of any Distribution Date, the lesser of (i) the LTV Ratio for such
Class of Certificates multiplied by the Appraised Current Market Value of such
Aircraft (or with respect to any such Aircraft which has suffered an Event of
Loss under and as defined in the relevant Lease, the amount of the insurance
proceeds paid to the related Loan Trustee in respect thereof to the extent then
held by such Loan Trustee (and/or on deposit in the Special Payments Account) or
payable to such Loan Trustee in respect thereof) and (ii) the outstanding
principal amount of the Equipment Notes secured by such Aircraft after giving
effect to any principal payments of such Equipment Notes on or before such
Distribution Date.
"LTV Ratio" means for the Class A Certificates 38.0%, for the Class B
Certificates 52.0% and for the Class C Certificates 67.2%.
"Appraised Current Market Value" of any Aircraft means the lower of the
average and the median of the most recent three LTV Appraisals of such Aircraft.
After a Triggering Event occurs and any Equipment Note becomes a Non-Performing
Equipment Note, the Subordination Agent shall obtain LTV Appraisals of the
Aircraft securing such Equipment Note as soon as practicable and additional LTV
Appraisals on or prior to each anniversary of the date of such initial LTV
Appraisals; provided that if the Controlling Party reasonably objects to the
appraised value of the Aircraft shown in such LTV Appraisals, the Controlling
Party shall have the right to obtain or cause to be obtained substitute LTV
Appraisals (including LTV Appraisals based upon physical inspection of such
Aircraft).
"LTV Appraisal" means a current fair market value appraisal (which may be a
"desk-top" appraisal) performed by any Appraiser or any other nationally
recognized appraiser on the basis of an arm's-length transaction between an
informed and willing purchaser under no compulsion to buy and an informed and
willing seller under no compulsion to sell and both having knowledge of all
relevant facts.
Interest Drawings under the Liquidity Facility and withdrawals from the
Cash Collateral Account, in each case in respect of interest on the Certificates
of any Trust, will be distributed to the Trustee for such Trust, notwithstanding
the priority of distributions set forth in the Intercreditor Agreement and
otherwise described herein. All amounts on deposit in the Cash Collateral
Account for any Trust that are in excess of the Required Amount will be paid to
the applicable Liquidity Provider.
VOTING OF EQUIPMENT NOTES
In the event that the Subordination Agent, as the registered holder of any
Equipment Note, receives a request for its consent to any amendment,
modification, consent or waiver under such Equipment Note or the related
Indenture (or, if applicable, the related Lease, the related Participation
Agreement or other related document), (i) if no Indenture Default shall have
occurred and be continuing with respect to such Indenture, the Subordination
Agent shall request instructions from the Trustee(s) and shall vote or
S-58
<PAGE> 59
consent in accordance with the directions of such Trustee(s) and (ii) if any
Indenture Default (which has not been cured by the applicable Owner Trustee or
Owner Participant) shall have occurred and be continuing with respect to such
Indenture, the Subordination Agent will exercise its voting rights as directed
by the Controlling Party, subject to certain limitations; provided that no such
amendment, modification, consent or waiver shall, without the consent of the
Liquidity Provider, reduce the amount of rent, supplemental rent or stipulated
loss values payable by Continental under any Lease. (Intercreditor Agreement,
Section 9.1(b))
THE SUBORDINATION AGENT
Wilmington Trust Company will be the Subordination Agent under the
Intercreditor Agreement. Continental and its affiliates may from time to time
enter into banking and trustee relationships with the Subordination Agent and
its affiliates. The Subordination Agent's address is Wilmington Trust Company,
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Corporate Trust Administration.
The Subordination Agent may resign at any time, in which event a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. The Controlling Party 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 eight Boeing 737-3T0 aircraft manufactured in 1987
and six McDonnell Douglas MD-82 aircraft, two manufactured in 1986 and four in
1987. All of the Aircraft are currently owned by Continental. The Aircraft have
been designed to be in compliance with Stage 3 noise level standards, which are
the most restrictive regulatory standards currently in effect in the United
States for aircraft noise abatement.
Boeing 737-3T0 Aircraft
The Boeing 737-3T0 aircraft is a medium-range aircraft with a seating
capacity of approximately 128 passengers (2-class). The Boeing 737-3T0 Aircraft
are powered by two CFM International, Inc. CFM56-3B-1 engines. Approximately
1,042 Boeing 737-300 series aircraft have been delivered to its customers as of
March 1, 1998 (as provided by Boeing).
McDonnell Douglas MD-82 Aircraft
The McDonnell Douglas MD-82 aircraft is a medium-range aircraft with a
seating of approximately 141 passengers (2-class). The McDonnell Douglas MD-82
Aircraft are powered by two Pratt & Whitney JT8D-217A engines. Approximately
1,159 McDonnell Douglas MD-80 series (MD-81, MD-82 and MD-83) aircraft have been
delivered to its customers as of March 1, 1998 (as provided by Boeing).
S-59
<PAGE> 60
THE APPRAISALS
The table below sets forth the appraised values and certain additional
information regarding the Aircraft.
<TABLE>
<CAPTION>
AIRCRAFT APPRAISED VALUE
REGISTRATION YEAR OF MANUFACTURER'S ---------------------------------------
AIRCRAFT TYPE ENGINE TYPE NUMBER MANUFACTURE SERIAL NUMBER AISI BK MBA
------------- ----------- ------------ ----------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Boeing 737-3T0........ CFM56-3B-1 N14336 1987 23574 $21,000,000 $20,900,000 $20,480,000
Boeing 737-3T0........ CFM56-3B-1 N14337 1987 23575 21,000,000 20,900,000 20,480,000
Boeing 737-3T0........ CFM56-3B-1 N59338 1987 23576 21,000,000 20,900,000 20,630,000
Boeing 737-3T0........ CFM56-3B-1 N14341 1987 23579 21,000,000 20,900,000 20,792,000
Boeing 737-3T0........ CFM56-3B-1 N14342 1987 23580 21,000,000 20,900,000 20,792,000
Boeing 737-3T0........ CFM56-3B-1 N39343 1987 23581 21,000,000 20,900,000 20,792,000
Boeing 737-3T0........ CFM56-3B-1 N17344 1987 23582 21,000,000 20,900,000 20,870,000
Boeing 737-3T0........ CFM56-3B-1 N17345 1987 23583 21,000,000 20,900,000 20,870,000
McDonnell Douglas
MD-82............... JT8D-217A N72821 1986 49481 18,260,000 16,500,000 19,362,500
McDonnell Douglas
MD-82............... JT8D-217A N76823 1986 49483 18,260,000 16,500,000 19,435,000
McDonnell Douglas
MD-82............... JT8D-217A N72829 1987 49489 19,110,000 17,050,000 19,883,200
McDonnell Douglas
MD-82............... JT8D-217A N72830 1987 49490 19,110,000 17,050,000 19,883,200
McDonnell Douglas
MD-82............... JT8D-217A N57837 1987 49582 19,110,000 17,550,000 20,338,000
McDonnell Douglas
MD-82............... JT8D-217A N34838 1987 49634 19,110,000 17,550,000 20,413,800
</TABLE>
The appraised values set forth in the foregoing chart were determined by
the following three independent aircraft appraisal and consulting firms: AISI,
BK and MBA, each as of March 30, 1998. 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. Such appraised values are intended to reflect
the value of the Aircraft without giving effect to current market conditions.
The Appraisers have delivered letters summarizing their respective appraisals,
copies of which are annexed to this Prospectus Supplement as Appendix II. For a
discussion of the assumptions and methodologies used in each of the appraisals,
reference is hereby made to such summaries.
An appraisal is only an estimate of value and should not be relied upon as
a measure of current or future realizable value; the proceeds realized upon a
sale of any Aircraft may be less than the appraised value thereof. The value of
the Aircraft in the event of the exercise of remedies under the applicable
Indenture will depend on market and economic conditions, the availability of
buyers, the condition of the Aircraft and other similar factors. Accordingly,
there can be no assurance that the proceeds realized upon any such exercise with
respect to the Equipment Notes and the Aircraft pursuant to the applicable
Indenture would equal the appraised value of such Aircraft or be sufficient to
satisfy in full payments due on the Equipment Notes issued thereunder or the
Certificates.
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 and the trust
agreements under which the Owner Trustees act on behalf of the Owner
Participants (the "Trust Agreements" and, collectively with such other
instruments, the "Operative Agreements") set forth in the Prospectus. The
summaries make use of terms defined in and are qualified in their entirety by
reference to all of the provisions of the Equipment Notes, the Indentures, the
Leases, the Participation Agreements and the Trust 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. Except as otherwise indicated, the following
summaries relate to the Equipment Notes, the Indenture, the Lease, the
Participation Agreement and the Trust Agreement applicable to each Aircraft.
S-60
<PAGE> 61
GENERAL
The Equipment Notes will be issued in three series with respect to each
Aircraft, under a separate Indenture between First Security Bank, National
Association, as Owner Trustee of a trust for the benefit of the owner
participant who will be the beneficial owner of such Aircraft (the "Owner
Participant"), and Wilmington Trust Company, as Loan Trustee. The 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 Aircraft to Continental pursuant
to a separate Lease between such Owner Trustee and Continental with respect to
such Aircraft. Under each Lease, Continental will be obligated to make or cause
to be made rental and other payments to the related Loan Trustee on behalf of
the related Owner Trustee, which rental and other payments will be at least
sufficient to pay in full when due all payments required to be made on the
Equipment Notes issued with respect to such Aircraft. The Equipment Notes are
not, however, direct obligations of, or guaranteed by, Continental.
Continental's rental obligations under each Lease will be general obligations of
Continental.
SUBORDINATION
Series B Equipment Notes issued in respect of an Aircraft will be
subordinated in right of payment to Series A Equipment Notes issued in respect
of such Aircraft, and Series C Equipment Notes issued in respect of such
Aircraft will be subordinated in right of payment to such Series B Equipment
Notes. On each Equipment Note payment date, (i) payments of interest and
principal due on Series A Equipment Notes issued in respect of an Aircraft will
be made prior to payments of interest and principal due on Series B Equipment
Notes issued in respect of such Aircraft and (ii) payments of interest and
principal due on such Series B Equipment Notes will be made prior to payments of
interest and principal due on Series C Equipment Notes issued in respect of such
Aircraft.
PRINCIPAL AND INTEREST PAYMENTS
Subject to the provisions of the Intercreditor Agreement, interest paid on
the Equipment Notes held in each Trust will be passed through to the
Certificateholders of such Trust on the dates and at the rate per annum set
forth on the cover page of this Prospectus Supplement with respect to
Certificates issued by such Trust until the final expected Regular Distribution
Date for such Trust. Subject to the provisions of the Intercreditor Agreement,
principal paid on the Equipment Notes held in each Trust will be passed through
to the Certificateholders of such Trust in scheduled amounts on the dates set
forth herein until the final expected Regular Distribution Date for such Trust.
S-61
<PAGE> 62
The aggregate original principal amounts of the Equipment Notes issued with
respect to each Aircraft, as such Equipment Notes will be held in each of the
Trusts, are as follows:*
<TABLE>
<CAPTION>
AIRCRAFT TRUST 1998-2A TRUST 1998-2B TRUST 1998-2C
REGISTRATION EQUIPMENT EQUIPMENT EQUIPMENT
NUMBER NOTES NOTES NOTES TOTAL
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
N14336................ $ 7,928,795 $ 2,921,135 $ 3,550,070 $ 14,400,000
N14337................ 7,928,795 2,921,135 3,550,070 14,400,000
N59338................ 7,928,795 2,921,135 3,550,070 14,400,000
N14341................ 7,928,795 2,921,135 3,550,070 14,400,000
N14342................ 7,928,795 2,921,135 3,550,070 14,400,000
N39343................ 7,928,795 2,921,135 3,550,070 14,400,000
N17344................ 7,928,795 2,921,135 3,550,070 14,400,000
N17345................ 7,928,795 2,921,135 3,550,070 14,400,000
N72821................ 7,061,154 2,601,478 2,337,369 12,000,000
N76823................ 7,061,154 2,601,478 2,337,369 12,000,000
N72829................ 7,061,154 2,601,478 2,337,369 12,000,000
N72830................ 7,061,154 2,601,478 2,337,369 12,000,000
N57837................ 7,061,154 2,601,478 2,337,369 12,000,000
N34838................ 7,061,154 2,601,478 2,337,369 12,000,000
------------ ----------- ----------- ------------
Total....... $105,797,282 $38,977,946 $42,424,772 $187,200,000
============ =========== =========== ============
</TABLE>
- ---------------
* The information relating to the principal amount of the Equipment Notes is
indicative only and subject to change.
Interest will be payable on the unpaid principal amount of each Equipment
Note at the rate applicable to such Equipment Note on April 15 and October 15 of
each year, commencing on October 15, 1998. Such interest will be computed on the
basis of a 360-day year of twelve 30-day months.
The principal of the Equipment Notes purchased by each Trust will be
payable as set forth in Appendix III to this Prospectus Supplement.
If any date scheduled for a payment of principal, premium (if any) or
interest with respect to the Equipment Notes is not a Business Day, such payment
will be made on the next succeeding Business Day without any additional
interest.
REDEMPTION
If an Event of Loss occurs with respect to an Aircraft and such Aircraft is
not replaced by Continental under the related Lease, the Equipment Notes issued
with respect to such Aircraft will be redeemed, in whole, in each case at a
price equal to the aggregate unpaid principal amount thereof, together with
accrued interest thereon to, but not including, the date of redemption, but
without premium, on a Special Distribution Date. (Indentures, Section 2.10(a))
If Continental exercises its right to terminate a Lease under Section 9 of
such Lease, the Equipment Notes relating to the applicable Aircraft will be
redeemed, in whole, on a Special Distribution Date at a price equal to the
aggregate unpaid principal amount thereof, together with accrued and unpaid
interest thereon to, but not including, the date of redemption, plus, in the
case of any series of Equipment Notes, if such redemption is made prior to the
Premium Termination Date applicable to such series, a Make-Whole Premium.
