<PAGE> 1
Pursuant to Rule 424(b)(2)
Registration No. 33-54987
Prospectus Supplement (to Prospectus dated October 11, 1994)
PHILLIPS PETROLEUM COMPANY
$87,959,874
1994 PASS THROUGH TRUSTS
7.53% PASS THROUGH CERTIFICATES, SERIES 1994-A1
8.52% PASS THROUGH CERTIFICATES, SERIES 1994-A2
The Pass Through Certificates offered hereby consist of Phillips Petroleum
Company 7.53% Pass Through Certificates, Series 1994-A1, in the aggregate amount
of $18,209,041 and Phillips Petroleum Company 8.52% Pass Through Certificates,
Series 1994-A2, in the aggregate amount of $69,750,833, which will represent
fractional undivided interests in the Phillips Petroleum Company Pass Through
Trust, 1994-A1, and the Phillips Petroleum Company Pass Through Trust, 1994-A2,
respectively. Each Pass Through Trust will be formed pursuant to a separate Pass
Through Trust Agreement, in each case between Phillips Petroleum Company (the
"Company"), and Shawmut Bank Connecticut, National Association, not in its
individual capacity but solely as the Pass Through Trustee under such Pass
Through Trust. The property of each Pass Through Trust will consist of equipment
notes (the "Equipment Notes") being issued as nonrecourse obligations by four
separate Owner Trusts in connection with four separate leveraged lease
transactions. The proceeds of the Equipment Notes will be used (i) to repay and
refinance interim loans made to each of the Owner Trusts to pay up to 80% of the
acquisition cost of specific items of transportation equipment described herein
(the "Equipment") which have been sold by the Company to such Owner Trusts and
leased back by such Owner Trusts to the Company and (ii) to pay certain costs
and expenses incurred in connection with the acquisition of the Equipment.
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(Continued on next page)
THE PASS THROUGH CERTIFICATES, SUBJECT TO CERTAIN EXCEPTIONS MORE FULLY
DESCRIBED UNDER "ERISA CONSIDERATIONS", MAY NOT BE PURCHASED BY, OR WITH THE
ASSETS OF, ANY EMPLOYEE BENEFIT PLAN SUBJECT TO TITLE I OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR INDIVIDUAL RETIREMENT
ACCOUNT OR PLAN SUBJECT TO SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
PASS THROUGH AGGREGATE APPLICABLE FINAL DISTRIBUTION INITIAL PUBLIC
CERTIFICATES AMOUNT INTEREST RATE DATE OFFERING PRICE(1)(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SERIES 1994-A1 $18,209,041 7.53% September 27, 1998 100%
SERIES 1994-A2 $69,750,833 8.52% September 27, 2011 100%
TOTAL $87,959,874 $87,959,874
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from the date of
issuance of such Pass Through Certificates.
(2) All of the proceeds from the sale of the Pass Through Certificates will be
used to purchase the Equipment Notes issued by the Owner Trustee on behalf
of four Owner Trusts. The underwriting fees aggregate $91,045 with respect
to Series 1994-A1 and $453,380 with respect to Series 1994-A2, which
constitutes 0.62% of the aggregate amount of the Pass Through Certificates.
The underwriting fees and certain other expenses relating to the offering,
estimated at $558,500, will be paid by the Owner Trustee on behalf of the
Owner Participants. The Company has agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended.
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The Pass Through Certificates are offered by the Underwriter, subject to prior
sale, when, as and if issued and accepted by the Underwriter and subject to
certain other conditions. The Underwriter reserves the right to withdraw, cancel
or modify such offers and to reject orders in whole or in part. It is expected
that the delivery of the Pass Through Certificates will be made in book-entry
form through the facilities of The Depository Trust Company on or about October
27, 1994, against payment therefor in immediately available funds.
CHEMICAL SECURITIES INC.
The date of this Prospectus Supplement is October 19, 1994.
<PAGE> 2
Equipment Notes, each of which may have a different principal amount,
interest rate, maturity date and schedule of principal payments, will be issued
on behalf of each Owner Trust under the Indentures as nonrecourse obligations of
Wilmington Trust Company, acting not in its individual capacity but solely as
Owner Trustee of such Owner Trust, and will be purchased from the Owner Trustee
by the Pass Through Trustee. The aggregate principal amount of the Equipment
Notes issued under each Indenture will not exceed 80% of the acquisition cost of
the Equipment subject to such Indenture.
For each Pass Through Trust, all of the Equipment Notes purchased by the
Pass Through Trustee will have identical interest rates, in each case equal to
the rate applicable to the Pass Through Certificates of such Pass Through Trust
set forth on the cover page hereof, and will have a maturity date on or before
the final distribution date for such Pass Through Trust. Interest paid on the
Equipment Notes held in each Pass Through Trust will be passed through to the
related Certificateholders on each March 27 and September 27, commencing on
March 27, 1995, at the applicable rate per annum set forth on the cover page
hereof until the final distribution date for such Pass Through Trust. Principal
paid on the Equipment Notes held in each Pass Through Trust will be passed
through to the related Certificateholders in scheduled amounts on March 27 or
September 27, or both, of each specified year, commencing on March 27, 1995, for
the Series 1994-A1 Pass Through Certificates and commencing on March 27, 1999,
for the Series 1994-A2 Pass Through Certificates, until the final distribution
date for such Pass Through Trust.
Prior to the maturity thereof, the Equipment Notes relating to any Equipment
may be purchased at the direction of the Owner Participant and such Equipment
Notes may be prepaid by the Owner Trustee, under the circumstances and at the
prices described in this Prospectus Supplement under "Description of the
Equipment Notes -- Prepayment." Any such purchase or prepayment would result in
an early distribution of principal paid in respect of the Pass Through
Certificates.
THE PASS THROUGH CERTIFICATES REPRESENT INTERESTS IN THE RELATED PASS
THROUGH TRUST ONLY AND ALL PAYMENTS AND DISTRIBUTIONS SHALL BE MADE ONLY FROM
THE PROPERTY OF SUCH PASS THROUGH TRUST. THE PASS THROUGH CERTIFICATES DO NOT
REPRESENT AN INTEREST IN, OBLIGATION OF, OR GUARANTEE BY THE COMPANY.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PASS THROUGH
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN ANY OVER-THE-COUNTER MARKET OR
OTHERWISE AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3
PROSPECTUS SUMMARY
The following is a summary of more detailed information contained elsewhere
in this Prospectus Supplement and the accompanying Prospectus and should be read
only in conjunction with this Prospectus Supplement and the Prospectus.
THE OFFERING
Glossary................... A glossary of certain of the significant defined
terms used in this Prospectus Supplement is
included as Appendix A to this Prospectus
Supplement.
Diagram of Payments........ A diagram of payments illustrating certain of the
payment flows in the Pass Through Trust structure
for Equipment being leased by the Company appears
on page S-10 of this Prospectus Supplement.
The Offering............... The Pass Through Certificates offered hereby
consist of Phillips Petroleum Company 7.53% Pass
Through Certificates, Series 1994-A1 (the "Series
A1 Pass Through Certificates"), in the aggregate
amount of $18,209,041 and 8.52% Pass Through
Certificates, Series 1994-A2 (the "Series A2 Pass
Through Certificates"), in the aggregate amount
of $69,750,833. Each such series of Pass Through
Certificates is a "Series" and the Pass Through
Certificates of both such Series, collectively,
are the "Pass Through Certificates." The Series
A1 Pass Through Certificates and the Series A2
Pass Through Certificates will be issued by
Phillips Petroleum Company Pass Through Trust,
1994-A1 and Phillips Petroleum Company Pass
Through Trust, 1994-A2, respectively (each, a
"Pass Through Trust"), to be formed pursuant to
the Pass Through Trust Agreement 1994-A1 and Pass
Through Trust Agreement 1994-A2, respectively
(each, a "Pass Through Agreement"), in each case
between the Company and Shawmut Bank Connecticut,
National Association ("Shawmut Bank
Connecticut"), as pass through trustee under each
such Pass Through Trust (the "Pass Through
Trustee") for the benefit of the registered
holders (the "Certificateholders") of the related
Series of Pass Through Certificates.
Certificates Offered;
Book-Entry Registration.... Each Pass Through Certificate will represent a
fractional undivided interest in the related Pass
Through Trust. The Pass Through Certificates of
each Pass Through Trust will be issued in fully
registered form only. The Pass Through
Certificates of each Pass Through Trust will be
represented by one or more permanent global Pass
Through Certificates registered in the name of
Cede & Co. ("Cede"), as the nominee of The
Depository Trust Company ("DTC"). No person
acquiring an interest in the Pass Through
Certificates will be entitled to receive a
definitive certificate representing such person's
interest in the related Pass Through Trust,
except in the event that definitive certificates
are issued under the limited circumstances
described herein. See "Description of the Pass
Through Certificates -- Book-Entry Registration"
in the Prospectus.
Trust Property............. The property held in each Pass Through Trust (the
"Trust Property") will consist of equipment notes
(the "Equipment Notes") issued as nonrecourse
obligations by Wilmington Trust Company, not in
its individual capacity but solely as Owner
Trustee (the "Owner Trus-
S-3
<PAGE> 4
tee") under four separate owner trusts (each, an
"Owner Trust") pursuant to four separate trust
indentures and security agreements (each, an
"Indenture") between the Owner Trustee and
Shawmut Bank Connecticut, as indenture trustee
(the "Indenture Trustee"). The proceeds of such
Equipment Notes will be used (i) to repay and
refinance interim loans made to each of the Owner
Trusts to pay up to 80% of the acquisition cost
of each of four classes of equipment (each, a
"Class") consisting of 1,676 covered hoppers and
708 tank rail cars (the "Rail Cars"), three
Falcon 20 corporate aircraft (the "F-20
Aircraft"), one Falcon 50 corporate aircraft (the
"F-50 Aircraft") and 136 mobile aircraft
refueling vehicles (the "Vehicles"),
respectively, which have been leased to the
Company in four separate leveraged lease
transactions (the Rail Cars, the F-20 Aircraft,
the F-50 Aircraft and the Vehicles, collectively,
the "Equipment") and (ii) to pay certain costs
and expenses incurred in connection with the
acquisition of the Equipment. The aggregate
acquisition cost of the Equipment of each Class
is as follows: the Rail Cars, $77,651,450; the
F-20 Aircraft, $15,510,000; the F-50 Aircraft,
$10,400,000; and the Vehicles, $7,690,100. The
Equipment of each Class is owned by a separate
Owner Trust, and the Equipment Notes issued on
behalf of each Owner Trust will be payable only
from the assets of such Owner Trust. (See
"Description of the Equipment Notes -- General"
for a description of which Equipment Notes
constitute the property of the respective Pass
Through Trusts.) Each Pass Through Trust will
include Equipment Notes with identical interest
rates, in each case equal to the rate applicable
to the Pass Through Certificates of such Pass
Through Trust as set forth on the cover of this
Prospectus Supplement, and will have maturity
dates on or before the final distribution date
for such Pass Through Trust. For each Pass
Through Trust, the aggregate principal amount of
the Equipment Notes held in such Pass Through
Trust will equal the aggregate amount of the
related Series of Pass Through Certificates.
Denominations.............. The Pass Through Certificates of each Pass Through
Trust will be issued in registered form without
coupons in minimum denominations of $1,000 or any
integral multiple thereof, except that one Pass
Through Certificate with respect to each Pass
Through Trust may be in an amount that is not a
multiple of $1,000.
Distribution Dates......... March 27 and September 27, commencing on March 27,
1995.
Special Distribution
Dates...................... The 27th day of any month.
Record Dates............... The 15th day preceding a Distribution Date or a
Special Distribution Date, as the case may be.
Distributions of Scheduled
Payments................. Payments of interest on the Equipment Notes held in
each Pass Through Trust are scheduled to be
received by the Pass Through Trustee on each
March 27 and September 27, commencing on March
27, 1995, and, subject to receipt, are to be
distributed to the related Certificateholders on
the corresponding Distribution Dates. Interest on
the Equipment Notes will be calculated on the
basis of a 360-day year consisting of twelve
30-day months. Payments of principal on such
Equipment Notes are scheduled to be received in
specified amounts on
S-4
<PAGE> 5
March 27 or September 27, or both, of each
specified year, commencing on March 27, 1995, in
the case of the Pass Through Trust relating to
the Series A1 Pass Through Certificates, and
commencing on March 27, 1999, in the case of the
Pass Through Trust relating to the Series A2 Pass
Through Certificates, and, subject to receipt,
are to be distributed to the related
Certificateholders on the corresponding
Distribution Dates. Such scheduled payments of
principal of, and interest on, the Equipment
Notes are referred to herein as "Scheduled
Payments." See "Description of the Pass Through
Certificates -- Payments and Distributions" in
the Prospectus.
Distributions of
Special Payments......... For any Pass Through Trust, any payments of
principal, premium, if any, or interest, other
than Scheduled Payments, received by the Pass
Through Trustee on any of the Equipment Notes
held in such Pass Through Trust will be
distributed on a Special Distribution Date after
(i) not less than 20 days' notice in the case of
a Special Payment on account of a prepayment of
any Equipment Note or (ii) notice as soon as is
practicable after confirmation by the Pass Though
Trustee of the receipt of funds in the case of
any other Special Payment.
Method of
Distributions............ Under the terms of each Pass Through Agreement, the
Company and the Pass Through Trustee will treat
the persons in whose names the related Pass
Through Certificates are registered as the owners
of such Pass Through Certificates for the purpose
of receiving payments of principal and interest
on such Pass Through Certificates and for all
other purposes whatsoever. Neither the Company,
the Pass Through Trustee nor any other agent of
the Company or the Pass Through Trustee will have
any responsibility or liability for the payment
of principal or interest on the Pass Through
Certificates. So long as the Pass Through
Certificates are registered in the name of Cede,
as nominee of DTC, distributions on the Pass
Through Certificates of any Pass Through Trust
will be made in same-day funds to DTC. See
"Description of Pass Through
Certificates -- Book-Entry Registration" in the
Prospectus. DTC will in turn make distributions
in same-day funds to those participants in DTC
who are credited with ownership of the Pass
Through Certificates ("DTC Participants") in
amounts proportionate to the principal amount of
each such DTC Participant's respective holdings
of beneficial interests in the Pass Through
Certificates. Corresponding payments by the DTC
Participants to beneficial owners of the Pass
Through Certificates will be the responsibility
of such DTC Participants and will be made in
accordance with customary industry practices. See
"Description of the Pass Through
Certificates -- Book-Entry Registration" in the
Prospectus. At such time, if ever, as the Pass
Through Certificates are issued in definitive
form and not registered in the name of Cede, as
nominee for DTC, distribution by the Pass Through
Trustee to the holders of Pass Through
Certificates, other than the final distribution,
will be made by check mailed to each holder of
Pass Through Certificates of record on the
applicable record date at its address appearing
on the register or, upon application by such
Certificateholder to the Pass Through Trustee, by
wire transfer in immediately available funds to a
bank account of such Certificateholder. The final
distribution with respect
S-5
<PAGE> 6
to the Pass Through Certificates of any Pass
Through Trust will be made only upon presentation
and surrender thereof at the office or agency of
the Pass Through Trustee. See "Description of the
Pass Through Certificates -- Book Entry
Registration" and "-- Payments and Distributions"
in the Prospectus.
Equipment Notes:
Security and Payments.... For each Owner Trust, the principal amount of the
Equipment Notes issued on behalf of such Owner
Trust, premium, if any, and interest thereon will
be secured by a security interest in the Class of
Equipment owned by such Owner Trust and by an
assignment to the Indenture Trustee of certain of
the Owner Trustee's rights under the related
Lease, including the right to receive rental
payments payable by the Company thereunder. With
respect to the Equipment owned by each Owner
Trust, the Company will be obligated to make
rental payments on account of such Equipment that
will be at least equal to all scheduled payments
of principal of and interest on the Equipment
Notes issued on behalf of such Owner Trust when,
and as scheduled to be, due and payable. Unless
and until an Indenture Event of Default has
occurred and is continuing under an Indenture,
the Indenture Trustee generally may not exercise
any of the rights of the Owner Trustee under the
related Lease, except the right to receive rental
payments due under such Lease. Even when an
Indenture Event of Default has occurred and is
continuing, certain rights under such Lease may
be exercised by the Owner Trustee and the Owner
Participant. There will be no
cross-collateralization provisions in the
Indentures and, consequently, the Equipment Notes
issued on behalf of an Owner Trust will not be
secured by any Class of Equipment owned by any
other Owner Trust or any Lease relating to any
other such Class of Equipment. There will be no
cross-default provisions in the Indentures and,
consequently, events resulting in an Indenture
Event of Default under one Indenture may not
result in an Indenture Event of Default under any
other Indenture. If the Equipment Notes issued on
behalf of an Owner Trust are in default, the
Equipment Notes issued on behalf of any other
Owner Trust may not be in default and, if not in
default, no remedies will be exercisable under
the Indenture with respect to such other
Equipment Notes. See "Description of the
Equipment Notes -- Security" in the Prospectus.
Equipment Notes:
Prepayment or Purchase
with Premium............. If all or any items of any Class of Equipment
become obsolete, surplus or operationally
uneconomic to the Company's requirements, the
Company may, subject to certain limitations,
terminate the relevant Lease with respect to such
item or items of Equipment, and in connection
with such voluntary termination, the related
Equipment Notes will be prepaid in whole (in the
case of a termination with respect to all items
of a Class of Equipment) or in part (in the case
of a termination with respect to less than all
items of a Class of Equipment) at a prepayment
price equal to the product of (x) the aggregate
principal amount of such Equipment Notes and (y)
a fraction the numerator of which shall be the
acquisition cost of such item(s) of Equipment and
the denominator of which shall be the aggregate
acquisition cost of all items of such Class of
Equipment, plus accrued but unpaid interest
S-6
<PAGE> 7
thereon and a premium thereon, if any. Such
premium, if any, with respect to each Equipment
Note will be in an amount sufficient, when added
to the principal repaid, to provide an amount
upon prepayment that, if invested in United
States Treasury securities with maturities
comparable to the remaining weighted average life
of such Equipment Note, would preserve the pretax
coupon yield of such Equipment Note. In addition,
the Equipment Notes issued with respect to any
Class of Equipment will be subject to prepayment
or purchase at the direction of the related Owner
Participant in whole, but not in part, prior to
the maturity thereof at a price equal to the
aggregate principal amount of such Equipment
Notes plus accrued but unpaid interest thereon
and premium, if any (calculated as described
above), if, subject to certain restrictions, one
or more Lease Events of Default under the related
Lease has occurred and has continued. See
"Description of Equipment Notes -- Prepayment" in
this Prospectus Supplement for a more complete
description of an Owner Participant's purchase
rights, including a description of the
circumstances in which an Owner Participant's
purchase rights will and will not be subject to a
payment of premium on the Equipment Notes. In any
such case, such prepayment price shall include
all other amounts due the Indenture Trustee or
any holder of such Equipment Notes. See
"Description of the Equipment
Notes -- Prepayment" and "-- The Leases --
Purchase Options" in this Prospectus Supplement
for a discussion of prepayments with a premium in
connection with the Company's exercise of certain
options or elections relating to the purchase of
Equipment under certain circumstances.
Equipment Notes:
Prepayment or Purchase
Without Premium.......... If all or any items of any Class of Equipment
suffer an Event of Loss, the related Equipment
Notes will be prepaid in whole (if all such items
of Equipment suffer such event) or in part (if
less than all of such items of Equipment suffer
such event). In any such case, such prepayment
shall be at a prepayment price equal to the
product of (x) the aggregate principal amount of
such Equipment Notes and (y) a fraction the
numerator of which shall be the acquisition cost
of such item(s) of Equipment and the denominator
of which shall be the aggregate acquisition cost
of all items of such Class of Equipment, plus
accrued but unpaid interest thereon to the
prepayment date but without premium. See
"Description of the Equipment
Notes -- Prepayment" in this Prospectus
Supplement for a description of an Owner
Participant's Equipment Note purchase rights,
including a description of the circumstances in
which such purchase rights will and will not be
subject to the payment of premium on the related
Equipment Notes.
Assumption of
Equipment Notes.......... In connection with the exercise of its purchase
option with respect to any of the items of
Equipment and subject to certain limitations, the
Company may, on the date of purchase thereof,
elect to assume the obligations of the Owner
Trustee under the portion of the Equipment Notes
relating to such items of Equipment in lieu of
prepaying the principal of, premium, if any, and
interest on such portion of such Equipment Notes.
If the Company elects to assume the obligations
of the Owner Trustee in respect of such portion
of such Equipment
S-7
<PAGE> 8
Notes, then the Company will execute and deliver
appropriate documentation providing for the
assumption of such obligations on a full recourse
basis by the Company and maintaining a security
interest in such items of Equipment to secure
such assumed obligations. See "Description of the
Equipment Notes -- The Leases -- Purchase
Options."
The Pass Through Trustee;
The Indenture Trustee.... Shawmut Bank Connecticut will be the Pass Through
Trustee for each Pass Through Trust. See
"Description of the Pass Through
Certificates -- The Pass Through Trustee; the
Indenture Trustee" in the Prospectus. In
addition, Shawmut Bank Connecticut will be the
Paying Agent, Authenticating Agent and Registrar
for the Pass Through Certificates and the
Indenture Trustee under the Indentures pursuant
to which the Equipment Notes will be issued.
Federal Income Tax
Consequences............. The Pass Through Trusts will not be classified as
associations taxable as corporations, but,
rather, will be classified as grantor trusts
under Section 671 of the Internal Revenue Code of
1986, as amended (the "Code"), and each
Certificateholder will be treated as the owner of
a pro rata undivided interest in each of the
Equipment Notes and any other property held in
the related Pass Through Trust. Each
Certificateholder will be required to report on
its federal income tax return its pro rata share
of the entire income from each of the Equipment
Notes and other property held in the related Pass
Through Trust, in accordance with such
Certificateholder's method of accounting. See
"Federal Income Tax Consequences" in the
Prospectus.
ERISA Considerations....... The Pass Through Certificates may not be purchased
by, or with the assets of, any employee benefit
plan subject to Title I of the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or individual retirement
account or plan subject to Section 4975 of the
Internal Revenue Code of 1986, as amended (the
"Code"; such plans and accounts are hereinafter
collectively referred to as "ERISA Plans") unless
such ERISA Plan, or the assets thereof, is
eligible for a prohibited transaction exemption
issued by the Department of Labor which exemption
applies to the purchase and holding of the Pass
Through Certificates by such ERISA Plan (such
exemption, a "Prohibited Transaction Exemption").
