PROSPECTUS SUPPLEMENT TO PROSPECTUS, DATED AUGUST 23, 2001
$329,166,000
[CONTINENTAL AIRLINES LOGO]
2002-1 Pass Through Trusts
Pass Through Certificates, Series 2002-1
------------------
Two classes of the Continental Airlines Pass Through Certificates, Series
2002-1, are being offered under this prospectus supplement: Class G-1 and G-2. A
separate trust will be established for each class of certificates. The proceeds
from the sale of certificates will initially be held in escrow (except as
described below). The trusts will use the escrowed funds to acquire equipment
notes. The equipment notes will be issued to finance the purchase by Continental
Airlines of seven new Boeing aircraft scheduled for delivery through May 2002.
Payments on the equipment notes held in each trust will be passed through to the
holders of certificates of such trust. A portion of the offering proceeds may be
used at the closing of the offering to acquire equipment notes for the aircraft
delivered at or prior to closing.
The equipment notes will have a security interest in each aircraft financed
by the trusts. Interest on the equipment notes held for the Class G-1 and G-2
certificates will be payable quarterly on each February 15, May 15, August 15
and November 15 after issuance, beginning on May 15, 2002. Principal payments on
the equipment notes held for the Class G-1 certificates are scheduled on
February 15 and August 15 in certain years, beginning on February 15, 2003. The
entire principal of the equipment notes held for the Class G-2 certificates will
be scheduled for payment on February 15, 2012.
Simultaneously with the issuance of the Class G-1 and G-2 certificates,
Continental Airlines will privately place subordinated pass through
certificates, including $145,834,000 face amount of Class H certificates. The
Class H trust will purchase equipment notes secured by the same aircraft as the
equipment notes purchased by the Class G-1 and G-2 trusts, subject to obtaining
funding at the time of such purchase from the holder of the Class H
certificates. The Class G-1 and G-2 trusts will not be obligated to purchase
equipment notes for an aircraft unless the Class H trust simultaneously
purchases a specified amount of equipment notes for such aircraft.
The Class G-1 and G-2 certificates will rank equally in right of
distributions and will rank senior to the Class H and other subordinated
certificates.
Landesbank Hessen-Thuringen Girozentrale will provide a primary liquidity
facility for each of the Class G-1 and G-2 certificates. Merrill Lynch Capital
Services, Inc. will provide an above-cap liquidity facility for the Class G-1
certificates. The primary liquidity facilities, together with the above-cap
liquidity facility in the case of the Class G-1 certificates, are expected to
provide an amount sufficient to make six quarterly interest payments on the
applicable class of certificates.
Ambac Assurance Corporation will issue insurance policies to support the
payment of interest on the Class G-1 and G-2 certificates when due and the
payment of principal no later than the final maturity date.
[AMBAC LOGO]
The certificates will not be listed on any national securities exchange.
INVESTING IN THE CERTIFICATES INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
S-21.
PASS THROUGH PRINCIPAL INTEREST FINAL EXPECTED PRICE TO
CERTIFICATES AMOUNT RATE DISTRIBUTION DATE PUBLIC(1)
------------ ------------ ------------------------- ----------------- ---------
Class G-1... $134,644,000 USD 3-Month LIBOR + 0.45% August 15, 2011 100%
Class G-2... 194,522,000 6.563% February 15, 2012 100
(1) Plus accrued interest, if any, from the date of issuance.
The underwriters will purchase all of the Class G-1 and G-2 certificates if
any are purchased. The aggregate proceeds from the sale of the Class G-1 and G-2
certificates will be $329,166,000. Continental will pay the underwriters
compensation totaling $3,000,000, representing underwriting commission, as well
as certain structuring and advisory fees. Delivery of the Class G-1 and G-2
certificates in book-entry form only will be made on or about March 25, 2002.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
Joint Bookrunners
CREDIT SUISSE FIRST BOSTON
JPMORGAN
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
------------------
MORGAN STANLEY
The date of this prospectus supplement is March 11, 2002.
PRESENTATION OF INFORMATION
These offering materials consist of two documents: (a) this Prospectus
Supplement, which describes the terms of the certificates that we are currently
offering, and (b) the accompanying Prospectus, which provides general
information about our pass through certificates, some of which may not apply to
the certificates that we are currently offering. The information in this
Prospectus Supplement replaces any inconsistent information included in the
accompanying Prospectus.
We have given certain capitalized terms specific meanings for purposes of
this Prospectus Supplement. The "Index of Terms" attached as Appendix I to this
Prospectus Supplement lists the page in this Prospectus Supplement on which we
have defined each such term.
At various places in this Prospectus Supplement and the Prospectus, we
refer you to other sections of such documents for additional information by
indicating the caption heading of such other sections. The page on which each
principal caption included in this Prospectus Supplement and the Prospectus can
be found is listed in the Table of Contents below. All such cross-references in
this Prospectus Supplement are to captions contained in this Prospectus
Supplement and not in the Prospectus, unless otherwise stated.
S-2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
-----
PROSPECTUS SUPPLEMENT SUMMARY............. S-5
Summary of Terms of Certificates........ S-5
Equipment Notes and the Aircraft........ S-6
Loan to Aircraft Value Ratios........... S-7
Cash Flow Structure..................... S-8
The Offering............................ S-9
SUMMARY FINANCIAL AND OPERATING DATA...... S-18
RISK FACTORS.............................. S-21
Terrorist Attacks....................... S-21
Risk Factors Relating to the Company.... S-22
Risk Factors Relating to the Airline
Industry.............................. S-24
Risk Factors Relating to the
Certificates and the Offering......... S-25
Risk Factors Relating to the Policy
Provider.............................. S-27
RECENT DEVELOPMENTS....................... S-28
Proposed Initial Public Offering of
ExpressJet............................ S-28
USE OF PROCEEDS........................... S-28
THE COMPANY............................... S-29
Domestic Operations..................... S-29
International Operations................ S-30
DESCRIPTION OF THE POLICY PROVIDER........ S-32
DESCRIPTION OF THE CERTIFICATES........... S-34
General................................. S-34
Issuance of Subordinated Certificates... S-35
Subordination........................... S-36
Payments and Distributions.............. S-38
Pool Factors............................ S-41
Reports to Certificateholders........... S-43
Indenture Defaults and Certain Rights
Upon an Indenture Default............. S-44
Purchase Rights of Certificateholders... S-45
PTC Event of Default.................... S-46
Merger, Consolidation and Transfer of
Assets................................ S-46
Modifications of the Pass Through Trust
Agreements and Certain Other
Agreements............................ S-47
Obligation to Purchase Equipment
Notes................................. S-49
Possible Issuance of Class J
Certificates.......................... S-52
Liquidation of Original Trusts.......... S-52
Termination of the Trusts............... S-53
The Trustees............................ S-53
Book-Entry; Delivery and Form........... S-53
DESCRIPTION OF THE DEPOSIT AGREEMENTS..... S-54
General................................. S-54
Unused Deposits......................... S-54
Distribution Upon Occurrence of
Triggering Event...................... S-55
Depositary.............................. S-55
Replacement of Depositary............... S-56
DESCRIPTION OF THE ESCROW AGREEMENTS...... S-57
DESCRIPTION OF THE LIQUIDITY FACILITIES... S-58
Primary Liquidity Facilities............ S-58
Above-Cap Liquidity Facility............ S-65
DESCRIPTION OF THE POLICIES AND THE POLICY
PROVIDER AGREEMENT...................... S-67
The Policies............................ S-67
General................................. S-69
PAGE
-----
Definitions............................. S-70
The Policy Provider Agreement........... S-70
DESCRIPTION OF THE INTERCREDITOR
AGREEMENT............................... S-71
Intercreditor Rights.................... S-71
Priority of Distributions............... S-73
Voting of Equipment Notes............... S-78
Addition of Trustee for Class J
Certificates.......................... S-78
The Subordination Agent................. S-78
DESCRIPTION OF THE AIRCRAFT AND THE
APPRAISALS.............................. S-79
The Aircraft............................ S-79
The Appraisals.......................... S-79
Deliveries of Aircraft.................. S-80
Substitute Aircraft..................... S-81
DESCRIPTION OF THE EQUIPMENT NOTES........ S-82
General................................. S-82
Subordination........................... S-82
Principal and Interest Payments......... S-83
Determination of LIBOR.................. S-83
Redemption.............................. S-84
Security................................ S-86
Loan to Value Ratios of Equipment
Notes................................. S-86
Limitation of Liability................. S-87
Indenture Defaults, Notice and Waiver... S-87
Remedies................................ S-88
Modification of Indentures.............. S-89
Indemnification......................... S-90
Certain Provisions of the Indentures.... S-90
CERTAIN U.S. FEDERAL INCOME TAX
CONSEQUENCES............................ S-94
General................................. S-94
Tax Status of the Trusts................ S-94
Taxation of Certificateholders
Generally............................. S-95
Effect of Reallocation of Payments under
the Intercreditor Agreement........... S-96
Dissolution of Original Trusts and
Formation of New Trusts............... S-97
Sale or Other Disposition of the
Certificates.......................... S-97
Foreign Certificateholders.............. S-97
Backup Withholding...................... S-97
CERTAIN DELAWARE TAXES.................... S-98
CERTAIN ERISA CONSIDERATIONS.............. S-98
UNDERWRITING.............................. S-101
NOTICE TO CANADIAN RESIDENTS.............. S-102
Resale Restrictions..................... S-102
Representations of Purchasers........... S-102
Rights of Action - Ontario Purchasers
Only.................................. S-103
Enforcement of Legal Rights............. S-103
Taxation and Eligibility for
Investment............................ S-103
LEGAL MATTERS............................. S-103
EXPERTS................................... S-103
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................... S-104
INDEX OF TERMS ....................... APPENDIX I
APPRAISAL LETTERS ................... APPENDIX II
S-3
PROSPECTUS
PAGE
----
WHERE YOU CAN FIND MORE INFORMATION........ 1
FORWARD-LOOKING STATEMENTS................. 1
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE................................ 2
SUMMARY.................................... 3
The Offering............................. 3
Certificates............................. 3
Pass Through Trusts...................... 4
Equipment Notes.......................... 4
THE COMPANY................................ 6
USE OF PROCEEDS............................ 6
RATIO OF EARNINGS TO FIXED CHARGES......... 7
DESCRIPTION OF THE CERTIFICATES............ 7
General.................................. 7
Book-Entry Registration.................. 10
Payments and Distributions............... 13
Pool Factors............................. 14
Reports to Certificateholders............ 14
Voting of Equipment Notes................ 15
Events of Default and Certain Rights Upon
an Event of Default.................... 15
Merger, Consolidation and Transfer of
Assets................................. 18
Modifications of the Basic Agreement..... 18
Modification of Indenture and Related
Agreements............................. 19
Cross-Subordination Issues............... 19
Termination of the Pass Through Trusts... 20
Delayed Purchase of Equipment Notes...... 20
PAGE
----
Liquidity Facility....................... 20
The Pass Through Trustee................. 20
DESCRIPTION OF THE EQUIPMENT NOTES......... 21
General.................................. 21
Principal and Interest Payments.......... 21
Redemption............................... 22
Security................................. 22
Ranking of Equipment Notes............... 24
Payments and Limitation of Liability..... 24
Defeasance of the Indentures and the
Equipment Notes in Certain
Circumstances.......................... 24
Assumption of Obligations by Continental... 25
Liquidity Facility......................... 25
Intercreditor Issues....................... 25
U.S. INCOME TAX MATTERS.................... 26
General.................................. 26
Tax Status of the Pass Through Trusts.... 26
Taxation of Certificateholders
Generally.............................. 26
Effect of Subordination of
Certificateholders of Subordinated
Trusts................................. 27
Original Issue Discount.................. 27
Sale or Other Disposition of the
Certificates........................... 27
Foreign Certificateholders............... 28
Backup Withholding....................... 28
ERISA CONSIDERATIONS....................... 28
PLAN OF DISTRIBUTION....................... 28
LEGAL OPINIONS............................. 30
EXPERTS.................................... 30
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY
ON THE DATE OF THIS DOCUMENT.