(Indentures, Section 2.10(b)) See " -- The Leases -- Lease Termination".
All of the Equipment Notes issued with respect to an Aircraft may be
redeemed prior to maturity as part of a refunding or refinancing thereof under
Section 11 of the applicable Participation Agreement at a price equal to the
aggregate unpaid principal thereof, together with accrued and unpaid interest
S-62
<PAGE> 63
thereon to, but not including, the date of redemption, plus, in the case of any
series of Equipment Notes, if such redemption is made prior to the Premium
Termination Date applicable to such series, a Make-Whole Premium. (Indentures,
Section 2.11) If notice of such a redemption shall have been given in connection
with a refinancing of Equipment Notes with respect to an Aircraft, such notice
may be revoked not later than three days prior to the proposed redemption date.
(Indentures, Section 2.12).
If, with respect to an Aircraft, (x) one or more Lease Events of Default
have occurred and are continuing, (y) in the event of a bankruptcy proceeding
involving Continental, (A) during the Section 1110 Period, the trustee in such
proceeding or Continental does not assume or agree to perform its obligations
under the related Lease or (B) at any time after assuming or agreeing to perform
such obligations, such trustee or Continental ceases to perform such obligations
such that the stay period applicable under the U.S. Bankruptcy Code comes to an
end or (z) the Equipment Notes with respect to such Aircraft have been
accelerated or the Loan 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 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 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 purchase date, but without any premium (provided that a
Make-Whole Premium shall be payable if such Equipment Notes are to be purchased
prior to the Premium Termination Date applicable thereto pursuant to clause (x)
above when a Lease Event of Default has occurred and is continuing for less than
120 days). (Indentures, Section 2.13)
"Make-Whole Premium" means, with respect to any Equipment Note, an amount
(as determined by an independent investment bank of national standing) equal to
the excess, if any, of (a) the present value of the remaining scheduled payments
of principal and interest to maturity of such Equipment Note 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 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
S-63
<PAGE> 64
Note by (ii) the number of days from and including such determination date to
but excluding the date on which such payment of principal is scheduled to be
made, by (b) the then outstanding principal amount of such Equipment Note.
SECURITY
The Equipment Notes issued with respect to each Aircraft will be secured by
(i) an assignment by the related Owner Trustee to the related Loan Trustee of
such Owner Trustee's rights, except for certain limited rights, under the Lease
with respect to the related Aircraft, including the right to receive payments of
rent thereunder, and (ii) a mortgage to such Loan Trustee of such Aircraft,
subject to the rights of Continental under such Lease. Unless and until an
Indenture Default has occurred and is continuing, the Loan Trustee may not
exercise the rights of the Owner Trustee under the related Lease, except the
Owner Trustee's right to receive payments of rent due thereunder. The assignment
by the Owner Trustee to the Loan Trustee of its rights under the related Lease
will exclude certain rights of such Owner Trustee and the related Owner
Participant, including the rights of the Owner Trustee and the Owner Participant
with respect to indemnification by Continental for certain matters, insurance
proceeds payable to such Owner Trustee in its individual capacity or to such
Owner Participant under public liability insurance maintained by Continental
under such Lease or by such Owner Trustee or such Owner Participant, insurance
proceeds payable to such Owner Trustee in its individual capacity or to such
Owner Participant under certain casualty insurance maintained by such Owner
Trustee or such Owner Participant under such Lease and certain reimbursement
payments made by Continental to such Owner Trustee. (Indentures, Granting
Clause) The Equipment Notes will not be cross-collateralized, and, consequently,
the Equipment Notes issued in respect of any one Aircraft will not be secured by
any of the other Aircraft or replacement aircraft therefor (as described in
" -- The Leases -- Events of Loss") or the Leases related thereto.
Funds, if any, held from time to time by the Loan Trustee with respect to
any Aircraft, including funds held as the result of an Event of Loss to such
Aircraft or termination of the Lease, if any, relating thereto, will be invested
and reinvested by such Loan Trustee, at the direction of the related Owner
Trustee, in investments described in the related Indenture. (Indentures, Section
5.09)
LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The following tables titled "Loan to Value Ratios" set forth loan to
Aircraft value ratios for the Equipment Notes issued in respect of each Aircraft
as of the Issuance Date and the specified Regular Distribution Dates obtained by
dividing (i) the outstanding balance (assuming no payment default) of such
Equipment Notes determined, in the case of Regular Distribution Dates,
immediately after giving effect to the payments scheduled to be made on each
such Regular Distribution Date by (ii) the assumed value (the "Assumed Aircraft
Value") of the Aircraft securing such Equipment Notes.
The tables contain forward-looking information that is based on the
assumption that the value of each Aircraft included in the Assumed Aircraft
Value opposite the Issuance Date depreciates by 3% per year until the fifteenth
year after the year of delivery of such Aircraft by the manufacturer, by 4% per
year thereafter until the twentieth year after the year of such delivery and by
5% 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.
S-64
<PAGE> 65
Loan to Value Ratios*
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N14336 AIRCRAFT REGISTRATION NUMBER N14337
------------------------------------ ------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO
---- ----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
April , 1998........ $14,400,000 $20,793,333 69.25% $14,400,000 $20,793,333 69.25%
April 15, 1999....... 13,910,265 19,862,289 70.03 13,910,265 19,862,289 70.03
April 15, 2000....... 12,493,770 18,931,244 66.00 12,493,770 18,931,244 66.00
April 15, 2001....... 10,996,449 18,000,199 61.09 10,996,449 18,000,199 61.09
April 15, 2002....... 9,413,114 16,758,806 56.17 9,413,114 16,758,806 56.17
April 15, 2003....... 7,738,241 15,517,413 49.87 7,738,241 15,517,413 49.87
April 15, 2004....... 5,965,952 14,276,020 41.79 5,965,952 14,276,020 41.79
April 15, 2005....... 4,089,992 13,034,627 31.38 4,089,992 13,034,627 31.38
April 15, 2006....... 2,103,702 11,793,234 17.84 2,103,702 11,793,234 17.84
April 15, 2007....... 0 10,241,493 NA 0 10,241,493 NA
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N59338
------------------------------------
EQUIPMENT
NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO
---- ----------- -------- -------
<S> <C> <C> <C>
April , 1998........ $14,400,000 $20,843,333 69.09%
April 15, 1999....... 13,910,265 19,910,050 69.87
April 15, 2000....... 12,493,770 18,976,766 65.84
April 15, 2001....... 10,996,449 18,043,483 60.94
April 15, 2002....... 9,413,114 16,799,104 56.03
April 15, 2003....... 7,738,241 15,554,726 49.75
April 15, 2004....... 5,965,952 14,310,348 41.69
April 15, 2005....... 4,089,992 13,065,970 31.30
April 15, 2006....... 2,103,702 11,821,592 17.80
April 15, 2007....... 0 10,266,119 NA
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N14341 AIRCRAFT REGISTRATION NUMBER N14342
------------------------------------ ------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO
---- ----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
April , 1998........ $14,400,000 $20,897,333 68.91% $14,400,000 $20,897,333 68.91%
April 15, 1999....... 13,910,265 19,961,632 69.69 13,910,265 19,961,632 69.69
April 15, 2000....... 12,493,770 19,025,930 65.67 12,493,770 19,025,930 65.67
April 15, 2001....... 10,996,449 18,090,229 60.79 10,996,449 18,090,229 60.79
April 15, 2002....... 9,413,114 16,842,627 55.89 9,413,114 16,842,627 55.89
April 15, 2003....... 7,738,241 15,595,025 49.62 7,738,241 15,595,025 49.62
April 15, 2004....... 5,965,952 14,347,423 41.58 5,965,952 14,347,423 41.58
April 15, 2005....... 4,089,992 13,099,821 31.22 4,089,992 13,099,821 31.22
April 15, 2006....... 2,103,702 11,852,219 17.75 2,103,702 11,852,219 17.75
April 15, 2007....... 0 10,292,716 NA 0 10,292,716 NA
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N39343
------------------------------------
EQUIPMENT
NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO
---- ----------- -------- -------
<S> <C> <C> <C>
April , 1998........ $14,400,000 $20,897,333 68.91%
April 15, 1999....... 13,910,265 19,961,632 69.69
April 15, 2000....... 12,493,770 19,025,930 65.67
April 15, 2001....... 10,996,449 18,090,229 60.79
April 15, 2002....... 9,413,114 16,842,627 55.89
April 15, 2003....... 7,738,241 15,595,025 49.62
April 15, 2004....... 5,965,952 14,347,423 41.58
April 15, 2005....... 4,089,992 13,099,821 31.22
April 15, 2006....... 2,103,702 11,852,219 17.75
April 15, 2007....... 0 10,292,716 NA
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N17344 AIRCRAFT REGISTRATION NUMBER N17345
------------------------------------ ------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO
---- ----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
April , 1998........ $14,400,000 $20,900,000 68.90% $14,400,000 $20,900,000 68.90%
April 15, 1999....... 13,910,265 19,964,179 69.68 13,910,265 19,964,179 69.68
April 15, 2000....... 12,493,770 19,028,358 65.66 12,493,770 19,028,358 65.66
April 15, 2001....... 10,996,449 18,092,537 60.78 10,996,449 18,092,537 60.78
April 15, 2002....... 9,413,114 17,156,716 54.87 9,413,114 17,156,716 54.87
April 15, 2003....... 7,738,241 15,908,955 48.64 7,738,241 15,908,955 48.64
April 15, 2004....... 5,965,952 14,661,194 40.69 5,965,952 14,661,194 40.69
April 15, 2005....... 4,089,992 13,413,433 30.49 4,089,992 13,413,433 30.49
April 15, 2006....... 2,103,702 12,165,672 17.29 2,103,702 12,165,672 17.29
April 15, 2007....... 0 10,917,910 NA 0 10,917,910 NA
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N72821
------------------------------------
EQUIPMENT
NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO
---- ----------- -------- -------
<S> <C> <C> <C>
April , 1998........ $12,000,000 $18,040,833 66.52%
April 15, 1999....... 11,555,000 17,195,169 67.20
April 15, 2000....... 9,865,002 16,349,505 60.34
April 15, 2001....... 8,088,403 15,503,841 52.17
April 15, 2002....... 6,219,675 14,376,289 43.26
April 15, 2003....... 4,252,936 13,248,737 32.10
April 15, 2004....... 2,181,930 12,121,185 18.00
April 15, 2005....... 0 10,993,633 NA
April 15, 2006....... 0 0 NA
April 15, 2007....... 0 0 NA
</TABLE>
- ---------------
* The information relating to Equipment Note outstanding balance for each
Aircraft and resulting LTVs is indicative only and subject to change.
Differences may occur due to rounding.
S-65
<PAGE> 66
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N76823 AIRCRAFT REGISTRATION NUMBER N72829
------------------------------------ ------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO
---- ----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
April , 1998........ $12,000,000 $18,065,000 66.43% $12,000,000 $18,681,067 64.24%
April 15, 1999....... 11,555,000 17,218,203 67.11 11,555,000 17,844,601 64.75
April 15, 2000....... 9,865,002 16,371,406 60.26 9,865,002 17,008,135 58.00
April 15, 2001....... 8,088,403 15,524,609 52.10 8,088,403 16,171,670 50.02
April 15, 2002....... 6,219,675 14,395,547 43.21 6,219,675 15,056,382 41.31
April 15, 2003....... 4,252,936 13,266,484 32.06 4,252,936 13,941,095 30.51
April 15, 2004....... 2,181,930 12,137,422 17.98 2,181,930 12,825,807 17.01
April 15, 2005....... 0 11,008,359 NA 0 11,710,519 NA
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N72830
------------------------------------
EQUIPMENT
NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO
---- ----------- -------- -------
<S> <C> <C> <C>
April , 1998........ $12,000,000 $18,681,067 64.24%
April 15, 1999....... 11,555,000 17,844,601 64.75
April 15, 2000....... 9,865,002 17,008,135 58.00
April 15, 2001....... 8,088,403 16,171,670 50.02
April 15, 2002....... 6,219,675 15,056,382 41.31
April 15, 2003....... 4,252,936 13,941,095 30.51
April 15, 2004....... 2,181,930 12,825,807 17.01
April 15, 2005....... 0 11,710,519 NA
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER N57837 AIRCRAFT REGISTRATION NUMBER N34838
-------------------------------------- --------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED LOAN TO NOTE ASSUMED LOAN TO
OUTSTANDING AIRCRAFT VALUE OUTSTANDING AIRCRAFT VALUE
DATE BALANCE VALUE RATIO BALANCE VALUE RATIO
---- ----------- ----------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
April , 1998................. $12,000,000 $18,999,333 63.16% $12,000,000 $19,024,600 63.08%
April 15, 1999................. 11,555,000 18,148,617 63.67 11,555,000 18,172,752 63.58
April 15, 2000................. 9,865,002 17,297,900 57.03 9,865,002 17,320,904 56.95
April 15, 2001................. 8,088,403 16,447,184 49.18 8,088,403 16,469,057 49.11
April 15, 2002................. 6,219,675 15,596,468 39.88 6,219,675 15,617,209 39.83
April 15, 2003................. 4,252,936 14,462,179 29.41 4,252,936 14,481,412 29.37
April 15, 2004................. 2,181,930 13,327,891 16.37 2,181,930 13,345,615 16.35
April 15, 2005................. 0 12,193,602 NA 0 12,209,818 NA
</TABLE>
LIMITATION OF LIABILITY
The Equipment Notes are not direct obligations of, or guaranteed by,
Continental, any Owner Participant or the Loan Trustees or the Owner Trustees in
their individual capacities. None of the Owner Trustees, the Owner Participants
or the Loan Trustees, or any affiliates thereof, will be personally liable to
any holder of an Equipment Note or, in the case of the Owner Trustees and the
Owner Participants, to the Loan Trustees for any amounts payable under the
Equipment Notes or, except as provided in each Indenture, for any liability
under such Indenture. All payments of principal of, premium, if any, and
interest on the Equipment Notes issued with respect to any Aircraft (other than
payments made in connection with an optional redemption or purchase of Equipment
Notes by the related Owner Trustee or the related Owner Participant) will be
made only from the assets subject to the lien of the Indenture with respect to
such Aircraft or the income and proceeds received by the related Loan Trustee
therefrom (including rent payable by Continental under the Lease with respect to
such Aircraft).