In addition, certain governmental and
non-electing church plans are not subject to
Title I of ERISA or Section 4975 of the Code and,
therefore, may invest in the Pass Through
Certificates. The purchase by any person of any
Pass Through Certificate constitutes a
representation by such person to the Company,
each Owner Participant, the Owner Trustee, the
Indenture Trustee and the Pass Through Trustee
that such person is not an ERISA Plan and that
such person is not acquiring, and has not
acquired, such Pass Through Certificate with
assets of an ERISA Plan, or, if such person is an
ERISA Plan or is acquiring or has acquired such
Pass Through Certificate with the assets of an
ERISA Plan, such purchase constitutes a
representation by such person to the Company,
such Owner Participant, the Owner Trustee, the
Indenture Trustee and the Pass Through Trustee
that a Prohibited Transaction Exemption applies
to such purchase and the holding of such Pass
Through Certificate.
S-8
<PAGE> 9
PHILLIPS PETROLEUM COMPANY
Phillips Petroleum Company, incorporated in Delaware in 1917, is a fully
integrated oil company engaged in petroleum exploration and production on a
worldwide basis, petroleum refining and marketing, and natural gas gathering and
processing, principally in the United States. Phillips also produces and
distributes chemicals worldwide. Its principal executive offices are located in
the Phillips Building, Bartlesville, Oklahoma 74004 (telephone (918) 661-6600).
The words "Company" and "Phillips" as used in this Prospectus Supplement
and the accompanying Prospectus refer to Phillips Petroleum Company or Phillips
Petroleum Company and its consolidated subsidiaries.
RECENT DEVELOPMENTS
Effective December 28, 1994, regulations under the Oil Pollution Act of
1990 ("OPA 90") will require that all vessel owners carrying certain substances,
including crude oil, have on board a certificate of financial responsibility
("COFR") issued by the U.S. Coast Guard. The COFR will serve as evidence of
financial responsibility for all pollution damages within limits set by the
applicable law and regulation. Without such a certificate the vessel will not be
permitted to enter U.S. waters. At present it is uncertain whether vessel owners
will be able or willing to meet the financial responsibility tests required or
procure acceptable forms of insurance, guaranties, or bonds to receive the
required COFR. Further, it remains unclear whether cargo owners, such as the
Company, will be able to effectively provide acceptable forms of financial
security on behalf of vessel owners to support issuance of a COFR.
The Company currently relies on water borne foreign crude oil as feedstock
for a significant portion of its U.S. refining capacity. This oil is transported
by vessels owned by third parties and chartered by the Company. A reduction in
the number of vessel owners able to transport crude oil in U.S. waters, as a
result of their inability to obtain COFRs, could constrain availability of
foreign crude oil in the United States generally and adversely affect the
Company's operations. The Company and others have efforts under way to address
compliance with the OPA 90 regulations, but the outcome of such efforts is
presently unsettled.
USE OF PROCEEDS
The Pass Through Certificates will be issued to refinance the original debt
financing of four leveraged lease transactions which have been entered into by
the Company, as lessee, with respect to the four Classes of Equipment and to pay
certain costs and expenses incurred in connection with the acquisition of the
Equipment. The proceeds from the sale of such Pass Through Certificates will be
used by the Pass Through Trustee on behalf of the related Pass Through Trust to
purchase Equipment Notes. The Equipment Notes will be issued as nonrecourse
obligations of four owner trusts (each, an "Owner Trust" created pursuant to a
"Trust Agreement") by Wilmington Trust Company, not in its individual capacity
but solely as the owner trustee (the "Owner Trustee") for the benefit of the
owner participant named therein (each, an "Owner Participant"), in connection
with four leveraged lease transactions. The proceeds of the Equipment Notes will
be used (i) to repay and refinance interim loans made to each of the Owner
Trusts by Chemical Bank, an affiliate of the underwriter, Chemical Securities
Inc. (see "Underwriting"), in an aggregate amount of approximately $87 million,
which proceeds were used by each Owner Trust to pay up to 80% of the acquisition
cost of the Equipment of the relevant Class that is being leased by such Owner
Trust to the Company pursuant to the relevant equipment lease agreement (each, a
"Lease") and (ii) to pay certain costs and expenses incurred in connection with
the acquisition of the Equipment. The aggregate acquisition cost of the
Equipment of each Class is as follows: the Rail Cars, $77,651,450; the F-20
Aircraft, $15,510,000; the F-50 Aircraft, $10,400,000; and the Vehicles,
$7,690,100.
The Equipment Notes to be sold to the Pass Through Trusts will be issued by
each Owner Trust and authenticated by Shawmut Bank Connecticut, as indenture
trustee (the "Indenture Trustee"), under a separate trust indenture and security
agreement (each, an "Indenture") between the Owner Trustee and the Indenture
Trustee. Each Owner Participant has provided from sources other than the
proceeds of the interim loans provided by Chemical Bank, the portion of the
acquisition cost for the relevant Class of Equipment
S-9
<PAGE> 10
which portion did not, in the case of any Owner Participant, exceed 30% of such
acquisition cost. No Owner Participant is personally liable for any amount
payable under the related Indenture or the Equipment Notes issued thereunder.
The underwriting fees and certain other expenses relating to the offering
of the Pass Through Certificates will be paid on behalf of the Owner
Participants by the Owner Trustee. Such fees and expenses to be paid by the
Owner Trustee on behalf of the Owner Participants will be payable from sources
other than the proceeds of the sale of the Equipment Notes.
DIAGRAM OF PAYMENTS
The following diagram illustrates certain aspects of the payment flows in
the Pass Through Trust structure for each leveraged lease transaction among the
Company, the Owner Trustee, an Owner Participant, the Indenture Trustee, the
Pass Through Trustee and the relevant Certificateholders. One or more Equipment
Notes will be issued for each Class of Equipment, and each Pass Through Trust
may hold Equipment Notes relating to more than one Class of Equipment.
The Company has leased each Class of Equipment from the Owner Trustee under
a separate Lease and is obligated to make scheduled rental payments for each
Class of Equipment under the related Lease. As a result of the assignment under
the related Indenture of certain rights of the Owner Trustee under such Lease,
the Company will make these payments directly to the Indenture Trustee. From
these rental payments the Indenture Trustee will pay to the Pass Through Trustee
for each Pass Through Trust the interest or interest and principal due from the
Owner Trustee on the Equipment Notes issued under the related Indenture and held
in such Pass Through Trust. After such payments have been made, the Indenture
Trustee will pay the remaining balance, if any, to the Owner Trustee for the
benefit of the related Owner Participant. The Pass Through Trustee will
distribute to the Certificateholders of each Pass Through Trust payments
received on the Equipment Notes held in such Pass Through Trust.
[Image No. 1]
- ---------------
* Each Class of Equipment will be subject to a separate Lease and a separate
Indenture.
S-10
<PAGE> 11
DESCRIPTION OF THE PASS THROUGH CERTIFICATES
The following description of the particular terms of the Pass Through
Certificates offered hereby supplements, and to the extent inconsistent
therewith replaces, the description of the general terms and provisions of the
Pass Through Certificates set forth in the Prospectus, reference to which is
hereby made.
The statements set forth under this caption are summaries and do not
purport to be complete. The summaries make use of terms defined in, and are
qualified in their entirety by reference to, the provisions of the applicable
Pass Through Agreement, the form of which has been filed as an exhibit to the
Registration Statement of which the Prospectus is a part.
GENERAL
The Pass Through Certificates offered hereby will be issued by Phillips
Petroleum Company Pass Through Trust, 1994-A1 and Phillips Petroleum Company
Pass Through Trust, 1994-A2, to be formed pursuant to Pass Through Agreement
1994-A1 and Pass Through Agreement 1994-A2, respectively, to be entered into
between the Company and the Pass Through Trustee on the date of issuance of the
related Pass Through Certificates. Each Pass Through Agreement will contain
substantially the same terms and conditions, except that the interest rate,
scheduled repayments of principal, and maturity date applicable to the Equipment
Notes held in each Pass Through Trust, the aggregate principal amount of such
Equipment Notes, and the final distribution date applicable to each Pass Through
Trust will differ.
The Pass Through Agreements, the Participation Agreements, the Equipment
Notes, the Indentures and the Leases will not contain any debt or other
financial covenants or any other provisions that would afford Certificateholders
protection in the event of a highly leveraged transaction involving the Company.
Each Pass Through Certificate will represent a fractional undivided
interest in the Pass Through Trust created by the Pass Through Agreement
pursuant to which such Pass Through Certificate was issued. The property of each
Pass Through Trust (the "Trust Property") will include the Equipment Notes held
in such Pass Through Trust, all monies at any time paid thereon and all monies
due and to become due thereunder and funds from time to time deposited with the
Pass Through Trustee in accounts relating to such Pass Through Trust.
BOOK-ENTRY FORM
The Pass Through Certificates of each Pass Through Trust will be issued in
fully registered form only and will be represented by one or more permanent
global Pass Through Certificates registered in the name of Cede & Co. ("Cede")
as the nominee of The Depository Trust Company ("DTC"). No person acquiring an
interest in a global Pass Through Certificate ("Certificate Owner") will be
entitled to receive a definitive certificate representing such person's interest
in such global Pass Through Certificates, except in the limited circumstances
set forth in the Prospectus under "Description of the Pass Through
Certificates -- Book-Entry Registration." 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 those participants in DTC who are
credited with ownership of the Pass Through Certificates ("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 the Pass
Through Certificates, or to DTC Participants for distribution to Certificate
Owners in accordance with DTC procedures. See "Description of the Pass Through
Certificates -- Book-Entry Registration" in the Prospectus.
DTC will have no knowledge of the actual Certificate Owners. Certificate
Owners will not receive written confirmation from DTC of their purchase, but are
expected to receive written confirmations providing details of the transaction,
as well as periodic statements of their holdings, from the DTC Participants
through which the Certificate Owners entered the transaction. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such laws may impair the ability
to transfer interests in a permanent global Pass Through Certificate.
S-11
<PAGE> 12
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Pass
Through Certificates will trade in DTC's Same Day Funds Settlement System until
maturity, and secondary market trading activity in the Pass Through Certificates
will therefore be required by DTC to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Pass Through Certificates.
PAYMENTS AND DISTRIBUTIONS
The Distribution Dates for each Pass Through Trust are March 27 and
September 27. Payments of interest on the Equipment Notes held in each Pass
Through Trust are scheduled to be received by the Pass Through Trustee on each
March 27 and September 27, commencing on March 27, 1995, and, subject to
receipt, are to be distributed to the related Certificateholders on the
corresponding Distribution Dates. The record date for any Distribution Date will
be the 15th day preceding such Distribution Date. For each Pass Through Trust,
the Equipment Notes held in such Pass Through Trust will accrue interest on the
unpaid principal amount thereof at the rate per annum set forth on the cover of
this Prospectus Supplement applicable to the related Pass Through Certificates,
which is calculated on the basis of a 360-day year consisting of twelve 30-day
months.
Payments of principal on the Equipment Notes held in each Pass Through
Trust are scheduled to be received in specified amounts on March 27 or September
27, or both, of each specified year, commencing on March 27, 1995, in the case
of the Pass Through Trust relating to the Series A1 Pass Through Certificates,
and commencing on March 27, 1999, in the case of the Pass Through Trust relating
to the Series A2 Pass Through Certificates, and, subject to receipt, are to be
distributed to the related Certificateholders on the corresponding Distribution
Dates. (See "Pool Factors" below).
For each Pass Through Trust, the Special Distribution Dates will be the
27th day of any month. The record date for any Special Distribution Date will be
the 15th day preceding such Special Distribution Date.
If any Distribution Date or Special Distribution Date is not a Business
Day, distributions scheduled to be made on such Distribution Date or Special
Distribution Date may be made on the next succeeding Business Day without
additional interest. (Pass Through Agreements, Section 12.09)
So long as the Pass Through Certificates are registered in the name of
Cede, as nominee of DTC, distributions on the Pass Through Certificates of any
Pass Through Trust will be made in same-day funds to DTC. See "Description of
Pass Through Certificates -- Book-Entry Registration" in the Prospectus. DTC
will in turn make distributions in same-day funds to DTC Participants in amounts
proportionate to the principal amount of each such DTC Participant's respective
holdings of beneficial interests in the Pass Through Certificates. Corresponding
payments by the DTC Participants to Certificate Owners will be the
responsibility of such DTC Participants and will be made in accordance with
customary industry practices. See "Description of the Pass Through
Certificates -- Book-Entry Registration" in the Prospectus. At such time, if
any, as the Pass Through Certificates are issued in the form of definitive
certificates and not to Cede, as nominee for DTC, distributions by the Pass
Through Trustee will be made by check mailed to each Certificateholder of record
of such Pass Through Trust on the applicable record date at its address
appearing on the register maintained with respect to such Pass Through Trust or,
upon application by such Certificateholder to the Pass Through Trustee, by wire
transfer in immediately available funds to a bank account of such
Certificateholder. The final distribution for each Pass Through Trust, however,
will be made only upon presentation and surrender of the Certificates for such
Pass Through Trust at the office or agency of the Pass Through Trustee specified
in the notice given by the Pass Through Trustee of such final distribution. The
Pass Through Trustee will mail such notice of the final distribution to the
Certificateholders of such Pass Through Trust, specifying the date set for such
final distribution and the amount of such distribution.
S-12
<PAGE> 13
THE PAYING AGENT, AUTHENTICATING AGENT AND REGISTRAR
Shawmut Bank Connecticut will be the Paying Agent, Authenticating Agent and
Registrar for each Pass Through Trust. Shawmut Bank Connecticut is also the
Indenture Trustee under each of the Indentures pursuant to which the Equipment
Notes will be issued.
POOL FACTORS
As of the date of issuance of the Pass Through Certificates by the Pass
Through Trustee, and assuming that no prepayment or default in respect of any
Equipment Notes shall occur, the aggregate scheduled repayments of principal on
such Equipment Notes for each Pass Through Trust, and the resulting Pool Factors
for such Pass Through Trusts after taking into account each repayment, are set
forth below:
<TABLE>
<CAPTION>
PASS THROUGH TRUST, PASS THROUGH TRUST,
1994-A1 1994-A2
--------------------------- ---------------------------
SCHEDULED SCHEDULED
PRINCIPAL PRINCIPAL
PAYMENTS PAYMENTS
ON EQUIPMENT ON EQUIPMENT
DISTRIBUTION DATES NOTES POOL FACTOR NOTES POOL FACTOR
----------------------------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
March 27, 1995..................... $ 940,926 0.9483264
September 27, 1995................. 577,252 0.9166250
March 27, 1996..................... 2,533,860 0.7774711
September 27, 1996................. 804,872 0.7332693
March 27, 1997..................... 3,536,979 0.5390263
September 27, 1997................. 2,580,829 0.3972929
March 27, 1998..................... 4,324,048 0.1598258
September 27, 1998................. 2,910,275 0.0000000
March 27, 1999..................... $1,211,512 0.9826309
September 27, 1999................. 1,000,729 0.9682837
March 27, 2000..................... 2,889,327 0.9268602
September 27, 2000................. 1,085,990 0.9112906
March 27, 2001..................... 7,288,607 0.8067957
September 27, 2001................. 694,519 0.7968386
March 27, 2002..................... 7,146,134 0.6943862
September 27, 2002................. 852,380 0.6821659
March 27, 2003..................... 8,125,919 0.5656666
September 27, 2003................. 970,270 0.5517561
March 27, 2004..................... 8,854,013 0.4248184
September 27, 2004................. 2,216,953 0.3930345
March 27, 2005..................... 6,165,643 0.3046392
September 27, 2005................. 481,204 0.2977403
March 27, 2006..................... 4,829,156 0.2285060
September 27, 2006................. 0 0.2285060
March 27, 2007..................... 2,966,135 0.1859812
September 27, 2007................. 899,324 0.1730879
March 27, 2008..................... 2,357,837 0.1392841
September 27, 2008................. 935,897 0.1258664
March 27, 2009..................... 2,513,781 0.0898270
September 27, 2009................. 2,296,708 0.0568997
March 27, 2010..................... 511,330 0.0495689
September 27, 2010................. 2,145,730 0.0188061
March 27, 2011..................... 202,335 0.0159052
September 27, 2011................. 1,109,400 0.0000000
</TABLE>
S-13
<PAGE> 14
DESCRIPTION OF THE EQUIPMENT NOTES
The following description of the particular terms of the Equipment Notes
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the Equipment Notes set forth in the
Prospectus, reference to which is hereby made.
The statements under this caption are summaries and do not purport to be
complete. The summaries make use of terms defined in, and are qualified in their
entirety by reference to, the provisions of the Indentures, the Equipment Notes,
the Leases, the Participation Agreements, the Trust Agreements and other related
documents to be used in connection with the transactions described herein, the
forms of which have been filed as exhibits to the Registration Statement of
which the accompanying Prospectus forms a part. The provisions of the Indenture,
the Equipment Notes, the Lease and the Participation Agreement which relate to
each Class of Equipment and that are summarized below are substantially the
same, except where otherwise indicated.
GENERAL
The Equipment Notes will be nonrecourse obligations of the Owner Trustee,
in each case acting for an Owner Trust for the benefit of the relevant Owner
Participant, and will be authenticated under the related Indenture by the
Indenture Trustee. The Equipment Notes are not obligations of, or guaranteed by,
the Company.
For each Class of Equipment, Equipment Notes, each of which will have a
different interest rate, maturity date and schedule of principal payments, will
be issued under the related Indenture. The aggregate principal amounts of the
Equipment Notes to be issued with respect to each Class of Equipment, and the
respective principal amounts of such Equipment Notes to be held in each of the
Pass Through Trusts, are as follows:
<TABLE>
<CAPTION>
PASS THROUGH TRUST PASS THROUGH TRUST
1994-A1 1994-A2
CLASS OF 7.53% 8.52% TOTAL PER
EQUIPMENT EQUIPMENT NOTES EQUIPMENT NOTES CLASS OF EQUIPMENT
--------------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Rail Cars........................ $ 9,329,634 $ 52,790,168 $ 62,119,802
F-20 Aircraft.................... 4,943,562 7,464,436 12,407,998
F-50 Aircraft.................... 1,688,357 5,591,640 7,279,997
Vehicles......................... 2,247,488 3,904,589 6,152,077
------------------ ------------------ ------------------
$ 18,209,041 $ 69,750,833 $ 87,959,874
============== ============== ==============
</TABLE>
For each Pass Through Trust, the Equipment Notes held in such Pass Through
Trust will accrue interest on the unpaid principal amount thereof at the rate
per annum set forth on the cover of this Prospectus Supplement applicable to the
related Pass Through Certificates, which will be payable to the Pass Through
Trustee on each March 27 and September 27, commencing on March 27, 1995, until
the final distribution date for such Pass Through Trust. Interest on the
Equipment Notes will be calculated on the basis of a 360-day year consisting of
twelve 30-day months. For any Equipment Notes, any overdue payment of principal,
interest or any other amount payable thereon will accrue interest from the due
date for such amount to the date such amount is paid in full at a rate per annum
equal to 2% plus the interest rate otherwise applicable to such Equipment Note.
(Indentures, Section 2.01)
S-14
<PAGE> 15
Each Pass Through Trust will hold Equipment Notes upon which principal is
payable in installments on March 27 or September 27, or both, of each year,
commencing on March 27, 1995, in the case of Equipment Notes held in the Pass
Through Trust relating to the Series A1 Pass Through Certificates, and
commencing on March 27, 1999, in the case of Equipment Notes held in the Pass
Through Trust relating to the Series A2 Pass Through Certificates, in each case
according to the schedule of principal installment dates and amounts set forth
below.
PASS THROUGH TRUST, 1994-A1
7.53% EQUIPMENT NOTES
<TABLE>
<CAPTION>
AGGREGATE
PAYMENT DATES RAIL CARS F-20 AIRCRAFT F-50 AIRCRAFT VEHICLES TOTAL
- ------------------------------- ---------- ------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
March 27, 1995................. $ 812,224 $ 59,158 $ 69,544 $ 0 $ 940,926
September 27, 1995............. 577,252 0 0 0 577,252
March 27, 1996................. 949,030 757,748 357,863 469,219 2,533,860
September 27, 1996............. 804,872 0 0 0 804,872
March 27, 1997................. 1,657,134 949,358 384,810 545,677 3,536,979
September 27, 1997............. 865,479 1,715,350 0 0 2,580,829
March 27, 1998................. 1,861,547 1,461,948 413,787 586,766 4,324,048
September 27, 1998............. 1,802,096 0 462,353 645,826 2,910,275
---------- ------------- ------------- ---------- -----------
$9,329,634 $ 4,943,562 $ 1,688,357 $2,247,488 $18,209,041
========= ========= ========= ========= ==========
</TABLE>
PASS THROUGH TRUST, 1994-A2
8.52% EQUIPMENT NOTES
<TABLE>
<CAPTION>
AGGREGATE
PAYMENT DATES RAIL CARS F-20 AIRCRAFT F-50 AIRCRAFT VEHICLES TOTAL
- ------------------------------ ----------- ------------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
March 27, 1999................ $ 0 $ 1,211,512 $ 0 $ 0 $ 1,211,512
September 27, 1999............ 1,000,729 0 0 0 1,000,729
March 27, 2000................ 291,215 1,569,228 479,760 549,124 2,889,327
September 27, 2000............ 1,085,990 0 0 0 1,085,990
March 27, 2001................ 3,446,779 1,131,586 1,758,932 951,310 7,288,607
September 27, 2001............ 690,739 3,780 0 0 694,519
March 27, 2002................ 3,747,214 1,444,744 921,814 1,032,362 7,146,134
September 27, 2002............ 767,997 65,487 433 18,463 852,380
March 27, 2003................ 4,553,094 1,509,080 961,102 1,102,643 8,125,919
September 27, 2003............ 728,958 132,563 41,395 67,354 970,270
March 27, 2004................ 7,270,416 396,456 1,003,808 183,333 8,854,013
September 27, 2004............ 2,131,033 0 85,920 0 2,216,953
March 27, 2005................ 5,827,167 0 338,476 0 6,165,643
September 27, 2005............ 481,204 0 0 0 481,204
March 27, 2006................ 4,829,156 0 0 0 4,829,156
September 27, 2006............ 0 0 0 0 0
March 27, 2007................ 2,966,135 0 0 0 2,966,135
September 27, 2007............ 899,324 0 0 0 899,324
March 27, 2008................ 2,357,837 0 0 0 2,357,837
September 27, 2008............ 935,897 0 0 0 935,897
March 27, 2009................ 2,513,781 0 0 0 2,513,781
September 27, 2009............ 2,296,708 0 0 0 2,296,708
March 27, 2010................ 511,330 0 0 0 511,330
September 27, 2010............ 2,145,730 0 0 0 2,145,730
March 27, 2011................ 202,335 0 0 0 202,335
September 27, 2011............ 1,109,400 0 0 0 1,109,400
----------- ------------- ------------- ---------- -----------
$52,790,168 $ 7,464,436 $ 5,591,640 $3,904,589 $69,750,833
========== ========= ========= ========= ==========
</TABLE>
S-15
<PAGE> 16
If any amount payable under any Equipment Notes or the related Indenture
falls due on a day that is not a Business Day, then such amount may be paid on
the next succeeding Business Day without additional interest. (Indentures,
Section 2.04)
SECURITY
For each Class of Equipment, the principal amount of the related Equipment
Notes, premium, if any, and interest thereon will be secured by (i) an
assignment by the Owner Trustee to the Indenture Trustee of the Owner Trustee's
rights (except for certain limited rights described below) under the applicable
Lease, including the right to receive rent and other payments thereunder and
(ii) a security interest granted to the Indenture Trustee in the items of
Equipment of such Class, subject to the rights of the Company under such Lease
and to certain other permitted liens and encumbrances (Indentures, Granting
Clause). Unless and until an Indenture Event of Default under an Indenture shall
have occurred and be continuing, the Indenture Trustee may not exercise any of
the rights of the Owner Trustee under the related Lease, except the right to
receive payments of rent thereunder and certain other rights. The assignment by
the Owner Trustee to the Indenture Trustee of its rights under each Lease will
exclude rights of the Owner Trustee and the Owner Participant relating to (i)
indemnification by the Company for certain matters, (ii) proceeds of public
liability insurance payable to the Owner Trustee and the Indenture Trustee in
their respective individual capacities and to the Owner Participant under
insurance maintained by the Company under such Lease, (iii) proceeds of any
insurance policies separately maintained by such Owner Trustee in its individual
capacity or by the Owner Participant and (iv) certain amounts payable to the
Owner Trustee or the Owner Participant for its own account other than as lessor
under such Lease.