S-4
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information from this Prospectus
Supplement and the accompanying Prospectus and may not contain all of the
information that is important to you. For more complete information about the
Certificates and Continental Airlines, you should read this entire Prospectus
Supplement and the accompanying Prospectus, as well as the materials filed with
the Securities and Exchange Commission that are considered to be part of this
Prospectus Supplement and the Prospectus. See "Incorporation of Certain
Documents by Reference" in this Prospectus Supplement and the Prospectus.
SUMMARY OF TERMS OF CERTIFICATES
CLASS G-1 CLASS G-2 CLASS H
CERTIFICATES CERTIFICATES CERTIFICATES(1)
----------------- ----------------- -----------------
Aggregate Face Amount.................. $134,644,000 $194,522,000 $145,834,000
Ratings:
Moody's.............................. Aaa Aaa Not Rated
Standard & Poor's.................... AAA AAA Not Rated
Initial Loan to Aircraft Value
(cumulative)(2)...................... 52.5% 52.5% 75.7%
Expected Highest Loan to Aircraft Value
(cumulative)(3)...................... 52.5% 52.5% 76.1%
Expected Principal Distribution Window
(in years)........................... 0.9-9.4 9.9 0.9-4.9
Initial Average Life (in years from
Issuance Date)....................... 5.0 9.9 4.1
Regular Distribution Dates............. February 15, May February 15, May February 15, May
15, August 15 and 15, August 15 and 15, August 15 and
November 15 November 15 November 15
Final Expected Regular Distribution
Date................................. August 15, 2011 February 15, 2012 February 15, 2007
Final Maturity Date.................... February 15, 2013 August 15, 2013 February 15, 2007
Minimum Denomination................... $1,000 $1,000 $100,000
Section 1110 Protection................ Yes Yes Yes
Liquidity Facility Coverage............ 6 quarterly 6 quarterly None
interest payments interest payments
Policy Provider Coverage............... Yes Yes None
---------------
(1) Simultaneously with the issuance of the Class G-1 and G-2 Certificates,
Continental will privately place the Class H and I Certificates. The Class I
Certificates will have an aggregate face amount of $40,000,000, an initial
average life of 1.1 years from the Issuance Date and a final expected
distribution date of August 15, 2003. The Class G-1 and G-2 Trusts will not
be obligated to purchase Equipment Notes for an Aircraft unless the Class H
Trust simultaneously purchases a specified amount of Equipment Notes for
such Aircraft. Continental may elect at any time, subject to certain
conditions, to redeem the Series H or Series I Equipment Notes, in any case,
without redeeming the Equipment Notes held by the Trusts for the Class G-1
and G-2 Certificates. Redemption of the Series H Equipment Notes is subject
to the requirement that Continental simultaneously issue new Series H
Equipment Notes having terms the same in all material respects as the
redeemed Series H Equipment Notes, except that the interest rate may be
changed, the maturity date may be extended and the principal amount may be
increased. In addition, any such new Series H Equipment Notes must be held
by a pass through trust subject to the same subordination provisions as are
applicable to the Class H Trust, and Continental must obtain confirmation
from the Rating Agencies that the redemption and issuance of the new Series
H Equipment Notes will not result in a withdrawal, suspension or downgrading
of the ratings of the Class G-1 or G-2 Certificates (without regard to the
Policies). If the Series I Equipment Notes are redeemed, new Series I
Equipment Notes cannot be issued.
(2) These percentages are calculated assuming that the last four Boeing
767-424ER aircraft of the six Boeing 767-424ER aircraft and the second of
the two Boeing 777-224ER aircraft from which Continental may choose are
financed hereunder and are determined as of August 15, 2002, the first
Regular Distribution Date after the aircraft are scheduled to have been
delivered. In calculating these percentages, we have assumed that all
aircraft to be financed hereunder are delivered prior to such date, that the
required principal amount of Equipment Notes is issued and that the
aggregate appraised value of such aircraft is $627,093,334 as of such date.
The appraised value is only an estimate and reflects certain assumptions.
See "Description of the Aircraft and the Appraisals--The Appraisals".
(3) See "--Loan to Aircraft Value Ratios".
S-5
EQUIPMENT NOTES AND THE AIRCRAFT
The seven Boeing aircraft to be financed pursuant to this offering will
consist of two Boeing 757-324 aircraft, four Boeing 767-424ER aircraft and one
Boeing 777-224ER aircraft. Continental will select the Boeing 767-424ER aircraft
and Boeing 777-224ER aircraft to be financed from among six Boeing 767-424ER
aircraft and two Boeing 777-224ER aircraft. The two Boeing 757-324 aircraft were
delivered in February 2002. The other relevant aircraft are scheduled for
delivery from March 2002 to May 2002. See "Description of the Aircraft and the
Appraisals--The Appraisals" for a description of the six Boeing 767-424ER
aircraft and two Boeing 777-224ER aircraft from which Continental may select the
aircraft of such models that may be financed with the proceeds of this offering.
Set forth below is certain information about the Equipment Notes expected to be
held in the Offered Certificate Trusts and Class H Trust and the aircraft
expected to secure such Equipment Notes (assuming for purposes of the chart
below that the last four Boeing 767-424ER aircraft and the last Boeing 777-224ER
aircraft scheduled for delivery among the aircraft of such models from which
Continental may choose are financed hereunder):
REQUIRED PRINCIPAL REQUIRED PRINCIPAL
EXPECTED AMOUNT OF SERIES AMOUNT OF SERIES
REGISTRATION MANUFACTURER'S SCHEDULED DELIVERY G-1 EQUIPMENT G-2 EQUIPMENT
AIRCRAFT TYPE NUMBER SERIAL NUMBER MONTH(1) NOTES(2) NOTES(2)
------------- ------------ -------------- ------------------ ------------------ ------------------
Boeing 757-324....... N75853 32812 February 2002 $13,236,852 $19,123,458
Boeing 757-324....... N75854 32813 February 2002 13,236,852 19,123,458
Boeing 767-424ER..... N69063 29458 April 2002 20,053,877 28,972,107
Boeing 767-424ER..... N76064 29459 April 2002 20,053,877 28,972,107
Boeing 767-424ER..... N76065 29460 May 2002 20,053,877 28,972,107
Boeing 767-424ER..... N77066 29461 May 2002 20,053,877 28,972,107
Boeing 777-224ER..... N37018 31680 April 2002 27,954,788 40,386,656
REQUIRED PRINCIPAL
AMOUNT OF SERIES H
EQUIPMENT APPRAISED
AIRCRAFT TYPE NOTES(2) VALUE(3)
------------- ------------------ ------------
Boeing 757-324....... $14,336,941 $ 61,646,667
Boeing 757-324....... 14,336,941 61,646,667
Boeing 767-424ER..... 21,720,516 93,400,000
Boeing 767-424ER..... 21,720,516 93,400,000
Boeing 767-424ER..... 21,720,516 93,400,000
Boeing 767-424ER..... 21,720,516 93,400,000
Boeing 777-224ER..... 30,278,054 130,200,000
---------------
(1) The Boeing 757-324 aircraft were delivered to Continental during February
2002. The delivery deadline for purposes of financing an aircraft pursuant
to this offering is August 31, 2002 (or later under certain circumstances).
The actual delivery date for any aircraft may be subject to delay or
acceleration. See "Description of the Aircraft and the
Appraisals--Deliveries of Aircraft". Continental has the option to
substitute other aircraft if the delivery of any Aircraft is expected to be
delayed for more than 30 days after the month scheduled for delivery or
beyond the delivery deadline. See "Description of the Aircraft and the
Appraisals--Substitute Aircraft".
(2) The aggregate principal amount of all of the Equipment Notes will not exceed
the aggregate face amount of the Certificates. For information concerning
the required principal amount of Equipment Notes applicable to the other
Boeing 767-424ER and 777-224ER aircraft that Continental may choose to
finance pursuant to this offering in lieu of the aircraft of such models
listed above, see "Description of the Certificates--Obligation to Purchase
Equipment Notes". Continental also expects that additional Equipment Notes
will be issued with respect to each Aircraft, which will be purchased by the
Class I Trust. See "Description of the Certificates--Subordinated
Certificates."
(3) The appraised value of each Aircraft set forth above is the lesser of the
average and median values of such Aircraft as appraised by three independent
appraisal and consulting firms, projected as of the scheduled delivery month
of each Aircraft. These appraisals are based upon varying assumptions and
methodologies. An appraisal is only an estimate of value and should not be
relied upon as a measure of realizable value. In particular, the adverse
effects of the September 11, 2001 terrorist attacks on the airline industry
have created uncertainty in the valuation of aircraft. See "Risk
Factors--Risk Factors Relating to the Certificates and the
Offering--Appraisals and Realizable Value of Aircraft". The appraised value
of each of the other Boeing 767-424ER and 777-224ER aircraft that
Continental may choose to finance pursuant to this offering is lower than
the appraised value of each of the Aircraft of the same model listed above.
See "Description of the Aircraft and the Appraisals--The Appraisals".
S-6
LOAN TO AIRCRAFT VALUE RATIOS
The following table sets forth loan to Aircraft value ratios ("LTVs") for
each Class of Offered Certificates and for the Class H Certificates as of August
15, 2002 (the first Regular Distribution Date that occurs after all Aircraft
assumed to be financed in this Offering are scheduled to have been delivered)
and each August 15 Regular Distribution Date thereafter. The LTVs for any Class
of Certificates for the period prior to August 15, 2002 are not meaningful,
since during such period all of the Equipment Notes expected to be acquired by
the Offered Certificate Trusts and the related Aircraft will not be included in
the calculation. The table should not be considered a forecast or prediction of
expected or likely LTVs but simply a mathematical calculation based on one set
of assumptions. See "Risk Factors--Risk Factors Relating to the Certificates and
the Offering--Appraisals and Realizable Value of Aircraft".