Except as otherwise provided in the Indentures, each Owner Trustee and each
Loan Trustee, in its individual capacity, will not be answerable or accountable
under the Indentures or under the Equipment Notes under any circumstances
except, among other things, for its own willful misconduct or gross negligence.
No Owner Participant will have any duty or responsibility under any of the
Indentures or the Equipment Notes to the Loan Trustees or to any holder of any
Equipment Note.
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will include: (a) the occurrence of
any Lease Event of Default under the related Lease (other than the failure to
make certain indemnity payments and other payments to the related Owner Trustee
or Owner Participant unless a notice is given by such Owner Trustee that such
failure shall constitute an Indenture Default), (b) the failure by the related
Owner Trustee (other than as a result of a Lease Default or Lease Event of
Default) to pay any interest or principal or premium, if any, when due under
such Indenture or under any Equipment Note issued thereunder that continues for
more than 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
S-66
<PAGE> 67
Participant receives written demand from the related Loan Trustee or holder of
an Equipment Note, (c) the failure by the related Owner Participant or the
related Owner Trustee (in its individual capacity) to discharge certain liens
that continue after notice and specified cure periods, (d) any representation or
warranty made by the related Owner Trustee or Owner Participant in such
Indenture, the related Participation Agreement or certain related documents
furnished to the Loan Trustee or any holder of an Equipment Note pursuant
thereto being false or incorrect in any material respect when made that
continues to be material and adverse to the interests of the Loan Trustee or
Note Holders and remains unremedied after notice and specified cure periods, (e)
failure by the related Owner Trustee or Owner Participant to perform or observe
any covenant or obligation for the benefit of the Loan Trustee or holders of
Equipment Notes under such Indenture or certain related documents that continues
after notice and specified cure periods, (f) the registration of the related
Aircraft ceasing to be effective as a result of the Owner Participant not being
a citizen of the United States, as defined in the Transportation Code (subject
to a cure period) or (g) the occurrence of certain events of bankruptcy,
reorganization or insolvency of the related Owner Trustee or Owner Participant.
(Indentures, Section 4.02) There will not be cross-default provisions in the
Indentures or in the Leases. Consequently, events resulting in an Indenture
Default under any particular Indenture may or may not result in an Indenture
Default occurring under any other Indenture, and a Lease Event of Default under
any particular Lease may or may not constitute a Lease Event of Default under
any other Lease.
If Continental fails to make any semiannual basic rental payment due under
any Lease, within a specified period after such failure the applicable Owner
Trustee may furnish to the Loan Trustee the amount due on the Equipment Notes
issued with respect to the related Aircraft, together with any interest thereon
on account of the delayed payment thereof, in which event the Loan Trustee and
the holders of outstanding Equipment Notes issued under such Indenture may not
exercise any remedies otherwise available under such Indenture or such Lease as
the result of such failure to make such rental payment, unless such Owner
Trustee 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. 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. (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.
(Indentures, Section 4.08)
REMEDIES
If an Indenture Default occurs and is continuing under an Indenture, the
related Loan Trustee or the holders of a majority in principal amount of the
Equipment Notes outstanding under such Indenture may, subject to the applicable
Owner Participant's or Owner Trustee's right to cure, as discussed above,
declare the principal of all such Equipment Notes issued thereunder immediately
due and payable, together with all accrued but unpaid interest thereon, 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
S-67
<PAGE> 68
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. (Indentures,
Section 4.04(b))
Each Indenture provides that if an Indenture Default under such Indenture
has occurred and is continuing, the related Loan Trustee may exercise certain
rights or remedies available to it under such Indenture or under applicable law,
including (if the corresponding Lease has been declared in default) one or more
of the remedies under such Indenture or such Lease with respect to the Aircraft
subject to such Lease. If an Indenture Default arises solely by reason of one or
more events or circumstances which constitute a Lease Event of Default, the
related Loan Trustee's right to exercise remedies under an Indenture is subject,
with certain exceptions, to its having proceeded to exercise one or more of the
dispossessory remedies under the Lease with respect to such Aircraft; provided
that the requirement to 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, provided further, however, that the requirement to
exercise one or more of such remedies under the Lease shall nonetheless be
applicable during the period referred to in the preceding proviso, subsequent to
such 60 day or other period, to the extent that the continuation of such stay or
prohibition beyond such 60 day or other period results 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, (ii) such Loan Trustee's consent to an extension of such period, (iii)
such Loan Trustee's failure to give any requisite notice, or (iv) 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 -- Events
of Default under the Leases". Such remedies may be exercised by the related Loan
Trustee to the exclusion of the related Owner Trustee, subject to certain
conditions specified in such Indenture, and of Continental, subject to the terms
of such Lease. Any Aircraft sold in the exercise of such remedies will be free
and clear of any rights of those parties, including the rights of Continental
under the Lease with respect to such Aircraft; provided that no exercise of any
remedies by the related Loan Trustee may affect the rights of Continental under
any Lease unless a Lease Event of Default has occurred and is continuing.
(Indentures, Section 4.04)
If a bankruptcy proceeding involving Continental under the U.S. Bankruptcy
Code occurs, all of the rights of the Owner Trustee as lessor under a particular
Lease will be exercised by the Owner Trustee in accordance with the terms
thereof unless (i) during the Section 1110 Period the trustee in such proceeding
or Continental does not assume or agree to perform its obligations under such
Lease, (ii) at any time after assuming or agreeing to perform such obligations,
such trustee or Continental ceases to perform such obligations or (iii) the
related Loan Trustee takes action, or notifies the Owner Trustee that such Loan
Trustee intends to take action, to foreclose the lien of the related Indenture
or otherwise commence the exercise of any significant remedy in accordance with
the 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 Indenture.
If the Equipment Notes issued in respect of one Aircraft are in default,
the Equipment Notes issued in respect of the other Aircraft may not be in
default, and, if not, no remedies will be exercisable under the applicable
Indentures with respect to such other Aircraft.
Section 1110 of the U.S. Bankruptcy Code provides in relevant part that the
right of lessors, conditional vendors and holders of security interests with
respect to "equipment" (as defined in Section 1110 of the U.S. Bankruptcy Code)
to take possession of such equipment in compliance with the provisions of a
lease, conditional sale contract or security agreement, as the case may be, is
not affected by (a) the automatic stay provision of the U.S. Bankruptcy Code,
which provision enjoins repossessions by creditors for the duration of the
reorganization period, (b) the provision of the U.S. Bankruptcy Code allowing
the trustee in reorganization to use property of the debtor during the
S-68
<PAGE> 69
reorganization period, (c) Section 1129 of the U.S. Bankruptcy Code (which
governs the confirmation of plans of reorganization in Chapter 11 cases) and (d)
any power of the bankruptcy court to enjoin a repossession. Section 1110
provides in relevant part, however, that the right of a lessor, conditional
vendor or holder of a security interest to take possession of an aircraft in the
event of an event of default may not be exercised for 60 days following the date
of commencement of the reorganization proceedings (unless specifically permitted
by the bankruptcy court) and may not be exercised at all if, within such 60-day
period (or such longer period consented to by the lessor, conditional vendor or
holder of a security interest), the trustee in reorganization agrees to perform
the debtor's obligations that become due on or after such date and cures all
existing defaults (other than defaults resulting solely from the financial
condition, bankruptcy, insolvency or reorganization of the debtor). "Equipment"
is defined in Section 1110 of the U.S. Bankruptcy Code, in part, as an aircraft,
aircraft engine, propeller, appliance, or spare part (as defined in Section
40102 of Title 49 of the U.S. Code) that is subject to a security interest
granted by, leased to, or conditionally sold to a debtor that is a citizen of
the United States (as defined in Section 40102 of Title 49 of the U.S. Code)
holding an air carrier operating certificate issued by the Secretary of
Transportation pursuant to chapter 447 of Title 49 of the U.S. Code for aircraft
capable of carrying ten or more individuals or 6,000 pounds or more of cargo.
The Loan Trustee with respect to each Indenture will receive an opinion of
Hughes Hubbard & Reed LLP, counsel to Continental, that the Owner Trustee, as
lessor under the Lease for the Aircraft subject to such Indenture, and such Loan
Trustee, as assignee of such Owner Trustee's rights under such Lease pursuant to
such Indenture, will be entitled to the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to the airframe and engines comprising such
Aircraft so long as Continental continues to be a "citizen of the United States"
as defined in Section 40102 of Title 49 of the U.S. Code holding an air carrier
operating certificate issued by the Secretary of Transportation pursuant to
chapter 447 of Title 49 of the U.S. Code for aircraft capable of carrying ten or
more individuals or 6,000 pounds or more of cargo. For a description of certain
limitations on the Loan Trustee's exercise of rights contained in the Indenture,
see "-- Indenture Defaults, Notice and Waiver".
The opinion of Hughes Hubbard & Reed LLP will not address the possible
replacement of an Aircraft after an Event of Loss in the future, the
consummation of which is conditioned upon the contemporaneous delivery of an
opinion of counsel to the effect that the related Loan Trustee will be entitled
to Section 1110 benefits with respect to such replacement unless there is a
change in law or court interpretation that results in Section 1110 not being
available. See " -- The Leases -- 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 an Aircraft subleased by Continental.
On March 10, 1998, the U.S. District Court for the District of Colorado
issued an opinion arising from the bankruptcy proceedings of Western Pacific
Airlines, Inc. (Civil Action No. 98-K-358). The decision, reversing an order of
the bankruptcy court, 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 of the U.S. Bankruptcy Code, 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 states that, in such firm's opinion, the District Court case
was incorrectly decided, since it is 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 is not limited to defaults occurring at the
commencement of the bankruptcy proceeding. Moreover, such opinion of Hughes
Hubbard & Reed LLP states that, in such firm's opinion, such District Court case
is contrary to the clear intent of Congress in enacting Section 1110, since it
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 filed motions for
reconsideration of the decision with the U.S. District Court.
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
S-69
<PAGE> 70
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 Aircraft is owned by the related Owner Trustee in trust, such
Aircraft and the related Lease and Equipment Notes might become part of such
proceeding. In such event, payments under such Lease or on such Equipment Notes
might be interrupted and the ability of the related Loan Trustee to exercise its
remedies under the related Indenture might be restricted, although such Loan
Trustee would retain its status as a secured creditor in respect of the related
Lease and the related Aircraft. In addition, it is possible that, in the event
of proceedings under the U.S. Bankruptcy Code involving Continental, the assets
and liabilities of the Owner Participant or an Owner Trust could be
substantively consolidated with the assets and liabilities of Continental as a
consolidated entity for purposes of such proceedings, although the Loan Trustee
will receive a reasoned opinion of Hughes Hubbard & Reed LLP, counsel to
Continental, that, subject to certain assumptions and qualifications specified
therein, a court would not substantively consolidate Continental and the Owner
Participant or Continental and an Owner Trust. See "-- The Leases -- Owner
Participant".
MODIFICATION OF INDENTURES AND LEASES
Without the consent of holders of a majority in principal amount of the
Equipment Notes outstanding under any Indenture, the provisions of such
Indenture and any related Lease, Participation Agreement or Trust Agreement may
not be amended or modified, except to the extent indicated below.
Subject to certain limitations, certain provisions of any Indenture, and of
the Lease, the Participation Agreement and the Trust Agreement related thereto,
may be amended or modified by the parties thereto without the consent of any
holders of the Equipment Notes outstanding under such Indenture. In the case of
each Lease, such provisions include, among others, provisions relating to (i)
the return to the related Owner Trustee of the related Aircraft at the end of
the term of such Lease (except to the extent that such amendment would affect
the rights or exercise of remedies under the Lease) and (ii) the renewal of such
Lease and the option of Continental at the end of the term of such Lease to
purchase the related Aircraft so long as the same would not adversely affect the
Note Holders. (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. (Indentures, Section 9.01(c))
Without the consent of the Liquidity Provider and the holder of each
Equipment Note outstanding under any Indenture affected thereby, no amendment or
modification of such Indenture may among other things (a) reduce the principal
amount of, or premium, if any, or interest payable on, any Equipment Notes
issued under such Indenture or change the date on which any principal, premium,
if any, or interest is due and payable, (b) permit the creation of any security
interest with respect to the property subject to the lien of such Indenture,
except as provided in such Indenture, or deprive any holder of an Equipment Note
issued under such Indenture of the benefit of the lien of such Indenture upon
the property subject thereto or (c) modify the percentage of holders of
Equipment Notes issued under such Indenture required to take or approve any
action under such Indenture. (Indentures, Section 9.01(b))
INDEMNIFICATION
Continental will be required to indemnify each Loan Trustee, each Owner
Participant, each Owner Trustee, the Liquidity Provider, the Subordination Agent
and each Trustee, but not the holders of Certificates, for certain losses,
claims and other matters. Continental will be required under certain
circumstances to indemnify each Owner Participant against the loss of
depreciation deductions and certain other benefits allowable for certain income
tax purposes with respect to the related Aircraft.