PREPAYMENT
Prepayment with Premium. If all or any items of any Class of Equipment
become obsolete, surplus or operationally uneconomic to the Company's
requirements, the Company may, subject to certain limitations, terminate the
relevant Lease with respect to such item or items of Equipment, and in
connection with such voluntary termination, the related Equipment Notes will be
prepaid in whole (in the case of a termination with respect to all items of a
Class of Equipment) or in part (in the case of a termination with respect to
less than all items of a Class of Equipment). (Leases, Section 10) Such
prepayment shall be at a prepayment price for such Equipment Notes equal to the
product of (x) the aggregate principal amount of such Equipment Notes and (y) a
fraction the numerator of which shall be the acquisition cost of such item(s) of
Equipment and the denominator of which shall be the aggregate acquisition cost
of all items of such Class of Equipment, together with accrued but unpaid
interest thereon to the prepayment date, plus an additional amount, if any,
which, when added to such principal and interest would, if invested at such time
in United States Treasury securities with maturities comparable to the Remaining
Weighted Average Life (as defined below) of such Equipment Notes, yield the
holder thereof a pretax yield equivalent to the yield the holder would have
realized had such holder held such Equipment Note to its maturity date (the
"Make-Whole Premium"). Prepayment of the Equipment Notes with a premium also may
occur in connection with the Company's exercise of certain options or elections
relating to the purchase of any items of Equipment under certain circumstances.
See "The Leases -- Purchase Options."
The Make-Whole Premium for any Equipment Note to be prepaid will be
calculated by an independent investment banking institution of national standing
appointed by the Company (an "Independent Investment Banker"). In calculating
the Make-Whole Premium, the Independent Investment Banker will first determine
the Treasury Rate (as defined below) applicable to such Equipment Note. The
Independent Investment Banker then will determine the sum of present values of
all remaining scheduled payments of principal and interest on such Equipment
Note discounted semi-annually on each March 27 and September 27 at a rate equal
to the Treasury Rate based on a 360-day year of twelve 30-day months. If the sum
of these present values exceeds the unpaid principal amount of the Equipment
Note to be prepaid plus any accrued but unpaid interest, the difference will be
the Make-Whole Premium payable upon prepayment. If the sum is equal to or less
than such amount of principal and accrued interest, there will be no Make-Whole
Premium payable upon prepayment of such Equipment Note. In addition to the
amounts described above, the aggregate prepayment
S-16
<PAGE> 17
price to be paid on such prepayment date will include all other amounts due the
Indenture Trustee or any holder of the applicable Equipment Notes under the
related Indenture, Participation Agreement and Lease.
For purposes of determining the Make-Whole Premium, "Treasury Rate" means
with respect to each Equipment Note, a per annum rate (expressed as a semiannual
equivalent and as a decimal and, in the case of United States Treasury bills,
converted to a bond equivalent yield), determined to be the per annum rate equal
to the semiannual yield to maturity for United States Treasury securities
maturing on the Average Life Date (as defined below) of such Equipment Note, as
determined by interpolation between the most recent weekly average yields to
maturity for two series of United States Treasury securities, (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), as published in H.15(519)).
H.15(519) means "Statistical Release H.15(519), Selected Interest Rates", or any
successor publication, published by the Board of Governors of the Federal
Reserve System. The most recent H.15(519) means the latest H.15(519) which is
published prior to the close of business on the third Business Day preceding the
scheduled prepayment date. "Average Life Date" means, for any Equipment Note,
the date which follows the prepayment date by a period equal to the Remaining
Weighted Average Life of such Equipment Note. "Remaining Weighted Average Life"
means, for any Equipment Note, as of any prepayment date, the number of days
equal to the quotient obtained by dividing (a) the sum of the products obtained
by multiplying (i) the amount of the remaining principal payments on such
Equipment Notes by (ii) the number of days from and including such prepayment
date to but excluding the scheduled payment date of such principal payment by
(b) the unpaid principal amount of such Equipment Note.
For any Class of Equipment, if (i) one or more Lease Events of Default
under the related Lease has occurred and has continued for a period of six
consecutive months or more during which time such Equipment Notes could, but
shall not, have been accelerated and the Indenture Trustee could, but has not
been, exercising remedies under the related Lease or (ii) such Equipment Notes
have been accelerated, then such Equipment Notes will be subject to purchase by
the Owner Trustee, in whole but not in part, upon 30 days' prior notice from the
Owner Trustee to the Indenture Trustee at a purchase price equal to the unpaid
principal amount of such Equipment Notes, together with accrued interest
thereon, plus all other sums then due and payable to the holders of the
Equipment Notes, including, subject to the next sentence, any Make-Whole Premium
thereon. In connection with such purchase, Make-Whole Premium, if any, shall be
payable unless such purchase is made (x) after the acceleration of such
Equipment Notes or (y) pursuant to clause (i) of the preceding sentence after
the expiration of 120 days following the later of (A) the occurrence of one or
more Lease Events of Default continuing on the date notice of such purchase is
given or (B) the expiration of any period during which the Indenture Trustee is
required to refrain from exercising remedies under the related Indenture and, in
the case of this clause (y), the Indenture Trust has not, prior to the receipt
of such notice of purchase, commenced the exercise of remedies under the related
Lease intended to dispossess the Company of its interest in the related
Equipment and is not then stayed or otherwise prevented by operation of law from
doing so. (Indentures, Section 4.04)
Prepayment Without Premium. If all or any items of any Class of Equipment
suffer an Event of Loss, the related Equipment Notes will be prepaid in whole
(if all such items of Equipment suffer such event) or in part (if less than all
of such items of Equipment suffer such event). See "The Leases--Events of Loss"
below. Any such prepayment shall be at a prepayment price equal to the product
of (x) the aggregate principal amount of such Equipment Notes and (y) a fraction
the numerator of which shall be the acquisition cost of such item(s) of
Equipment and the denominator of which shall be the aggregate acquisition cost
of all items of such Class of Equipment, together with accrued but unpaid
interest thereon to the prepayment date, but without Make-Whole Premium. See the
immediately preceding paragraph for a description of the Owner Participant's
Equipment Note purchase rights, including a description of the circumstances in
which such purchase rights will not be subject to the payment of premium on the
Equipment Notes. (Indentures, Section 4.04)
Non-Pro Rata Prepayment. The Equipment Notes issued under the Indenture
relating to the Rail Cars have maturities and scheduled principal installments
related to the term of the Rail Car Lease for particular
S-17
<PAGE> 18
groups of Rail Cars. In connection with (i) the termination of the Rail Car
Lease with respect to less than all of the Rail Cars, (ii) an Event of Loss with
respect to less than all of the Rail Cars and (iii) the Company's exercise of
its purchase option with respect to less than all of the Rail Cars, the
principal amount of the Equipment Notes to be prepaid in connection with any
such event will be made with respect to the Equipment Notes issued in respect of
the group or groups relating to such Rail Cars, which will not necessarily be on
a pro-rata basis with respect to all Equipment Notes issued pursuant to the
Indenture related to the Rail Cars. Consequently, in connection with any such
event, the Equipment Notes constituting the Trust Property of each Pass Through
Trust will not necessarily be prepaid on a pro rata basis.
INVESTMENT OF FUNDS
Funds, if any, held from time to time by the Indenture Trustee pursuant to
the express terms of any Indenture or Lease and not required to be distributed
pursuant to the terms of any such Indenture will be invested and reinvested in
Permitted Investments at the written direction and risk and expense of the
Company, except that in the absence of such direction and after a Lease Event of
Default shall have occurred and be continuing, such amounts shall be invested
and reinvested solely in obligations of, or obligations guaranteed by, the
United States of America or any of its agencies for the payment of which the
full faith and credit of the United States of America is pledged. (Indentures,
Section 6.04)
INDENTURE EVENTS OF DEFAULT, NOTICE AND WAIVER
Events of default under each Indenture (each, an "Indenture Event of
Default") include:
(a) any Lease Event of Default under the Lease related to such
Indenture shall have occurred and be continuing (other than a Lease Event
of Default solely by reason of a failure by the Company to pay any amounts
which are not subject to the lien of the Indenture unless the Owner
Participant directs that such failure constitutes an Indenture Event of
Default) (see "The Leases -- Lease Events of Default" below);
(b) default by the Owner Trustee in making any payment when due of
principal of, premium, if any, or interest on any Equipment Note issued
pursuant to such Indenture and the continuance of such default unremedied
for 10 Business Days after the same shall become due and payable;
(c) any failure by the Owner Trustee or the Owner Participant to
observe or perform any covenant or obligation in such Indenture or the
related Equipment Notes (other than as set forth in clause (b)) or in the
related Participation Agreement if, but only if, such failure is not
remedied within a period of 30 days after there has been given to the Owner
Trustee, the Owner Participant and the Company by the Indenture Trustee a
written notice specifying such failure and requiring it to be remedied;
provided that, if such failure is capable of being remedied, no such
failure shall constitute an Indenture Event of Default for a period of 360
days after such notice so long as the Owner Trustee or the Owner
Participant is diligently proceeding to remedy such failure;
(d) any representation or warranty made by the Owner Trustee or the
Owner Participant under the related Participation Agreement, or by the
Owner Trustee under such Indenture, or by any representative of the Owner
Trustee or the Owner Participant in any document or certificate furnished
to the Indenture Trustee or the Pass Through Trustee in connection
therewith or pursuant thereto, shall prove at any time to have been
incorrect as of the date made in any respect material to the interests of
the holders of Equipment Notes and such incorrectness shall remain material
in such respect and continue unremedied for a period of 30 days after there
has been given to the Owner Trustee and the Owner Participant by the
Indenture Trustee or the Pass Through Trustee a written notice specifying
such incorrectness, stating that such incorrectness is a default under such
Indenture and requiring it to be remedied; or
(e) the occurrence of certain events of bankruptcy, reorganization or
insolvency of the Owner Trustee (as Owner Trustee and not in its individual
capacity), the Owner Trust or the Owner Participant or similar events.
(Indentures, Section 4.01)
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Each Indenture provides that, unless and until an Indenture Event of
Default thereunder has occurred and is continuing, the Indenture Trustee
generally may not exercise any of the rights of the Owner Trustee under the
Lease assigned to the Indenture Trustee under such Indenture, except the right
to receive rental payments due under such Lease. Whether or not an Indenture
Event of Default has occurred and is continuing, the Owner Trustee and the Owner
Participant may exercise certain rights under such Lease.
There are no cross-default provisions in the Indentures and any event
resulting in an Indenture Event of Default under one Indenture will not
necessarily result in the occurrence of an Indenture Event of Default under the
other Indentures.
If the Company shall fail to make any payment of Basic Rent under the Lease
related to the applicable Indenture within 10 Business Days after the same shall
become due, and if such failure of the Company to make such payment of Basic
Rent shall not constitute the fourth or subsequent consecutive or the seventh or
subsequent cumulative such failure, then as long as no other Indenture Event of
Default shall have occurred and be continuing under such Indenture the Owner
Participant or the Owner Trustee may (but need not) pay to the Indenture
Trustee, at any time prior to the expiration of a period of 10 Business Days (a
"Ten Day Period") after written notice of such default is given to the Owner
Trustee by the Indenture Trustee or the Pass Through Trustee (prior to the
expiration of which Ten-Day Period the Indenture Trustee shall not declare the
related Lease in default or exercise any of the rights, powers or remedies
pursuant thereto), an amount equal to the full amount of such payment of Basic
Rent, together with any interest due thereon on account of the delayed payment
thereof, and such payment by the Owner Participant or the Owner Trustee shall be
deemed to cure any such Indenture Event of Default which arose from such failure
of the Company (but such cure shall not relieve the Company of any of its
obligations). (Indentures, Section 4.04(a))
If the Company shall fail to make any other payment (other than Basic Rent)
or to perform or observe any other covenant, condition or agreement to be
performed or observed by it under the Lease or certain other agreements related
to the applicable Indenture and if (but only if) the performance or observance
thereof can be effected by the payment of money alone, then as long as no other
Indenture Event of Default under such Indenture shall have occurred and be
continuing the Owner Participant or the Owner Trustee may (but need not) pay to
the Indenture Trustee (or to such other person as may be entitled to receive the
same), at any time prior to the expiration of a Ten-Day Period after the later
of (x) the expiration of the grace period, if any, provided with respect to such
failure on the part of the Lessee in the relevant Lease and (y) the date that
written notice of such default is given to the Owner Trustee by the Indenture
Trustee or the Pass Through Trustee (prior to the expiration of which Ten-Day
Period the Indenture Trustee shall not declare the relevant Lease in default or
exercise any of the rights, powers or remedies pursuant thereto), all sums
necessary to effect the payment of such defaulted amount or the performance or
observance of such covenant, condition or agreement, together with any interest
due thereon on account of the delayed payment thereof, and such payment by the
Owner Participant or the Owner Trustee shall be deemed to cure any Indenture
Event of Default which arose from such failure of the Lessee (but such cure
shall not relieve the Company of any of its obligations); provided, however,
that the Owner Trustee and the Owner Participant shall not be entitled to effect
cures described in this sentence in amounts that, cumulatively, exceed
$7,800,000 in the aggregate under the Indenture related to the Rail Cars,
$1,500,000 in the aggregate under the Indenture related to the F-20 Aircraft,
$1,000,000 in the aggregate under the Indenture related to the F-50 Aircraft and
$1,000,000 in the aggregate under the Indenture related to the Vehicles.
(Indentures, Section 4.04(a))
Each Indenture provides that the Indenture Trustee must, after the
occurrence of any event that is a default under such Indenture and is actually
known to the Indenture Trustee, notify the Pass Through Trustee of such default.
(Indentures, Section 5.01)
The holders of not less than a majority in aggregate principal amount of
outstanding Equipment Notes issued under an Indenture to which an Indenture
Event of Default relates may on behalf of all holders thereof waive any past
Indenture Event of Default thereunder and its consequences, except that consent
from each holder of Equipment Notes issued under such Indenture is required with
respect to a waiver of such a default in the payment of the principal of,
Make-Whole Premium, if any, or interest on any such Equipment Notes or
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in respect of any covenant or provision of such Indenture that, pursuant to the
provisions of such Indenture, cannot be modified or amended without the consent
of each such holder. (Indentures, Section 4.06)
The Company is required under each Participation Agreement to furnish to
the Pass Through Trustee, the Owner Participant, the Owner Trustee and the
Indenture Trustee promptly upon any officer of the Company obtaining knowledge
of any condition or event that constitutes a Lease Event of Default, an
officer's certificate specifying the nature and period of existence of such
event and what action the Company has taken or is taking or proposes to take
with respect thereto. (Participation Agreements, Section 5)
REMEDIES
Each Indenture provides that, subject to the Owner Trustee's right to cure
certain defaults and to purchase the related Equipment Notes, if an Indenture
Event of Default has occurred and is continuing unremedied thereunder, the
Indenture Trustee may exercise certain specified rights or remedies available to
it under applicable law, including, if a Lease Event of Default under the
related Lease has occurred, one or more of the remedies with respect to the
items of the related Class of Equipment afforded to the Owner Trustee by the
related Lease for Lease Events of Default thereunder. (See "The Leases -- Lease
Events of Default" below.) Such remedies may be exercised by the Indenture
Trustee to the exclusion of the Owner Trustee and the Owner Participant. Any
items of Equipment sold in the exercise of such remedies will be free and clear
of any rights of those parties (other than, in certain cases, rights of
redemption provided by law and rights to certain proceeds as described in the
next paragraph), including the rights of the Company under the applicable Lease.
No exercise of any remedies by the Indenture Trustee, however, may affect the
rights of the Company under a Lease unless a Lease Event of Default under such
Lease has occurred and is continuing, and the Indenture Trustee may not sell any
part of the related trust estate under such Indenture unless the related
Equipment Notes have been accelerated. (Indentures, Article IV)
Notwithstanding the rights and powers of the Indenture Trustee described
above, the Indenture Trustee shall not foreclose the lien of any Indenture as a
result of an Indenture Event of Default that constitutes or occurs solely by
virtue of one or more Lease Events of Default under the related Lease unless (i)
the Indenture Trustee shall have exercised, or, to the extent it is then
entitled to do so under such Indenture and such Lease, shall contemporaneously
commence the exercise of, one or more of the remedies provided for in such Lease
intended to dispossess the Company of its interest in the related Class of
Equipment or (ii) the Indenture Trustee is stayed or otherwise prevented by
operation of law from exercising such remedies under
>such Lease; provided, however, that in the event that the Indenture Trustee is
so stayed or otherwise prevented by operation of law from exercising such
remedies under such Lease, then it shall nevertheless refrain from foreclosing
the lien of such Indenture (A) if, and for so long as, the only Lease Event of
Default under the related Lease that has occurred and is continuing is a Lease
Event of Default resulting solely from a proceeding for reorganization of the
Company under Chapter 11 of the Bankruptcy Code and the Company has assumed or
otherwise agreed to continue to perform its obligations under such Lease or (B)
until the earlier of (1) the later of (x) the expiration of a period of 120 days
during which the Indenture Trustee was so stayed or otherwise prevented by
operation of law from exercising such remedies under such Lease and (y) if such
stay or operation of law is being contested by appropriate legal proceedings,
the expiration of the period during which such contest is being conducted (but
in no event longer than 60 days after the expiration of the 120-day period
described in clause (x) above) and (2) the date that the Indenture Trustee
ceases to be so stayed or otherwise prevented by operation of law from
exercising such remedies under such Lease and complies with clause (i) above;
provided further, however, that the Indenture Trustee shall not be required to
refrain from foreclosing the Lien of such Indenture if there shall have occurred
and be continuing any Indenture Event of Default other than a Lease Event of
Default. (Indentures, Section 4.04(c))
If an Indenture Event of Default occurs under an Indenture as a result of
certain specified events of bankruptcy, insolvency or reorganization of the
Owner Trustee, the Owner Trust, the Owner Participant or the Company, then the
unpaid principal of the related Equipment Notes, together with interest accrued
but unpaid thereon and all other amounts due thereunder and under such
Indenture, immediately and without further act shall become due and payable. If
any other Indenture Event of Default occurs and is continuing under an
Indenture, the Indenture Trustee, acting on its own or at the direction of the
holders of not less than
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a majority in aggregate principal amount of outstanding Equipment Notes issued
under such Indenture, may declare the principal of all such Equipment Notes due
and payable, together with all accrued but unpaid interest thereon and all other
amounts due and payable thereunder and under such Indenture, by giving 10 days'
prior written notice to the Owner Trustee. The holders of not less than a
majority in aggregate principal amount of all such outstanding Equipment Notes
may rescind any such declaration by written notice to the Owner Trustee, the
Indenture Trustee and the Company, at any time prior to the sale or disposition
of the property subject to the Lien of the Indenture if (i) there has been paid
to or deposited with the Indenture Trustee an amount sufficient to pay all
overdue installments of interest on all such Equipment Notes and the principal
of and premium on any Equipment Notes that has become due otherwise than by such
declaration, (ii) the rescission would not conflict with any judgment or decree
and (iii) all Indenture defaults and Indenture Events of Default under such
Indenture (other than the nonpayment of principal and interest that has become
due solely because of such declaration) have been cured or waived. (Indentures,
Section 4.02)
In the event of the bankruptcy of an Owner Participant or an Owner Trust,
the ability of the Indenture Trustee to exercise its remedies under the
applicable Indenture against the bankrupt party might be limited and payments
required to be made under the related Lease might be interrupted, although the
Indenture Trustee would retain its status as a secured creditor in respect of
the Owner Trust's interest in such Lease and the related items of Equipment. In
addition, in the event of such bankruptcy it is possible that the related Lease
might be rejected as an executory contract or unexpired lease. Such a rejection,
if successful, would leave the Indenture Trustee as a secured creditor in
respect of the Owner Trust's interest in such Lease and the related items of
Equipment with a claim against the bankrupt estate in the amount owing under the
related Equipment Notes.