OUTSTANDING BALANCE(2) LTV(3)
------------------------------------------ ---------------------------
ASSUMED AGGREGATE CLASS G-1 CLASS G-2 CLASS H CLASS G-1 CLASS G-2
REGULAR DISTRIBUTION DATE AIRCRAFT VALUE(1) CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
------------------------- ----------------- ------------ ------------ ------------ ------------ ------------
August 15, 2002........ $627,093,334 $134,644,000 $194,522,000 $145,834,000 52.5% 52.5%
August 15, 2003........ 608,280,534 118,325,000 194,522,000 138,834,000 51.4 51.4
August 15, 2004........ 589,467,734 102,345,000 194,522,000 122,834,000 50.4 50.4
August 15, 2005........ 570,654,934 86,704,000 194,522,000 103,834,000 49.3 49.3
August 15, 2006........ 551,842,134 71,404,000 194,522,000 88,834,000 48.2 48.2
August 15, 2007........ 533,029,334 56,444,000 194,522,000 0 47.1 47.1
August 15, 2008........ 514,216,534 41,823,000 194,522,000 0 46.0 46.0
August 15, 2009........ 495,403,734 27,542,000 194,522,000 0 44.8 44.8
August 15, 2010........ 476,590,934 13,601,000 194,522,000 0 43.7 43.7
August 15, 2011........ 457,778,134 0 194,522,000 0 NA 42.5
LTV(3)
------------
CLASS H
REGULAR DISTRIBUTION DATE CERTIFICATES
------------------------- ------------
August 15, 2002........ 75.7%
August 15, 2003........ 74.3
August 15, 2004........ 71.2
August 15, 2005........ 67.5
August 15, 2006........ 64.3
August 15, 2007........ NA
August 15, 2008........ NA
August 15, 2009........ NA
August 15, 2010........ NA
August 15, 2011........ NA
---------------
(1) We have assumed that the initial appraised value of each Aircraft,
determined as described under "--Equipment Notes and the Aircraft", declines
by approximately 3% per year for the first ten years after the year of
delivery of such Aircraft. The aggregate Aircraft value as of any date does
not include the value of Aircraft as to which the Equipment Notes secured by
such Aircraft are expected to have been paid in full on or prior to such
date. Other rates or methods of depreciation would result in materially
different LTVs. We cannot assure you that the depreciation rate and method
used for purposes of the table will occur or predict the actual future value
of any Aircraft. See "Risk Factors--Risk Factors Relating to the
Certificates and the Offering--Appraisals and Realizable Value of Aircraft".
(2) In calculating the outstanding balances, we have assumed that the Trusts
will acquire the required principal amount of Equipment Notes for all
Aircraft.
(3) The LTVs for each Class of Certificates were obtained for each Regular
Distribution Date by dividing (i) the expected outstanding balance of such
Class together with the expected outstanding balance of the other Classes
equal or senior in right of payment to such Class after giving effect to the
distributions expected to be made on such date, by (ii) the assumed value of
all of the Aircraft on such date based on the assumptions described above.
The outstanding balances and LTVs may change if, among other things, the
aggregate principal amount of the Equipment Notes acquired by the Trusts is
less than the amount required for all Aircraft under the terms of this
offering or the amortization of the Equipment Notes differs from the assumed
amortization schedule calculated for purposes of this Prospectus Supplement.
S-7
CASH FLOW STRUCTURE
Set forth below is a diagram illustrating the structure for the offering of
the Certificates and certain cash flows.
[Diagram omitted, which shows that Continental will pay the mortgage payments
to the Loan Trustees. From such mortgage payments, the Loan Trustees will make
Equipment Note payments on the Series G-1 Equipment Notes, the Series G-2
Equipment Notes and the Subordinated Equipment Notes with respect to all
Aircraft to the Subordination Agent. From such Equipment Note payments, the
Subordination Agent will pay principal, premium, if any, and interest
distributions to the Class G-1 Trustee, the Class G-2 Trustee and the
Subordinated Certificate Trustees, who will pay such principal, premium, if
any, and interest distributions to the Class G-1 Certificateholders, the Class
G-2 Certificateholders and the Subordinated Certificateholders, respectively.
The Subordination Agent may also receive advances, if any, from, and pay
reimbursements, if any, to, the applicable Primary Liquidity Provider. The
Subordination Agent may also receive payments from the Class G-1 Above-Cap
Account (into which payments may be deposited by the Class G-1 Above-Cap
Liquidity Provider). The Subordination Agent may also receive policy advances,
if any, from, and pay reimbursements, if any, to, the Policy Provider. The
Depositary will make interest payments on the Deposits held for the benefit of
the Class G-1 Certificateholders and the Class G-2 Certificateholders to the
Escrow Agent. From such interest payments, the Escrow Agent will make payments
to the Class G-1 Certificateholders and the Class G-2 Certificateholders.]
---------------
(1) Each Aircraft will be subject to a separate Indenture.
(2) The Primary Liquidity Facility for each of the Class G-1 and G-2
Certificates, together with the Above-Cap Liquidity Facility for the Class
G-1 Certificates, are expected to cover six consecutive quarterly interest
payments with respect to such Class, except that the Liquidity Facilities
will not cover interest on the Deposits. There will be no Liquidity Facility
for the Subordinated Certificates.
(3) The Policies cover regular interest distributions and outstanding principal
on the Final Maturity Date (or earlier under some circumstances) relating to
the Class G-1 and G-2 Certificates, but do not cover any other amounts
payable in respect of the Class G-1 or G-2 Certificates. The Policies do not
cover amounts payable in respect of the Subordinated Certificates.
(4) To the extent not used to purchase Equipment Notes at the closing of the
offering, the proceeds of the offering of the Class G-1 and G-2 Certificates
will initially be held in escrow and deposited with the Depositary. The
Depositary will hold such funds as interest-bearing Deposits. Each
applicable Trust will withdraw funds from the Deposits relating to such
Trust to purchase Equipment Notes from time to time as each Aircraft is
financed after the closing of the offering. The scheduled payments of
interest on the Equipment Notes and on the Deposits relating to a Trust,
taken together, will be sufficient to pay accrued interest on the
outstanding Certificates of such Trust. If any funds remain as Deposits with
respect to the Class G-1 or G-2 Trust at the Delivery Period Termination
Date, such funds will be withdrawn by the Escrow Agent and distributed to
the holders of the Certificates issued by such Trust, together with accrued
and unpaid interest thereon and, in the case of the Class G-1 Trust, LIBOR
break amount, if any, or, in the case of the Class G-2 Trust, a premium.
Continental will be obligated to pay any such LIBOR break amount and
premium. No interest will accrue with respect to the Deposits after they
have been fully withdrawn.
(5) The Subordinated Certificates will be issued in a private placement
simultaneously with the issuance of the Offered Certificates. There will be
no escrow arrangement for the Subordinated Certificates. Instead, the
purchasers of the Subordinated Certificates will be required to provide
funds to the related Trust when necessary to acquire Subordinated Equipment
Notes. See "Description of the Certificates--Issuance of Subordinated
Certificates".
S-8
THE OFFERING
Certificates Offered.......... - Class G-1 Certificates
- Class G-2 Certificates
Each Class of Offered Certificates will
represent a fractional undivided interest in a
related Trust.
Use of Proceeds............... The proceeds from the sale of the Offered
Certificates will initially be held in escrow
and deposited with the Depositary, except for
any funds used on the issuance date to acquire
Equipment Notes. Each Trust for the Offered
Certificates will withdraw funds from the
escrow relating to such Trust to acquire
Equipment Notes. The Equipment Notes will be
issued to finance the purchase by Continental
of seven new Boeing aircraft.
Issuance of Subordinated
Certificates................ Simultaneously with the issuance of the Class
G-1 and G-2 Certificates, Continental will
privately place the Class H and I
Certificates. Distributions on the Class H and
Class I Certificates will be subordinated to
distributions on the Class G-1 and Class G-2
Certificates. There will be no escrow
arrangement for the Subordinated Certificates.
Instead, the holders of the Subordinated
Certificates will be required to provide funds
to the Subordinated Certificate Trusts when
necessary to acquire Equipment Notes. The
Offered Certificate Trusts will not be
obligated to purchase Equipment Notes for an
Aircraft unless the Class H Trust
simultaneously purchases a specified amount of
Equipment Notes for such Aircraft.
Subordination Agent, Trustee,
Paying Agent and Loan
Trustee..................... Wilmington Trust Company
Escrow Agent.................. Wells Fargo Bank Northwest, National
Association
Depositary.................... Credit Suisse First Boston, New York branch
Primary Liquidity Provider.... Landesbank Hessen-Thuringen Girozentrale
Above-Cap Liquidity
Provider...................... Merrill Lynch Capital Services, Inc. The
obligations of Merrill Lynch Capital Services
under the Above-Cap Liquidity Facility will be
guaranteed by its parent company, Merrill
Lynch & Co., Inc.
Policy Provider............... Ambac Assurance Corporation
Trust Property................ The property of each Offered Certificate Trust
will include:
- Equipment Notes acquired by such Trust.
- All monies receivable under the Liquidity
Facilities for such Trust.
- All monies receivable under the Policy for
such Trust.
- Funds from time to time deposited with the
Trustee in accounts relating to such Trust.
Regular Distribution Dates.... February 15, May 15, August 15 and November
15, commencing on May 15, 2002.
S-9
Record Dates.................. The fifteenth day preceding the related
Distribution Date.
Distributions................. The Trustee will distribute all payments of
principal, LIBOR break amount (if any),
premium (if any) and interest received on the
Equipment Notes held in each Trust to the
holders of the Certificates of such Trust,
subject to the subordination provisions
applicable to the Certificates.
Scheduled payments of principal and interest
made on the Equipment Notes will be
distributed on the applicable Regular
Distribution Dates.
Payments of principal, LIBOR break amount (if
any), premium (if any) and interest made on
the Equipment Notes resulting from any early
redemption of such Equipment Notes will be
distributed on a special distribution date
after not less than 15 days' notice to
Certificateholders.
Subordination................. Distributions on the Certificates will be made
in the following order:
- First, to the holders of the Class G-1 and
Class G-2 Certificates.
- Second, to the holders of the Subordinated
Certificates (subject to rankings of
priority between the Subordinated
Certificates).
If Continental is in bankruptcy or certain
other specified events have occurred but
Continental is continuing to meet certain of
its obligations, the subordination provisions
applicable to the Certificates permit
distributions to be made to junior
Certificates prior to making distributions in
full on the senior Certificates.
Control of Loan Trustee....... The holders of at least a majority of the
outstanding principal amount of Equipment
Notes issued under each Indenture (or, in the
case of the Series G-1 and G-2 Equipment
Notes, the Policy Provider except under
certain circumstances) will be entitled to
direct the Loan Trustee under such Indenture
in taking action as long as no Indenture
Default is continuing thereunder. If an
Indenture Default is continuing, subject to
certain conditions, the "Controlling Party"
will direct the Loan Trustee under such
Indenture (including in exercising remedies,
such as accelerating such Equipment Notes or
foreclosing the lien on the Aircraft securing
such Equipment Notes).
The Controlling Party will be:
- The Policy Provider or, if a Policy Provider
Default is continuing:
(1) The Class G-1 Trustee or Class G-2
Trustee, whichever represents the Class
with the larger principal amount of
Certificates outstanding at the time
that the Indenture Default occurs.
(2) Upon payment of final distributions to
the holders of such larger Class, the
other of the Class G-1 Trustee or Class
G-2 Trustee.