S-70
<PAGE> 71
THE LEASES
Each Aircraft will be leased to Continental by the relevant Owner Trustee
under the relevant lease agreement (each, a "Lease").
Lease Term Rentals and Payments
The Aircraft will be acquired by the Owner Trustees from Continental for
fair consideration reflective of current market conditions. Thereafter, each
Aircraft will be leased separately by the relevant Owner Trustee to Continental
for a term commencing on the date on which the Aircraft is acquired by the Owner
Trustee and expiring on a date not earlier than the latest maturity date of the
relevant Equipment Notes, unless terminated prior to the originally scheduled
expiration date as permitted by the applicable Lease. The 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 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; Indentures, Section 3.01)
"Lease Payment Date" means, with respect to each Lease, April 15 or October
15 during the term of such Lease.
Net Lease; Maintenance
Under the terms of each Lease, Continental's obligations in respect of each
Aircraft will be those of a lessee under a "net lease". Accordingly, Continental
is obligated under each Lease, among other things and at its expense, to keep
each Aircraft duly registered and insured, to pay all costs of operating the
Aircraft and to maintain, service, repair and overhaul the Aircraft so as to
keep it in as good an operating condition as when delivered to Continental from
the manufacturer, 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)
Possession, Sublease and Transfer
Each Aircraft may be operated by Continental or, subject to certain
restrictions, by certain other persons. Normal interchange and pooling
agreements customary in the commercial airline industry with respect to any
Engine are permitted. Subleases 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 Owner Trustee's title to, and
the Loan Trustee's security interest in respect of, the applicable Aircraft. In
addition, a sublessee may not be subject to insolvency or similar proceedings at
the commencement of such sublease. (Leases, Section 7) Permitted foreign air
carriers are not limited to those based in a country that is a party to the
Convention on the International Recognition of Rights in Aircraft (Geneva 1948)
(the "Convention"). It is uncertain to what extent the relevant Loan Trustee's
security interest would be recognized if an Aircraft is registered or located in
a jurisdiction not a party to the Convention. Moreover, in the case of an
Indenture Default, the ability of the related Loan Trustee to realize upon its
security interest in an Aircraft could be adversely affected as a legal or
practical matter if such Aircraft were registered or located outside the United
States.
S-71
<PAGE> 72
Registration
Continental is required to keep each Aircraft duly registered under the
Transportation Code with the FAA, except if the relevant Owner Trustee or the
relevant Owner Participant fails to meet the applicable citizenship
requirements, and to record each Lease and Indenture and certain other documents
under the Transportation Code. (Leases, Section 7) 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 or certain bankruptcy or payment
defaults exist, Continental has the right to register the Aircraft subject to
such Lease in a country other than the United States at its own expense in
connection with a permitted sublease of the Aircraft to a permitted foreign air
carrier, subject to certain conditions set forth in the related Participation
Agreement. These conditions include a requirement that an opinion of counsel be
provided that the lien of the applicable Indenture will continue as a first
priority security interest in the applicable Aircraft. (Leases, Section 7.1.2;
Participation Agreements, Section 7.6.11)
Liens
Continental is required to maintain each Aircraft free of any liens, other
than the rights of the relevant Loan Trustee, the holders of the related
Equipment Notes, Continental and the Owner Participant and Owner Trustee arising
under the applicable Indenture, the Lease or the other operative documents
related thereto, and other than certain limited liens permitted under such
documents, including but not limited to (i) liens for taxes either not yet due
or being contested in good faith by appropriate proceedings; (ii) materialmen's,
mechanics' and other similar liens arising in the ordinary course of business
and securing obligations that either are not yet delinquent for more than 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 or, in the case of (iii), involve a
discernible risk of criminal liability or a material risk of civil liability
against the relevant Owner Trustee or Owner Participant. (Leases, Section 6)
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)
Insurance
Continental is required to maintain, at its expense (or at the expense of a
permitted sublessee), all-risk aircraft hull insurance covering each Aircraft,
at all times in an amount not less than the stipulated loss value of such
Aircraft (which will exceed the aggregate outstanding principal amount of the
S-72
<PAGE> 73
Equipment Notes relating to such Aircraft, together with accrued interest
thereon). However, after giving effect to self-insurance permitted as described
below, the amount payable under such insurance may be less than such amounts
payable with respect to the Equipment Notes. In the event of a loss involving
insurance proceeds in excess of $3,500,000 per occurrence, such proceeds up to
the stipulated loss value of the relevant Aircraft will be payable to the
applicable Loan Trustee, for so long as the relevant Indenture shall be in
effect. In the event of a loss involving insurance proceeds of up to $3,500,000
per occurrence such proceeds will be payable directly to Continental so long as
the Owner Trustee or Loan 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)
In addition, Continental is obligated to maintain comprehensive airline
liability insurance at its expense (or at the expense of a permitted sublessee),
including, without limitation, passenger liability, baggage liability, cargo and
mail liability, hangarkeeper's liability and contractual liability insurance
with respect to each Aircraft. Such liability insurance must be underwritten by
insurers of nationally or internationally recognized responsibility. The amount
of such liability insurance coverage per occurrence may not be less than the
amount of comprehensive airline liability insurance from time to time applicable
to aircraft owned or leased and operated by Continental of the same type and
operating on similar routes as such Aircraft. (Leases, Section 11.1 and Annex D)
Continental is also required to maintain war-risk, hijacking or allied
perils insurance if it (or any permitted sublessee) operates any Aircraft,
Airframe or Engine in any area of recognized hostilities or if Continental (or
any permitted sublessee) maintains such insurance with respect to other aircraft
operated on the same international routes or areas on or in which the Aircraft
is operated. (Leases, Annex D)
Continental may self-insure under a program applicable to all aircraft in
its fleet, but the amount of such self-insurance in the aggregate may not exceed
50% of the largest replacement value of any single aircraft in Continental's
fleet or 1 1/2% of the average aggregate insurable value (during the preceding
policy year) of all aircraft on which Continental carries insurance, whichever
is less, unless an insurance broker of national standing shall certify that the
standard among all other major U.S. airlines is a higher level of
self-insurance, in which case Continental may self-insure the Aircraft to such
higher level. In addition, Continental may self-insure to the extent of any
applicable deductible per Aircraft that does not exceed industry standards for
major U.S. airlines. (Leases, Section 11.1 and Annex D)
In respect of each Aircraft, Continental is required to name as additional
insured parties the relevant Loan Trustee, the holders of the Equipment Notes,
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)
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 fourth anniversary (in the case of the McDonnell Douglas MD-82 Aircraft) or
sixth anniversary (in the case of the Boeing 737-3T0 Aircraft) of the date on
which such Lease commenced, if it makes a good faith determination that the
Aircraft subject to such Lease is economically obsolete or surplus to its
requirements. Continental is required to give notice of its intention to
exercise its right of termination described in this paragraph at least 90 days
prior to the proposed date of termination, which notice may be withdrawn up to
ten Business Days prior to such proposed date; provided that Continental may
give only three such termination notices. In such a situation, unless the Owner
Trustee elects to retain title to such Aircraft, Continental is required to use
commercially reasonable efforts to sell such Aircraft as an agent for such Owner
Trustee, and Owner Trustee will sell such Aircraft on the date of termination to
the highest cash bidder. If such sale occurs, the Equipment Notes related
thereto are required to be prepaid. If the net proceeds to be received from
S-73
<PAGE> 74
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;
Indentures, Section 2.10(b))
The Owner Trustee has the option to retain title to the Aircraft if
Continental has given a notice of termination under the Lease. In such event,
such Owner Trustee will pay to the applicable Loan Trustee an amount sufficient
to prepay the outstanding Equipment Notes issued with respect to such Aircraft
(including any 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; Indentures, Sections 2.06 and 2.10(b))
Events of Loss
If an Event of Loss occurs with respect to the Airframe or the Airframe and
Engines of an Aircraft, Continental must elect within 45 days after such
occurrence either to make payment with respect to such Event of Loss or to
replace such Airframe and any such Engines. Not later than the first Business
Day following the 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 the stipulated loss value of such
Aircraft, together with certain additional amounts, but, in any case, without
any Make-Whole Premium or (ii) unless any Lease Event of Default or certain
bankruptcy or payment 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; Indentures, Section 2.10(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 convey
to the related Owner Trustee title to an airframe (or airframe and one or more
engines, as the case may be) 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 that was placed in service in the same or later
year as the Airframe being replaced, 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. Continental is also required to provide to
the relevant Loan Trustee and 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 Loan Trustee (as assignee of
lessor's rights and interests under the Lease) 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)
If Continental elects not to replace such Airframe, or Airframe and
Engine(s), then upon payment of the stipulated loss value for such Aircraft,
together with all additional amounts then due and unpaid with respect to such
Aircraft, which must be at least sufficient to pay in full as of the date of
payment thereof the aggregate unpaid principal amount under such Equipment Notes
together with accrued but unpaid interest thereon and all other amounts due and
owing in respect of such Equipment Notes, the lien of the Indenture and the
Lease relating to such Aircraft shall terminate with respect to such Aircraft,
the obligation of Continental thereafter to make the scheduled rent payments
with respect thereto shall cease and the related Owner Trustee shall transfer
all of its right, title and interest in and to the related Aircraft to
Continental. The stipulated loss value and other payments made under the Leases
by Continental shall be deposited with the applicable Loan Trustee. Amounts in
excess of the amounts due and owing under the Equipment Notes issued with
respect to such Aircraft will be distributed by such
S-74
<PAGE> 75
Loan Trustee to the applicable Owner Trustee. (Leases, Section 10.1.2;
Indentures, Sections 2.06 and 3.02)
If an Event of Loss occurs with respect to an Engine alone, Continental
will be required to replace such Engine within 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 compatible for use with the other
Engine, 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. (Leases, Section 10.2)
An "Event of Loss" with respect to an Aircraft, Airframe or any Engine
means any of the following events with respect to such property: (i) the
destruction of such property, damage to such property beyond economic repair or
rendition of such property permanently unfit for normal use; (ii) the actual or
constructive total loss of such property or any damage to such property or
requisition of title or use of such property which results in an insurance
settlement with respect to such property on the basis of a total loss or a
constructive or compromised total loss; (iii) any theft, hijacking or
disappearance of such property for a period of 180 consecutive days or more;
(iv) any seizure, condemnation, confiscation, taking or requisition (including
loss of title) to such property by any governmental entity or purported
governmental entity (other than a requisition of use by a U.S. government
entity) for a period exceeding 180 consecutive days or, if earlier, at the end
of the term of such Lease or, in the case of a requisition of title, the
requisition of title shall not have been reversed within 90 days from the date
of such requisition of title or, if earlier, at the end of the term of such
Lease; (v) any seizure, condemnation, confiscation, taking or requisition of use
of such property by any U.S. government entity that continues until the 30th day
after the last day of the term of the relevant Lease (unless the Owner Trustee
shall have elected not to treat such event as an Event of Loss); (vi) as a
result of any law, rule, regulation, order or other action by the FAA or any
governmental entity, the use of such property in the normal course of
Continental's business of passenger air transportation is prohibited for 180
consecutive days, unless Continental, prior to the expiration of such 180-day
period, shall have undertaken and shall be diligently carrying forward steps
which are necessary or desirable to permit the normal use of such property by
Continental, but in any event if such use shall have been prohibited for a
period of one year (or, if earlier, the end of the term of such Lease), 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 one-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 two years or such use shall be
prohibited at the expiration of the term of the relevant Lease; or (vii) with
respect to any Engine, any divestiture of title to such Engine in connection
with pooling or certain other arrangements shall be treated as an Event of Loss.
(Leases, Section 7.2.6 and Annex A)
Renewal 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. (Leases, Section 17)
Events of Default under the Leases
Lease Events of Default under each Lease include, among other things, (i)
failure by Continental to make any payment of basic rent, stipulated loss value
or termination value under such Lease within 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
S-75
<PAGE> 76
and after the date of any written notice from the Owner Trustee or Loan Trustee
of the failure to make such payment when due; (ii) failure by Continental to
make any excluded payment (as defined) within ten Business Days after written
notice that such failure constitutes a Lease Event of Default is given by the
relevant Owner Participant to Continental and the relevant Loan Trustee; (iii)
failure by Continental to carry and maintain insurance on and in respect of the
Aircraft, Airframe and Engines, in accordance with the provisions of such Lease;
(iv) failure by Continental to perform or observe in any material respect any
other covenant or agreement to be performed or observed by it under such Lease
or the related Participation Agreement or certain other related operative
documents (other than the related tax indemnity agreement between Continental
and the Owner Participant), and such failure shall continue unremedied for a
period of 30 days after written notice of such failure by the applicable Owner
Trustee or Loan Trustee unless such failure is capable of being corrected and
Continental shall be diligently proceeding to correct such failure, in which
case there shall be no Lease Event of Default unless and until such failure
shall continue unremedied for a period of 180 days after the receipt of such
notice; (v) any representation or warranty made by Continental in such Lease or
the related Participation Agreement or in certain other related operative
documents (other than in the related tax indemnity agreement between Continental
and the Owner Participant) shall prove to have been untrue or inaccurate in any
material respect at the time made, such representation or warranty is material
at the time in question and the same shall remain uncured (to the extent of the
adverse impact thereof) for more than 30 days after the date of written notice
thereof to Continental; and (vi) the occurrence of certain voluntary events of
bankruptcy, reorganization or insolvency of Continental or the occurrence of
involuntary events of bankruptcy, reorganization or insolvency which shall
continue undismissed, unvacated or unstayed for a period of 90 days. (Leases,
Section 14)
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 Indenture, the Loan Trustee's) option,
either (i) the excess of the present value of all unpaid rent during the
remainder of the term of such Lease over the present value of the fair market
rental value of such Aircraft for the remainder of the term of such Lease or
(ii) the excess of the stipulated loss value of such Aircraft over the fair
market sales value of such Aircraft or, if such Aircraft has been sold, the net
sales proceeds from the sale of such Aircraft. (Leases, Section 15; 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. (Indentures, Section 4.04(a))
Owner Participant
The initial Owner Participant with respect to each Aircraft will be Caljet
LLC, a Delaware limited liability company (the "LLC"). The LLC was organized in
April 1998 exclusively to engage in the leveraged lease transactions with
respect to the Aircraft described in this Prospectus Supplement and to engage in
other matters incidental thereto. The LLC will have two members: a wholly-owned
subsidiary of Continental, which will contribute 75% of the initial capital of
the LLC and have a corresponding membership interest, and a wholly-owned
subsidiary of a major U.S. equipment leasing company (the "Other Member"), which
will contribute 25% of the initial capital and have a corresponding membership
interest. As a result of Continental's indirect 75% ownership interest in the
LLC, the Equipment Notes to be issued in connection with the Offering will be
carried as indebtedness on Continental's consolidated balance sheet.