The holders of not less than a majority in aggregate principal amount of
outstanding Equipment Notes issued under any Indenture may direct the Indenture
Trustee to exercise or refrain from exercising any trust or power conferred on
the Indenture Trustee upon the occurrence of an Indenture of Default. The
Indenture Trustee shall not be required to exercise or refrain from exercising
any such trust or power if it shall have reasonable grounds for believing that
it is not adequately indemnified with respect thereto. (Indentures, Section
5.03)
If an Indenture Event of Default occurs and continues, any sums held or
received by the Indenture Trustee under the related Indenture may be applied to
reimburse the Indenture Trustee for any tax, expense, charge or other loss
incurred by it and to pay any other amounts due the Indenture Trustee prior to
any payments to holders of the Equipment Notes with respect to which such
Indenture Event of Default relates. (Indentures, Section 3.03)
It is impossible to predict the resale value for any item of Equipment to
be sold upon the exercise of the Indenture Trustee's remedies under the related
Indenture, and there can be no assurance that the net proceeds realized from the
sale or other disposition of any Equipment in the exercise of such remedies will
be sufficient to satisfy in full amounts due and payable on the related
Equipment Notes.
MODIFICATION OF AGREEMENTS
Without the consent of not less than a majority in interest of the
aggregate principal amount of the outstanding Equipment Notes under an
Indenture, the provisions of such Indenture, the related Lease, the related
Participation Agreement, and the related Trust Agreement may not be amended or
modified, except to the extent indicated below. (Indentures, Sections 9.01 and
9.05)
Certain provisions of the Indentures, the Leases (including provisions
relating to maintenance, insurance and possession of the Equipment), the
Participation Agreements and the Trust Agreements may be amended or modified
without the consent of the Indenture Trustee or any of the holders of the
Equipment Notes related thereto. Without the consent of each holder of an
Equipment Note affected thereby, no amendment or modification of the Indenture
pursuant to which such Equipment Notes were issued or the related Lease or
Participation Agreement may (i) reduce the principal amount of or Make-Whole
Premium, if any, or interest payment payable on such Equipment Note or change
the date on which any such principal, Make-Whole Premium, if any, or any
interest payment is due and payable or otherwise affect the terms of payment of
such
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Equipment Note, (ii) to the extent payable to such holder, extend the time of,
or reduce the aggregate amount of, or release the Company from its obligation to
pay, rent, stipulated loss value or any other amounts payable under, or as
provided in, such Lease upon the occurrence of an Event of Loss or termination
value and any other amounts payable with respect to the applicable Equipment,
(iii) create any security interest with respect to the property subject to the
Lien of such Indenture ranking prior to or on a parity with the security
interest created by such Indenture or deprive the holder of any such Equipment
Note of the lien of such Indenture upon the property subject thereto, or (iv)
reduce the percentage of the aggregate principal amount of such Equipment Notes
necessary to modify or amend any provision of such Indenture or to waive
compliance therewith. Subject to the preceding sentence, the Indenture Trustee
may, without the consent of any holder of Equipment Notes, consent to any
amendment or modification of the related Indenture, Lease or Trust Agreement
upon receipt of an officer's certificate of the Company and, as to any matters
of law, an opinion of counsel (which counsel may be an employee of the Company)
stating that such amendment or modification does not materially adversely affect
the interests of the holders of the Equipment Notes. (Indentures, Sections 9.01
and 9.05)
THE LEASES
General. The Owner Trustee has leased the items of each Class of Equipment
to the Company on behalf of the related Owner Trust, and the Company has taken
possession of such items of Equipment subject to the terms of the related Lease.
Terms and Rentals. Each item of Equipment has been leased by the Owner
Trustee to the Company for a term commencing on the related Lease Commencement
Date and expiring on a date not earlier than the latest maturity date of the
related Equipment Notes, unless previously terminated or extended, as permitted
by the related Lease. The scheduled rental payments by the Company under each
Lease are payable on each March 27 and September 27, commencing on March 27,
1995, and have been assigned under the related Indenture by the Owner Trustee to
the Indenture Trustee. (Leases, Article 3; Indentures, Granting Clause)
The Company is obligated to make rental payments under each Lease that will
be at least equal to all scheduled payments of principal of and interest on the
related Equipment Notes when, and as scheduled to be, due and payable. The
Company's obligations to make rental payments and to cause other payments to be
made under each Lease are general obligations of the Company.
Net Lease. The Company's obligations in respect of each Class of Equipment
are those of a lessee under a "net lease." Accordingly, the Company is obligated
to pay all costs of operating such Equipment and, at its expense, to maintain,
inspect, service, repair, test and overhaul such Equipment so as to keep such
Equipment in good operating condition, ordinary wear and tear excepted, and in a
manner consistent with the Company's maintenance practices in respect of similar
equipment owned or leased by it. In the case of any Aircraft, the Company also
is obligated to maintain the airworthiness certification of such Aircraft in
good standing at all times under the Aviation Act other than during temporary
periods of storage or periods of grounding ordered by the FAA.
Except as set forth below, the Company is obligated to replace or cause to
be replaced all parts that may from time to time be incorporated or installed in
or attached to any item of Equipment and that may become worn out, lost, stolen,
destroyed, seized, confiscated, damaged beyond repair or permanently rendered
unfit for use. Any such replacement part becomes subject to the related Lease
and the lien of the related Indenture in lieu of the part replaced. (Leases,
Section 9.3; Indentures, Granting Clause) The Company must make all alterations,
modifications and additions to each item of Equipment necessary to meet the
applicable requirements of any governmental authority with jurisdiction over the
Company's operations and such item of Equipment. The Company may in good faith
contest the validity or application of any such requirement in any reasonable
manner which, among other things, does not impair the Lien of the related
Indenture or create any material risk or danger of the sale of, loss of or
interference with the use or possession of any item of Equipment or interfere
with the payment of rent under the related Lease. (Leases, Section 9.1)
The Company may make other alterations, modifications and improvements to
any item of Equipment, so long as such alteration, modification or improvement
does not materially diminish the value, utility or
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remaining economic useful life below that immediately prior to such alteration,
modification or improvement, assuming that such item of Equipment was then in
the condition required by the related Lease. (Leases, Section 9.2)
Subleasing. The Company is permitted to sublease any Rail Car or Aircraft
to any business entity which is not subject to bankruptcy proceedings other than
Chapter 11 of the Bankruptcy Code (and in such case, only if all appropriate
court approvals are obtained to protect the interest of the Lessor in such Rail
Car or Aircraft) so long as no Lease Default or Lease Event of Default under the
related Lease shall have occurred and be continuing at the time the Company
enters into such sublease. The Company is permitted to sublease any Vehicle to
any business which is not subject to bankruptcy proceedings so long as no Lease
Default or Lease Event of Default shall have occurred and be continuing under
the Vehicle Lease at the time the Company enters into such sublease. The term of
any such sublease of any item of Equipment may not extend beyond the expiration
of the term of the related Lease. Any such sublease of any item of Equipment
will be subject and subordinate to the related Lease and the rights and
interests of the Lessor thereunder, except that any such sublease of Vehicles
entered into prior to the Lease Commencement Date may not be subject and
subordinate on the Lease Commencement Date but if the term of any such sublease
is renewed then on such renewal date (but in no event later than one year after
the Lease Commencement Date), the Company has agreed to cause such sublease to
be made subject and subordinate to the Vehicle Lease and the rights and
interests of the Lessor thereunder. (Leases, Section 8.3)
Liens. Each item of Equipment is required to be maintained free of any
Liens, other than the respective rights of the Owner Participant, the Owner
Trustee, Indenture Trustee, the holders of the related Equipment Notes, the
Company and any permitted sublessee arising under the related Indenture, Lease,
Participation Agreement and Trust Agreement, and other than certain limited
liens permitted under the Lease relating thereto including: (i) Liens for taxes
either not yet due or being contested in good faith by appropriate proceedings,
so long as, among other things, there exists no material risk of sale,
forfeiture, loss or loss of or interference with use or possession of such item
of Equipment, the interference with the payment of rent in respect thereof or
the impairment of the lien of the related Indenture thereon; (ii) materialmen's,
mechanics', supplier's, laborer's, repairmen's, employees' or other like Liens
arising against the Company or any permitted sublessee in the ordinary course of
business securing obligations the payment of which is either not yet due or is
being contested in good faith by appropriate proceedings, so long as, among
other things, there exists no material risk of sale, forfeiture, loss or loss of
or interference with use or possession of such item of Equipment or the
impairment of the lien of the related Indenture thereon or interference with the
payment of rent in respect thereof; (iii) Liens arising from judgments or awards
against the Company or any permitted sublessee with respect to which (x) at the
time an appeal or proceeding for review is being prosecuted in good faith and
for the payment of which adequate reserves have been provided as required by
generally accepted accounting principles or other appropriate provisions have
been made and with respect to which there shall have been secured a stay of
execution pending such appeal or proceeding for review and, among other things,
there exists no material risk of sale, forfeiture, loss or loss of or
interference with use or possession of such item of Equipment, interference with
the payment of rent in respect thereof or impairment of the lien of the related
Indenture thereon; (iv) Liens bonded to the reasonable satisfaction of the Owner
Participant; and (v) certain Liens required to be removed by the related Owner
Trustee, Owner Participant, Indenture Trustee or Pass Through Trustee. (Leases,
Section 7)
Insurance. The Company will, at its own expense, cause to be carried and
maintained with insurance companies (which may be captive insurance companies
affiliated with the Company) (i) physical damage insurance in respect of all
Equipment and (ii) public liability insurance with respect to third-party
personal injury and property damage, in such amounts and against such risks
customarily insured against by the Company in respect of similar equipment and
subject to certain other limitations including such public liability insurance
being reasonably and economically available to the Company. There is no
assurance that the Company will carry any insurance in the future, or, if it is
carried, as to the amount of such insurance or as to the amount of the
deductible limits in respect of such insurance. (Leases, Section 12)
Use. The Company, any of its affiliates or any permitted sublessee shall be
entitled to use any Rail Car only in the United States, Canada and Mexico and
only in the manner for which it was designed and intended
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and so as to subject it only to ordinary wear and tear. The Company, any of its
affiliates or any permitted sublessee shall be entitled to use any Vehicle only
in the United States and only in the manner for which it was designed and
intended and so as to subject it only to ordinary wear and tear. The Company or
any permitted sublessee shall be entitled to fly or locate any Aircraft in any
area other than a recognized war zone unless such Aircraft is located in such
area as a result of an isolated or extraordinary event beyond the control of the
Company and the Company is using all reasonable efforts to remove the Aircraft
from such area. (Leases, Section 8.2)
Termination. The Company may, subject to certain limitations set forth in
the related Lease, on any scheduled rent payment date on at least 90 days' prior
written notice to the Owner Trustee and the Indenture Trustee (which notice may
be revoked by the Company not less than 30 days prior to the proposed
termination date) terminate the lease term with respect to any item of Equipment
if the Company determines in good faith that such item of Equipment has become
obsolete, surplus or operationally uneconomic to the Company's requirements. The
Company, as non-exclusive agent for the Owner Trustee, is then required to use
its reasonable best efforts to obtain bids for the cash purchase of such item of
Equipment on the proposed termination date. No bid may be submitted by the
Company (or any of its affiliates) or any agent or person acting on behalf of
the Company. (Leases, Section 10)
On the termination date, the Owner Trustee is required to sell such item of
Equipment to the party submitting the highest cash bid. The proceeds of such
sale, net of all expenses of the sale, will be paid to the Owner Trustee. If the
net proceeds received from such sale are less than the applicable termination
value, the Company is required to pay to the Owner Trustee an amount equal to
that deficiency, together with certain other amounts, which under any
circumstance will be sufficient to satisfy all amounts due to the holders of the
related Equipment Notes under the related Indenture and Participation Agreement.
All funds to be paid to the Lessor shall, so long as the related Indenture shall
not have been discharged, be paid directly to the Indenture Trustee. Upon such
payment, the Equipment Notes will be prepaid in full (if all items of Equipment
under such Lease are terminated) or in part (if less than all items of Equipment
under such Lease are terminated). (See "Description of the Equipment
Notes -- Prepayment.")
If, after receiving a termination notice from the Company, the Owner
Participant pays to the Indenture Trustee on behalf of the holders of the
related Equipment Notes the aggregate principal amount of such Equipment Notes
which is due and payable together with any premium which is due and payable and
accrued but unpaid interest and any other sums due and payable to the Indenture
Trustee or the holders of such Equipment Notes under such Lease, the related
Indenture or Participation Agreement on account thereof, the Owner Participant
may retain such item of Equipment with respect to which the Company has given a
notice of termination, provided that if the Owner Participant fails to make such
payment after giving notice of its intention to retain such items of Equipment,
the Lease shall not be terminated for such items of Equipment, although the
Company, at its option, may submit another notice of termination with respect to
such items of Equipment and the Owner Participant shall not be permitted to
elect to retain such Equipment. (Leases, Section 10)
Purchase Options. Subject to certain limitations set forth in the related
Lease, the Company may elect to purchase any item of Equipment on the Early Buy
Out Date for such item of Equipment and terminate the related Lease in respect
of such item of Equipment. In connection with any such purchase, the Company is
required with respect to the Equipment Notes relating to such item of Equipment
being purchased either (x) to pay the principal of such Equipment Notes in an
amount described in the next sentence plus Make-Whole Premium, if any, and
interest payable thereon or (y) to assume the obligations of the Owner Trustee
under such portion of such Equipment Notes, the related Indenture, the related
Participation Agreement and certain agreements related thereto. The principal
amount of the Equipment Notes to be paid or assumed, as the case may be, in
connection with any such purchase shall be equal to the product of (x) the
aggregate principal amount of such Equipment Notes and (y) a fraction the
numerator of which shall be the acquisition cost of such item of Equipment and
the denominator of which shall be the aggregate acquisition cost of all items of
the Class of Equipment of which such item of Equipment is a part. If the Company
elects to purchase such item of Equipment and pay the amount described in clause
(x) above, then upon payment to the Owner Trustee of the full purchase price for
such item of Equipment determined in accordance with such Lease and
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all other amounts owing to the parties to the related Participation Agreement,
the Owner Trustee will transfer all of its right, title and interest in and to
such item of Equipment to the Company and the related Lease and the Lien of the
related Indenture will terminate with respect to such item of Equipment. If the
Company elects to purchase such item of Equipment and assume the obligations of
the Owner Trustee described in clause (y) above, then the Company will execute
and deliver appropriate documentation providing for the assumption of such
obligations on a full recourse basis by the Company, maintaining a security
interest in such item of Equipment to secure such assumed obligations, and upon
payment to the Owner Trustee of the full purchase price (or, if such purchase
price is paid in installments as described in the next sentence, the first
installment of such purchase price) for such item of Equipment determined in
accordance with such Lease and all other amounts owing to the parties in
connection therewith, the Owner Trustee will transfer all of its right, title
and interest in and to such item of Equipment to the Company and the related
Lease will terminate with respect to such item of Equipment, except that if the
item of Equipment subject to such purchase is an Aircraft, the Owner Trustee
shall only transfer its right, title and interest in such Equipment upon payment
of the full purchase price for such Equipment whether or not such purchase price
is paid in installments. In connection with any such assumption of Equipment
Notes described in the preceding sentence, the Company may elect to pay certain
amounts payable to the Owner Trustee for the benefit of the related Owner
Participant in installments over a period not to exceed one year, and, in which
case, the Owner Trustee shall retain a security interest in the Equipment
subject to such purchase subordinate to the security interest maintained in such
Equipment for the benefit of the holders of the assumed Equipment Notes, and, in
addition, the Owner Trustee shall have such cure rights and other rights as are
specified in "Description of the Equipment Notes -- Indenture Events of Default,
Notice and Waiver" until all such installments of the purchase price have been
paid in full. (Leases, Section 22.6, Participation Agreements, Section 10.3,
Indenture, Article VII) See also "Federal Income Tax Consequences -- General" in
the Prospectus.
After any assumption of any Equipment Notes described in the preceding
paragraph, if less than all obligations under the related Equipment Notes are
assumed, the obligations of the Company so assumed and the obligations under the
relevant Lease remaining assigned under the related Indenture shall constitute
separate obligations of the Company and default under either thereof shall not
necessarily result in the occurrence of a default under the other. There will be
no cross-collateralization of the Equipment securing the obligations assumed by
the Company and the obligations remaining secured under the relevant Indenture.
Consequently, the items of Equipment related to such assumption will not
constitute security for the obligations remaining secured under the relevant
Indenture, nor will the Equipment remaining subject to such Indenture constitute
security for such assumed obligations. (Indenture, Article VII)
At the end of the term of each Lease, after the final maturity of the
related Equipment Notes, the Company has certain options to renew the lease term
for any item of Equipment or purchase such item of Equipment. (Leases, Article
22)
Events of Loss. If an Event of Loss (as defined below) occurs with respect
to an item of Equipment, the Company shall give notice to the Lessor and the
Indenture Trustee within 90 days of the occurrence thereof and either (i) pay to
the Lessor within 240 days of such occurrence the applicable stipulated loss
value (which is an amount at least sufficient to pay in full the allocable
principal amount of the related Equipment Notes plus accrued but unpaid interest
thereon) together with certain other amounts which under any circumstances will
be sufficient to satisfy all amounts due payable to the holders of such
Equipment Notes on account of such Event of Loss under the related Indenture and
Participation Agreement, and any other amounts owed by the Company to the Owner
Trustee or the Owner Participant under the related Lease or Participation
Agreement or (ii) within 180 days of such occurrence and subject to certain
other limitations, replace such item of Equipment with an item of Equipment
which has a value, utility and remaining economic useful life at least equal to
the item of Equipment being replaced assuming it was in the condition required
by the related Lease. (Leases, Section 11) See "Description of the Equipment
Notes -- Prepayment."
If an Event of Loss occurs with respect to an engine on, but not the
Airframe of, any Aircraft, the Company is required, within 180 days after the
occurrence of such Event of Loss, to replace such engine with another engine
having a value and utility at least equal to, and being in as good operating
condition as, such engine being replaced, assuming such engine was of the value
and utility and in the condition and repair
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<PAGE> 26
required by the related Lease immediately prior to such Event of Loss, provided
that after any replacement, all engines on such Aircraft shall be suitable for
use thereon. (Aircraft Leases, Section 11.7)
An "Event of Loss" with respect to an Airframe or an engine thereon
includes any of the following events:
(i) such equipment suffers damage or destruction which, in the
Company's opinion, makes repairs uneconomic or renders such equipment
permanently unfit for normal use;
(ii) such equipment shall suffer an actual or constructive total loss;
(iii) such equipment is permanently returned to the manufacturer
pursuant to any patent indemnity provisions;
(iv) such equipment suffers a requisition of title by any governmental
authority;
(v) such equipment suffers theft or disappearance or is the subject of
a condemnation, a confiscation, a seizure or a requisition of use by any
governmental authority that results in the Company's loss of possession for
a period in excess of 6 months (or such longer period not to exceed one
year from the end of such 6 month period if the location of such equipment
is known and the Company is diligently pursuing recovery); and
(vi) such equipment shall be the subject of any rule, regulation,
order or other action of any governmental authority which results in the
prohibition of the operation of such equipment for a period of at least six
consecutive months but less than twelve consecutive months, unless the
Company is diligently taking steps necessary or desirable to permit the
normal use of such property by the Company. (Aircraft Leases, Section 11.1)
An "Event of Loss" with respect to a Rail Car or Vehicle includes any of
the following events:
(i) such equipment suffers damage or contamination which, in the
Company's opinion, makes repair uneconomic or renders such equipment
permanently unfit for normal use for any reason whatsoever other than
obsolescence;
(ii) such equipment suffers an actual or constructive total loss;
(iii) such equipment is permanently returned to the manufacturer
pursuant to any patent indemnity provisions;
(iv) such equipment suffers theft or disappearance, has title thereto
taken or appropriated by any governmental authority under the power of
eminent domain or otherwise; or is taken or requisitioned for use by any
governmental authority thereof under the power of eminent domain or
otherwise, and, in the case of any such theft, disappearance, taking,
appropriation or requisition, the period thereof exceeds 90 days;
(v) such equipment suffers theft or disappearance, has title thereto
taken or appropriated by any governmental authority under the power of
eminent domain or otherwise;
(vi) any governmental authority with jurisdiction over the Company's
operations and such equipment requires an alteration, modification or
addition to such equipment which would be economically impractical to make;
or
(vii) in the case of the Rail Cars only, such equipment is prohibited
from being used in the normal course of interstate rail commerce by any
federal governmental authority for a period in excess of six months. (Rail
Car Lease and Vehicle Lease, Section 11.1)
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<PAGE> 27
Lease Events of Default. Events of default under each Lease (each, a "Lease
Event of Default") include, among other things:
(a) failure by the Company to make any scheduled rental payment or any
payment of applicable stipulated loss value or termination value under such
Lease within 10 Business Days after the same shall have become due and
payable;
(b) failure by the Company to pay any supplemental rent under such
Lease or the related Participation Agreement or certain other agreements
entered into by the Company within 15 Business Days after the Company has
received written demand therefor from the person entitled to receive such
payment;
(c) any representation or warranty made by the Company in such Lease
or the related Participation Agreement shall prove to be untrue or
incorrect in any material respect when made and such untruth or
incorrectness shall continue to be material and unremedied for a period of
30 days after receipt by the Company of written notice thereof from the
Lessor or the Indenture Trustee;
(d) the occurrence of certain events of bankruptcy, reorganization or
insolvency of the Company or similar events; or
(e) failure by the Company to perform or observe any other covenant,
condition or agreement to be performed or observed by it under the related
Lease or Participation Agreement, and such failure shall continue
unremedied for a period of 60 days from the date the Company has received
written notice of such failure from the Owner Trustee, the Owner
Participant or the Indenture Trustee, provided that if such failure is
capable of being remedied, no such failure shall constitute a Lease Event
of Default for a period of 360 days after receipt of such notice so long as
the Company is diligently proceeding to remedy such failure. (Leases,
Section 14)
There are no cross-default provisions in the Leases and any event resulting
in a Lease Event of Default under any particular Lease will not necessarily
result in the occurrence of a Lease Event of Default under the other Leases.
If a Lease Event of Default under a Lease has occurred and is continuing,
the Indenture Trustee, as assignee of the Owner Trustee's rights under such
Lease, may, subject to certain rights of the Owner Trustee and the Owner
Participant under the related Indenture, exercise one or more of the remedies
provided in such Lease with respect to any or all of the Equipment subject
thereto. Those remedies include the right to repossess such Equipment, to sell
such Equipment free and clear of the Company's rights, and to require the
Company to pay as liquidated damages any unpaid rent plus an amount equal to the
excess of the stipulated loss value for such Equipment specified in such Lease
(which is an amount at least sufficient to pay in full the aggregate unpaid
principal amount of the outstanding related Equipment Notes plus accrued but
unpaid interest thereon) over the actual fair market value of such Equipment.