S-10
- Upon payment of final distributions to the
holders of Class G-1 and G-2 Certificates
and, unless a Policy Provider Default is
continuing, of any obligations to the Policy
Provider, the Trustees for the Subordinated
Certificates (subject to certain ranking
provisions between such Trustees).
- Under certain circumstances, and
notwithstanding the foregoing, the Primary
Liquidity Provider with the largest amount
owed to it.
In exercising remedies during the nine months
after the earlier of (a) the acceleration of
the Equipment Notes issued pursuant to any
Indenture or (b) the bankruptcy of
Continental, the Controlling Party may not
direct the sale of such Equipment Notes or the
Aircraft subject to the lien of such Indenture
for less than certain specified minimums.
Right to Buy Other Classes of
Certificates................ If Continental is in bankruptcy or certain
other specified events have occurred, the
Certificateholders and the Policy Provider may
have the right to buy certain Classes of
Certificates on the following basis:
- If the Class G-1 or Class G-2
Certificateholders are then represented by
the Controlling Party, the
Certificateholders of such other Class will
have the right to purchase all of such Class
of Certificates represented by the
Controlling Party.
- The Subordinated Certificateholders will
have the right to purchase all of the Class
G-1 and G-2 Certificates (subject to certain
purchase rights between the Subordinated
Certificateholders).
- Whether or not any Class of
Certificateholders has purchased or elected
to purchase the Class G-1 or G-2
Certificates, the Policy Provider will have
the right to purchase all of the Class G-1
and G-2 Certificates if it is the
Controlling Party and 180 days have elapsed
since the occurrence of a Triggering Event
that is continuing.
The purchase price in each case described
above will be the outstanding balance of the
applicable Class of Certificates plus accrued
and unpaid interest.
Liquidity Facilities.......... Under the Primary Liquidity Facility for each
Offered Certificate Trust, the Primary
Liquidity Provider will, if necessary, make
advances in an aggregate amount, together, in
the case of the Class G-1 Trust, with amounts
payable by the Above-Cap Liquidity Provider
under the Above-Cap Liquidity Facility,
expected to provide an amount sufficient to
pay interest on the applicable Certificates on
up to six successive quarterly Regular
Distribution Dates at the applicable interest
rate for such Certificates. Drawings under the
Primary Liquidity Facilities and payments
under the Above-Cap Liquidity Facility cannot
be used to pay any other amount in respect of
the Offered Certificates and will not cover
interest payable on amounts held in escrow as
Deposits with the Depositary.
S-11
There will be no Liquidity Facility for the
Subordinated Certificate Trusts.
Notwithstanding the subordination provisions
applicable to the Certificates, the holders of
the Certificates to be issued by each Offered
Certificate Trust will be entitled to receive
and retain the proceeds of drawings under the
Primary Liquidity Facility for such Trust and,
in the case of the Class G-1 Trust,
withdrawals from the account into which
payments under the Above-Cap Liquidity
Facility are required to be made.
Upon each drawing under any Primary Liquidity
Facility to pay interest on the Offered
Certificates, the Subordination Agent will
reimburse the applicable Primary Liquidity
Provider for the amount of such drawing. Such
reimbursement obligation and all interest,
fees and other amounts owing to the Primary
Liquidity Provider under any Primary Liquidity
Facility and certain other agreements will
rank equally with comparable obligations
relating to the other Primary Liquidity
Facility and will rank senior to the
Certificates in right of payment.
Policy Coverage............... Under the Policy for each Offered Certificate
Trust, the Policy Provider will honor drawings
to cover:
- Any shortfall on any Regular Distribution
Date (other than the Final Maturity Date) in
funds to be distributed as accrued interest
on the Certificates of such Trust and the
related Escrow Receipts.
- Any shortfall on the Final Maturity Date for
such Trust in the Final Distributions (other
than any unpaid premium) on the Certificates
issued by such Trust.
- Any shortfall in the proceeds from the
disposition of an Equipment Note held for
such Trust (or any underlying collateral) on
the related Special Distribution Date from
the amount required to reduce the Pool
Balance of such Trust by the outstanding
principal amount of such Equipment Note plus
accrued and unpaid interest.
- If certain payments with respect to the
Certificates of such Trust are by court
order determined to be a "preferential
transfer" under the Bankruptcy Code or
otherwise required to be returned, the
amount of such payments.
- If (1) there has been a principal payment
default on an Equipment Note held for such
Trust or such an Equipment Note has been
accelerated and (2) the Subordination Agent
has not received any proceeds of the
disposition of such Equipment Note (or its
underlying collateral) on or prior to the
first Business Day that is 24 months after
the last date on which the Subordination
Agent received payment in full of scheduled
payments on such Equipment Note (which
Business Day shall be set as a Special
Distribution Date for such Trust), an amount
equal to the then outstanding principal
amount of such Equipment Note plus accrued
and unpaid interest from the last Regular
Distribution Date to such Special
Distribution Date.
S-12
The Policy Provider has the right at the end
of the 24-month period referred to above, so
long as no Policy Provider Default has
occurred and is continuing, to elect instead:
- To pay on such Special Distribution Date an
amount equal to any shortfall in the
scheduled principal and interest that came
due on the applicable Equipment Note
(without regard to any acceleration thereof)
during the 24-month period (after giving
effect to the application of funds received
from the related Primary Liquidity Facility,
the related Cash Collateral Account or, in
the case of the Class G-1 Certificates, the
Above-Cap Account, in each case with respect
to such interest), and
- To permit, on each subsequent Regular
Distribution Date, drawings under the Policy
for an amount equal to the scheduled
principal (without regard to any
acceleration thereof) and interest that were
to become due on the applicable Equipment
Note on the related payment date until paid
in full.
After the Policy Provider has made such
election, (1) on any Business Day elected by
the Policy Provider upon 20 days' notice
(which shall be set as a Special Distribution
Date for such Trust) or (2) if a Policy
Provider Default occurs and is continuing or
the Subordination Agent receives proceeds from
the sale or other disposition of that
Equipment Note (or its underlying collateral)
in connection with the exercise of remedies,
on any Business Day specified by the
Subordination Agent upon 20 days' notice
(which shall be set as a Special Distribution
Date for such Trust), the Subordination Agent
will request a Policy Drawing for an amount
equal to the then outstanding principal
balance of such Equipment Note and accrued
interest on such Equipment Note from the last
Regular Distribution Date to that Special
Distribution Date less any Policy Drawings
previously paid by the Policy Provider of
principal on that Equipment Note.
Any shortfall for which a drawing under a
Policy may be made as described above (except
in specified circumstances) will be calculated
after the application of funds available
through the subordination provisions applicable
to the Certificates, in respect of accrued
interest on the related Deposits, drawings
under the related Primary Liquidity Facility,
withdrawals from the related Cash Collateral
Account and, in the case of the Class G-1
Trust, withdrawals from the Above-Cap Account.
A Policy will cover only the applicable Offered
Certificates (and interest on the Escrow
Receipts attached to such Certificates), and
will not cover any Subordinated Certificates.
The Policy Provider will honor drawings under
the Policy for any Class of Offered
Certificates by the Primary Liquidity Provider
for such Class to cover the payment to such
Primary Liquidity Provider of interest accruing
on outstanding drawings under the related
Primary Liquidity Facility from and after the
end of the 24-month period referred to above as
and when such interest becomes due in
accordance with such Primary Liquidity
Facility.
S-13
The reimbursement of drawings under each Policy
ranks junior to further distributions on the
Offered Certificates.
Escrowed Funds................ Funds in escrow for the Certificateholders of
each Offered Certificate Trust will be held by
the Depositary as Deposits relating to such
Trust. The Offered Certificate Trustees may
withdraw these funds from time to time to
purchase Equipment Notes prior to the deadline
established for purposes of this offering. On
each Regular Distribution Date, the Depositary
will pay interest accrued on the Deposits
relating to such Offered Certificate Trust at a
rate per annum equal to the interest rate
applicable to the Certificates issued by such
Trust. The Deposits relating to each Offered
Certificate Trust and interest paid thereon
will not be subject to the subordination
provisions applicable to the Certificates. The
Deposits cannot be used to pay any other amount
in respect of the Certificates.
Unused Escrowed Funds......... All of the Deposits held in escrow may not be
used to purchase Equipment Notes by the
deadline established for purposes of this
offering. This may occur because of delays in
the delivery of Aircraft, failure of the Class
H Certificate Trustee to purchase Equipment
Notes or other reasons. See "Description of the
Certificates--Obligation to Purchase Equipment
Notes". If any funds remain as Deposits with
respect to any Offered Certificate Trust after
such deadline, the funds held as Deposits will
be withdrawn by the Escrow Agent for such Trust
and distributed, with accrued and unpaid
interest and, in the case of the Class G-1
Trust, LIBOR break amount, if any, or, in the
case of the Class G-2 Trust, a premium, to the
Certificateholders of such Trust after at least
15 days' prior written notice. Continental will
be obligated to pay any such LIBOR break amount
and premium. See "Description of the Deposit
Agreements--Unused Deposits".
Obligation to Purchase
Equipment Notes............... The Trustees will be obligated to purchase the
Equipment Notes issued with respect to each
Aircraft pursuant to the Note Purchase
Agreement. Continental will enter into a
secured debt financing with respect to each
Aircraft pursuant to financing agreements
substantially in the forms attached to the Note
Purchase Agreement. The terms of such financing
agreements must (a) contain the Mandatory
Document Terms set forth in the Note Purchase
Agreement and (b) not vary the Mandatory
Economic Terms set forth in the Note Purchase
Agreement. In addition, Continental must
certify to the Trustees that any modifications
do not materially and adversely affect the
Certificateholders. Continental must also
obtain written confirmation from each Rating
Agency that the use of financing agreements
modified in any material respect from the forms
attached to the Note Purchase Agreement will
not result in a withdrawal, suspension or
downgrading of the rating of any Class of
Offered Certificates.
It is a condition to the Offered Certificate
Trustees' obligation to purchase Equipment
Notes relating to any Aircraft that the
required amount of Series H Equipment Notes
relating to such Aircraft specified in the Note
Purchase Agreement shall be
S-14
concurrently purchased by the Class H Trustee.
In addition, the Trustees will not be obligated
to purchase Equipment Notes if, at the time of
issuance, Continental is in bankruptcy or
certain other specified events have occurred.
See "Description of the
Certificates--Obligation to Purchase Equipment
Notes".
Equipment Notes
(a) Issuer.................. Continental
(b) Interest................ The Equipment Notes held in each Offered
Certificate Trust will accrue interest at the
rate per annum for the Certificates issued by
such Trust set forth on the cover page of this
Prospectus Supplement. Interest will be payable
on February 15, May 15, August 15 and November
15 of each year, commencing on the first such
date after issuance of such Equipment Notes.
Interest on the Series G-1 Equipment Notes is
calculated on the basis of the actual number of
days elapsed over a 360-day year. Interest on
the Series G-2 Equipment Notes is calculated on
the basis of a 360-day year consisting of
twelve 30-day months. LIBOR is determined from
time to time by the Reference Agent as
described in "Description of the Equipment
Notes--Determination of LIBOR".