S-76
<PAGE> 77
The agreement governing the operation of the LLC (the "LLC Agreement")
provides that the business and affairs of the LLC will be managed by or under
the authority of the Other Member, in its capacity as manager of the LLC (the
"Manager"). Under the LLC Agreement, the members of the LLC are generally
prohibited from taking part in the management of the business and affairs of the
LLC, except that each member must approve certain specified matters. The Manager
may be removed as such by the members of the LLC holding a majority of the
membership interests only upon the occurrence of certain specified events. The
Manager may resign at any time on at least 30 days' notice. Any replacement
Manager will be appointed by members of the LLC holding a majority of the
membership interests, except that so long as the Equipment Notes are
outstanding, the Manager may not be an affiliate of Continental. (Participation
Agreements, Section 7.2.5)
The Loan Trustee with respect to each Indenture will receive a reasoned
opinion of Hughes Hubbard & Reed LLP, counsel to Continental, concluding
(although there is no case litigated on the merits directly on point) that,
subject to certain assumptions and qualifications specified therein, in the
event Continental were to become a debtor in a case under the Bankruptcy Code, a
court having jurisdiction thereof would not substantively consolidate
Continental and the Owner Participant or Continental and the Owner Trust
relating to such Indenture, assuming that a party in interest would timely
present an objection to substantive consolidation and properly brief and argue
such objection. Such opinion notes that substantive consolidation is an
equitable doctrine and that courts have accorded different degrees of importance
to the factual elements before them in determining whether to exercise their
equitable power to order substantive consolidation. In addition, such opinion
assumes the correctness of the opinion of counsel to the Owner Trustee that,
subject to certain assumptions and qualifications stated therein, (i) neither a
Utah court nor a federal court applying Utah law or federal law, if properly
presented with the issue and after having properly considered such issue, would
permit the Owner Participant to terminate the Trust Agreement, except in
accordance with its terms and (ii) although there is no Utah case directly on
point, under the laws of the State of Utah, so long as the Trust Agreement has
not been terminated in accordance with its terms, creditors of any person that
is an Owner Participant, holders of a lien against the assets of any such person
that is an Owner Participant, such as trustees, receivers or liquidators
(whether or not an insolvency proceeding has been commenced) (collectively the
"Creditors") may acquire valid claims and liens, as to the Trust Estate, only
against the rights of such Owner Participant under the Trust Agreement or in the
Trust Estate, and do not have, and may not through the enforcement of such
Creditors' rights acquire, any greater rights than such Owner Participant with
respect to the Trust Agreement or the Trust Estate. The foregoing opinions are
not binding on any court. Accordingly, there can be no assurance that a court
will not reach a different result. If a court concluded otherwise, or if an
attempt were made to litigate any of the foregoing issues, delays in payments on
the Equipment Notes and possible reductions in the payments of principal of and
interest on the Equipment Notes could occur.
Subject to certain restrictions, each Owner Participant may transfer all or
any part of its interest in the related Aircraft. (Participation Agreements,
Section 10.1.1)
S-77
<PAGE> 78
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, each of the Trusts will be classified as a
grantor trust for U.S. federal income tax purposes.
TAXATION OF CERTIFICATEHOLDERS GENERALLY
Trusts Classified as Grantor Trusts
A U.S. Certificateholder will be treated as owning its pro rata undivided
interest in each of the Equipment Notes and any other property held by the
Trust. Accordingly, each U.S. Certificateholder's share of interest paid on
Equipment Notes will be taxable as ordinary income, as it is paid or accrued, in
accordance with such U.S. Certificateholder's method of accounting for U.S.
federal income tax purposes, and a U.S. Certificateholder's share of premium, if
any, paid on redemption of an Equipment Note will be treated as capital gain.
Any amounts received by 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.
S-78
<PAGE> 79
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.
EFFECT OF SUBORDINATION OF CLASS B AND CLASS C CERTIFICATEHOLDERS
In the event that the Class B Trust or the Class C Trust (such Trusts being
the "Subordinated Trusts" and the related Certificates being the "Subordinated
Certificates") receives less than the full amount of the receipts of interest,
principal or premium paid with respect to the Equipment Notes held by it (any
shortfall in such receipts being the "Shortfall Amounts") because of the
subordination of the Equipment Notes held by such Trust under the Intercreditor
Agreement, the corresponding owners of beneficial interests in the Subordinated
Certificates (the "Subordinated Certificateholders") would probably be treated
for federal income tax purposes as if they had (1) received as distributions
their full share of such receipts, (2) paid over to the relevant preferred class
of Certificateholders an amount equal to their share of such Shortfall Amount,
and (3) retained the right to reimbursement of such amounts to the extent of
future amounts payable to such Subordinated Certificateholders with respect to
such Shortfall Amount.
Under this analysis, (1) Subordinated Certificateholders incurring a
Shortfall Amount would be required to include as current income any interest or
other income of the corresponding Subordinated Trust that was a component of the
Shortfall Amount, even though such amount was in fact paid to the relevant
preferred class of Certificateholders, (2) a loss would only be allowed to such
Subordinated Certificateholders when their right to receive reimbursement of
such Shortfall Amount becomes worthless (i.e., when it becomes clear that funds
will not be available from any source to reimburse such loss), and (3)
reimbursement of such Shortfall Amount prior to such a claim of worthlessness
would not be taxable income to Subordinated Certificateholders because such
amount was previously included in income. These results should not significantly
affect the inclusion of income for Subordinated Certificateholders on the
accrual method of accounting, but could accelerate inclusion of income to
Subordinated Certificateholders on the cash method of accounting by, in effect,
placing them on the accrual method.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of a Certificate, a U.S.
Certificateholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the disposition (other than any amount
attributable to accrued interest which will be taxable as ordinary income) and
the U.S. Certificateholder's adjusted tax basis in the Equipment Notes and any
other property held by the corresponding Trust. Any gain or loss will be
long-term capital gain or loss to the extent attributable to property held by
the Trust for more than one year. In the case of individuals, estates and
trusts, the maximum rate of tax on net long-term capital gains generally is 20%,
except that a maximum rate of 28% applies to property held for more than one
year but not more than 18 months.
S-79
<PAGE> 80
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 stock of, or 10% or more of the capital or profits
interest in, 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.
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 Chapter 1 of
Subtitle A of the Code, (i) the Trusts will not be subject to any tax
(including, without limitation, net or gross income, tangible or intangible
property, net worth, capital, franchise or doing business tax), fee or other
governmental charge under the laws of the State of Delaware or any political
subdivision thereof and (ii) Certificateholders that are not residents of or
otherwise subject to tax in Delaware will not be subject to any tax (including,
without limitation, net or gross income, tangible or intangible property, net
worth, capital, franchise or doing business tax), fee or other governmental
charge under the laws of the State of Delaware or any political subdivision
thereof as a result of purchasing, holding (including receiving payments with
respect to) or selling a Certificate.
Neither the Trusts nor the Certificateholders will be indemnified for any
state or local taxes imposed on them, and the imposition of any such taxes on a
Trust could result in a reduction in the amounts available for distribution to
the Certificateholders of such Trust. In general, should a Certificateholder or
any Trust be subject to any state or local tax which would not be imposed if the
Trustee were located in a different jurisdiction in the United States, the
Trustee will resign and a new Trustee in such other jurisdiction will be
appointed.
S-80
<PAGE> 81
CERTAIN ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans subject to
Title I of ERISA ("ERISA Plans"), and on those persons who are fiduciaries with
respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA's
general fiduciary requirements, including, but not limited to, the requirement
of investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code, such
as individual retirement accounts (together with ERISA Plans, "Plans")) and
certain persons (referred to as "parties in interest" or "disqualified persons")
having certain relationships to such Plans, unless a statutory or administrative
exemption is applicable to the transaction. A party in interest or disqualified
person who engages in a prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code.
The Department of Labor has promulgated a regulation, 29 CFR Section
2510.3-101 (the "Plan Asset Regulation"), describing what constitutes the assets
of a Plan with respect to the Plan's investment in an entity for purposes of
ERISA and Section 4975 of the Code. Under the Plan Asset Regulation, if a Plan
invests (directly or indirectly) in a Certificate, the Plan's assets will
include both the Certificate and an undivided interest in each of the underlying
assets of the corresponding Trust, including the Equipment Notes held by such
Trust, unless it is established that equity participation in the Trust by
benefit plan investors (including but not limited to Plans and entities whose
underlying assets include Plan assets by reason of an employee benefit plan's
investment in the entity) is not "significant" within the meaning of the Plan
Asset 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 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,
S-81
<PAGE> 82
may nevertheless be subject to state or other federal laws that are
substantially similar to the foregoing provisions of ERISA and the Code.
Fiduciaries of any such plans should consult with their counsel before
purchasing any Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase any
Certificates should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 of the Code to such an investment, and to confirm that such
purchase and holding will not constitute or result in a non-exempt prohibited
transaction or any other violation of an applicable requirement of ERISA.
In addition to the Class Exemptions referred to above, an individual
exemption may apply to the purchase, holding and secondary market sale of Class
A Certificates by Plans, provided that certain specified conditions are met. In
particular, the Department of Labor has issued individual administrative
exemptions to the Underwriters which are substantially the same as the
administrative exemption issued to The Chase Manhattan Bank, Prohibited
Transaction Exemption 90-31 (55 Fed. Reg. 23,144 (1990)), as amended (the
"Underwriter Exemption"). The Underwriter Exemption generally exempts from the
application of certain, but not all, of the prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Code certain transactions relating
to the initial purchase, holding and subsequent secondary market sale of pass
through certificates which represent an interest in a trust that holds secured
credit instruments that bear interest or are purchased at a discount in
transactions by or between business entities (including equipment notes secured
by leases) and certain other assets, provided that certain conditions set forth
in the Underwriter Exemption are satisfied.
The Underwriter Exemption sets forth a number of general and specific
conditions which must be satisfied for a transaction involving the initial
purchase, holding or secondary market sale of certificates representing a
beneficial ownership interest in a trust to be eligible for exemptive relief
thereunder. In particular, the Underwriter Exemption requires that the
acquisition of certificates by a Plan be on terms that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an unrelated
party; the rights and interests evidenced by the certificates not be
subordinated to the rights and interests evidenced 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.
Even if all of the conditions of the Underwriter Exemption are satisfied
with respect to the Class A Certificates, no assurance can be given that the
Underwriter Exemption would apply with respect to all transactions involving the
Class A Certificates or the assets of the Class A Trust. In particular, it
appears that the Underwriter Exemption would not apply to the purchase by Class
B Certificateholders or Class C Certificateholders of Class A Certificates in
connection with the exercise of their rights upon the occurrence and during the
continuance of a Triggering Event. Therefore, the fiduciary of a Plan
considering the purchase of a Class A Certificate should consider the
availability of the exemptive relief provided by the Underwriter Exemption, as
well as the availability of any other exemptions that may be applicable, such as
the Class Exemptions.
The Underwriter Exemption does not apply to the Class B or Class C
Certificates. Therefore, the fiduciary of a Plan considering the purchase of a
Class B or Class C Certificate should consider the availability of other
exemptions, such as the Class Exemptions.
Each person who acquires or accepts a Certificate or an interest therein,
will be deemed by such acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been used to purchase such
Certificate or an interest therein or (ii) the purchase and holding of such
Certificate or an interest therein are exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
S-82
<PAGE> 83
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated as of April , 1998 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters") have severally but not jointly
agreed with the Company to purchase from the Trustee the following respective
principal amounts of the Class A Certificates, the Class B Certificates and the
Class C Certificates:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A CLASS B CLASS C
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES
- ----------- ------------ ------------ ------------
<S> <C> <C> <C>
Chase Securities Inc. ......................... $ $ $
Credit Suisse First Boston Corporation.........
Morgan Stanley & Co. Incorporated..............
------------ ----------- -----------
Total................................ $105,797,282 $38,977,946 $42,424,772
============ =========== ===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all the Certificates if any are
purchased. The Underwriting Agreement provides that, in the event of a default
by an Underwriter, in certain circumstances the purchase commitments of
non-defaulting Underwriters may be increased or the Underwriting Agreement may
be terminated.