(Leases, Section 15; Indentures, Article IV)
REGISTRATION OF THE AIRCRAFT
The Owner Trustee in its individual capacity has represented and warranted
that it is a United States citizen. For any Aircraft, the Owner Trustee has
agreed that if it has actual knowledge that it has ceased to be a United States
citizen at a time when citizenship is necessary for the registration of such
Aircraft in the United States, or if lack thereof would adversely affect the
Company or the related Owner Participant, it will immediately resign as Owner
Trustee and the Owner Participant then may appoint a successor Owner Trustee
that, among other things, is a United States citizen. The Owner Participant
under each Aircraft Participation Agreement has represented that it is a United
States citizen and has agreed that if it ceases to be, or believes itself likely
to cease to be, a United States citizen and the related Aircraft would be
ineligible for registration in the United States in the name of the Owner
Trustee, then the Owner Participant shall give notice thereof to the Indenture
Trustee and the Company and shall promptly effect a voting trust or take any
other action necessary to maintain United States registration of the related
Aircraft. (Aircraft Participation Agreements, Section 6.5)
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement") between the Company and Chemical Securities Inc.
(the "Underwriter") relating to the Pass Through Certificates, the Company has
agreed to cause each Pass Through Trust to sell to the Underwriter, and the
Underwriter has agreed to purchase, the aggregate amount of Pass Through
Certificates of each Series. The Underwriter is committed to purchase all such
Pass Through Certificates if any are purchased.
The Underwriter proposes to offer the Pass Through Certificates of each
Series to the public at the initial public offering price for such Series set
forth on the cover page of this Prospectus Supplement and to certain dealers at
such public offering price less a concession not to exceed 0.30% of the public
offering price of the Series A-1 Pass Through Certificates and not to exceed
0.40% of the public offering price of the Series A-2 Pass Through Certificates.
The Underwriter may allow, and such dealers may reallow, a discount not in
excess of 0.25% of any such public offering price to certain other dealers.
The Pass Through Certificates are a new issue of securities with no
established trading market, and the Company does not intend to apply for the
listing of the Pass Through Certificates on a national securities exchange. The
Company has been advised by the Underwriter that the Underwriter intends to make
a market in the Pass Through Certificates but is not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Pass Through Certificates.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
The Underwriter is an affiliate of Chemical Bank which is a lender to the
Company. In addition, Chemical Bank and its affiliates participate on a regular
basis in various general financing and banking transactions for the Company and
its affiliates. John L. Adams, a member of the board of directors of Phillips
Gas Company, a subsidiary of the Company, is a vice chairman and a member of the
board of directors of Texas Commerce Bancshares, Inc. and a member of the board
of directors of Texas Commerce Bank National Association, each an affiliate of
the Underwriter.
As further described under "Use of Proceeds," the proceeds of the offering
of the Pass Through Certificates will be used by the Pass Through Trustee to
purchase Equipment Notes issued as nonrecourse obligations of the Owner Trusts,
and a substantial portion of the proceeds of the Equipment Notes will be used to
repay and refinance interim loans extended by Chemical Bank to the Owner Trusts.
Accordingly, because more than 10% of the net proceeds of the offering will be
paid to an affiliate of the Underwriter, a member of the National Association of
Securities Dealers, Inc. (the "NASD"), the offering is being made pursuant to
the provisions of Article III, Section 44(c)(8) of the NASD Rules of Fair
Practice.
LEGAL MATTERS
The validity of the Pass Through Certificates offered hereby is being
passed upon for the Company by Dale J. Billam, Esq., Senior Counsel of the
Company, and Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New
York 10017, special counsel for the Company, and for the Underwriter by Cravath,
Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019.
Both Simpson Thacher & Bartlett and Cravath, Swaine & Moore may rely on the
opinion of Shipman & Goodwin, counsel for Shawmut Bank Connecticut, individually
and as Pass Through Trustee, as to the authorization, execution and delivery of
the Pass Through Agreements and the Pass Through Certificates by Shawmut Bank
Connecticut.
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APPENDIX A
GLOSSARY OF CERTAIN TERMS
The following is a glossary of certain terms used in this Prospectus
Supplement. To the extent the definitions of terms used in this glossary are
also used in the Pass Through Agreements, the Indentures or the Leases, such
definitions are qualified in their entirety by reference to the definitions of
such terms contained therein.
"Aircraft" means the Airframes, together with the engines installed on such
Airframes, sold by the Company to the Owner Trustee on the Lease Commencement
Date and leased back to the Company pursuant to the Aircraft Lease.
"Aircraft Lease" means each of the two separate lease agreements between
the Owner Trustee and the Company, relating to the three Falcon 20 corporate
aircraft and to the Falcon 50 corporate aircraft, respectively.
"Aircraft Participation Agreement" means each of the two Participation
Agreements relating to the Aircraft among the Owner Trustee, the Company, the
Indenture Trustee, the Owner Participant and the Pass Through Trustee, relating
to the three Falcon 20 corporate aircraft and the Falcon 50 corporate aircraft,
respectively.
"Airframe" means each of the three Falcon 20 corporate aircraft and Falcon
50 corporate aircraft (excluding engines from time to time installed thereon)
leased by the Owner Trustee to the Company pursuant to the Aircraft Lease.
"Authenticating Agent" means, for each Pass Through Trust, Shawmut Bank
Connecticut, National Association.
"Aviation Act" means the Federal Aviation Act of 1958, as amended, and the
applicable regulations thereunder.
"Bankruptcy Code" means Title 11 of the United States Code (11 U.S.C. et
seq.), as amended, or any successor provisions thereto.
"Business Day" means any day other than a Saturday, Sunday or a day on
which commercial banking institutions are authorized or required by law to be
closed in New York, New York, Bartlesville, Oklahoma, the city and state in
which the principal corporate trust office of the Owner Trustee is located, or
the city and state in which the principal corporate trust office of the
Indenture Trustee is located.
"Certificateholder" means, for any Pass Through Trust, the registered
holder of any Pass Through Certificate issued by such Pass Through Trust.
"Certificate Owner" means a person having a beneficial interest in a Pass
Through Certificate.
"Class" or "Class of Equipment" means each of (i) the Rail Cars, (ii) the
three Falcon 20 corporate aircraft subject to an Aircraft Lease, (iii) the
Falcon 50 corporate aircraft subject to an Aircraft Lease and (iv) the Vehicles.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Company" means Phillips Petroleum Company, a Delaware corporation.
"Distribution Date" means, for each Pass Through Trust, March 27 and
September 27 of each year until payment of all the Scheduled Payments to be made
under the Equipment Notes has been made, commencing March 27, 1995.
"Early Buy Out Date" means September 27, 2002, in respect of certain Rail
Cars, September 27, 2004, in respect of certain other Rail Cars, September 27,
2006, in respect of certain other Rail Cars, September 27,
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<PAGE> 30
2008, in respect of certain other Rail Cars and September 27, 2009, in respect
of the remaining Rail Cars; September 27, 1997, in respect of the Falcon 20
corporate aircraft; September 27, 2000, in respect of the Falcon 50 corporate
aircraft; and September 27, 2003, in respect of the Vehicles.
"Equipment Notes" means, for each Class of Equipment, the equipment notes
issued by the Owner Trustee pursuant to the related Indenture and any equipment
note issued in exchange therefor or replacement thereof pursuant to the related
Indenture.
"Event of Loss" means, for any Class of Equipment, each of the events
designated as such in the related Lease. For a description of certain events
constituting Events of Loss, see "Description of the Equipment Notes -- The
Leases -- Events of Loss."
"FAA" means the United States Federal Aviation Administration.
"Indenture" means each of the four separate trust indenture and security
agreements between the Owner Trustee and the Indenture Trustee, in each case
under which the Owner Trustee will issue Equipment Notes relating to a Class of
Equipment.
"Indenture Event of Default" means, for any Indenture, each of the events
designated as an event of default in such Indenture. For a description of
certain events constituting Indenture Events of Default, see "Description of the
Equipment Notes -- Indenture Events of Default, Notice and Waiver."
"Indenture Trustee" means Shawmut Bank Connecticut, National Association, a
national banking association, in its capacity as indenture trustee under each
Indenture, and any successor thereunder.
"Lease" means each of the Aircraft Leases, the Rail Car Lease and the
Vehicle Lease.
"Lease Commencement Date" means, for each Lease, September 28, 1994.
"Lease Event of Default" means, for any Lease, each of the events
designated as an event of default in such Lease. For a description of certain
events constituting Lease Events of Default, see "Description of the Equipment
Notes -- The Leases -- Lease Events of Default."
"Lessee" means the Company.
"Lessor" means the Owner Trustee.
"Lien" means any mortgage, pledge, security interest, lien, encumbrance, or
disposition of title.
"Owner Participant" means, with respect to each Class of Equipment, the
owner participant for whose benefit the Owner Trustee owns such Class of
Equipment, and its permitted successors and assigns.
"Owner Trust" means a trust created for the benefit of an Owner Participant
under which the Owner Trustee is acting as trustee.
"Owner Trustee" means Wilmington Trust Company, a Delaware banking
corporation, not in its individual capacity, but solely as Owner Trustee.
"Participation Agreement" means each of the Aircraft Participation
Agreements, the Rail Car Participation Agreement and the Vehicle Participation
Agreement.
"Pass Through Agreement" means each of the Pass Through Trust Agreements
between the Company and the Pass Through Trustee, in accordance with which the
Pass Through Trusts will be formed.
"Pass Through Certificates" means the Phillips Petroleum Company 1994 Pass
Through Certificates, Series A1, and the Phillips Petroleum Company 1994 Pass
Through Certificates, Series A2, to be issued by the Pass Through Trustee
pursuant to the related Pass Through Agreement and which represent fractional
undivided interests in the related Pass Through Trusts.
"Pass Through Trust" means Phillips Petroleum Company Pass Through Trust,
1994 A1, and Phillips Petroleum Company Pass Through Trust, 1994 A2, each to be
formed pursuant to the related Pass Through Agreement.
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<PAGE> 31
"Pass Through Trustee" means Shawmut Bank Connecticut, National
Association, a national banking association, in its capacity as pass through
trustee under the Pass Through Agreements and each Pass Through Trust, and its
successors and assigns thereunder.
"Paying Agent" means, for each Pass Through Trust, Shawmut Bank
Connecticut, National Association.
"Permitted Investments" means (i) direct obligations of the United States
of America and agencies thereof for which the full faith and credit of the
United States is pledged, (ii) obligations fully guaranteed by the United States
of America, (iii) certificates of deposit issued by, or bankers acceptances of,
or time deposits with, any bank, trust company or national banking association
incorporated or doing business under the laws of the United States of America or
one of the States thereof having combined capital and surplus and retained
earnings of at least $500,000,000 (including the Indenture Trustee and the Owner
Trustee if such conditions are met) and having a rating assigned to the
long-term unsecured debt of such institutions by Standard & Poor's Corporation
and Moody's Investors Service, Inc. at least equal to AA and Aa2, respectively,
(iv) commercial paper of companies, banks, trust companies or national banking
associations incorporated or doing business under the laws of the United States
of America or one of the States thereof and in each case having a rating
assigned to such commercial paper by Standard & Poor's Corporation or Moody's
Investors Service, Inc. equal to the highest rating assigned by such
organization, and (v) a money market fund registered under the Investment
Company Act of 1940, as amended, the portfolio of which is limited to United
States government obligations and United States agency obligations; provided
that if all of the above investments are unavailable, the entire amount to be
invested may be used to purchase Federal Funds from an entity described in (iii)
above; and provided further that no investment shall be eligible as a "Permitted
Investment" unless the final maturity or date of return of such investment is 90
days or less from the date of purchase thereof.
"Pool Balance" means, for any Pass Through Trust, as of any date of
determination the aggregate unpaid principal amount of the Equipment Notes that
constitute Trust Property of such Pass Through Trust on such date plus the
amount of the principal payments on such Equipment Notes held by the Pass
Through Trustee and not yet distributed (other than earnings thereon and without
giving effect to any losses on investments thereof). The Pool Balance as of any
Distribution Date or Special Distribution Date shall be computed after giving
effect to the payment of principal, if any, on such Equipment Notes and the
distribution thereof being made on that date.
"Pool Factor" means, for any Pass Through Trust, as of any date of
determination the quotient (rounded to the seventh decimal place) computed by
dividing (i) the Pool Balance by (ii) the aggregate original amount of the Pass
Through Certificates of the related Series. The Pool Factor as of any
Distribution Date or Special Distribution Date shall be computed after giving
effect to the payment of principal, if any, on such Equipment Notes and the
distribution thereon being made on that date.
"Rail Cars" means the 1,676 covered hoppers and 708 tank rail cars sold by
the Company to the Owner Trustee on the Lease Commencement Date and leased back
to the Company under the Rail Car Lease.
"Rail Car Lease" means the lease agreement between the Owner Trustee and
the Company under which the Owner Trustee leases the Rail Cars to the Company.
"Rail Car Participation Agreement" means the Participation Agreement
relating to the Rail Cars among the Owner Trustee, the Company, the Indenture
Trustee, the Owner Participant and the Pass Through Trustee.
"Registrar" means, for each Pass Through Trust, Shawmut Bank Connecticut,
National Association.
"Scheduled Payment" means any payment of interest on, or principal of and
interest on, any Equipment Note that constitutes Trust Property thereof,
scheduled to be received by the Pass Through Trustee on a Distribution Date,
except any such payment that is received more than five days after the
applicable Distribution Date (which payment will be treated as a Special
Payment).
"Series" means Phillips Petroleum Company Pass Through Certificates, Series
1994-A1, and Phillips Petroleum Company Pass Through Certificates, Series
1994-A2.
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<PAGE> 32
"Special Distribution Date" means the date on which a Special Payment is
scheduled to be distributed, which date will be the 27th day of any month.
"Special Payment" means, for any Pass Through Trust, any payments of
principal, Make-Whole Premium or interest other than Scheduled Payments received
by the Pass Through Trustee on any of the Equipment Notes held in such Pass
Through Trust and any proceeds from the sale of any such Equipment Notes
received by the Pass Through Trustee.
"Trust Property" means, for the Pass Through Trust, all money, instruments,
including the related Equipment Notes, and other property held as the property
of such Pass Through Trust, including all distributions thereon and proceeds
thereof.
"Vehicles" mean the 136 mobile aircraft refueling vehicles sold by the
Company to the Owner Trustee on the Lease Commencement Date and leased back to
the Company under the Vehicle Lease.
"Vehicle Lease" means the lease agreement between the Owner Trustee and the
Company under which the Owner Trustee leases the Vehicles to the Company.
"Vehicle Participation Agreement" means the Participation Agreement
relating to the Vehicles among the Owner Trustee, the Company, the Indenture
Trustee, the Owner Participant and the Pass Through Trustee.
A-4
<PAGE> 33
PROSPECTUS
PHILLIPS PETROLEUM COMPANY
PASS THROUGH CERTIFICATES
Up to $110,000,000 aggregate amount of Pass Through Certificates (the "Pass
Through Certificates") may be offered for sale from time to time pursuant to
this Prospectus and one or more Prospectus Supplements. The Pass Through
Certificates may be offered in one or more series (each, a "Series") in amounts,
at prices and on terms to be determined at the time of sale. For each Series of
Pass Through Certificates offered pursuant to this Prospectus and a Prospectus
Supplement, a separate Pass Through Trust (a "Pass Through Trust") will be
formed pursuant to a separate Pass Through Trust Agreement (a "Pass Through
Agreement") between Phillips Petroleum Company (the "Company") and Shawmut Bank
Connecticut, National Association, as the Pass Through Trustee under such Pass
Through Trust. Each Pass Through Certificate in a Series will evidence a
fractional undivided interest in the related Pass Through Trust and will have no
rights, benefits or interest in respect of any other Pass Through Trust or the
Trust Property held in any other such Pass Through Trust. The Trust Property of
each Pass Through Trust will consist of equipment notes (the "Equipment Notes")
issued as nonrecourse obligations by one or more Owner Trusts, in connection
with leveraged lease transactions. The Equipment Notes will be issued to
refinance or finance a portion of the payment made or to be made by each such
Owner Trust to the Company for the acquisition cost of specified items of
transportation equipment sold and leased back by the Company (the "Equipment").
The Prospectus Supplement relating to each offering will describe certain terms
of the Pass Through Certificates offered thereby, the respective Pass Through
Trusts, the Equipment Notes to be purchased by such Pass Through Trusts, the
leveraged lease transactions and the Equipment relating to such Equipment Notes.
With respect to one or more items of Equipment, the Owner Trustee may issue
one or more Equipment Notes, each of which may have a different interest rate
and final maturity date. For each Series of Pass Through Certificates, the Pass
Through Trustee will purchase one or more Equipment Notes issued with respect to
one or more items of Equipment such that all of the Equipment Notes held in the
related Pass Through Trust will have identical interest rates, in each case
equal to the rate applicable to the Pass Through Certificates issued by such
Pass Through Trust, and such that the latest maturity date for such Equipment
Notes will occur on or before the final distribution date for such Pass Through
Certificates. For any item of Equipment, the related Equipment Notes will be
secured by a security interest in the Lease relating thereto, including the
right to receive rent payable by the Company under such Lease and in the related
items of Equipment subject to such Lease (except that for certain vehicles
included in the Equipment the security interest in such vehicles may not be
perfected). None of the Equipment Notes held in the respective Pass Through
Trusts will be obligations of, or guaranteed by, the Company. The amounts
payable by the Company under the Leases from time to time will be at least equal
to the amounts of all principal, premium, if any, and interest payable on the
related Equipment Notes from time to time.
Interest paid on the Equipment Notes held in each Pass Through Trust will
be passed through to the registered holders of the Pass Through Certificates for
such Pass Through Trust (for each Pass Through Trust, the "Certificateholders")
on the dates and at the rate per annum set forth in the Prospectus Supplement
relating to such Pass Through Certificates until the final distribution date for
such Pass Through Trust. Principal paid on the Equipment Notes held in each Pass
Through Trust will be passed through to the Certificateholders in scheduled
amounts on the dates set forth in the Prospectus Supplement relating to such
Pass Through Certificates until the final distribution date for such Pass
Through Trust.
The Pass Through Certificates represent interests in the related Pass
Through Trust only, and all payments and distributions shall be made only from
the property of such Pass Through Trust. The Pass Through Certificates do not
represent an interest in or obligation of the Company.
The Pass Through Certificates may be sold to or through underwriters or
directly to other purchasers or through agents. The Prospectus Supplement
relating to each offering will set forth the names of any underwriters, dealers
or agents involved in the sale of the Pass Through Certificates in connection
with which this Prospectus is being delivered, the amounts, if any, to be
purchased by underwriters and the compensation, if any, of such underwriters or
agents.
Prior to their issuance, there will have been no market for the Pass
Through Certificates of any Series and there can be no assurance that one will
develop. Unless otherwise indicated in the applicable Prospectus Supplement, the
Company does not intend to apply for the listing of any Series of Pass Through
Certificates on a national securities exchange. See "Plan of Distribution."
This Prospectus may not be used to consummate sales of any Pass Through
Certificates unless accompanied by the Prospectus Supplement applicable to the
Pass Through Certificates being sold.
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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 COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is October 11, 1994.
<PAGE> 34
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SECURITIES
OFFERED HEREBY OR OTHER SECURITIES OF THE COMPANY AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
---------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any underwriter, dealer or agent. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy Securities by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to any person to whom it
is unlawful to make such offer or solicitation in such jurisdiction.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Offices of the Commission
at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7
World Trade Center, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission at Room 1024
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such material can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005, and the Pacific
Stock Exchange, Incorporated, 301 Pine Street, San Francisco, California 94104,
on which certain of the Company's securities are listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1993, as amended, and its Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1994, all of which have previously been filed by the
Company with the Commission, are incorporated by reference in this Prospectus.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in this Prospectus or
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the documents referred to above which have been
or may be incorporated by reference herein (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference in
such documents). Requests for such copies should be directed to Dale J. Billam,
Secretary, Phillips Petroleum Company, 1234 Adams Building, Bartlesville,
Oklahoma 74004 (telephone (918) 661-5638).
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PHILLIPS PETROLEUM COMPANY
Phillips Petroleum Company, incorporated in Delaware in 1917, is a fully
integrated oil company engaged in petroleum exploration and production on a
worldwide basis, petroleum refining and marketing, and natural gas gathering and
processing, principally in the United States. Phillips also produces and
distributes chemicals worldwide. Its principal executive offices are located in
the Phillips Building, Bartlesville, Oklahoma 74004 (telephone (918) 661-6600).
The words "Company" and "Phillips" as used in this Prospectus refer to
Phillips Petroleum Company or Phillips Petroleum Company and its consolidated
subsidiaries.
RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
The following table sets forth the Company's ratio of earnings to fixed
charges for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------- --------------------------------
1994 1993 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges..................... 2.8 3.0 2.3 2.1 2.0 2.8 1.9
</TABLE>
For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes, extraordinary items and
cumulative effect of change in accounting principle, plus fixed charges
(excluding capitalized interest and the portion of the preferred dividend
requirements of a subsidiary to the extent not deducted in determining pretax
income, but including amortization of interest previously capitalized), less
equity in undistributed earnings of companies owned less than 50 percent. Fixed
charges consist of interest (including capitalized interest) on all
indebtedness, amortization of debt discount and expense, that portion of rental
expense that the Company believes to be representative of interest and the
amounts accrued to cover the preferred stock dividend requirements of a
subsidiary. A statement setting forth the computation of the unaudited ratios of
earnings to fixed charges is filed as an exhibit to the Registration Statement
of which this Prospectus is a part.
OUTLINE OF PASS THROUGH TRUST STRUCTURE
For each Series of Pass Through Certificates (as such terms are defined
below) offered pursuant to this Prospectus and the related Prospectus
Supplement, a separate pass through trust (a "Pass Through Trust") will be
formed pursuant to a Pass Through Trust Agreement (a "Pass Through Agreement")
between the Company and Shawmut Bank Connecticut, National Association as pass
through trustee (the "Pass Through Trustee"), for the benefit of the registered
holders (the "Certificateholders") of the series (a "Series") of certificates
(the "Pass Through Certificates") evidencing fractional undivided interests in
such Pass Through Trust. The property held in each Pass Through Trust (the
"Trust Property") will consist of equipment notes issued in connection with one
or more leveraged lease transactions (the "Equipment Notes"), as specified in
the applicable Prospectus Supplement.
As more fully described below under "Use of Proceeds," in connection with
each leveraged lease transaction, one or more Equipment Notes may be issued,
each of which may have different interest rates and final maturity dates.