(c) Principal............... Amortizing Notes. Principal payments on the
Series G-1 Equipment Notes are scheduled on
February 15 and August 15 in certain years,
commencing on February 15, 2003.
Bullet Maturity Notes. The entire principal
amount of the Series G-2 Equipment Notes is
scheduled to be paid on February 15, 2012.
(d) Redemption and
Purchase...................... Aircraft Event of Loss. If an Event of Loss
occurs with respect to an Aircraft, all of the
Equipment Notes issued with respect to such
Aircraft will be redeemed, unless Continental
replaces such Aircraft under the related
financing agreements. The redemption price in
such case will be the unpaid principal amount
of such Equipment Notes, together with accrued
interest and, in the case of the Series G-1
Equipment Notes, LIBOR break amount, if any,
but without any premium.
Optional Redemption. Continental may elect to
redeem all of the Equipment Notes issued with
respect to an Aircraft prior to maturity. The
redemption price in such case will be the
unpaid principal amount of such Equipment
Notes, together with accrued interest and
Make-Whole Premium, if any, plus, in the case
of the Series G-1 Equipment Notes, LIBOR break
amount, if any. See "Description of the
Equipment Notes--Redemption".
Continental may elect at any time, subject to
certain conditions, to redeem all of the Series
H or Series I Equipment Notes, in any case,
without redeeming the Equipment Notes held for
the Offered Certificate Trusts. Redemption of
the Series H Equipment Notes is subject to the
requirement that Continental simultaneously
issue new Series H Equipment Notes having terms
the same in all material respects as the
redeemed Series H Equipment Notes, except that
the interest rate may be changed, the maturity
date
S-15
may be extended and the principal amount may be
increased. In addition, any such new Series H
Equipment Notes must be held by a pass through
trust subject to the same subordination
provisions as are applicable to the Class H
Trust, and Continental must obtain confirmation
from the Rating Agencies that the redemption
and issuance of the new Series H Equipment
Notes will not result in a withdrawal,
suspension or downgrading of the ratings of the
Class G-1 or G-2 Certificates (without regard
to the Policies). If the Series I Equipment
Notes are redeemed, new Series I Equipment
Notes may not be issued.
(e) Security................ The Equipment Notes issued with respect to each
Aircraft will be secured by a security interest
in such Aircraft.
There will not be cross-default provisions in
the Indentures. This means that if the
Equipment Notes issued with respect to one or
more Aircraft are in default and the Equipment
Notes issued with respect to the remaining
Aircraft are not in default, no remedies will
be exercisable with respect to the remaining
Aircraft.
(f)
Cross-collateralization....... The Equipment Notes will be
cross-collateralized. This means that any
proceeds from the sale of an Aircraft or other
exercise of remedies with respect to such
Aircraft will be available to cover shortfalls
then due under Equipment Notes issued with
respect to the other Aircraft. In the absence
of any such shortfall, excess proceeds will be
held by the relevant Loan Trustee as additional
collateral for such other Equipment Notes.
(g) Section 1110
Protection.................... Continental's outside counsel will provide its
opinion to the Trustees that the benefits of
Section 1110 of the U.S. Bankruptcy Code will
be available with respect to the Equipment
Notes.
Certain Federal Income Tax
Consequences................ Each Certificate Owner generally should report
on its federal income tax return its pro rata
share of income from the relevant Deposits and
income from the Equipment Notes and other
property held by the relevant Trust. See
"Certain U.S. Federal Income Tax Consequences".
Certain ERISA
Considerations................ Each person who acquires a Certificate will be
deemed to have represented that either: (a) no
employee benefit plan assets have been used to
purchase such Certificate or (b) the purchase
and holding of such Certificate are exempt from
the prohibited transaction restrictions of the
Employee Retirement Income Security Act of 1974
and the Internal Revenue Code of 1986 pursuant
to one or more prohibited transaction statutory
or administrative exemptions. See "Certain
ERISA Considerations".
Rating of the Certificates.... It is a condition to the issuance of the
Offered Certificates that they be rated by
Moody's and Standard & Poor's not less than the
ratings set forth below:
STANDARD &
CERTIFICATES MOODY'S POOR'S
------------ ------- ----------
Class G-1............................ Aaa AAA
Class G-2............................ Aaa AAA
S-16
A rating is not a recommendation to purchase,
hold or sell Certificates, since such rating
does not address market price or suitability
for a particular investor. There can be no
assurance that such ratings will not be lowered
or withdrawn by a Rating Agency after the
Offered Certificates have been issued.
STANDARD &
MOODY'S POOR'S
------- ----------
Rating of the Depositary.................. Short Term........................... P-1 A-1+
STANDARD &
MOODY'S POOR'S
------- ----------
Threshold Rating for the Liquidity Short Term...........................
Providers............................... P-1 A-1
Primary Liquidity Provider
Rating........................ The Primary Liquidity Provider meets the
Threshold Rating requirement.
Above-Cap Liquidity Provider
Rating........................ Merrill Lynch & Co., Inc., the guarantor of the
obligations of Merrill Lynch Capital Services,
Inc., as the Above-Cap Liquidity Provider,
meets the Threshold Rating requirement.
S-17
SUMMARY FINANCIAL AND OPERATING DATA
The following tables summarize certain consolidated financial data and
certain operating data with respect to Continental. The following selected
consolidated financial data for the years ended December 31, 2001, 2000 and 1999
are derived from the audited consolidated financial statements of Continental
(including certain reclassifications to conform to the current year
presentation) including the notes thereto incorporated by reference in this
Prospectus Supplement and should be read in conjunction with those financial
statements. The following selected consolidated financial data for the years
ended December 31, 1998 and 1997 are derived from the selected financial data
contained in Continental's Annual Report on Form 10-K, as amended, for the year
ended December 31, 2001, incorporated by reference in this Prospectus
Supplement, and the audited consolidated financial statements of Continental for
the years ended December 31, 1998 and 1997 and should be read in conjunction
therewith.
YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(IN MILLIONS OF DOLLARS, EXCEPT OPERATING DATA,
PER SHARE DATA AND RATIOS)
FINANCIAL DATA--OPERATIONS:
Operating Revenue........................... $8,969 $9,899 $8,639 $7,927 $7,194
Operating Expenses.......................... 8,825(1) 9,170 8,024(2) 7,226(3) 6,478
------ ------ ------ ------ ------
Operating Income............................ 144 729 615 701 716
Nonoperating Income (Expense), net.......... (258)(4) (158) 183(5) (53) (76)
------ ------ ------ ------ ------
Income (Loss) before Income Taxes,
Extraordinary Charges and Cumulative
Effect of Change in Accounting
Principles................................ (114) 571 798(6) 648 640
Net Income (Loss)........................... $ (95) $ 342 $ 455 $ 383 $ 385
====== ====== ====== ====== ======
Basic Earnings (Loss) per Share............. $(1.72) $ 5.62 $ 6.54(7) $ 6.34 $ 6.65
====== ====== ====== ====== ======
Diluted Earnings (Loss) per Share........... $(1.72) $ 5.45 $ 6.20(8) $ 5.02 $ 4.99
====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges(9)....... --(10) 1.51x 1.80x 1.94x 2.07x
====== ====== ====== ====== ======
OPERATING DATA(11):
Revenue passenger miles (millions)(12)...... 61,140 64,161 60,022 53,910 47,906
Available seat miles (millions)(13)......... 84,485 86,100 81,946 74,727 67,576
Passenger load factor(14)................... 72.4% 74.5% 73.2% 72.1% 70.9%
Breakeven passenger load factor(15)(16)..... 74.9% 67.6% 66.4% 61.6% 61.0%
Passenger revenue per available seat mile
(cents)(17)............................... 8.98 9.84 9.12 9.23 9.29
Operating cost per available seat mile
(cents)(18)(19)........................... 9.58 9.68 8.98 8.89 9.04
Average yield per revenue passenger mile
(cents)(20)............................... 12.42 13.20 12.45 12.79 13.11
Average length of aircraft flight (miles)... 1,185 1,159 1,114 1,044 967
S-18
AS OF DECEMBER 31,
------------------------
2001 2000
--------- ---------
(IN MILLIONS OF DOLLARS)
FINANCIAL DATA--BALANCE SHEET:
ASSETS:
Cash, Cash Equivalents and Short-Term Investments......... $1,132 $1,395
Other Current Assets...................................... 1,012 1,064
Total Property and Equipment, net......................... 6,153 5,163
Routes and Airport Operating Rights, net.................. 1,033 1,081
Other Assets, net......................................... 461 498
------ ------
Total Assets........................................... $9,791 $9,201
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities....................................... $3,191 $2,980
Long-Term Debt and Capital Leases......................... 4,198 3,374
Deferred Credits and Other Long-Term Liabilities.......... 998 995
Continental-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Convertible Subordinated Debentures(21)................ 243 242
Redeemable Common Stock(22)............................... -- 450
Stockholders' Equity...................................... 1,161 1,160
------ ------
Total Liabilities and Stockholders' Equity............. $9,791 $9,201
====== ======
---------------
(1) Includes $417 million grant under the Stabilization Act and $124 million of
special charges, which consist of $61 million of fleet impairment losses,
$29 million of costs associated with furloughs and company offered leaves,
$17 million of costs for environmental remediation expenses and $17 million
of costs associated with the closure and nonutilization of certain
facilities and for certain uncollectable receivables.
(2) Includes an $81 million fleet disposition/impairment loss resulting from
Continental's decision to accelerate the retirement of six DC-10-30
aircraft and the disposal of related excess inventory.
(3) Includes a $122 million fleet disposition/impairment loss resulting from
Continental's decision to accelerate the retirement of certain jet and
turboprop aircraft.
(4) Includes a $22 million special charge related to the impairment of
investments in certain affiliates and the uncollectibility of related notes
receivable.
(5) Includes a $326 million net gain on the sale of the Company's interest in
Amadeus Global Travel Distribution S.A. and other asset sales.
(6) Reflects income before income taxes and cumulative effect of a change in
accounting principle. During 1999, Continental recorded a $33 million
charge for the cumulative effect of changes in the accounting for the sale
of frequent flyer mileage credits to participating partners and
preoperating costs related to the integration of new types of aircraft.
(7) Reflects basic earnings per share after cumulative effect of changes in
accounting principles. See Note (6) for a description of the changes in
accounting principles. Basic earnings per share for the year ended December
31, 1999 was $7.02 before the cumulative effect of such changes in
accounting principles.
(8) Reflects diluted earnings per share after cumulative effect of changes in
accounting principles. See Note (6) for a description of the changes in
accounting principles. Diluted earnings per share for the year ended
December 31, 1999 was $6.64 before the cumulative effect of such changes in
accounting principles.
(9) For purposes of calculating this ratio, earnings consist of income before
income taxes, extraordinary charges and cumulative effect of a change in
accounting principle plus interest expense (net of capitalized interest),
the portion of rental expense representative of interest expense and
amortization of previously capitalized interest. Fixed charges consist of
interest expense and the portion of rental expense representative of
interest expense.
(10) For the year ended December 31, 2001, earnings were inadequate to cover
fixed charges and the coverage deficiency was $152 million.