Continental has been advised by the Underwriters that the Underwriters
propose to offer all or part of the Certificates directly to the public at the
public offering price per Certificate designation set forth on the cover page of
this Prospectus Supplement and may offer a portion of the Certificates to
dealers at a price which represents a concession not in excess of the amounts
set forth below for the respective designations of the Certificates. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of the amounts set forth below for the respective designations of the
Certificates for certain dealers. After the initial public offering, the public
offering prices and such concessions and reallowances may be varied by the
Underwriters.
<TABLE>
<CAPTION>
PASS THROUGH CONCESSION REALLOWANCE
CERTIFICATE DESIGNATION TO DEALERS CONCESSION
----------------------- ---------- -----------
<S> <C> <C>
1998-2A..................................... % %
1998-2B.....................................
1998-2C.....................................
</TABLE>
The Certificates are a new issue of securities with no established trading
market. The Underwriters have advised Continental that one or more of them
intend to act as a market maker for the Certificates. However, the Underwriters
are not obligated to do so and may discontinue any market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Certificates.
Continental has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act of 1933 (the
"Securities Act"), or contribute to payments which the Underwriters may be
required to make in respect thereof.
From time to time, several of the Underwriters or their affiliates perform
investment banking and advisory services for, and provide general financing and
banking services to, Continental and its affiliates. In particular, The Chase
Manhattan Bank, an affiliate of Chase Securities Inc., is a lender to
Continental under several loan agreements.
It is expected that delivery of the Certificates will be made against
payment therefor on or about the date specified in the last paragraph of the
cover page of this Prospectus Supplement, which will be the business day
following the date of pricing of the Certificates. Under Rule 15c6-1 of the U.S.
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), trades in the secondary market generally are
required to settle in three business
S-83
<PAGE> 84
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 connection with the offering of the Certificates, Chase Securities Inc.,
on behalf of the Underwriters, may engage in over-allotment, stabilizing
transactions and syndicate covering transactions in accordance with Regulation M
under the Exchange Act. Over-allotment involves sales in excess of the offering
size, which creates a short position for the Underwriters. Stabilizing
transactions involve bids to purchase the Certificates in the open market for
the purpose of pegging, fixing or maintaining the price of the Certificates.
Syndicate covering transactions involve purchases of the Certificates in the
open market after the distribution has been completed in order to cover short
positions. Such stabilizing transactions and syndicate covering transactions may
cause the price of the Certificates to be higher than it would otherwise be in
the absence of such transactions. Such activities, if commenced, may be
discontinued 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 authorization, execution and delivery of the
Certificates under the Pass Through Trust Agreements.
EXPERTS
The consolidated financial statements (including financial statement
schedules) of Continental Airlines, Inc. appearing in Continental Airlines,
Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1997,
incorporated by reference in this Prospectus Supplement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon.
Such consolidated financial statements are incorporated therein in reliance upon
such reports of Ernst & Young LLP given upon the authority of such firm as
experts in accounting and auditing.
The references to AISI, BK and MBA, and to their respective appraisal
reports, each dated as of March 30, 1998, 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Continental with the Commission (File No.
0-9781) are hereby incorporated by reference in this Prospectus Supplement: (i)
Continental's Annual Report on Form 10-K for the year ended December 31, 1997,
filed on March 19, 1998, and (ii) Continental's Current Reports on Form 8-K
filed on January 25, February 20 and March 3, 1998.
Reference is made to the information under "Incorporation of Certain
Documents by Reference" in the accompanying Prospectus. All documents filed
under the Exchange Act with the Commission prior to January 1, 1998 and
incorporated by reference in the Prospectus have been superseded by the
above-listed documents and shall not be deemed to constitute a part of the
Prospectus or this Prospectus Supplement.
S-84
<PAGE> 85
APPENDIX I -- INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjusted Expected Distributions...... S-16
Administration Expenses.............. S-57
Aggregate LTV Collateral Amount...... S-16
Air Partners......................... S-26
Air Partners Transaction............. S-27
Aircraft............................. S-2
AISI................................. S-4
America West......................... S-34
Appraised Current Market Value....... S-17
Appraisers........................... S-4
Assumed Aggregate Aircraft Value..... S-4
Assumed Aircraft Value............... S-64
Average Life Date.................... S-63
Base Rate............................ S-53
Basic Agreement...................... S-1
BK................................... S-4
Boeing............................... S-24
Bush Intercontinental................ S-33
Business Day......................... S-43
Cash Collateral Account.............. S-13
CDG.................................. S-36
Cede................................. S-49
Certificate Account.................. S-42
Certificate Owner.................... S-50
Certificateholders................... S-8
Certificates......................... S-1
Class Exemptions..................... S-81
Class A Certificates................. S-7
Class A Trust........................ S-1
Class A Trustee...................... S-14
Class B Certificates................. S-7
Class B Trust........................ S-1
Class B Trustee...................... S-14
Class C Certificates................. S-7
Class C Trust........................ S-1
Class C Trustee...................... S-14
CMI.................................. S-33
Code................................. S-19
Commission........................... S-40
Company.............................. S-1
Continental.......................... S-1
Continental Express.................. S-33
Controlling Party.................... S-17
Convention........................... S-71
Creditors............................ S-77
Current Distribution Date............ S-14
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
default.............................. S-45
Delayed Delivery Notes............... S-11
disqualified persons................. S-81
Distribution Date.................... S-14
Downgrade Drawing.................... S-13
DTC.................................. S-49
DTC Participants..................... S-49
Equipment............................ S-69
Equipment Notes...................... S-2
ERISA................................ S-19
ERISA Plans.......................... S-81
Event of Loss........................ S-75
Exchange Act......................... S-83
Expected Distributions............... S-14
Express.............................. S-33
FAA.................................. S-28
Final Distributions.................. S-18
Final Drawing........................ S-13
Final Maturity Date.................. S-42
financial institution................ S-80
Gulfstream........................... S-34
H.15(519)............................ S-63
Hopkins International................ S-33
IACP................................. S-25
Indenture............................ S-7
Indenture Default.................... S-44
Intercreditor Agreement.............. S-14
Interest Drawings.................... S-11
IRS.................................. S-78
Issuance Date........................ S-4
KLM.................................. S-26
Lease................................ S-71
Lease Event of Default............... S-44
Lease Payment Date................... S-71
LIBOR................................ S-53
Liquidity Event of Default........... S-54
Liquidity Expenses................... S-56
Liquidity Facility................... S-11
Liquidity Obligations................ S-12
Liquidity Provider................... S-7
LLC.................................. S-76
LLC Agreement........................ S-77
Loan Trustee......................... S-7
LTV Appraisal........................ S-17
LTV Collateral Amount................ S-17
</TABLE>
I-1
<PAGE> 86
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LTV Ratio............................ S-17
LTVs................................. S-4
Make-Whole Premium................... S-63
Manager.............................. S-77
Maximum Available Commitment......... S-12
MBA.................................. S-4
Minimum Sale Price................... S-19
Moody's.............................. S-20
most recent H.15(519)................ S-63
Newark International................. S-33
NOLs................................. S-25
Non-Extension Drawing................ S-13
Non-Performing Equipment Notes....... S-16
Non-U.S. Certificateholder........... S-80
Northwest............................ S-26
Northwest Alliance................... S-26
Northwest Parties.................... S-37
Northwest Transaction................ S-27
Offering............................. S-7
Operative Agreements................. S-60
Other Member......................... S-76
Owner Participant.................... S-61
Owner Trust.......................... S-2
Owner Trustee........................ S-2
Participation Agreements............. S-7
parties in interest.................. S-81
Pass Through Trust Agreements........ S-1
Performing Equipment Note............ S-12
Plan Asset Regulation................ S-81
Plans................................ S-81
Pool Balance......................... S-43
Pool Factor.......................... S-43
Premium Termination Date............. S-9
Prospectus........................... S-3
PTC Event of Default................. S-8
PTCE................................. S-81
Rating Agencies...................... S-20
Regular Distribution Dates........... S-41
Remaining Weighted Average Life...... S-63
Replacement Facility................. S-51
Required Amount...................... S-11
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Scheduled Payments................... S-41
Section 1110 Period.................. S-13
Section 382.......................... S-25
Securities Act....................... S-83
Series A Equipment Notes............. S-2
Series B Equipment Notes............. S-2
Series C Equipment Notes............. S-2
Shareholder Litigation............... S-27
Shortfall Amounts.................... S-79
SOP 90-7............................. S-24
Southwest............................ S-33
Special Distribution Date............ S-42
Special Payment...................... S-42
Special Payments Account............. S-42
Standard & Poor's.................... S-20
Stated Interest Rates................ S-12
Subordinated Certificateholders...... S-79
Subordinated Certificates............ S-79
Subordinated Trusts.................. S-79
Subordination Agent.................. S-7
T+ ................................. S-2
Tax Counsel.......................... S-78
Teamsters............................ S-25
Termination Notice................... S-54
Threshold Rating..................... S-51
ticket tax........................... S-28
Transportation Code.................. S-47
Treasury Yield....................... S-63
Triggering Event..................... S-8
Trust Agreements..................... S-60
Trust Indenture Act.................. S-47
Trust Property....................... S-7
Trust Supplement..................... S-1
Trustee.............................. S-1
Trusts............................... S-1
U.S. Certificateholders.............. S-78
U.S. Persons......................... S-78
Underwriter Exemption................ S-82
Underwriters......................... S-83
Underwriting Agreement............... S-83
Virgin............................... S-36
</TABLE>
I-2
<PAGE> 87
APPENDIX II -- APPRAISAL LETTER
[AIRCRAFT INFORMATION SERVICES, INC. LOGO]
30 March 1998
Mr. Todd Ruden
Corporate Finance
Continental Airlines, Inc.
2929 Allen Parkway, Suite 1588
Houston, TX 77019
Subject: AISI Report No.: A8S023BVO
Sight Unseen Base Value Appraisal
Eight B737-300 Passenger Aircraft and Six MD-82 Passenger Aircraft.
Dear Mr. Ruden:
In response to your request, Aircraft Information Services, Inc. (AISI) is
pleased to offer Continental Airlines, Inc. our opinion of the sight unseen
half life base value of eight B737-300 passenger aircraft and six MD-82
passenger aircraft as defined and listed in Table I of this report.
1. METHODOLOGY AND DEFINITIONS
The method used by AISI in its valuation of the Aircraft was based both on a
review of information and aircraft specifications supplied by Continental
Airlines and also on a review of present and past market conditions, various
expert opinions (such as aircraft brokers and financiers) and information
contained in AISI's databases that help determine aircraft availability and
price data and thus arrive at the appraised values for the subject aircraft.
The historical standard term of reference for commercial aircraft value has been
'half-life fair market value' of an 'average' aircraft. However, 'fair market
value' could mean a fair value in the given market or a value in a hypothetical
'fair' or balanced market, and the two definitions are not equivalent. Recently,
the term 'base value' has been created to describe the theoretical balanced
market condition and to avoid the potentially misleading term 'fair market
value' which has now become synonymous with the term 'current market value' or a
'fair' value in the actual current market. AISI value definitions are consistent
with those of the International Society of Transport Aircraft Trading (ISTAT) of
01 January 1994; AISI is a member of that organization and employs an ISTAT
Certified Senior Aircraft Appraiser.
HEADQUARTERS, 26072 MERIT CIRCLE, SUITE 123, LAGUNA HILLS, CA 92653
TEL: 714-582-8888 FAX: 714-582-8887 E-Mail: [email protected]
<PAGE> 88
[AISI LOGO]
30 March 1998
AISI File No. A8S023BVO
Page-2-
AISI defines a 'base value' as that of a transaction between equally willing and
informed buyer and seller, neither under compulsion to buy or sell, for a single
unit cash transaction with no hidden value or liability, and with supply and
demand of the sale item roughly in balance. Base values are typically given for
aircraft in 'new' condition, 'average half-life' condition, or in a specifically
described condition unique to a single aircraft at a specific time. An 'average'
aircraft is an operable airworthy aircraft in average physical condition and
with average accumulated flight hours and cycles, with clear title and standard
unrestricted certificate of airworthiness, and registered in an authority which
does not represent a penalty to aircraft value or liquidity, with no damage
history and with inventory configuration and level of modification which is
normal for its intended use and age. AISI assumes average condition unless
otherwise specified in this report. 'Half-life' condition assumes that every
component or maintenance service which has a prescribed interval that determines
its service life, overhaul interval or interval between maintenance services, is
at a condition which is one-half of the total interval. It should be noted that
AISI and ISTAT value definitions apply to a transaction involving a single
aircraft, and that transactions involving more than one aircraft are often
executed at considerable and highly variable discounts to a single aircraft
price, for a variety of reasons relating to an individual buyer or seller.
AISI encourages the use of base values to consider historical trends, to
establish a consistent baseline for long term value comparisons and future value
considerations, or to consider how actual market values vary from theoretical
base values. Base values are normally inappropriate to determine near term
values of an aircraft.
2. HALF LIFE BASE VALUATION
Following is AISI's opinion of the half life base values for the subject
aircraft in 1998 USDollars. Valuations are presented in Table I subject to the
assumptions, definitions and disclaimers herein.
<PAGE> 89
[AISI LOGO]
30 March 1998
AISI File No. A8S023BVO
Page - 3 -
Unless otherwise agreed by Aircraft Information Services, Inc. (AISI) in
writing, this report shall be for the sole use of the client/addressee. This
report is offered as a fair and unbiased assessment of the subject aircraft.