Concurrently with the execution and delivery of each Pass Through Agreement, the
Pass Through Trustee, on behalf of the related Pass Through Trust, will enter
into one or more participation agreements or a supplement thereto (each, a
"Participation Agreement") pursuant to which it will, among other things,
purchase one or more Equipment Notes, such that the Equipment Notes that
constitute the property of such Pass Through Trust will have identical interest
rates, in each case equal to the rate applicable to the Pass Through
Certificates issued by such Pass Through Trust, and such that the latest
maturity date for such Equipment Notes will occur on or before the final
distribution date applicable to such Pass Through Certificates. For each Pass
Through Trust, the aggregate amount of the related Series of Pass Through
Certificates will equal the aggregate principal amount of the Equipment Notes
constituting the Trust Property of such Pass Through Trust. The Pass Through
Trustee will distribute the amount of payments of principal, premium, if any,
and interest received by it as holder of the Equipment Notes to the
Certificateholders of the
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<PAGE> 36
Pass Through Trust in which such Equipment Notes are held. See "Description of
the Pass Through Certificates" and "Description of the Equipment Notes."
USE OF PROCEEDS
Each Series of Pass Through Certificates offered pursuant to this
Prospectus and a related Prospectus Supplement will be issued to facilitate the
refinancing or financing of the debt portion of one or more leveraged sale-lease
back transactions entered into or to be entered into by the Company, as seller
and lessee, with respect to one or more of the items of transportation
equipment, comprised of covered hopper and tank railroad cars (the "Rail Cars"),
corporate aircraft (the "Aircraft") and mobile aircraft refueling vehicles (the
"Vehicles"); (the Rail Cars, Aircraft and Vehicles, collectively, the
"Equipment"), as specified in the applicable Prospectus Supplement. At the time
of issuance of the applicable Series of Pass Through Certificates, none of the
related items of Equipment will represent collateral for an outstanding
liability of the Company. Each Prospectus Supplement will provide further
descriptive and identifying information with respect to the Equipment. The
proceeds from the sale of such Pass Through Certificates will be used by the
Pass Through Trustee on behalf of the related Pass Through Trust to purchase
Equipment Notes. The Equipment Notes will be issued as nonrecourse obligations
of one or more owner trusts (each, an "Owner Trust" created pursuant to a "Trust
Agreement") by Wilmington Trust Company, not in its individual capacity but
solely as the owner trustee (the "Owner Trustee") for the benefit of the owner
participant named therein (each, an "Owner Participant"), in connection with one
or more leveraged lease transactions, in each case to refinance or finance a
portion of the Owner Trust's acquisition cost of one or more items of Equipment
that are leased by such Owner Trust to the Company pursuant to a separate lease
agreement (each, a "Lease"), as specified in the applicable Prospectus
Supplement.
The Equipment Notes to be sold to any Pass Through Trust will be issued by
the Owner Trust and authenticated by Shawmut Bank Connecticut, National
Association, as indenture trustee (the "Indenture Trustee") under a separate
trust indenture and security agreement (each, an "Indenture") between the Owner
Trustee and the Indenture Trustee. Each Owner Participant will have provided or
will be obligated to provide, from sources other than the proceeds of the
related Equipment Notes, the portion of the acquisition cost for the related
Equipment specified in the applicable Prospectus Supplement. No Owner
Participant, however, will be personally liable for any amount payable under the
related Indenture or the Equipment Notes issued thereunder.
DESCRIPTION OF THE PASS THROUGH CERTIFICATES
In connection with each offering of a Series of Pass Through Certificates,
a separate Pass Through Trust will be formed pursuant to a separate Pass Through
Agreement to be entered into between the Company and the Pass Through Trustee.
The following summary relates to each of the Pass Through Agreements, the Pass
Through Trusts to be formed thereby and the Pass Through Certificates to be
issued by each Pass Through Trust, except as otherwise described in the
applicable Prospectus Supplement.
The discussion that follows is a summary and does not purport to be
complete. The summary includes descriptions of the material terms of the Pass
Through Agreements and the Indentures, the forms of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. The
forms of the related Participation Agreements, Leases and Trust Agreements have
also been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. This summary makes use of terms defined in and is
qualified in its entirety by reference to the Pass Through Agreements.
GENERAL
Unless otherwise provided in the applicable Pass Through Agreement, the
Pass Through Certificates will be issued in fully registered, certificated form
only. Each Pass Through Certificate will represent a fractional undivided
interest in the separate Pass Through Trust formed by the Pass Through Agreement
pursuant to which such Pass Through Certificate is issued. The property of each
Pass Through Trust will consist of the Equipment Notes held in such Pass Through
Trust, all monies at any time paid thereon, all monies due and to
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<PAGE> 37
become due thereunder and funds from time to time deposited with the Pass
Through Trustee in accounts relating to such Pass Through Trust. Each Pass
Through Certificate will represent a pro rata share of the outstanding principal
amount of the Equipment Notes and other property held in the related Pass
Through Trust and will be issued, unless otherwise specified in the applicable
Prospectus Supplement, in minimum denominations of $1,000 or any integral
multiple of $1,000, except that one Pass Through Certificate with respect to
each Pass Through Trust may be in a multiple of less than $1,000. (Pass Through
Agreement, Articles II and III)
Interest will be passed through to Certificateholders of each Pass Through
Trust at the rate per annum payable on the Equipment Notes held in such Pass
Through Trust, as set forth for such Pass Through Trust on the cover page of the
applicable Prospectus Supplement.
The Pass Through Certificates represent interests in the related Pass
Through Trust only, and all payments and distributions shall be made only from
the Trust Property of such Pass Through Trust. The Pass Through Certificates do
not represent an interest in or obligation of the Company, the Pass Through
Trustee, any related Owner Participant, the Owner Trustee in its individual
capacity or any affiliate of any of the foregoing. Each Certificateholder by its
acceptance of a Pass Through Certificate agrees to look solely to the income and
proceeds from the property held in the related Pass Through Trust as provided in
the applicable Pass Through Agreement (Pass Through Agreement, Section 3.08)
The Pass Through Agreements, except as otherwise described in the
applicable Prospectus Supplement, the Participation Agreements, the Equipment
Notes, the Indentures and the Leases, do not contain any debt or other financial
covenants or any other provisions that would afford Certificateholders
protection in the event of a highly leveraged transaction involving the Company.
BOOK-ENTRY REGISTRATION
If specified in the applicable Prospectus Supplement, the Pass Through
Certificates will be subject to the provisions described below. Upon issuance,
each Series of the Pass Through Certificates will be represented by one fully
registered global certificate. 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"), its nominee. No Certificateholder will be entitled
to receive a certificated Pass Through Certificate, except as set forth below.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Exchange Act. DTC was created to hold securities for its participants
("DTC Participants") and to facilitate the clearance and settlement of
securities transactions among DTC Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. DTC
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Access to DTC's
book-entry system is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a DTC Participant, either directly or indirectly.
Certificateholders that are not DTC Participants but desire to purchase,
sell or otherwise transfer ownership of, or other interests in, Pass Through
Certificates may do so only through DTC Participants. In addition,
Certificateholders will receive all distributions of principal and interest from
the Pass Through Trustee through the DTC Participants. Under the rules,
regulations and procedures creating and affecting DTC and its operation, DTC is
required to make book-entry transfers of Pass Through Certificates among DTC
Participants on whose behalf it acts and to receive and transmit distributions
of principal of, and premium, if any, and interest on, the Pass Through
Certificates. Under the book-entry system, Certificateholders may experience
some delay in their receipt of payments, since such payments will be forwarded
by the Pass Through Trustee to Cede, as nominee for DTC, and DTC in turn will
forward the payments to the appropriate DTC Participants. Distributions by DTC
Participants to Certificateholders will be the sole responsibility of such DTC
Participants and will be made in accordance with customary industry practices.
Accordingly, although Certificateholders will not have possession of the Pass
Through Certificates, the rules of
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<PAGE> 38
DTC provide a mechanism by which DTC Participants will receive payments and will
be able to transfer their interests. Although the DTC Participants are expected
to convey the rights represented by their interests in any global security to
the related Certificateholders, because DTC can only act on behalf of DTC
Participants, the ability of Certificateholders to pledge Pass Through
Certificates to persons or entities that are not DTC Participants, or to
otherwise act with respect to such Pass Through Certificates, may be limited due
to the lack of physical certificates for such Pass Through Certificates.
Neither the Company, the Pass Through Trustee nor any other agent of the
Company or the Pass Through Trustee will have any responsibility or liability
for any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the Pass Through Certificates or for
supervising or reviewing any records relating to such beneficial ownership
interests. Since the only "Holder" will be Cede, as nominee of DTC,
Certificateholders will not be recognized by the Pass Through Trustee as
Holders, as such term is used in the applicable Pass Through Agreement, and
Certificateholders will be permitted to exercise the rights of Holders only
indirectly through DTC and DTC Participants.
The Pass Through Certificates will be issued in fully registered,
certificated form to Certificateholders, or their nominees, rather than to DTC
or its nominee, only if (i) DTC advises the Pass Through Trustee in writing that
it is no longer willing or able or qualified to discharge properly its
responsibilities as depository with respect to the Pass Through Certificates,
and the Pass Through Trustee and the Company are unable to locate a qualified
successor, (ii) the Company, at its option, elects to terminate the book-entry
system through DTC or (iii) after the occurrence of an Event of Default,
Certificateholders holding a majority of the beneficial ownership interests in
the Pass Through Certificates advise the Pass Through Trustee and DTC through
DTC Participants in writing that continuation of a book-entry system through DTC
is no longer in the best interest of the Certificateholders. In such event, the
Pass Through Trustee will notify all Certificateholders through DTC Participants
of the availability of such certificated Pass Through Certificates. Upon
surrender by DTC of the registered global certificate representing the affected
Series of Pass Through Certificates and receipt of instructions for
re-registration, the Pass Through Trustee will reissue the Pass Through
Certificates in certificated form to Certificateholders or their nominees. Such
certificated Pass Through Certificates will be freely transferable and
exchangeable at the office of the Pass Through Trustee upon compliance with the
requirements set forth in the related Pass Through Agreement. No service charge
will be imposed for any registration of transfer or exchange, but payment of a
sum sufficient to cover any tax or other governmental charge will be required.
All payments made under any Lease or any Indenture in respect of the
Equipment Notes will be in immediately available funds. Such payments will be
passed through to DTC in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Pass
Through Certificates will trade in DTC's Same Day Funds Settlement System until
maturity, and secondary market trading activity in the Pass Through Certificates
will therefore be required by DTC to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Pass Through Certificates.
PAYMENTS AND DISTRIBUTIONS
Except under certain circumstances, after the Indenture Trustee has made
principal and interest payments to the Pass Through Trustee for each of the Pass
Through Trusts on the related Equipment Notes held in such Pass Through Trust,
the Indenture Trustee will pay the remaining balance, if any, of rental payments
received from the Company to the Owner Trustee for the benefit of the related
Owner Participant. The Pass Through Trustee for each such Pass Through Trust
will distribute to the Certificateholders of such Pass Through Trust payments
received on the Equipment Notes held in such Pass Through Trust as described
below.
Payments of principal of, and interest on the unpaid amount of, the
Equipment Notes held in each Pass Through Trust will be scheduled to be received
by the Pass Through Trustee on the dates specified in the applicable Prospectus
Supplement (such scheduled payments of principal of, and interest on, the
Equipment
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Notes are referred to herein as "Scheduled Payments," and the dates specified
for distributions of Scheduled Payments to the Pass Through Trustee in the
applicable Prospectus Supplement are referred to herein as "Regular Distribution
Dates"). For each Pass Through Trust, the Pass Through Trustee will distribute
on each Regular Distribution Date to the related Certificateholders any
Scheduled Payment timely received by the Pass Through Trustee. If a Scheduled
Payment is not received by the Pass Through Trustee on or before a Regular
Distribution Date but is received within five days thereafter, it will be
distributed on the date received to the Certificateholders. Each such
distribution of a Scheduled Payment will be made by the Pass Through Trustee to
the Certificateholders of record of such Pass Through Trust on the fifteenth day
prior to such Regular Distribution Date, subject to certain exceptions. Each
such Certificateholder will be entitled to receive a pro rata share of any such
distribution. (Pass Through Agreement, Sections 4.01 and 4.02) If a Scheduled
Payment is received more than five days after the applicable Regular
Distribution Date, it will be treated as a Special Payment and will be
distributed as described below.
After any prepayment of principal, any redemption or any default with
respect to some or all of the Equipment Notes held in any Pass Through Trust,
any Certificateholder of such Pass Through Trust should refer to the Pool
Balance and the Pool Factor (as such terms are defined below) for such Pass
Through Trust reported periodically by the Pass Through Trustee, in order to
calculate such Certificateholder's pro rata share of such Pass Through Trust.
See "Pool Factors" and "Statements to Certificateholders" below.
For any Pass Through Trust, any payments of principal, premium, if any, or
interest, other than Scheduled Payments, received by the Pass Through Trustee on
any of the Equipment Notes held in such Pass Through Trust, including payments
received (i) for the prepayment of such Equipment Notes in connection with
certain events specified in the applicable Prospectus Supplement, (ii) upon an
Indenture Event of Default in respect of such Equipment Notes or the exercise of
remedies under the related Indenture, and (iii) on account of the sale of such
Equipment Notes by the Pass Through Trustee (such payments are referred to
herein as "Special Payments"), will be distributed on the dates determined as
set forth in the applicable Prospectus Supplement (each, a "Special Distribution
Date" and, together with the Regular Distribution Dates, the "Distribution
Dates"). Prior to any Special Payment for any Pass Through Trust, the Pass
Through Trustee will notify the Certificateholders of record of such Pass
Through Trust of such Special Payment and the anticipated Special Distribution
Date therefor in accordance with the Pass Through Agreement. Each distribution
of a Special Payment, other than the final distribution, for any Pass Through
Trust will be made by the Pass Through Trustee to the Certificateholders of
record of such Pass Through Trust on the fifteenth day prior to such Special
Distribution Date, unless otherwise specified in the applicable Prospectus
Supplement. Each such Certificateholder will be entitled to receive a pro rata
share of any such distribution. (Pass Through Agreement, Section 4.02)
Each Pass Through Agreement requires that the Pass Through Trustee
establish and maintain, for the related Pass Through Trust and for the benefit
of the related Certificateholders, one or more non-interest bearing accounts
(each a "Certificate Account") for the deposit of Scheduled Payments on the
Equipment Notes held in such Pass Through Trust and one or more accounts which
will, except in connection with Permitted Investments as discussed below, be
non-interest bearing (each a "Special Payments Account") for the deposit of
Special Payments on such Equipment Notes. The Pass Through Trustee is required
to deposit any Scheduled Payments relating to a Pass Through Trust received by
it in the related Certificate Account and to deposit any Special Payments so
received by it in the related Special Payments Account pending distribution
thereof. (Pass Through Agreement, Section 4.01) Special Payments that are not
promptly distributed by the Pass Through Trustee will, to the extent
practicable, be invested by the Pass Through Trustee in Permitted Investments
pending the distribution of such funds on a Special Distribution Date, and the
income and earnings on such investments will be distributed with such Special
Payment. "Permitted Investments" are obligations of the United States of America
(for the payment of which its full faith and credit is pledged) maturing in not
more than 60 days or such lesser time as is necessary for the distribution of
any such funds on a Special Distribution Date. (Pass Through Agreement, Article
I and Section 4.04)
Distributions by the Pass Through Trust from the Certificate Account or the
Special Payments Account of any Pass Through Trust on any Distribution Date will
be paid to each Certificateholder of record of such Pass Through Trust on the
applicable record date at its address appearing on the register maintained for
such
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Pass Through Trust. (Pass Through Agreement, Section 4.02) The final
distribution for each Pass Through Trust, however, will be made only upon
presentation and surrender of the Pass Through Certificates for such Pass
Through Trust at the office or agency of the Pass Through Trustee specified in
the notice of such final distribution given by the Pass Through Trustee. The
Pass Through Trustee will mail such notice of the final distribution to the
Certificateholders of such Pass Through Trust, specifying the date set for such
final distribution and the amount of such distribution. (Pass Through Agreement,
Section 11.01) See "Termination of Pass Through Trusts" below.
If any Distribution Date is not a Business Day, distributions scheduled to
be made on such Distribution Date may be made on the next succeeding Business
Day without additional interest. (Pass Through Agreement, Section 12.09)
POOL FACTORS
Except as provided below, the Pool Factor (as defined below) for any Pass
Through Trust will decline in proportion to the scheduled repayments of
principal on the Equipment Notes held in such Pass Through Trust as described in
the applicable Prospectus Supplement. Where any Equipment Note held in a Pass
Through Trust has been prepaid, a scheduled repayment of principal thereon has
not been made or certain actions have been taken following a default thereon, as
discussed in the applicable Prospectus Supplement or below in "Events of Default
and Certain Rights Upon an Event of Default," the Pool Factor and the Pool
Balance (as defined below) of such Pass Through Trust will be recomputed after
giving effect thereto and notice thereof will be mailed to the
Certificateholders of such Pass Through Trust. Each Pass Through Trust will have
a separate Pool Factor.
Unless otherwise described in the applicable Prospectus Supplement, the
"Pool Balance" for each Pass Through Trust indicates, as of any date, the
aggregate unpaid principal amount of the Equipment Notes held in such Pass
Through Trust on such date plus any amounts in respect of principal on such
Equipment Notes held by the Pass Through Trustee and not yet distributed. The
Pool Balance for each Pass Through Trust as of any Distribution Date will be
computed after giving effect to the payment of principal, if any, on the
Equipment Notes held in such Pass Through Trust and the distribution thereof
being made on that date. (Pass Through Agreement, Article I)
Unless otherwise described in the applicable Prospectus Supplement, the
"Pool Factor" for each Pass Through Trust as of any Distribution Date is the
quotient (rounded to the seventh decimal place) computed by dividing (i) the
Pool Balance by (ii) the aggregate original principal amount of the Pass Through
Certificates issued in respect of such Pass Through Trust. The Pool Factor for
each Pass Through Trust as of any Distribution Date shall be computed after
giving effect to the payment of principal, if any, on the Equipment Notes held
in such Pass Through Trust and the distribution thereof being made on that date.
The Pool Factor for each Pass Through Trust will initially be 1.0000000;
thereafter, the Pool Factor for each Pass Through Trust will decline as
described above to reflect reductions in the Pool Balance of such Pass Through
Trust. For any Pass Through Trust, the amount of any Certificateholder's pro
rata share of the Pool Balance of such Pass Through Trust can be determined by
multiplying the original denomination of such Certificateholder's Pass Through
Certificate by the Pool Factor for such Pass Through Trust as of the applicable
Distribution Date. (Pass Through Agreement, Article I)
STATEMENTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Pass Through Trustee will include with each
distribution of a Scheduled Payment or Special Payment to Certificateholders of
record of the related Pass Through Trust a statement, giving effect to such
distribution being made on such Distribution Date, setting forth the following
information (per $1,000 in aggregate amount of Pass Through Certificates for
such Pass Through Trust, as to (i) and (ii) below):
(i) the amount of such distribution allocable to principal and
allocable to premium, if any;
(ii) the amount of such distribution allocable to interest; and
(iii) the Pool Balance and the Pool Factor for such Pass Through
Trust.
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In addition, after the end of each calendar year, the Pass Through Trustee
will prepare for each person who at any time during the preceding calendar year
was a Certificateholder of record a report containing the sum of the amounts
determined pursuant to clauses (i) and (ii) above with respect to the related
Pass Through Trust for such calendar year or, in the event such person was a
Certificateholder during a portion of such calendar year, for the applicable
portion of such calendar year. (Pass Through Agreement, Section 4.03)
VOTING OF EQUIPMENT NOTES
The Pass Through Trustee, as holder of the Equipment Notes held in each
Pass Through Trust, has the right to vote and give consents and waivers in
respect of such Equipment Notes under the related Indentures. Each Pass Through
Agreement sets forth the circumstances in which the Pass Through Trustee shall
direct any action or cast any vote as the holder of the Equipment Notes held in
such Pass Through Trust at its own discretion and the circumstances in which the
Pass Through Trustee shall seek instructions from the Certificateholders of such
Pass Through Trust. Prior to an Event of Default (as defined below) with respect
to any Pass Through Trust, the principal amount of the Equipment Notes held in
such Pass Through Trust directing any action or being voted for or against any
proposal will be in proportion to the principal amount of Pass Through
Certificates held by the Certificateholders of such Pass Through Trust taking
the corresponding position. (Pass Through Agreement, Article VI and Section
10.01)
EVENTS OF DEFAULT AND CERTAIN RIGHTS UPON AN EVENT OF DEFAULT
Each Pass Through Agreement defines an event of default for the
corresponding Pass Through Trust (an "Event of Default") as the occurrence and
continuance of an event of default under one or more of the related Indentures
(an "Indenture Event of Default"). The Indenture Events of Default under the
Indentures will be described in the applicable Prospectus Supplement and will
include events of default under the related Leases ("Lease Events of Default").
Since the Equipment Notes outstanding under an Indenture may be held in more
than one Pass Through Trust, a continuing Indenture Event of Default under such
Indenture would result in an Event of Default with respect to each such Pass
Through Trust. All of the Equipment Notes issued under the same Indenture will
relate to the items of Equipment identified and described in a Prospectus
Supplement. There will be no cross-collateralization or cross-default provisions
in the Indentures; consequently, events resulting in an Indenture Event of
Default under any particular Indenture will not necessarily result in an
Indenture Event of Default occurring under any other Indenture. If an Indenture
Event of Default occurs in fewer than all of the Indentures related to a Pass
Through Trust, the Equipment Notes issued pursuant to the related Indentures
with respect to which an Indenture Event of Default has not occurred will
continue to be held in such Pass Through Trust and payments of principal of,
premium, if any, and interest on such Equipment Notes will continue to be
distributed to the Certificateholders of such Pass Through Trust as originally
scheduled.
Under each Indenture the Owner Trustee has the right under certain
circumstances to cure an Indenture Event of Default that results from the
occurrence of a Lease Event of Default under the related Lease. If the Owner
Trustee chooses to exercise such cure right, the Indenture Event of Default and
consequently the Event of Default under any Pass Through Trust holding the
related Equipment Notes will be deemed to be cured. See the applicable
Prospectus Supplement for a more detailed discussion of certain provisions
described in this paragraph.