(11) Includes operating data for CMI, but does not include operating data for
ExpressJet's regional jet operations or turboprop operations.
(12) The number of scheduled miles flown by revenue passengers.
S-19
(13) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(14) Revenue passenger miles divided by available seat miles.
(15) The percentage of seats that must be occupied by revenue passengers in
order for the airline to break even on an income before income taxes basis,
excluding nonrecurring charges and other special items.
(16) Excludes $417 million of Stabilization Act Grant and $146 million of fleet
impairment, severance and other special charges in 2001. Also excludes a
$81 million fleet disposition/impairment loss and a $326 million net gain
on the sale of the Company's interest in Amadeus Global Travel Distribution
S.A. and other asset sales in 1999, and a $122 million fleet
disposition/impairment loss in 1998. See Notes (1), (2), (3) and (4) for
description of the charges.
(17) Passenger revenue divided by available seat miles.
(18) Operating expenses divided by available seat miles.
(19) Excludes $417 million of Stabilization Act grant and $124 million of fleet
impairment, severance and other special charges in 2001, a $81 million
fleet disposition/impairment loss in 1999 and a $122 million fleet
disposition/impairment loss in 1998. See Notes (1), (2) and (3) for
description of charges.
(20) The average revenue received for each mile a revenue passenger is carried.
(21) The sole assets of the Trust are convertible subordinated debentures with
an aggregate principal amount of $250 million, which bear interest at the
rate of 6% per annum and mature on November 15, 2030. Upon repayment, the
Continental-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust will be mandatorily redeemed.
(22) Represents the Company's commitment to repurchase 6.7 million shares of
Class A common stock of Continental owned by Northwest Airlines
Corporation. The transaction closed on January 22, 2001 and was accounted
for as an equity transaction.
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RISK FACTORS
TERRORIST ATTACKS
LAST YEAR'S TERRORIST ATTACKS ADVERSELY AFFECTED, AND MAY CONTINUE TO
ADVERSELY AFFECT, CONTINENTAL'S FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
PROSPECTS
As described in greater detail in Continental's filings with the Securities
and Exchange Commission, the terrorist attacks of September 11, 2001 involving
commercial aircraft have adversely affected Continental's financial condition,
results of operations and prospects, and the airline industry generally. Those
effects continue, although they have been mitigated somewhat by increased
traffic, the Air Transportation Safety and System Stabilization Act (the
"Stabilization Act") and Continental's cost-cutting measures. Moreover,
additional terrorist attacks, even if not made directly on the airline industry,
or the fear of such attacks, could further negatively impact Continental and the
airline industry.
Among the effects Continental experienced from the September 11, 2001
terrorist attacks were significant flight disruption costs caused by the Federal
Aviation Administration ("FAA") imposed grounding of the U.S. airline industry's
fleet, significantly increased security, insurance and other costs,
significantly higher ticket refunds, significantly reduced load factors, and
significantly reduced yields. Further terrorist attacks using commercial
aircraft could result in another grounding of Continental's fleet, and would
likely result in significant reductions in load factor and yields, along with
increased ticket refunds and security and other costs. In addition, terrorist
attacks not involving commercial aircraft, or other world events, could result
in decreased load factors and yields for airlines, including Continental, and
could also result in increased costs. For instance, fuel costs, which have
declined since September 11, 2001, could escalate if oil-producing countries
were impacted by hostilities or reduce output, which could also impact fuel
availability. In February 2002, Continental purchased out of the money call
options to hedge a significant increase in fuel costs for approximately 35% of
its projected 2002 fuel requirements for the period March through December.
Premiums for aviation insurance have increased substantially, and could escalate
further, or certain aviation insurance could become unavailable or available
only for reduced amounts of coverage that are insufficient to comply with the
levels of insurance coverage required by aircraft lenders and lessors or
required by applicable government regulations. Additionally, war-risk coverage
or other insurance might cease to be available to Continental's vendors, or
might be available only at significantly increased premiums or for reduced
amounts of coverage, which could adversely impact Continental's operations or
costs.
Due in part to the lack of predictability of future traffic, business mix
and yields, Continental is currently unable to estimate the long-term impact on
it of the events of September 11, 2001 and the sufficiency of its financial
resources to absorb that impact. However, given the magnitude of these
unprecedented events and their potential subsequent effects, the adverse impact
to Continental's financial condition, results of operations and prospects may
continue to be material.
CONTINENTAL MAY HAVE TO RECOGNIZE FURTHER SPECIAL CHARGES RELATED TO GROUNDED
AIRCRAFT
As of January 31, 2002, Continental had 56 jet aircraft and 19 turboprop
aircraft out of service from its fleet. The majority of these aircraft have been
temporarily removed from service and Continental will continue to evaluate
whether to return these temporarily grounded aircraft to service, which will
primarily depend on demand and yield in the coming months. In the fourth quarter
of 2001, Continental incurred a special charge of $39 million after taxes ($61
million pre-tax) associated primarily with the impairment of various owned
aircraft and spare engines, including all DC-10-30, ATR-42, EMB-120 and Boeing
747 and 727 aircraft. On February 28, 2002, Continental announced the permanent
grounding and retirement of its DC-10-30 fleet resulting in a special charge for
leased aircraft of $52 million after taxes ($83 million pre-tax). Continental
could suffer additional impairment of operating aircraft and other long-lived
assets in the future if the economic environment in which it operates does not
continue to improve or further deteriorates due to unforeseen circumstances. The
special charges for all or a significant portion of the temporarily grounded
aircraft would, and any additional special charges for impairment of operating
aircraft and other long-lived assets could, be material.
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THE AVIATION SECURITY ACT WILL IMPOSE ADDITIONAL COSTS AND MAY CAUSE POSSIBLE
SERVICE DISRUPTIONS
In November 2001, the President signed into law the Aviation and
Transportation Security Act (the "Aviation Security Act"). This law federalizes
substantially all aspects of civil aviation security, creating a new
Transportation Security Administration under the Department of Transportation.
Under the Aviation Security Act, all security screeners at airports will be
federal employees, and significant other elements of airline and airport
security will be overseen and performed by federal employees, including federal
security managers, federal law enforcement officers, federal air marshals, and
federal security screeners. Among other matters, the law mandates improved
flight deck security, deployment of federal air marshals onboard flights,
improved airport perimeter access security, airline crew security training,
enhanced security screening of passengers, baggage, cargo, mail, employees and
vendors, enhanced training and qualifications of security screening personnel,
additional provision of passenger data to U.S. Customs, and enhanced background
checks. Funding for airline and airport security under the law is provided by a
new $2.50 per enplanement ticket tax (subject to a $5 per one-way trip cap), and
a new annual tax on air carriers in an amount not to exceed the amounts paid in
calendar year 2000 by carriers for screening passengers and property. Air
carriers began collecting the new ticket tax from passengers, and became subject
to the new tax on air carriers, on February 1, 2002. The law requires that the
Undersecretary of Transportation for Security will assume all the civil aviation
security functions and responsibilities related to passenger screening called
for under the law beginning February 17, 2002, and provides that the
Undersecretary may assume existing contracts for the provision of passenger
screening services at U.S. airports for up to 270 days from that date, after
which all security screeners must be federal employees. The law also requires
that all checked baggage be screened by explosive detection systems by December
31, 2002, which will require significant equipment acquisitions by the
government and may require facility and baggage process changes to implement.
Implementation of the requirements of the Aviation Security Act will result in
increased costs for Continental and its passengers and may result in delays and
disruptions to air travel.
RISK FACTORS RELATING TO THE COMPANY
CONTINENTAL CONTINUES TO EXPERIENCE SIGNIFICANT OPERATING LOSSES
Since September 11, 2001, Continental has not generated positive cash flow
from its operations. Although improved traffic since September has significantly
decreased the average daily negative cash flow from operations, Continental's
cash flow from operations as of February 20, 2002, remains negative at
approximately $2 million per day, and Continental currently anticipates that it
will incur a significant loss in the first quarter of 2002. Based on current
information and trends, Continental also expects to incur a loss for the fourth
quarter of 2002 and for the full year 2002. Although load factors continue to
improve, they have done so against significantly reduced capacity. The reduced
capacity, coupled with the fact that many of Continental's costs are fixed in
the intermediate to long term, will continue to cause higher unit costs. Cost
per available seat mile for 2002 is expected to increase 5%, holding fuel rate
constant, as compared to 2001. This increase is partly attributable to
anticipated additional insurance costs in 2002 of approximately $85 million.
Business traffic in most markets continues to be weak, and carriers continue to
offer reduced fares to attract passengers, which lowers Continental's passenger
revenue and yields and raises Continental's break-even load factor. We cannot
predict when business traffic or yields will increase.
In addition, Continental's capacity purchase agreement with ExpressJet
provides that Continental purchase in advance all of its available seat miles
for a negotiated price, and Continental is at risk for reselling the available
seat miles at market prices. Continental previously announced its intention to
sell or otherwise dispose of some or all of its interests in ExpressJet. If
Continental does so, then it would have greater fixed costs, which could result
in lower or more volatile earnings or both. See "Recent Developments--Proposed
Initial Public Offering of ExpressJet."
S-22
CONTINENTAL'S HIGH LEVERAGE MAY AFFECT ITS ABILITY TO SATISFY ITS SIGNIFICANT
FINANCING NEEDS OR MEET ITS OBLIGATIONS
Continental has a higher proportion of debt compared to its equity capital
than some of its principal competitors. Continental also has significant
operating leases and facility rental costs. In addition, Continental has fewer
cash resources than some of its principal competitors. Most of Continental's
property and equipment is subject to liens securing indebtedness. Accordingly,
Continental may be less able than some of its competitors to withstand a
prolonged recession in the airline industry or respond as flexibly to changing
economic and competitive conditions.
As of December 31, 2001, Continental had:
- approximately $4.6 billion (including current maturities) of long-term
debt and capital lease obligations.
- $250 million liquidation amount of Continental-obligated mandatorily
redeemable preferred securities of trust ($243 million net of unamortized
discount).
- approximately $1.2 billion of stockholder's equity.
- $1.13 billion in cash, cash equivalents and short-term investments.
Continental has substantial commitments for capital expenditures, including
for the acquisition of new aircraft. As of December 31, 2001, Continental had
firm commitments for 87 aircraft from Boeing, with an estimated cost of
approximately $3.7 billion, after giving effect to the rescheduling discussed
below. Continental expects that 20 of these aircraft will be delivered between
January 2002 and May 2002. Thirteen of these 20 aircraft have been pre-financed,
and Continental expects to finance the remaining seven aircraft pursuant to this
Offering. Continental has agreed with Boeing to reschedule deliveries of the
remaining 67 aircraft so that they will be delivered between late 2003 and mid
2008. Continental does not have backstop financing from Boeing or any other
financing currently in place for the remaining 67 aircraft.
As of December 31, 2001, ExpressJet had firm commitments for 137 regional
jets from Empresa Brasileira de Aeronautica S.A. ("Embraer"), with an estimated
cost of approximately $2.6 billion. Neither ExpressJet nor Continental will have
any obligation to take any of these firm Embraer aircraft that are not financed
by a third party and leased to Continental.