AISI has no past, present, or anticipated future interest in the subject
aircraft. The conclusions and opinions expressed in this report are based on
published information, information provided by others, reasonable
interpretations and calculations thereof and are given in good faith. Such
conclusions and opinions are judgments that reflect conditions and values which
are current at the time of this report. The values and conditions reported upon
are subject to any subsequent change. AISI shall not be liable to any party for
damages arising out of reliance or alleged reliance on this report, or for any
parties action or failure to act as a result of reliance or alleged reliance on
this report.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
/s/ Fred E. Bearden
- -----------------------
Fred E. Bearden
President
<PAGE> 90
Table I - AISI File A8S023BVO - 30 March 1998 [AISI LOGO]
CONTINENTAL AIRLINES FLEET
HALF LIFE BASE VALUATION
<TABLE>
<CAPTION>
YEAR OF MTOW REGISTRATION SERIAL HALF LIFE
AIRCRAFT BUILD ENGINES (LBS.) NUMBERS NUMBERS 1998 BASE VALUE
- -------- ------- ------- ------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
B737-300 1987 CFM56-3B1 135,000 N14336 23574 $21,000,000
B737-300 1987 CFM56-3B1 135,000 N14337 23575 $21,000,000
B737-300 1987 CFM56-3B1 135,000 N59338 23576 $21,000,000
B737-300 1987 CFM56-3B1 135,000 N14341 23579 $21,000,000
B737-300 1987 CFM56-3B1 135,000 N14342 23580 $21,000,000
B737-300 1987 CFM56-3B1 135,000 N39343 23581 $21,000,000
B737-300 1987 CFM56-3B1 135,000 N17344 23582 $21,000,000
B737-300 1987 CFM56-3B1 135,000 N17345 23583 $21,000,000
MD-82 1986 JT8D-217A 149,500 N72821 49481 $18,260,000
MD-82 1986 JT8D-217A 149,500 N76823 49483 $18,260,000
MD-82 1987 JT8D-217A 149,500 N72829 49489 $19,110,000
MD-82 1987 JT8D-217A 149,500 N72830 49490 $19,110,000
MD-82 1987 JT8D-217A 149,500 N57837 49582 $19,110,000
MD-82 1987 JT8D-217A 149,500 N34838 49634 $19,110,000
</TABLE>
<PAGE> 91
BK Associates, Inc.
1295 Northern Boulevard
Manhasset, New York 11030
(516) 365-6272 - FAX (516) 365-6287
March 30, 1998
Mr. Todd Ruden
CONTINENTAL AIRLINES
2929 Allen Parkway, Suite 1588
Houston, TX 77019
Dear Todd:
In response to your request, BK Associates, Inc. is pleased to provide our
opinion regarding the current Base Value (BV) of various Boeing 737-3TO and
MD80 aircraft in your fleet (Aircraft). The aircraft are further identified by
registration, serial number, year of manufacture and engine model on the
attached Figure 1 along with our opinion of their current values.
It should be understood that BK Associates has neither inspected the Aircraft
nor their maintenance records, but has relied upon the information provided by
you and in the BK Associates database. The assumptions have been made that all
Airworthiness Directives have been complied with; accident damage has not been
incurred that would affect market values; maintenance has been accomplished in
accordance with a civil airworthiness authority's approved maintenance program
and accepted industry standards; and the Aircraft are at half-time between major
maintenance events. Deviations from these assumptions can change significantly
our opinion regarding the Aircrafts' values.
According to the International Society of Transport Aircraft Trading's (ISTAT)
definition of base value, to which BK Associates subscribes, base value is the
Appraiser's opinion of the underlying economic value of an aircraft in an open,
unrestricted, stable market environment with a reasonable balance of supply and
demand, and assumes full consideration of its "highest and best use". An
aircraft's Base Value is founded in the historical trend of values and in the
projection of value trends and presumes an arm's length, cash transaction
between willing, able and knowledgeable parties, acting prudently, with an
absence of duress and with a reasonable period of time available for marketing,
which BK Associates considers to be 12 to 18 months.
As the definition suggests, Base Value is determined from historic and future
value trends and is not influenced by current market conditions. It is often
determined as a function of the original cost of the aircraft, technical
characteristics of competing aircraft, and development of new models. BK
Associates has determined from analysis of historic data,
<PAGE> 92
[BK ASSOCIATES LOGO]
Mr. Todd Ruden
March 30, 1998
Page 2
a relationship between aircraft age and its value as a percentage of original
value for the average aircraft. These data form the basis for base value
determinations.
The B737 series and the -300 in particular is one of the most popular aircraft
ever built. There are 1,008 -300s in service or on order with 53 operators
worldwide and the family of next generation B737s is still in production. This
offers a vast operator base of potential users when aircraft must be sold.
By contrast there are 573 MD82s in service with 25 operators and 65 percent, or
377 aircraft are concentrated among the three largest operators. Further, our
analysis of Form 41 data filed with the U.S. Dept. of Transportation by U.S.
airlines shows that the direct operating cost per seat-mile for the B737-300 is
about eight percent lower than that of the MD82.
BK Associates, Inc. has no present or contemplated future interest in the
Aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation and the time and budget constraints imposed by the client. It is
not given as a recommendation, or as an inducement, for any financial
transaction and further, BK Associates, Inc. assumes no responsibility or legal
liability for any action taken or not taken by the addressee, or any other
party, with regard to the appraised equipment. By accepting this appraisal, the
addressee agrees that BK Associates, Inc. shall bear no such responsibility or
legal liability. This appraisal is prepared for the use of the addressee and
shall not be provided to other parties without the express consent of the
addressee.
Sincerely yours,
BK ASSOCIATES, INC.
/s/ John F. Keitz
John F. Keitz
President
ISTAT Certified Senior Appraiser
JFK/kf
Attachment
<PAGE> 93
Figure 1
Continental Airlines
Current Base Values of Selected Aircraft
<TABLE>
<CAPTION>
Base
TYPE REGIST S/N YEAR ENGINE Value
---- ------ --- ---- ------ -----
<S> <C> <C> <C> <C> <C>
B737-3T0 N14336 23574 1987 CFM56-3B1 20.90
B737-3T0 N14337 23575 1987 CFM56-3B1 20.90
B737-3T0 N59338 23576 1987 CFM56-3B1 20.90
B737-3T0 N14341 23579 1987 CFM56-3B1 20.90
B737-3T0 N14342 23580 1987 CFM56-3B1 20.90
B737-3T0 N39343 23581 1987 CFM56-3B1 20.90
B737-3T0 N17344 23582 1987 CFM56-3B1 20.90
B737-3T0 N17345 23583 1987 CFM56-3B1 20.90
MD82 N72821 49481 1986 JT8D-217A 16.50
MD82 N76823 49483 1986 JT8D-217A 16.50
MD82 N72829 49489 1987 JT8D-217A 17.05
MD82 N72830 49490 1987 JT8D-217A 17.05
MD82 N57837 49582 1987 JT8D-217A 17.55
MD82 N34838 49634 1987 JT8D-217A 17.55
</TABLE>
<PAGE> 94
I. INTRODUCTION AND SUMMARY OF FINDINGS
Morten Beyer and Agnew, Inc. (MBA), has been retained by Continental Airlines,
Inc. (Continental) to determine the Current Base Value (CBV) of 14 aircraft
currently operated by Continental Airlines. The aircraft are further identified
in Section II of this report.
In performing this valuation we did not inspect the aircraft or their
historical maintenance documentation, and we relied solely on information
provided to us by Continental. We are, however, familiar with Continental
Airlines operations and maintenance and have conducted previous inspections of
their aircraft and facilities. Based on the information set forth further in
this report, it is our opinion that the CBV of the aircraft is $285,021,700.00
as detailed in Section IV.
MBA uses the definition of certain terms, such as Base Value (BV), as
promulgated by the International Society of Transport Aircraft Trading (ISTAT),
a non-profit association of management personnel from banks, leasing companies,
airlines, manufacturers, appraisers, brokers, and others who have a vested
interest in the commercial aviation industry.
The ISTAT definition of Base Value (BV) is the price that will prevail when
market circumstances are in a reasonable state of equilibrium. Thus, BV
pertains to an idealized aircraft and market combination, but will not
necessarily reflect the actual Current Market Price (CMP) of the aircraft in
question. BV is founded in the historical trend of values and is generally used
to analyze historical values or to project future values.
The following table sets forth MBA's opinion regarding the base value of the
subject aircraft. Amounts are in terms of thousands of current 1998 US dollars.
[MBA Logo]
<PAGE> 95
II. AIRCRAFT
--------
- -------------------------------------------------------------------------------
TYPE SERIAL MONTH/YEAR OF MFR. PREVIOUS OWNER(S)
NUMBER
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
737-300 23574 January 1987 New to CAL
- -------------------------------------------------------------------------------
737-300 23575 January 1987 "
- -------------------------------------------------------------------------------
737-300 23576 February 1987 "
- -------------------------------------------------------------------------------
737-300 23579 April 1987 "
- -------------------------------------------------------------------------------
737-300 23580 April 1987 "
- -------------------------------------------------------------------------------
737-300 23581 April 1987
- -------------------------------------------------------------------------------
737-300 23582 May 1987
- -------------------------------------------------------------------------------
737-300 23583 May 1987 "
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MD80-82 49481 September 1986 "
- -------------------------------------------------------------------------------
MD80-82 49483 October 1986 CAL/ALM Antillean Air.
- -------------------------------------------------------------------------------
MD80-82 49489 April 1987 New to CAL
- -------------------------------------------------------------------------------
MD80-82 49490 April 1987 "
- -------------------------------------------------------------------------------
MD80-82 49582 October 1987 CAL/ALM Antillean Air.
- -------------------------------------------------------------------------------
MD80-82 49634 November 1987 New to CAL
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
III. CURRENT MARKET CONDITIONS
-------------------------
BOEING 737-300
The 737-300 was introduced in the early 1980s, and entered service in 1984,
several years behind the MD-80 which was already achieving extensive orders,
again giving the lead to Douglas.
As of January 1998, Boeing had delivered 1,829 of this reengined 2nd Generation
B-737 series, while another 233 remain on order, thus continuing the successful
tradition of the 737. Success was quick for the current production 737s, as they
found homes in fleets already populated with the -200s. The aircraft
particularly suited the deregulated American market, where smaller planes fitted
hub-and-spoke operations. Overall, more than 100 airlines have selected the 2nd
generation 737 to meet their growth/replacement needs. As airline consolidation
continues, however, and as
[MBA Logo]
<PAGE> 96
limited slot, gate, runway, and terminal facilities impede growth, we look to
the airlines to turn to larger aircraft to meet their needs.
According to Airclaims there are currently only three available for wet-lease/
lease or for sale.
MD 80-82
McDonnell Douglas was the first manufacturer to recognize and act on the
imminence of future noise restrictions, as well as to take advantage of
available technology to stretch the DC-9 at least one more time from a basic
139-seat to a 172-seat configuration. The MD-80 series is an elongated, higher
gross version of the venerable DC-9 fitted with Stage 3 Pratt & Whitney
JT8D-217/-219 engines. It was originally certified in 1980 after a few
embarrassing pratfalls. In the last decade gross weight and range have been
increased, and a truncated version, the MD-87, offered. Most recently, DAC had
announced the MD-90 series, using the new IAE V-2500 engine which offered
quieter, more efficient operation. But the MD-90 was a slow seller, a victim of
the malaise which gradually paralyzed Douglas and lead to the Boeing merger. The
MD-90 has now been officially terminated by Boeing after the remaining orders
are delivered.
Over 1,140 MD-80s of all versions are currently in service. MD-80s have a
five-abreast seating configuration, contrasted with the six-abreast seating of
the competitive Boeing and Airbus products. The JT8D-217/-219 engines achieve
only marginal compliance with Stage 3 noise limits, therefore, the nagging
concern exists that as noise rules are invariably tightened the MD-80 will be
squeezed out before its time. The only solution would be reengining with the
same power plants as the MD-90 -- an $8.0 to $10.0 million project per
aircraft, or development of further noise suppression through hushkits of lower
cost.
[MBA Logo]
<PAGE> 97
The MD-80 suffers from a smaller operator base than the Boeing
737-300/-400/-500s with which it competes. This has been a long-term problem
with the Douglas DC-8 and DC-9 competing with the B-707 and B737 as well. A
total of some 50 airlines worldwide operate the MD-80 series, and 40 percent are
in the hands of two carriers, American and Delta. Many operators utilize more
than one type of MD-80, no carrier utilizes more than four of the five. Most
carriers have fleets of five or less, suggesting that ultimate resales to these
operators will inevitably be in lots of one and two each.
The MD-80's accident record is relatively good -- only five have been
destroyed, only one of which is potentially attributable to design problems: the
SAS icing incident in Europe in 1994. The MD-80 should have a long and
relatively problem-free structural life, given the good record of Douglas on the
DC-8, DC-9, and DC-10.
The MBA Model shows the MD-80 series (with the exception of the short-bodied
MD-87) to have superior economic characteristics. At comparable seating
densities, its lower capital costs offset slightly higher fuel consumption than
the 737-300. The stretched fuselage gives it better seat-mile costs than
earlier DC-9s.
The MD-80's cost characteristics are reasonable due to its high seating
capacity, and provided it can skirt the ever-present risk of more stringent
noise restrictions, it should have a long and productive useful life in
competition with existing and newly developing aircraft. On the used market it
is already priced in the range of $125,000 a seat -- about 40 percent of a new
aircraft -- giving it a significant advantage for a new operator. Its largest
probable market is with existing DC-9 operators, replacing their 30-year-old
aircraft as they are forced to retire them.
The -82 is the most popular of the MD-80 series, with American's 227
representing nearly half of all produced. We do not believe that Boeing's
decision to terminate the production of the MD-80/90 series aircraft will have
a material effect on used aircraft
[MBA LOGO]
<PAGE> 98
prices since they are fully committed to maintaining technical support for the
existing aircraft. We expect that its strong performance capabilities will keep
this aircraft busy for many years to come. According to Airclaims, there are
currently no MD-82's available for sale or lease.