Each Pass Through Agreement provides that if an Indenture Event of Default
under an Indenture relating to Equipment Notes held in the corresponding Pass
Through Trust shall have occurred and be continuing, the Pass Through Trustee
(i) may vote all of the Equipment Notes issued under such Indenture that are
held in such Pass Through Trust, and (ii) upon the direction of the
Certificateholders evidencing fractional undivided interests aggregating not
less than a majority in interest of the Pass Through Certificates at the time
outstanding in respect of such Pass Through Trust shall vote a corresponding
majority of such Equipment Notes, in each case in favor of directing the related
Indenture Trustee to declare the unpaid principal amount of all Equipment Notes
issued under such Indenture and any accrued and unpaid interest
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<PAGE> 42
thereon to be due and payable. Each Pass Through Agreement also provides that if
an Indenture Event of Default under an Indenture relating to Equipment Notes
held in the corresponding Pass Through Trust shall have occurred and be
continuing, the Pass Through Trustee may, and upon the direction of the
Certificateholders evidencing fractional undivided interests aggregating not
less than a majority in interest of the Pass Through Certificates at the time
outstanding in respect of such Pass Through Trust shall, vote Equipment Notes
issued under such Indenture that are held in such Pass Through Trust in favor of
directing the related Indenture Trustee as to the time, method and place of
conducting any proceeding for any remedy available to such Indenture Trustee or
of exercising any trust or power conferred on such Indenture Trustee under such
Indenture. (Pass Through Agreement, Sections 6.01 and 6.04)
If the Equipment Notes outstanding under an Indenture are held by more than
one Pass Through Trust, then the ability of the Certificateholders of any one
Pass Through Trust to cause the Indenture Trustee for any Equipment Notes held
in such Pass Through Trust to accelerate the payment on such Equipment Notes
under the related Indenture or to direct the exercise of remedies by such
Indenture Trustee under the related Indenture will depend, in part, upon the
proportion between the aggregate principal amount of the Equipment Notes
outstanding under such Indenture and held in such Pass Through Trust and the
aggregate principal amount of all Equipment Notes outstanding under such
Indenture. If the Equipment Notes outstanding under an Indenture are held by
more than one Pass Through Trust, then each such Pass Through Trust will hold
Equipment Notes with different terms from those of the Equipment Notes held in
any other Pass Through Trust and, therefore, the Certificateholders of a Pass
Through Trust may have divergent or conflicting interests from those of the
Certificateholders of the other Pass Through Trusts holding Equipment Notes
relating to the same Indenture. In addition, so long as the same institution or
an affiliate of such institution acts as Pass Through Trustee of each Pass
Through Trust, in the absence of instructions from the Certificateholders of any
such Pass Through Trust, the Pass Through Trustee for such Pass Through Trust
could for the same reason be faced with a potential conflict of interest upon an
Indenture Event of Default. In such event, the initial Pass Through Trustee has
indicated that it would resign as Pass Through Trustee of one or all of such
Pass Through Trusts, and a successor pass through trustee would be appointed in
accordance with the terms of the applicable Pass Through Agreement. See "The
Pass Through Trustee; the Indenture Trustee" below for a discussion of
resignation procedures.
As an additional remedy, if an Indenture Event of Default under an
Indenture has occurred and is continuing, each Pass Through Agreement provides
that the Pass Through Trustee of the corresponding Pass Through Trust holding
Equipment Notes issued under such Indenture may, and upon the direction of the
Certificateholders evidencing fractional undivided interests aggregating not
less than a majority in interest of the Pass Through Certificates at the time
outstanding in respect of such Pass Through Trust will, sell all or part of such
Equipment Notes for cash to any person at a price or prices that it may
reasonably deem advisable. Any proceeds received by such Pass Through Trust upon
any such sale will be deposited in the Special Payments Account for such Pass
Through Trust and will be distributed to the Certificateholders of such Pass
Through Trust on a Special Distribution Date. (Pass Through Agreement, Sections
6.01 and 6.02) The market for Equipment Notes in default may be very limited and
there can be no assurance that they could be sold for a reasonable price.
Furthermore, so long as the same institution or any affiliate of such
institution acts as Pass Through Trustee of each Pass Through Trust, it may be
faced with a conflict in deciding from which Pass Through Trust to sell
Equipment Notes to available buyers. If the Pass Through Trustee sells any such
Equipment Notes with respect to which an Indenture Event of Default exists for
less than the outstanding principal amount thereof, the Certificateholders of
such Pass Through Trust will receive a smaller amount of principal distributions
than anticipated and will not have any claim for the shortfall against the Pass
Through Trustee, the Company, the Owner Trust, the Owner Trustee or any related
Owner Participant. Furthermore, neither the Pass Through Trustee nor the
Certificateholders of such Pass Through Trust could take any action with respect
to any remaining Equipment Notes held in such Pass Through Trust so long as no
Indenture Event of Default existed with respect thereto.
For any Pass Through Trust, any amount distributed to the Pass Through
Trustee by the Indenture Trustee under any Indenture on account of the Equipment
Notes held in such Pass Through Trust following an Indenture Event of Default
under such Indenture will be deposited in the Special Payments Account for
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such Pass Through Trust and will be distributed to the Certificateholders of
such Pass Through Trust on a Special Distribution Date. In addition, if,
following an Indenture Event of Default under any Indenture, the related Owner
Trustee exercises its option, if any, to prepay or purchase the outstanding
Equipment Notes issued under such Indenture as described in the related
Prospectus Supplement, the price paid by such Owner Trustee to the Pass Through
Trustee for such Equipment Notes held in such Pass Through Trust will be
deposited in the related Special Payments Account and will be distributed to the
Certificateholders of such Pass Through Trust on a Special Distribution Date.
Such price must be at least equal to the outstanding principal amount of such
Equipment Notes plus accrued and unpaid interest thereon. (Pass Through
Agreement, Sections 4.01 and 4.02)
Any funds representing payments received with respect to any Equipment
Notes held in a Pass Through Trust in default, or the proceeds from the sale by
the Pass Through Trustee of any such Equipment Notes, held by the Pass Through
Trustee in the Special Payments Account for such Pass Through Trust will, to the
extent practicable, be invested by the Pass Through Trustee in Permitted
Investments pending the distribution of such funds on a Special Distribution
Date. (Pass Through Agreement, Article I and Section 4.04)
Each Pass Through Agreement provides that the Pass Through Trustee will,
within 90 days after the occurrence of a default (as defined below) under the
corresponding Pass Through Trust, notify the Certificateholders of such Pass
Through Trust by mail of all uncured or unwaived defaults with respect to such
Pass Through Trust known to it. The Pass Through 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, except in the case
of default in the payment of principal of, premium, if any, or interest on any
of the Equipment Notes held in such Pass Through Trust. The term "default," for
the purpose of the provision described in this paragraph only, means the
occurrence of any Event of Default with respect to a Pass Through Trust as
described above, except that in determining whether any such Event of Default
has occurred any grace period or notice in connection therewith shall be
disregarded. (Pass Through Agreement, Section 7.02)
Each Pass Through Agreement provides that for the corresponding Pass
Through Trust, subject to the duty of the Pass Through Trustee during a default
to act with the required standard of care, the Pass Through Trustee is entitled
to be indemnified by the Certificateholders of such Pass Through Trust before
proceeding to exercise any right or power under such Pass Through Trust at the
request of such Certificateholders. (Pass Through Agreement, Section 7.03)
In certain cases, the Certificateholders of a Pass Through Trust evidencing
fractional undivided interests aggregating not less than a majority in interest
of the Pass Through Certificates at the time outstanding in respect of such Pass
Through Trust may on behalf of all the Certificateholders of such Pass Through
Trust waive any past default or Event of Default with respect to such Pass
Through Trust and thereby annul any direction given by such Certificateholders
to the Pass Through Trustee or the related Indenture Trustee with respect
thereto, except (i) a default in the deposit or distribution of any Scheduled
Payment or Special Payment, (ii) a default in payment of the principal of,
premium, if any, or interest on any of the Equipment Notes held in such Pass
Through Trust and (iii) a default in respect of any covenant or provision of the
corresponding Pass Through Agreement that cannot be modified or amended without
the consent of each Certificateholder of such Pass Through Trust affected
thereby. Any such waiver, however, will be effective to waive any such past
default or Event of Default if, but only if, the correlative Indenture Event of
Default has been waived under the related Indenture by the requisite holders of
the Equipment Notes outstanding thereunder. (Pass Through Agreement, Section
6.05)
Each Indenture provides that, with certain exceptions, the holders of a
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
Event of Default thereunder. If, as described above, the Certificateholders of a
Pass Through Trust elect to waive a past default or Event of Default with
respect to such Pass Through Trust, the principal amount of the Equipment Notes
issued under the related Indenture and held in such Pass Through Trust will be
counted in favor of the waiver of the corresponding past default or Indenture
Event of Default under the related Indenture when the Indenture Trustee
determines whether such past default or Indenture Event of Default has been
waived by the requisite majority in aggregate unpaid principal amount of
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Equipment Notes under such Indenture. If, for example, the Equipment Notes
issued under an Indenture held in a Pass Through Trust constitute only 45% in
aggregate unpaid principal amount of the Equipment Notes issued and unpaid under
such Indenture, even if all the Certificateholders of such Pass Through Trust
were to instruct the Pass Through Trustee not to waive a past default or Event
of Default with respect to such Pass Through Trust and, consequently, to vote
such Equipment Notes against the waiver of the corresponding past default or
Indenture Event of Default under such Indenture, the Equipment Notes so voted by
the Pass Through Trustee on behalf of such Pass Through Trust would not alone be
sufficient under the terms of such Indenture to compel the Indenture Trustee to
refrain from giving such waiver. Moreover, there would be no assurance that the
Certificateholders of any other Pass Through Trust holding Equipment Notes
issued under such Indenture would at such time vote such Equipment Notes against
such waiver. Therefore, if the Certificateholders of a Pass Through Trust or
Pass Through Trusts waive a past default or Event of Default such that the
principal amount of the Equipment Notes held either individually in such Pass
Through Trust or in the aggregate in such Pass Through Trusts constitutes the
required majority in aggregate unpaid principal amount under the applicable
Indenture, such past default or Indenture Event of Default under such Indenture
will be waived whether or not the Certificateholders of any other Pass Through
Trust holding Equipment Notes issued under such Indenture waive such past
default or Event of Default with respect to such other Pass Through Trust.
MODIFICATIONS OF THE AGREEMENTS
Each Pass Through Agreement contains provisions permitting the Company and
the Pass Through Trustee to enter into an agreement supplemental to the
corresponding Pass Through Trust, without the consent of the Certificateholders
of such Pass Through Trust, to (i) evidence the succession of another
corporation to the Company and the assumption by such corporation of the
Company's obligations under such Pass Through Agreement, (ii) add to the
covenants of the Company for the protection of the related Certificateholders,
(iii) surrender any right or power conferred upon the Company in such Pass
Through Agreement, (iv) cure any ambiguity or correct or supplement any
defective or inconsistent provision of such Pass Through Agreement, or make any
other provisions in regard to matters or questions arising thereunder, provided
that such action will not adversely affect the interests of the related
Certificateholders, (v) correct or amplify the description of property that
constitutes Trust Property or the conveyance of such property to the Pass
Through Trustee, (vi) evidence and provide for a successor Pass Through Trustee
for such Pass Through Trust, (vii) modify, eliminate or add to the provisions of
such Pass Through Agreement to the extent necessary to qualify such Pass Through
Agreement under the Trust Indenture Act or any similar federal statute enacted
thereafter, or (viii) add, eliminate or change any provision under such Pass
Through Agreement that will not adversely affect the interests of the
Certificateholders, provided that in each case such modification does not cause
the corresponding Pass Through Trust to become taxable as an "association,"
within the meaning of Treasury Regulation Section 301.7701-4 (Pass Through
Agreement, Section 9.01).
Each Pass Through Agreement also provides that the Company and the Pass
Through Trustee, with the consent of the Certificateholders evidencing
fractional undivided interests aggregating not less than a majority in interest
of the Pass Through Certificates at the time outstanding in respect of the
corresponding Pass Through Trust, may execute supplemental agreements adding any
provisions to or changing or eliminating any of the provisions of such Pass
Through Agreement or modifying the rights of such Certificateholders. No such
supplemental agreement may, however, without the consent of each such
Certificateholder so affected, (a) reduce in any manner the amount of, or delay
the timing of, any receipt by the Pass Through Trustee of payments on the
Equipment Notes held in such Pass Through Trust, or distributions in respect of
any Pass Through Certificate of such Pass Through Trust, or change any date of
payment on any such Pass Through Certificate or change the place of payment
where, or the coin or currency in which, such Pass Through Certificates are
payable, or impair the right of any such Certificateholder to institute suit for
the enforcement of any payment when due, (b) except as provided in such Pass
Through Agreement, permit the disposition of any Equipment Note held in such
Pass Through Trust, or permit the creation of any lien on the Trust Property or
otherwise deprive any Certificateholder of the benefit of the ownership of the
Equipment Notes held in such Pass Through Trust or the lien of the related
Indenture, (c) reduce the percentage of the aggregate fractional undivided
interests of such Pass Through Trust that is required to approve any
supplemental agreement or any
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waiver provided for in such Pass Through Agreement or (d) cause the Pass Through
Trust to become taxable as an "association," within the meaning of Treasury
Regulation Section 301.7701-4. (Pass Through Agreement, Section 9.02)
MODIFICATIONS, CONSENTS AND WAIVERS UNDER THE INDENTURES AND RELATED AGREEMENTS
If the Pass Through Trustee, as the holder of any Equipment Notes held in a
Pass Through Trust, receives a request for its consent to any amendment,
modification, waiver or supplement under the Indenture or other document
relating to such Equipment Notes (including any Lease), the Pass Through Trustee
will mail a notice of such proposed amendment, modification, waiver or
supplement to each Certificateholder of such Pass Through Trust as of the date
of such notice. The Pass Through Trustee will request instructions from such
Certificateholders as to whether or not to consent to such amendment,
modification, waiver or supplement. The Pass Through Trustee will vote or
consent with respect to such Equipment Notes in the same proportion as the Pass
Through Certificates of such Pass Through Trust are actually voted by such
Certificateholders by a certain date specified in such notice to
Certificateholders. If an Event of Default relating to such Indenture has
occurred and is continuing under such Pass Through Trust, the Pass Through
Trustee may, in the absence of instructions from Certificateholders holding a
majority in interest of the Pass Through Certificates at the time outstanding in
respect of such Pass Through Trust, in its own discretion consent to such
amendment, modification, waiver or supplement, and may so notify the related
Indenture Trustee. (Pass Through Agreement, Section 10.01)
TERMINATION OF PASS THROUGH TRUSTS
The obligations of the Company and the Pass Through Trustee with respect to
a Pass Through Trust will terminate upon the distribution to the
Certificateholders of such Pass Through Trust of all amounts required to be
distributed to them pursuant to the corresponding Pass Through Agreement and the
disposition of all property held in such Pass Through Trust. The Pass Through
Trustee will notify each Certificateholder of record of such Pass Through Trust
by mail of, among other things, the termination of such Pass Through Trust, the
amount of the proposed final payment and the proposed date for the distribution
of such final payment for such Pass Through Trust. The final distribution for
each Certificateholder of such Pass Through Trust will be made only upon
surrender of such Certificateholder's Pass Through Certificates at the office or
agency of the Pass Through Trustee specified in such termination notice. (Pass
Through Agreement, Section 11.01)
THE PASS THROUGH TRUSTEE; THE INDENTURE TRUSTEE
Shawmut Bank Connecticut, National Association will be the initial Pass
Through Trustee for each of the Pass Through Trusts. The Pass Through Trustee
and any of its affiliates may hold Pass Through Certificates in their own names.
(Pass Through Agreement, Section 7.05)
Unless otherwise specified in the related Prospectus Supplement, Shawmut
Bank Connecticut, National Association may also be the Indenture Trustee under
the Indentures under which the Equipment Notes have been or will be issued.
Shawmut Bank Connecticut, National Association may act as trustee under other
indentures with respect to other indebtedness of the Company. The Company from
time to time may borrow from, and maintain deposit accounts with, Shawmut Bank
Connecticut, National Association and its affiliates.
The Pass Through Trustee may resign under any or all of the Pass Through
Trusts at any time. The Pass Through Trustee is required to resign with respect
to a Pass Through Trust if it obtains knowledge of an Avoidable Tax (generally,
a state or local tax on such Pass Through Trust or its Certificateholders that
would be avoided if the Pass Through Trustee were located in another state)
unless the Company or the Owner Trustee pays such tax. If the Pass Through
Trustee fails to comply with Section 310 of the Trust Indenture Act or ceases to
be eligible to continue as Pass Through Trustee with respect to a Pass Through
Trust and, in either such case, fails to so comply or to resign after written
request by any Certificateholder that has been a bona fide Certificateholder of
the applicable Pass Through Trust for at least six months or if the Pass Through
Trustee becomes incapable of acting as Pass Through Trustee or becomes
insolvent, then the Company may
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remove such Pass Through Trustee, or any Certificateholder of such Pass Through
Trust for at least six months may, on behalf of itself and all others similarly
situated, petition any court of competent jurisdiction for the removal of such
Pass Through Trustee and the appointment of a successor trustee. In addition,
the Pass Through Trustee of any Pass Through Trust may be removed without cause
by the Certificateholders holding more than 50% in aggregate amount of the
related Pass Through Certificates. In the case of the resignation or removal of
the Pass Through Trustee, the Company will appoint a successor, subject to the
right of the Certificateholders holding more than 50% in aggregate amount of the
related Pass Through Certificates to appoint a different successor within one
year thereafter. If no successor Pass Through Trustee is appointed and accepts
its appointment, then any Certificateholder that has been a bona fide
Certificateholder of the relevant Pass Through Trust for at least six months
may, or the resigning Pass Through Trustee may, petition a court for the
appointment of a successor. The resignation or removal of the Pass Through
Trustee for any Pass Through Trust and the appointment of the successor trustee
for such Pass Through Trust does not become effective until acceptance of the
appointment by the successor trustee. (Pass Through Agreement, Section 7.09)
Pursuant to such resignation and successor trustee provisions, it is possible
that a different trustee could be appointed to act as the successor trustee with
respect to each Pass Through Trust. All references in this Prospectus to the
Pass Through Trustee are to the respective trustees acting in such capacity
under each of the Pass Through Trusts and should be read to take into account
the possibility that each of the Pass Through Trusts could have a different
successor trustee in the event of such a resignation or removal.
Each Pass Through Agreement provides that the Company will pay the Pass
Through Trustee's fees and expenses. Each Pass Through Agreement further
provides that the Pass Through Trustee in its individual capacity will be
entitled to indemnification by the Company for, and will be held harmless
against, any loss, liability or expense and any tax (other than taxes
attributable to the Pass Through Trustee's compensation) incurred by the Pass
Through Trustee in its individual capacity in connection with the acceptance or
administration of the corresponding Pass Through Trust to the extent provided in
the applicable Participation Agreement (see "Description of the Equipment
Notes -- The Participation Agreements"). In certain circumstances, the Pass
Through Trustee will be entitled to be reimbursed from, and will have a lien
prior to the Pass Through Certificates upon, the applicable Pass Through Trust
for any tax (other than income or similar taxes) incurred in its trust capacity
in connection with the acceptance or administration of such Pass Through Trust.
(Pass Through Agreement, Section 7.07)
DESCRIPTION OF THE EQUIPMENT NOTES
The discussion that follows is a summary that does not purport to be
complete and is qualified in its entirety by the detailed information appearing
in the applicable Prospectus Supplement. The following summary includes
descriptions of the material terms of the Equipment Notes and the Indentures.
Except as otherwise indicated below or as described in the applicable Prospectus
Supplement, the following summary applies to the Equipment Notes, the
Indentures, the Leases and the Participation Agreements related to the
Equipment. Additional provisions with respect to the Equipment Notes, the
Indentures, the Leases and the Participation Agreements relating to any
particular offering of Pass Through Certificates will be described in the
applicable Prospectus Supplement. To the extent that any provision in any
Prospectus Supplement is inconsistent with any provision of this summary, the
provision of such Prospectus Supplement will control.
GENERAL
The Equipment Notes will be issued as nonrecourse obligations of the
applicable Owner Trust, in each case by the Owner Trustee under such Owner Trust
for the benefit of the Owner Participant under such Owner Trust, and will be
authenticated under an Indenture by the Indenture Trustee. All of the Equipment
Notes issued under the same Indenture will relate to, and will be secured by,
one or more items of Equipment identified and described in the relevant
Prospectus Supplement which are or will be leased to the Company pursuant to a
Lease between the Owner Trustee under the applicable Owner Trust and the
Company. The Equipment subject to each Lease and the Equipment Notes issued
under the related Indenture will be identified and described in the applicable
Prospectus Supplement. Under each Lease of Equipment, the Company will be
obligated to make rental payments that will be at least equal to the scheduled
payments of
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principal of and interest on the related Equipment Notes when, and as scheduled
to be, due and payable. The Equipment Notes will not, however, be obligations
of, or guaranteed by, the Company. The Company's obligations to pay rent and to
cause other payments to be made under each Lease will be general obligations of
the Company.
PRINCIPAL AND INTEREST PAYMENTS
Interest received by the Pass Through Trustee on the Equipment Notes
constituting Trust Property of each Pass Through Trust will be passed through to
the Certificateholders of such Pass Through Trust on a pro rata basis on the
dates and at the rate per annum set forth in the applicable Prospectus
Supplement. Interest on the Equipment Notes will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
Each Pass Through Trust will hold Equipment Notes on which principal is
payable in scheduled amounts and on specified dates as set forth in the
applicable Prospectus Supplement. Principal received by the Pass Through Trustee
on such Equipment Notes will be passed through to the Certificateholders of such
Pass Through Trust on a pro rata basis as set forth in the applicable Prospectus
Supplement.
PREPAYMENT
The applicable Prospectus Supplement will describe the circumstances,
whether voluntary or involuntary, under which the related Equipment Notes may or
must be prepaid prior to the stated maturity date thereof, in whole or in part,
the premium, if any, applicable upon certain prepayments and other terms
applying to the prepayment of such Equipment Notes.