In addition, Continental has significant operating lease and facility
rental obligations. For the year ended December 31, 2001 and 2000, cash
expenditures under operating leases approximated $1.3 billion and $1.2 billion,
respectively.
Additional financing will be needed to satisfy Continental's capital
commitments. Continental cannot predict whether sufficient financing will be
available for capital expenditures not covered by firm financing commitments. On
several occasions subsequent to September 11, 2001, each of Moody's, Standard
and Poor's and Fitch downgraded the credit ratings of a number of major
airlines, including Continental's credit ratings. Reductions in Continental's
credit ratings may increase the cost and reduce the availability of financing to
Continental.
SIGNIFICANT CHANGES OR EXTENDED PERIODS OF HIGH FUEL COSTS WOULD MATERIALLY
AFFECT CONTINENTAL'S OPERATING RESULTS
Fuel costs constitute a significant portion of Continental's operating
expense. Fuel costs represented approximately 13.5% of Continental's operating
expenses for the year ended December 31, 2001 (excluding severance and other
special charges and Stabilization Act grant), and 15.2% of Continental's
operating expenses for the year ended December 31, 2000. Fuel prices and
supplies are influenced significantly by international political and economic
circumstances. From time to time Continental enters into petroleum swap
contracts, petroleum call option contracts and/or jet fuel purchase commitments
to provide some short-term protection (generally three to six months) against a
sharp increase in jet fuel prices. Continental's fuel hedging strategy may limit
its ability to benefit from declines in fuel prices. In February 2002,
Continental purchased
S-23
out of the money call options to hedge a significant increase in fuel costs for
approximately 35% of its projected 2002 fuel requirements for the period March
through December. If a fuel supply shortage were to arise from OPEC production
curtailments, a disruption of oil imports or otherwise, higher fuel prices or
reduction of scheduled airline service could result. Significant changes in fuel
costs or extended periods of high jet fuel prices would materially affect
Continental's operating results.
LABOR COSTS IMPACT CONTINENTAL'S RESULTS OF OPERATIONS
Labor costs constitute a significant percentage of Continental's total
operating costs. In July 2000, Continental completed a three-year program
bringing all employees to industry standard wages and also announced and began
implementing a phased plan to bring employee benefits to industry standard
levels by 2003. The plan provides for increases in vacation, paid holidays,
increased 401(k) matching cash contributions and additional past service
retirement credit for most senior employees.
Collective bargaining agreements between Continental and its mechanics (who
are represented by the International Brotherhood of Teamsters) and between both
Continental and ExpressJet and their respective pilots (who are represented by
the Air Line Pilots Association) are amendable in January 2002 and October 2002,
respectively. Negotiations were deferred due to the economic uncertainty
following the September 11, 2001 terrorist attacks. Negotiations with these
employee groups have recommenced with the International Brotherhood of Teamsters
in the first quarter of 2002 and are scheduled to commence with the Air Line
Pilots Association in the summer of 2002. Continental will incur increased labor
costs in connection with the negotiation of its collective bargaining
agreements. In addition, certain other U.S. air carriers have experienced work
slowdowns, strikes or other labor disruptions in connection with contract
negotiations. Although Continental enjoys generally good relations with its
employees, there can be no assurance that Continental will not experience labor
disruptions in the future.
RISK FACTORS RELATING TO THE AIRLINE INDUSTRY
THE INDUSTRY IN WHICH CONTINENTAL COMPETES IS HIGHLY COMPETITIVE
The airline industry is highly competitive and susceptible to price
discounting. Carriers use discount fares to stimulate traffic during periods of
slack demand, to generate cash flow and to increase market share. Some of
Continental's competitors have substantially greater financial resources or
lower cost structures than Continental.
Airline profit levels are highly sensitive to changes in fuel costs, fare
levels and passenger demand. Passenger demand and fare levels are influenced by,
among other things, the state of the global economy, domestic and international
events, airline capacity and pricing actions taken by carriers. The weak U.S.
economy, turbulent international events and extensive price discounting by
carriers contributed to unprecedented losses for U.S. airlines from 1990 to
1993. Since September 11, 2001, these same factors, together with the effects of
the terrorist attacks and the industry's reduction in capacity, have resulted in
dramatic losses for Continental and the airline industry generally. Continental
cannot predict when conditions will improve.
In recent years, the major U.S. airlines have sought to form marketing
alliances with other U.S. and foreign air carriers. Such alliances generally
provide for "code-sharing", frequent flyer reciprocity, coordinated scheduling
of flights of each alliance member to permit convenient connections and other
joint marketing activities. Such arrangements permit an airline to market
flights operated by other alliance members as its own. This increases the
destinations, connections and frequencies offered by the airline, which provide
an opportunity to increase traffic on its segment of flights connecting with its
alliance partners. Continental's alliance with Northwest Airlines is an example
of such an arrangement, and Continental has existing alliances with numerous
other air carriers. Other major U.S. airlines have alliances or planned
alliances more extensive than Continental's. The Company cannot predict the
extent to which Continental will be disadvantaged by competing alliances.
S-24
Since its deregulation in 1978, the U.S. airline industry has undergone
substantial consolidation, and it may in the future experience additional
consolidation. Continental routinely monitors changes in the competitive
landscape and engages in analysis and discussions regarding its strategic
position, including alliances and business combination transactions. Continental
has had, and expects it will continue to have, discussions with third parties
regarding strategic alternatives. The impact of any consolidation within the
U.S. airline industry cannot be predicted at this time.
CONTINENTAL'S BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
As evidenced by the enactment of the Aviation Security Act, airlines are
subject to extensive regulatory and legal compliance requirements that result in
significant costs. The FAA from time to time issues directives and other
regulations relating to the maintenance and operation of aircraft that require
significant expenditures. Some FAA requirements cover, among other things,
retirement of older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and other environmental
concerns, commuter aircraft safety and increased inspections and maintenance
procedures to be conducted on older aircraft. Continental expects to continue
incurring expenses to comply with the FAA's regulations.
Additional laws, regulations, taxes and airport rates and charges have been
proposed from time to time that could significantly increase the cost of airline
operations or reduce revenues. Additionally, because of significantly higher
security and other costs incurred by airports since September 11, 2001, and
because reduced landing weights since September 11, 2001 have reduced the fees
airlines pay to airports, many airports are significantly increasing their rates
and charges to air carriers, including to Continental. Restrictions on the
ownership and transfer of airline routes and takeoff and landing slots have also
been proposed. The ability of U.S. carriers to operate international routes is
subject to change because the applicable arrangements between the United States
and foreign governments may be amended from time to time, or because appropriate
slots or facilities are not made available. Continental cannot provide assurance
that laws or regulations enacted in the future will not adversely affect it.
CONTINENTAL'S OPERATIONS ARE AFFECTED BY THE SEASONALITY ASSOCIATED WITH THE
AIRLINE INDUSTRY
Due to greater demand for air travel during the summer months, revenue in
the airline industry in the second and third quarters of the year is generally
stronger than revenue in the first and fourth quarters of the year for most U.S.
air carriers. Continental's results of operations generally reflect this
seasonality, but have also been impacted by numerous other factors that are not
necessarily seasonal, including the extent and nature of competition from other
airlines, fare actions, excise and similar taxes, changing levels of operations,
fuel prices, weather, air traffic control delays, foreign currency exchange
rates and general economic conditions.
RISK FACTORS RELATING TO THE CERTIFICATES AND THE OFFERING
APPRAISALS AND REALIZABLE VALUE OF AIRCRAFT
Three independent appraisal and consulting firms have prepared appraisals
of the Aircraft. Letters summarizing such appraisals are annexed to this
Prospectus Supplement as Appendix II. Such appraisals are based on varying
assumptions and methodologies, which differ among the appraisers, and were
prepared without physical inspection of the Aircraft. Appraisals that are based
on other assumptions and methodologies may result in valuations that are
materially different from those contained in such appraisals. See "Description
of the Aircraft and the Appraisals--The Appraisals".
An appraisal is only an estimate of value. It does not indicate the price
at which an Aircraft may be purchased from the Aircraft manufacturer. Nor should
an appraisal be relied upon as a measure of realizable value. The proceeds
realized upon a sale of any Aircraft may be less than its appraised value. In
particular, the appraisals of the Aircraft are estimates of values as of future
delivery dates. The value of an Aircraft if remedies are exercised under the
applicable Indenture will depend on market and economic conditions, the supply
of similar aircraft, the availability of buyers, the condition of the Aircraft
and other factors.
S-25
Accordingly, Continental cannot assure you that the proceeds realized upon any
such exercise of remedies would be sufficient to satisfy in full payments due on
the Certificates.
In addition, the value of the Aircraft may be negatively affected as a
consequence of the events of September 11, 2001 referred to under "--Terrorist
Attacks--Last Year's Terrorist Attacks Adversely Affected, and May Continue to
Adversely Affect, Continental's Financial Condition, Results of Operations and
Prospects". Each of the appraisals indicates that current market values of
aircraft have been adversely affected by such events. However, the appraised
values set forth in the appraisals generally assume a stable market environment
and certain other market conditions. Accordingly, the extent to which the
September 11 events have been taken into account in determining these appraised
values varies among the appraisals, as discussed in the attached appraisal
letters. Each of the appraisals notes that the long-term impact on aircraft
values of these events is uncertain.
CONTROL OVER COLLATERAL; SALE OF COLLATERAL
If an Indenture Default is continuing, subject to certain conditions, the
Loan Trustee under such Indenture will be directed by the "Controlling Party" in
exercising remedies under such Indenture, including accelerating the applicable
Equipment Notes or foreclosing the lien on the Aircraft securing such Equipment
Notes. See "Description of the Certificates--Indenture Defaults and Certain
Rights Upon an Indenture Default".
The Controlling Party will be:
- The Policy Provider or, if a Policy Provider Default is continuing:
(1) The Class G-1 Trustee or Class G-2 Trustee, whichever represents the
Class with the larger principal amount of Certificates outstanding at
the time that the Indenture Default occurs.
(2) Upon payment of final distributions to the holders of such larger
Class, the other of the Class G-1 Trustee or Class G-2 Trustee.
- Upon payment of final distributions to the holders of Class G-1 and G-2
Certificates and, unless a Policy Provider Default is continuing, of any
obligations to the Policy Provider, the Trustees for the Subordinated
Certificates (subject to certain ranking provisions among such Trustees).
- Under certain circumstances, and notwithstanding the foregoing, the
Primary Liquidity Provider with the largest amount owed to it.
During the continuation of any Indenture Default, the Controlling Party may
direct the acceleration and sale of the Equipment Notes issued under such
Indenture, subject to certain limitations. See "Description of the Intercreditor
Agreement--Intercreditor Rights--Sale of Equipment Notes or Aircraft". The
market for Equipment Notes during any Indenture Default may be very limited, and
there can be no assurance as to the price at which they could be sold. If the
Controlling Party directs the sale of any Equipment Notes for less than their
outstanding principal amount, certain Certificateholders will receive a smaller
amount of principal distributions than anticipated and will not have any claim
for the shortfall against Continental or any Trustee.