[MBA LOGO]
<PAGE> 99
IV. VALUATION
<TABLE>
<CAPTION>
TYPE SERIAL # CURRENT BASE VALUE
- -------------------------------------------
<S> <C> <C>
737-300 23574 $ 20,480,000
- -------------------------------------------
737-300 23575 20,480,000
- -------------------------------------------
737-300 23576 20,630,000
- -------------------------------------------
737-300 23579 20,792,000
- -------------------------------------------
737-300 23580 20,792,000
- -------------------------------------------
737-300 23581 20,792,000
- -------------------------------------------
737-300 23582 20,870,000
- -------------------------------------------
737-300 23583 20,870,000
- -------------------------------------------
MD80-82 49481 19,362,500
- -------------------------------------------
MD80-82 49483 19,435,000
- -------------------------------------------
MD80-82 49489 19,883,200
- -------------------------------------------
MD80-82 49490 19,883,200
- -------------------------------------------
MD80-82 49582 20,338,000
- -------------------------------------------
MD80-82 49634 20,413,800
- -------------------------------------------
Total $285,021,700.00
- -------------------------------------------
</TABLE>
In developing the CBV of these aircraft, MBA did not inspect the aircraft or
its historical maintenance documentation. Therefore, we used certain
assumptions that are generally accepted industry practice to calculate the
value of an aircraft when more detailed information is not available. The
principal assumptions are as follows (for each aircraft):
1. The aircraft is in good overall condition.
2. The overhaul status of the airframe, engines, landing gear and other
major components are the equivalent of mid-time/mid-life unless
otherwise specified.
3. This historical maintenance documentation has been maintained to
acceptable international standards.
4. The specifications of the aircraft are those most common for an aircraft
of its type and vintage.
5. The aircraft is in a standard airline configuration.
6. The aircraft is current as to all Airworthiness Directives and Service
Bulletins.
[MBA LOGO]
<PAGE> 100
7. Its modification status is comparable to that most common for an
aircraft of its type and vintage.
8. Its utilization is comparable to industry averages.
9. There is no history of accident or incident damage.
10. No accounting was made for lease obligations or terms of ownership.
V. COVENANTS
---------
This report has been prepared for the exclusive use Continental and shall not be
provided to other parties by MBA without the express consent of Continental.
MBA certifies that this report has been independently prepared and that it fully
and accurately reflects MBA's opinion as to the Current Base Value. MBA further
certifies that it does not have, and does not expect to have, any financial or
other interest in the subject or similar aircraft.
This report represents the opinion of MBA as to the Current Base Value of the
subject aircraft and is intended to be advisory only in nature. Therefore, MBA
assumes no responsibility or legal liability for any actions taken or not taken
Continental or any other party with regard to the subject aircraft. By accepting
this report, all parties agree that MBA shall bear no such responsibility or
legal liability.
Sincerely,
/s/ Morten S. Beyer
-------------------
Morten S. Beyer
CEO and Chairman
ISTAT Certified Senior Appraiser
[MBA Logo]
<PAGE> 101
APPENDIX III -- EQUIPMENT NOTES PRINCIPAL PAYMENT SCHEDULE*
SERIES A
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER
REGULAR DISTRIBUTION ----------------------------------------------------------------------------------------
DATES N14336 N14337 N59338 N14341 N14342 N39343 N17344
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
April , 1998....... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
October 15, 1998..... 0 0 0 0 0 0 0
April 15, 1999....... 355,021 355,021 355,021 355,021 355,021 355,021 355,021
October 15, 1999..... 177,510 177,510 177,510 177,510 177,510 177,510 177,510
April 15, 2000....... 177,510 177,510 177,510 177,510 177,510 177,510 177,510
October 15, 2000..... 177,510 177,510 177,510 177,510 177,510 177,510 177,510
April 15, 2001....... 177,510 177,510 177,510 177,510 177,510 177,510 177,510
October 15, 2001..... 221,863 221,863 221,863 221,863 221,863 221,863 221,863
April 15, 2002....... 221,863 221,863 221,863 221,863 221,863 221,863 221,863
October 15, 2002..... 236,680 236,680 236,680 236,680 236,680 236,680 236,680
April 15, 2003....... 236,680 236,680 236,680 236,680 236,680 236,680 236,680
October 15, 2003..... 236,680 236,680 236,680 236,680 236,680 236,680 236,680
April 15, 2004....... 236,680 236,680 236,680 236,680 236,680 236,680 236,680
October 15, 2004..... 431,948 431,948 431,948 431,948 431,948 431,948 431,948
April 15, 2005....... 951,345 951,345 951,345 951,345 951,345 951,345 951,345
October 15, 2005..... 978,921 978,921 978,921 978,921 978,921 978,921 978,921
April 15, 2006....... 1,007,368 1,007,368 1,007,368 1,007,368 1,007,368 1,007,368 1,007,368
October 15, 2006..... 1,036,714 1,036,714 1,036,714 1,036,714 1,036,714 1,036,714 1,036,714
April 15, 2007....... 1,066,988 1,066,988 1,066,988 1,066,988 1,066,988 1,066,988 1,066,988
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER
REGULAR DISTRIBUTION ----------------------------------------------------------------------------------------
DATES N17345 N72821 N76823 N72829 N72830 N57837 N34838
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
April , 1998....... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
October 15, 1998..... 0 0 0 0 0 0 0
April 15, 1999....... 355,021 320,971 320,971 320,971 320,971 320,971 320,971
October 15, 1999..... 177,510 160,485 160,485 160,485 160,485 160,485 160,485
April 15, 2000....... 177,510 160,485 160,485 160,485 160,485 160,485 160,485
October 15, 2000..... 177,510 160,485 160,485 160,485 160,485 160,485 160,485
April 15, 2001....... 177,510 160,485 160,485 160,485 160,485 160,485 160,485
October 15, 2001..... 221,863 196,009 196,009 196,009 196,009 196,009 196,009
April 15, 2002....... 221,863 196,009 196,009 196,009 196,009 196,009 196,009
October 15, 2002..... 236,680 457,285 457,285 457,285 457,285 457,285 457,285
April 15, 2003....... 236,680 996,002 996,002 996,002 996,002 996,002 996,002
October 15, 2003..... 236,680 1,022,063 1,022,063 1,022,063 1,022,063 1,022,063 1,022,063
April 15, 2004....... 236,680 1,048,943 1,048,943 1,048,943 1,048,943 1,048,943 1,048,943
October 15, 2004..... 431,948 1,076,667 1,076,667 1,076,667 1,076,667 1,076,667 1,076,667
April 15, 2005....... 951,345 1,105,263 1,105,263 1,105,263 1,105,263 1,105,263 1,105,263
October 15, 2005..... 978,921 0 0 0 0 0 0
April 15, 2006....... 1,007,368 0 0 0 0 0 0
October 15, 2006..... 1,036,714 0 0 0 0 0 0
April 15, 2007....... 1,066,988 0 0 0 0 0 0
</TABLE>
- ---------------
* The principal amounts and payment schedule are indicative only and subject to
change.
III-1
<PAGE> 102
APPENDIX III -- EQUIPMENT NOTES PRINCIPAL PAYMENT SCHEDULE -- (CONTINUED)
SERIES B
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER
REGULAR DISTRIBUTION ----------------------------------------------------------------------------------------
DATES N14336 N14337 N59338 N14341 N14342 N39343 N17344
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
April , 1998....... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
October 15, 1998..... 0 0 0 0 0 0 0
April 15, 1999....... 130,797 130,797 130,797 130,797 130,797 130,797 130,797
October 15, 1999..... 65,399 65,399 65,399 65,399 65,399 65,399 65,399
April 15, 2000....... 65,399 65,399 65,399 65,399 65,399 65,399 65,399
October 15, 2000..... 65,399 65,399 65,399 65,399 65,399 65,399 65,399
April 15, 2001....... 65,399 65,399 65,399 65,399 65,399 65,399 65,399
October 15, 2001..... 81,739 81,739 81,739 81,739 81,739 81,739 81,739
April 15, 2002....... 81,739 81,739 81,739 81,739 81,739 81,739 81,739
October 15, 2002..... 87,198 87,198 87,198 87,198 87,198 87,198 87,198
April 15, 2003....... 486,472 486,472 486,472 486,472 486,472 486,472 486,472
October 15, 2003..... 636,905 636,905 636,905 636,905 636,905 636,905 636,905
April 15, 2004....... 662,023 662,023 662,023 662,023 662,023 662,023 662,023
October 15, 2004..... 492,667 492,667 492,667 492,667 492,667 492,667 492,667
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER
REGULAR DISTRIBUTION ----------------------------------------------------------------------------------------
DATES N17345 N72821 N76823 N72829 N72830 N57837 N34838
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
April , 1998....... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
October 15, 1998..... 0 0 0 0 0 0 0
April 15, 1999....... 130,797 118,252 118,252 118,252 118,252 118,252 118,252
October 15, 1999..... 65,399 59,126 59,126 59,126 59,126 59,126 59,126
April 15, 2000....... 65,399 59,126 59,126 59,126 59,126 59,126 59,126
October 15, 2000..... 65,399 59,126 59,126 59,126 59,126 59,126 59,126
April 15, 2001....... 65,399 315,686 315,686 315,686 315,686 315,686 315,686
October 15, 2001..... 81,739 726,480 726,480 726,480 726,480 726,480 726,480
April 15, 2002....... 81,739 750,230 750,230 750,230 750,230 750,230 750,230
October 15, 2002..... 87,198 513,451 513,451 513,451 513,451 513,451 513,451
April 15, 2003....... 486,472 0 0 0 0 0 0
October 15, 2003..... 636,905 0 0 0 0 0 0
April 15, 2004....... 662,023 0 0 0 0 0 0
October 15, 2004..... 492,667 0 0 0 0 0 0
</TABLE>
III-2
<PAGE> 103
APPENDIX III -- EQUIPMENT NOTES PRINCIPAL PAYMENT SCHEDULE -- (CONTINUED)
SERIES C
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER
REGULAR DISTRIBUTION ----------------------------------------------------------------------------------------
DATES N14336 N14337 N59338 N14341 N14342 N39343 N17344
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
April , 1998....... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
October 15, 1998..... 0 0 0 0 0 0 0
April 15, 1999....... 3,917 3,917 3,917 3,917 3,917 3,917 3,917
October 15, 1999..... 455,548 455,548 455,548 455,548 455,548 455,548 455,548
April 15, 2000....... 475,130 475,130 475,130 475,130 475,130 475,130 475,130
October 15, 2000..... 495,331 495,331 495,331 495,331 495,331 495,331 495,331
April 15, 2001....... 516,171 516,171 516,171 516,171 516,171 516,171 516,171
October 15, 2001..... 476,976 476,976 476,976 476,976 476,976 476,976 476,976
April 15, 2002....... 499,154 499,154 499,154 499,154 499,154 499,154 499,154
October 15, 2002..... 501,757 501,757 501,757 501,757 501,757 501,757 501,757
April 15, 2003....... 126,085 126,085 126,085 126,085 126,085 126,085 126,085
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT REGISTRATION NUMBER
REGULAR DISTRIBUTION ----------------------------------------------------------------------------------------
DATES N17345 N72821 N76823 N72829 N72830 N57837 N34838
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
April , 1998....... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
October 15, 1998..... 0 0 0 0 0 0 0
April 15, 1999....... 3,917 5,777 5,777 5,777 5,777 5,777 5,777
October 15, 1999..... 455,548 614,895 614,895 614,895 614,895 614,895 614,895
April 15, 2000....... 475,130 635,881 635,881 635,881 635,881 635,881 635,881
October 15, 2000..... 495,331 657,525 657,525 657,525 657,525 657,525 657,525
April 15, 2001....... 516,171 423,291 423,291 423,291 423,291 423,291 423,291
October 15, 2001..... 476,976 0 0 0 0 0 0
April 15, 2002....... 499,154 0 0 0 0 0 0
October 15, 2002..... 501,757 0 0 0 0 0 0
April 15, 2003....... 126,085 0 0 0 0 0 0
</TABLE>
III-3
<PAGE> 104
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITY TO WHICH THEY RELATE OR ANY OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCE IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER OR THEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF CONTINENTAL SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------------------------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Prospectus Supplement Summary S-3
Risk Factors S-24
Use of Proceeds S-32
The Company S-33
Description of the Certificates S-40
Description of the Liquidity
Facilities S-50
Description of the Intercreditor
Agreement S-54
Description of the Aircraft and the
Appraisals S-59
Description of the Equipment Notes S-60
Certain U.S. Federal Income Tax
Consequences S-78
Certain Delaware Taxes S-80
Certain ERISA Considerations S-81
Underwriting S-83
Legal Matters S-84
Experts S-84
Incorporation of Certain Documents
by Reference S-84
Index of Terms Appendix I
Appraisal Letters Appendix II
Equipment Notes Principal Payment
Schedule Appendix III
PROSPECTUS
Available Information 2
Incorporation of Certain Documents
by Reference 2
The Company 3
Use of Proceeds 3
Ratio of Earnings to Fixed Charges 4
General Outline of Trust Structure 4
Description of the Certificates 4
Description of the Equipment Notes 15
Certain United States Federal Income
Tax Consequences 20
ERISA Considerations 22
Plan of Distribution 22
Legal Opinions 24
Experts 24
</TABLE>
Prospectus Supplement
Continental
Airlines
1998-2 Pass Through Trusts
$187,200,000
PASS THROUGH CERTIFICATES,
SERIES 1998-2
[CONTINENTAL AIRLINES LOGO]
CHASE SECURITIES INC.
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY DEAN WITTER
Dated April , 1998