SECURITY
The Equipment Notes issued under each of the Indentures will be secured by
(i) an assignment by the related Owner Trust to the Indenture Trustee of such
Owner Trust's rights (except for certain limited rights described below) under
the Lease or Leases to which it is a party covering the related item or items of
Equipment including the right to receive rent and other payments thereunder,
(ii) a security interest granted to the Indenture Trustee in such related
Equipment, subject to the rights of the Company under such Lease or Leases and
to certain other permitted liens and encumbrances. The assignment by the Owner
Trust to the Indenture Trustee of its rights under each Lease will exclude
rights of the Owner Trustee and the related Owner Participant relating to (i)
indemnification by the Company for certain matters, (ii) proceeds of public
liability insurance payable to the Owner Trustee and the Indenture Trustee in
their respective individual capacities and to the Owner Participant under
insurance maintained by the Company under such Lease and (iii) proceeds of any
insurance policies separately maintained by such Owner Trustee in its individual
capacity or by such Owner Participant. The right of the Indenture Trustee,
however, to exercise any of the rights of the Owner Trustee under the related
Lease, except the right to receive payments of rent due thereunder, will be
subject to certain limitations as described in the applicable Prospectus
Supplement.
There will be no cross-collateralization provisions in the Indentures and
consequently the Equipment Notes issued by an Owner Trust will not be secured by
any items of Equipment held by any other Owner Trust or the Leases relating
thereto. There will be no cross-default provisions in the Indentures and
consequently events resulting in an Indenture Event of Default under any
particular Indenture may not result in an Indenture Event of Default occurring
under any other Indenture.
PAYMENTS AND LIMITATIONS OF LIABILITY
All payments of principal, of premium, if any, and interest on any
Equipment Notes will be made only from the assets subject to the lien of the
related Indenture or the income and proceeds received by the Indenture Trustee
therefrom, including rent payable by the Company under the related Lease. The
Equipment Notes will not be direct obligations of, or guaranteed by, the
Company. The Company's obligations to pay rent and to cause other payments to be
made under each Lease will be general obligations of the Company.
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Neither the Owner Trustee nor the Indenture Trustee (in their individual
capacities) nor any Owner Participant will be liable to any Certificateholder
or, in the case of the Owner Trustee, in its individual capacity, to the Company
or the Indenture Trustee for any amounts payable under the Equipment Notes or
the Indentures or, except as provided in the Indentures and the Participation
Agreements and except for the gross negligence or willful misconduct of the
Owner Trustee, for any liability thereunder.
INDENTURE EVENTS OF DEFAULT AND REMEDIES
For any Pass Through Trust, the applicable Prospectus Supplement will
describe the Indenture Events of Default under the Indentures related to the
Equipment Notes to be held by such Pass Through Trust, the remedies that the
related Indenture Trustee may exercise with respect to the related Equipment,
either at their own initiative or upon instructions from holders of the related
Equipment Notes, and other provisions relating to the occurrence of an Indenture
Event of Default the exercise of remedies and any limitations or restrictions
thereon. There will be no cross-default provisions in the Indentures and events
resulting in an Indenture Event of Default under any particular Indenture will
not necessarily result in an Indenture Event of Default under any other
Indenture.
THE LEASES
The following terms are applicable to each Lease:
Terms and Rentals. Each item of Equipment is or will be leased by an
Owner Trust to the Company for a term commencing on the date of the Owner
Trustee's acceptance thereof pursuant to the related Participation
Agreement and expiring on a date not earlier than the latest maturity date
of the related Equipment Notes, unless previously terminated or extended,
as permitted by the related Lease. The scheduled rental payments by the
Company under each Lease will be payable on the dates specified in the
applicable Prospectus Supplement. Such rental payments will be assigned
under the related Indenture by the Owner Trust to the Indenture Trustee to
provide the funds necessary to make payments of principal and interest due
from such Owner Trust on the Equipment Notes issued under such Indenture.
Any Prospectus Supplement may provide that, under certain circumstances,
the scheduled rental payments under any applicable Lease may be adjusted;
in that case, however, each such Lease will provide that under no
circumstances will the adjusted rental payments that the Company will be
unconditionally obligated to make or cause to be made under such Lease and
any other Lease to which the same Owner Trust is a party, after such
adjustment be less than the scheduled payments of principal and interest on
the Equipment Notes issued under the Indenture relating to such Lease or
Leases. See "Description of the Equipment Notes -- Payments and Limitations
of Liability." Scheduled payments of principal and interest on the
Equipment Notes will be made on the dates specified in the applicable
Prospectus Supplement.
Net Lease. The Company's obligations under each Lease in respect of
the Equipment leased thereunder will be those of a lessee under a "net
lease." Accordingly, the Company will be obligated to pay all costs of
operating the Equipment and its expenses, to maintain, service, repair and
overhaul the Equipment so as to keep the Equipment in good condition,
ordinary wear and tear excepted, and in a manner consistent with the
Company's maintenance practices in respect of similar equipment owned or
leased by it. In the case of a Lease of an Aircraft, the Company will be
obligated to maintain the airworthiness certification of such Aircraft in
good standing at all times under the Federal Aviation Act. Generally, the
Company will be obligated to replace or cause to be replaced all parts that
may from time to time be incorporated or installed in or attached to any
item of Equipment and that may become worn out, lost, stolen, destroyed,
seized, confiscated, damaged beyond repair or permanently rendered unfit
for use. The Company will be obligated to make all modifications to the
Equipment which are required by law and will have the right to make other
alterations, modifications and additions to the Equipment so long as such
alterations, modifications or additions do not materially decrease the
value, utility or remaining economic useful life of such Equipment. See the
applicable Prospectus Supplement for a description of certain limitations,
if any, applicable to provisions described in this paragraph.
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Insurance. Unless otherwise indicated in the applicable Prospectus
Supplement the Company will, at its own expense, cause to be carried and
maintained with insurance companies (which may be captive insurance
companies affiliated with the Company) (i) physical damage insurance in
respect of all Equipment and (ii) public liability insurance with respect
to third-party personal injury and property damage, in such amounts and
against such risks at least equal to those customarily insured against by
the Company in respect of equipment owned or leased by it similar in type
to the Equipment. There is no assurance that any insurance will be carried
in the future, or, if it is carried, as to the amount of such insurance or
as to the amount of the deductible limits in respect of such insurance. See
the applicable Prospectus Supplement for a description of any insurance
obligations of the Company not described in this paragraph or any
limitations applicable to provisions described in this paragraph.
Lease Events of Default; Remedies. The applicable Prospectus
Supplement will describe the Lease Events of Default under the related
Leases, the remedies that the Owner Trustee may exercise with respect to
the related Equipment, and other provisions relating to the occurrence of a
Lease Event of Default and the exercise of remedies.
THE PARTICIPATION AGREEMENTS
In each Participation Agreement the Company makes certain representations
relating to itself and the related Equipment. Each Participation Agreement
provides that the Company will indemnify each Indenture Trustee, each Owner
Participant, the Owner Trustee and the Pass Through Trustee, and certain parties
affiliated with the foregoing (but not including holders of the Equipment Notes
or the Certificateholders), for certain liabilities, losses, fees and expenses
and for certain other matters arising out of the transactions described herein
or relating to the applicable Equipment or the use thereof. In addition, under
certain circumstances the Company will be required to indemnify such persons
against certain taxes, levies and duties and for certain other matters relating
to such transactions or the applicable Equipment. Subject to certain
restrictions, each Participation Agreement permits the related Owner Participant
to convey all of its right, title and interest in the related Owner Trust.
Moreover, if so provided in the applicable Prospectus Supplement, a
Participation Agreement may provide that, in certain circumstances the Company
may assume the related Owner Trust's obligation under the related Equipment
Notes on a full recourse basis upon a purchase of the related Equipment by the
Company.
Each Participation Agreement also provides that the Company will be
prohibited from consolidating with or merging into any other corporation under
circumstances in which the Company is not the surviving corporation, or from
conveying, transferring or leasing all or substantially all of its assets as an
entirety to any person, unless among other things, (i) the successor or
transferee corporation expressly assumes all the obligations of the Company
contained in such Participation Agreement, the related Lease and certain other
related agreements and (ii) immediately before and after giving effect to such
transaction, no Lease Event of Default under the related Lease shall be in
existence.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Simpson Thacher & Bartlett, tax counsel to the Company,
the following discussion accurately describes the principal United States
federal income tax consequences of ownership and disposition of the Pass Through
Certificates, and should be read in conjunction with any additional discussion
of federal income tax consequences included in the applicable Prospectus
Supplement. This opinion is based on laws, regulations, rulings and decisions in
effect as of the date hereof. Changes to existing law, which could have
retroactive effect, may alter the consequences described below. This opinion
does not purport to address federal income tax consequences applicable to
particular categories of investors, some of which (for example, insurance
companies and foreign investors) may be subject to special rules. This summary
discusses only Pass Through Certificates held as capital assets for federal
income tax purposes. Persons considering purchasing interests in Pass Through
Certificates should consult their own tax advisors with regard to the
application of the United States federal income tax laws to their particular
situations as well as any tax consequences arising under the laws of any state,
local or foreign jurisdiction. The Pass Through Trusts are not indemnified for
any
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<PAGE> 50
federal income taxes that may be imposed upon them, and the imposition of any
such taxes on a Pass Through Trust would result in a reduction in the amounts
available for distribution to the Certificateholders of such Pass Through Trust.
GENERAL
The Pass Through Trusts will not be classified as associations taxable as
corporations, but rather, will be classified as grantor trusts under Section 671
of the Internal Revenue Code of 1986, as amended (the "Code"), and each
Certificateholder will be treated as the owner of a pro rata undivided interest
in each of the Equipment Notes and any other property held in the related Pass
Through Trust.
Each Certificateholder will be required to report on its federal income tax
return its pro rata share of the entire income from each of the Equipment Notes
and any other property held in the related Pass Through Trust in accordance with
such Certificateholder's method of accounting. A Certificateholder using the
cash method of accounting must take into account its pro rata share of income as
and when such income is considered to have been received by the Pass Through
Trustee. A Certificateholder using an accrual method of accounting must take
into account its pro rata share of income as it accrues or is received by the
Pass Through Trustee, whichever is earlier. Each Certificateholder will
generally be entitled to deduct its share of the Pass Through Trustee's fees and
expenses incurred in connection with its administration of the related Pass
Through Trust. However, a noncorporate Certificateholder's allocable share of
the Pass Through Trustee's fees and expenses may be a "miscellaneous itemized
deduction" as defined in Section 67 of the Code. Under that Section,
"miscellaneous itemized deductions" will be deductible by a noncorporate
Certificateholder only to the extent that the aggregate of such deductions
(including those arising from transactions unrelated to holding the Pass Through
Certificates) exceed 2% of such Certificateholder's adjusted gross income.
A purchaser of an interest in a Pass Through Certificate will be treated as
purchasing an interest in each Equipment Note and any other property in the
related Pass Through Trust at a price determined by allocating the purchase
price paid for the Pass Through Certificate among such Equipment Notes and other
property in proportion to their relative fair market values at the time of
purchase of the Pass Through Certificate. Unless otherwise indicated in a
Prospectus Supplement, the Company anticipates that when all the Equipment Notes
have been acquired by the related Pass Through Trust, the purchase price paid
for a Pass Through Certificate of such Pass Through Trust by an original
purchaser of such Pass Through Certificate should be allocated among the
Equipment Notes held in such Pass Through Trust in proportion to their
respective principal amounts.
If an Equipment Note held by a Pass Through Trust is prepaid, a
Certificateholder will be considered to have sold his pro rata share of that
Equipment Note, and will recognize gain or loss equal to the difference between
its aggregate adjusted basis in the Equipment Note and the amount realized on
the sale (except to the extent attributable to accrued interest, which would be
taxable as interest income if not previously included in income). Subject to the
market discount provisions of the Code (described below), any such gain or loss
will be long-term capital gain or loss if the Equipment Note is considered to
have been held for more than one year. Net capital gains of individuals are,
under certain circumstances, taxed at lower rates than items of ordinary income.
With respect to the Equipment Notes, although the matter is not entirely free
from doubt, an Owner Participant's conveyance of its interest in an Owner Trust
will not constitute a taxable event to the holders of interests in the related
Equipment Notes. If the Company were to assume an Owner Trust's obligations
under the related Equipment Notes upon a purchase of the related Equipment by
the Company, such assumption would be treated as a taxable exchange of the
respective Equipment Notes resulting in the recognition of taxable gain or loss
under the rules discussed above. For this purpose the amount realized will be
equal to the fair market value of the Certificateholder's pro rata share of the
respective Equipment Notes at such time. However, under proposed Treasury
regulations not currently in effect, the Company's assumption of the Owner
Trust's obligations under the circumstances described above would not be treated
as a taxable exchange of the Equipment Notes. It is impossible to predict
whether, or in what form, final or temporary regulations might be promulgated
and what the substance or effective date of such regulations might be.
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SALES OR EXCHANGES OF PASS THROUGH CERTIFICATES
A Certificateholder that sells or exchanges a Pass Through Certificate will
be considered to have sold his pro rata portion of the property held by the Pass
Through Trust, and will recognize gain or loss on the basis discussed in the
preceding paragraph.
MARKET DISCOUNT
A purchaser of a Pass Through Certificate generally will be considered to
have acquired an interest in an Equipment Note at a "market discount" to the
extent the remaining principal amount of such Equipment Note allocable to the
Pass Through Certificate exceeds the Certificateholder's tax basis allocable to
such Equipment Note, unless the excess does not exceed a prescribed de minimis
amount. In the event such excess exceeds the de minimis amount, the
Certificateholder will be subject to the market discount rules of Sections 1276
through 1278 of the Code with regard to its interest in such Equipment Note.
In the case of a sale or certain other disposition of indebtedness subject
to the market discount rules, Section 1276 of the Code requires that gain, if
any, from such sale or disposition be treated as ordinary income to the extent
such gain represents a market discount that has accrued during the period such
indebtedness was held. If such indebtedness is disposed of in a nontaxable
transaction (other than a nonrecognition transaction described in Code Section
1276(d)), accrued market discount will be includable as ordinary income as if
the Certificateholder had sold the Equipment Note at its then market value.
In the case of a partial principal payment on indebtedness subject to the
market discount rules, Section 1276 of the Code requires that such payment be
included in gross income as ordinary income to the extent such payment does not
exceed the market discount that has accrued during the period such indebtedness
was held. The amount of any accrued market discount later required to be
included in income upon a disposition or subsequent partial principal payment
will be reduced by the amount of accrued market discount previously included in
income.
Generally, market discount accrues under a straight line method or, at the
election of the taxpayer, a constant interest method. However, in the case of
installment obligations (such as the Equipment Notes), the manner in which the
market discount is to be accrued has been left to Treasury regulations not yet
promulgated. Until such Treasury regulations are issued, the explanatory
Conference Report to the Tax Reform Act of 1986 (the "Conference Report")
indicates that holders of installment obligations with a market discount (which
do not have original issue discount) may elect to accrue the market discount
either on the basis of a constant interest rate or as follows: the amount of the
market discount that is deemed to accrue is the amount of the market discount
that bears the same ratio to the total amount of the remaining market discount
that the amount of stated interest paid in the accrual period bears to the total
amount of stated interest remaining to be paid on the installment obligation as
of the beginning of such period.
Under Section 1277 of the Code, if in any taxable year interest paid or
accrued on indebtedness incurred or continued to purchase or carry indebtedness
subject to the market discount rules exceeds the interest currently includable
in income with respect to such indebtedness, deduction of the excess interest
must be deferred to the extent of the market discount allocable to the taxable
year. The deferred portion of any interest expense will generally be deductible
when such market discount is included in income upon the sale or other
disposition (including repayment) of the indebtedness.
Section 1278 of the Code allows a taxpayer to make an election to include
market discount in his gross income currently. If such election is made, the
rules of Sections 1276 and 1277 (described above) will not apply to the
taxpayer.
PREMIUM
A Certificateholder will be considered to have acquired an interest in an
Equipment Note at a premium to the extent such Certificateholder's tax basis
allocable to such Equipment Note exceeds the remaining principal amount of such
Equipment Note allocable to such Certificateholder's Pass Through Certificate.
In that event, a Certificateholder that holds such Pass Through Certificate as a
capital asset may elect (in
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accordance with applicable Code provisions) to amortize such premium as an
offset to interest income under Section 171 of the Code with corresponding
reductions in the Certificateholder's tax basis in such Equipment Note.
Generally, such amortization is on a constant yield basis. In the case of
installment obligations (such as the Equipment Notes), however, the Conference
Report indicates a Congressional intent that amortization will be in accordance
with the same rules that will apply to the accrual of market discount on
installment obligations. See "Market Discount."
Since the Equipment Notes may be called at a premium prior to maturity,
amortizable premium may be determined by reference to an early call date. Due to
the complexities of the amortizable premium rules, particularly where there is
more than one possible call date and the amount of any premium is uncertain,
Certificateholders are urged to consult their tax advisors as to the amount of
any such amortizable premium.
If a Certificateholder acquires an interest in an Equipment Note at a
premium and elects to amortize such premium, and the Internal Revenue Service
successfully challenges the amount of amortization claimed for a particular
period, then such Certificate Owner would be precluded from offsetting interest
income on the Equipment Note for such period with the amount of the disallowed
amortization, and the basis of such Equipment Note would be increased
accordingly.
ORIGINAL ISSUE DISCOUNT
Under a reasonable interpretation of applicable Treasury regulations on
original issue discount, it is not anticipated that the Equipment Notes (and,
consequently, the Pass Through Certificates) will be issued with original issue
discount.
BACKUP WITHHOLDING
Payments made on the Pass Through Certificates, and proceeds from the sale
or exchange of the Pass Through Certificates to or through certain brokers, may
be subject to a "backup" withholding tax of 31% unless the Certificateholder
complies with certain reporting procedures or is an exempt recipient under the
Code. Any such withholding amounts will be allowed as a credit against the
Certificateholder's federal income tax and may entitle such Certificateholder to
a refund, provided that the required information is furnished to the Internal
Revenue Service.
CERTAIN STATE TAXES
The Pass Through Trustee is a national banking association with its
corporate trust office in Hartford, Connecticut. Shipman & Goodwin, special
counsel for the Pass Through Trustee, has advised the Company that, in its
opinion, under currently applicable law, assuming that each Pass Through Trust
will not be classified as an association taxable as a corporation for federal
income tax purposes, but rather will be classified as a grantor trust under
Section 671 of the Code, and assuming that each Pass Through Trust does not
otherwise engage in business in Connecticut, (i) the Pass Through 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
Connecticut or any political subdivision thereof and (ii) Certificateholders
that are not residents of or otherwise subject to tax in Connecticut 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 Connecticut or
any political subdivision thereof as a result of purchasing, owning (including
receiving payments with respect to) or selling a Pass Through Certificate.
Neither the Pass Through 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 Pass Through Trust would result in a reduction in the
amounts available for distribution to the Certificateholders of such Pass
Through Trust. In general, should a Certificateholder or a Pass Through 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.
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ERISA CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, Pass
Through Certificates may not be purchased by, or with the assets of, any
employee benefit plan subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or individual retirement account or
plan subject to Section 4975 of the Code unless such assets are subject to a
prohibited transaction exemption issued by the Department of Labor which
exemption applies to the purchase and holding of the Pass Through Certificates
by the applicable plan or account. In addition, certain governmental plans and
non-electing church plans are not subject to Title I of ERISA or Section 4975 of
the Code and, therefore, may purchase the Pass Through Certificates.
PLAN OF DISTRIBUTION
The Pass Through Certificates may be sold to or through underwriters,
directly to other purchasers or through agents.
The distribution of the Pass Through Certificates may be effected from time
to time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices.
In connection with the sale of Pass Through Certificates, underwriters or
agents may receive compensation from the Company or from purchasers of Pass
Through Certificates for whom they may act as agents in the form of discounts,
concessions or commissions. Underwriters may sell Pass Through Certificates to
or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for whom they may act as agents. Underwriters, dealers and agents
that participate in the distribution of Pass Through Certificates may be deemed
to be underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of Pass Through Certificates by them may be
deemed to be underwriting discounts and commissions, under the Securities Act.
Any such underwriter or agent will be identified, and any such compensation
received from the Company will be described, in the applicable Prospectus
Supplement.
Under agreements which may be entered into by the Company, underwriters and
agents who participate in the distribution of Pass Through Certificates may be
entitled to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company does not intend to apply for the listing of any Series of Pass Through
Certificates on a national securities exchange. If the Pass Through Certificates
of any Series are sold to or through underwriters, the underwriters may make a
market in such Pass Through Certificates, as permitted by applicable laws and
regulations. No underwriter would be obligated, however, to make a market in
such Pass Through Certificates, and any such market-making could be discontinued
at any time at the sole discretion of the underwriters. Accordingly, no
assurance can be given as to the liquidity of, or trading markets for, the Pass
Through Certificates of any Series.
Certain of the underwriters or agents and their associates may be customers
of, engage in transactions with, and perform services for, the Company in the
ordinary course of business.
LEGAL MATTERS
Unless otherwise indicated in the applicable Prospectus Supplement, the
validity of the Pass Through Certificates offered hereby will be passed upon for
the Company by special counsel to the Company, Simpson Thacher & Bartlett, 425
Lexington Avenue, New York, New York 10017, and for the underwriters and certain
other purchasers by Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue,
New York, New York 10019. Unless otherwise indicated in the applicable
Prospectus Supplement, both Simpson Thacher & Bartlett and Cravath, Swaine &
Moore may rely on the opinion of Shipman & Goodwin, counsel for Shawmut Bank
Connecticut, National Association, individually and as Pass Through Trustee, as
to matters relating to the
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<PAGE> 54
authorization, execution and delivery of the Pass Through Agreement and of each
Series of Pass Through Certificates by the Pass Through Trustee.
EXPERTS
The consolidated financial statements and schedules of the Company
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, as amended, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements and
schedules are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
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NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Summary S-3
Phillips Petroleum Company S-9
Use of Proceeds S-9
Diagram of Payments S-10
Description of the Pass Through
Certificates S-11
Description of the Equipment Notes S-14
Underwriting S-28
Legal Matters S-28
Glossary of Certain Terms A-1
PROSPECTUS
Available Information 2
Incorporation of Certain Documents by Reference 2
Phillips Petroleum Company 3
Ratio of Earnings to Fixed Charges 3
Outline of Pass Through Trust Structure 3
Use of Proceeds 4
Description of the Pass Through
Certificates 4
Description of the Equipment Notes 14
Federal Income Tax Consequences 17
Certain State Taxes 20
ERISA Considerations 21
Plan of Distribution 21
Legal Matters 21
Experts 22
</TABLE>
Prospectus Supplement
PHILLIPS PETROLEUM
COMPANY
$87,959,874
7.53% PASS THROUGH CERTIFICATES,
SERIES 1994-A1
8.52% PASS THROUGH CERTIFICATES,
SERIES 1994-A2
CHEMICAL SECURITIES INC.
Dated October 19, 1994