RATINGS OF THE OFFERED CERTIFICATES
It is a condition to the issuance of the Offered Certificates that the
Class G-1 and G-2 Certificates be rated not lower than Aaa by Moody's and AAA by
Standard & Poor's. A rating is not a recommendation to purchase, hold or sell
Certificates, since such rating does not address market price or suitability for
a particular investor. A rating may not remain for any given period of time and
may be lowered or withdrawn entirely by a Rating Agency if in its judgment
circumstances in the future (including the downgrading of Continental, the
Depositary, a Liquidity Provider or the Policy Provider) so warrant.
The rating of the Offered Certificates is based primarily on the
availability of the Policies, as well as the default risk of the Equipment Notes
and the Depositary, the availability of the Liquidity Facilities, the collateral
value provided by the Aircraft relating to the Equipment Notes and the
subordination provisions
S-26
applicable to the Certificates. Standard & Poor's has indicated that its rating
applies to a unit consisting of Offered Certificates representing the Trust
Property and Escrow Receipts initially representing undivided interests in
certain rights to $329,166,000 (less any amounts used to purchase Equipment
Notes on the Issuance Date) of Deposits. Amounts deposited under the Escrow
Agreements are not property of Continental and are not entitled to the benefits
of Section 1110 of the U.S. Bankruptcy Code. Any cash collateral held as a
result of the cross-collateralization of the Equipment Notes also would not be
entitled to the benefits of Section 1110 of the U.S. Bankruptcy Code. Neither
the Offered Certificates nor the Escrow Receipts may be separately assigned or
transferred.
Continental's ability to pay any LIBOR break amount and premium due upon
distribution of Deposits not used to acquire Equipment Notes during the Delivery
Period has not been rated by either of the Rating Agencies.
RETURN OF ESCROWED FUNDS
Under certain circumstances, all of the funds held in escrow as Deposits
may not be used to purchase Equipment Notes by the deadline established for
purposes of this offering. See "Description of the Deposit Agreements--Unused
Deposits". If any funds remain as Deposits with respect to any Offered
Certificate Trust after such deadline, they will be withdrawn by the Escrow
Agent for such Trust and distributed, with accrued and unpaid interest and LIBOR
break amount, in the case of the Class G-1 Trust, or a premium, in the case of
the Class G-2 Trust, to the Certificateholders of such Trust. See "Description
of the Deposit Agreements--Unused Deposits". Continental will be obligated to
pay any such LIBOR break amount and premium.
ABOVE-CAP LIQUIDITY FACILITY
The Above-Cap Liquidity Facility provides that upon (i) a downgrading of an
Above-Cap Liquidity Provider (or, in the case of the initial Above-Cap Liquidity
Facility, the Above-Cap Liquidity Guarantor) below the applicable Threshold
Rating, (ii) in the case of the initial Above-Cap Liquidity Facility, the Above-
Cap Liquidity Guarantor's guarantee of the initial Above-Cap Liquidity
Provider's obligations thereunder becoming invalid or unenforceable, or (iii)
the occurrence of certain other events relating to certain changes in law or
other circumstances, unless the Above-Cap Liquidity Facility is replaced by a
replacement Above-Cap Liquidity Facility, the Above-Cap Liquidity Facility shall
be terminated. The Above-Cap Liquidity Provider will have the right to replace
the Above-Cap Liquidity Facility by a replacement Liquidity Facility or to
terminate the Above-Cap Liquidity Facility upon the occurrence of certain events
relating to deduction or withholding for tax. If the Above-Cap Liquidity
Facility is so terminated, the Above-Cap Liquidity Provider is required to
deposit into the Above-Cap Collateral Account a termination payment expected to
be sufficient to cover future payments under the Above-Cap Liquidity Facility,
assuming that LIBOR will not exceed 20%. See "Description of the Liquidity
Facilities--Above-Cap Liquidity Facility--Payments". Thus, if LIBOR at any time
exceeds 20%, there can be no assurance that the amounts available in the
Above-Cap Collateral Account would be sufficient to cover any interest
shortfalls on the Class G-1 Certificates as otherwise described herein.
LIMITED ABILITY TO RESELL THE OFFERED CERTIFICATES
Prior to this offering, there has been no public market for the Offered
Certificates. Neither Continental nor any Trust intends to apply for listing of
the Offered Certificates on any securities exchange or otherwise. The
Underwriters may assist in resales of the Offered Certificates, but they are not
required to do so. A secondary market for the Offered Certificates may not
develop. If a secondary market does develop, it might not continue or it might
not be sufficiently liquid to allow you to resell any of your Offered
Certificates.
RISK FACTORS RELATING TO THE POLICY PROVIDER
IF THE FINANCIAL CONDITION OF THE POLICY PROVIDER DECLINES, THE RATING ON THE
OFFERED CERTIFICATES MAY DECLINE
The Aaa rating by Moody's and the AAA rating by Standard & Poor's of the
Offered Certificates are based, primarily, on the existence of the Policies that
insure the complete and timely payment of interest
S-27
relating to the Offered Certificates on each Regular Distribution Date and the
payment of outstanding principal on or, in some cases, before the Final Maturity
Date. Ambac Assurance Corporation, the Policy Provider, will issue the Policies.
If the Policy Provider's financial condition declines or if it becomes
insolvent, the Subordination Agent may be unable to recover the full amount due
under the Policies. In addition, such a decline or insolvency could lead Moody's
or Standard & Poor's to downgrade the ratings of the Offered Certificates
because of a concern that the Policy Provider may be unable to make payments to
the holders of the Offered Certificates under the Policies. For information on
the financial information generally available relating to the Policy Provider,
see "Description of the Policy Provider".
POLICY PROTECTION IS LIMITED
Although the Subordination Agent may make drawings under the Policies for
interest payments on each Regular Distribution Date, the Subordination Agent
generally may not make drawings for principal payments until the Final Maturity
Date for the Offered Certificates except in certain limited circumstances. This
limits the protection afforded to holders of Offered Certificates by the
Policies.
RECENT DEVELOPMENTS
PROPOSED INITIAL PUBLIC OFFERING OF EXPRESSJET
Continental has announced that its wholly owned subsidiary, ExpressJet
Holdings, Inc. ("ExpressJet Holdings"), filed an amendment to its registration
statement previously filed with the Commission for the proposed initial public
offering of its common stock. ExpressJet wholly owns ExpressJet Airlines, Inc.,
the regional airline that operates as Continental Express ("ExpressJet").
In the initial public offering, ExpressJet Holdings intends to sell
10,000,000 shares of its common stock and use the proceeds to repay a portion of
its indebtedness to Continental. In addition, Continental expects to sell
10,000,000 of its shares of ExpressJet Holdings common stock in the offering and
to grant the underwriters an option to purchase an additional 3,000,000 shares
to cover over-allotments. Continental intends to use $150 million of the
proceeds received by it in connection with the offering to fund a portion of its
obligations to the Continental pension plan for its employees, and to use the
remainder of the proceeds for general corporate purposes.
Continental currently does not intend to remain a stockholder of ExpressJet
Holdings over the long term. Following the expiration of the 180-day lock-up
period that it expects to agree to in connection with the offering, Continental
expects to pursue other steps to divest its remaining ownership of ExpressJet
Holdings.
If the proposed initial public offering is consummated, ExpressJet's
financial results will cease to be consolidated in Continental's financial
statements. Assuming Continental had disposed of all of its ExpressJet Holdings
common stock as of January 1, 2001, for the year ended December 31, 2001, on a
pro forma basis Continental would have had operating income of $43 million (as
compared to $144 million actually reported), excluding any gain on the sale. In
addition, Continental's capacity purchase agreement with ExpressJet will result
in greater fixed costs for Continental. See "--Risk Factors Relating to the
Company--Continental Continues to Experience Significant Operating Losses."
Consummation of the proposed offering is subject to a number of conditions.
No assurance can be given that the proposed offering will be completed.
USE OF PROCEEDS
The proceeds from the sale of the Offered Certificates will be used to
purchase Equipment Notes issued by Continental during the Delivery Period to
finance a portion of the purchase price of the Aircraft. To the extent not used
on the Issuance Date to purchase Equipment Notes, the proceeds from the sale of
the Offered Certificates will be deposited with the Depositary on behalf of the
applicable Escrow Agent for the benefit of the holders of such Certificates.
S-28
THE COMPANY
Continental Airlines, Inc. ("Continental" or the "Company") is a major
United States air carrier engaged in the business of transporting passengers,
cargo and mail. Continental is the fifth largest United States airline (as
measured by revenue passenger miles in 2001) and, together with its wholly owned
subsidiaries, ExpressJet Airlines, Inc., which does business as Continental
Express, and Continental Micronesia, Inc. ("CMI"), serves 216 airports worldwide
at January 31, 2002. As of January 31, 2002, Continental flew to 123 domestic
and 93 international destinations and offered additional connecting service
through alliances with domestic and foreign carriers. Continental directly
serves 15 European cities, seven South American cities, Tokyo, Hong Kong and Tel
Aviv and is one of the leading airlines providing service to Mexico and Central
America, serving more destinations there than any other United States airline.
Through its Guam hub, CMI provides extensive service in the western Pacific,
including service to more Japanese cities than any other United States carrier.
The Company's executive offices are located at 1600 Smith Street, Houston, Texas
77002. The Company's telephone number is (713) 324-2950.
DOMESTIC OPERATIONS
Continental operates its domestic route system primarily through its hubs
in New York at Newark International Airport ("Newark"), in Houston, Texas at
George Bush Intercontinental Airport ("Bush Intercontinental") and in Cleveland,
Ohio at Hopkins International Airport ("Hopkins International"). The Company's
hub system allows it to transport passengers between a large number of
destinations with substantially more frequent service than if each route were
served directly. The hub system also allows Continental to add service to a new
destination from a large number of cities using only one or a limited number of
aircraft. As of January 31, 2002, Continental operated 61% of the average daily
jet departures from Newark, 83% of the average daily jet departures from Bush
Intercontinental, and 66% of the average daily jet departures from Hopkins
International (in each case including regional jets). Each of Continental's
domestic hubs is located in a large business and population center, contributing
to a high volume of "origin and destination" traffic.
EXPRESSJET
Continental's mainline jet service at each of its domestic hub cities is
coordinated with ExpressJet, which operates new-generation regional jets and
turboprop aircraft under the name "Continental Express". Effective January 1,
2001, Continental entered into a capacity purchase agreement with ExpressJet
pursuant to which Continental purchases in advance all of ExpressJet's available
seat miles for a negotiated price. Under the agreement, ExpressJet operates
regional flights on Continental's behalf, while Continental is responsible for
all scheduling, pricing and seat inventories, and is entitled to all revenue
associated with those flights. Continental pays ExpressJet based on scheduled
block hours in accordance with a formula designed to provide ExpressJet with an
operating margin of approximately 10% before taking into account variations in
some costs and expenses that are generally controllable by ExpressJet.
Accordingly, Continental assumes the risk of revenue volatility associated with
fares and passenger traffic, price volatility for specified expense items such
as fuel and the cost of all distribution and revenue-related costs.
As of January 31, 2002, ExpressJet served 41 destinations from Newark (38
by regional jet), 61 destinations from Bush Intercontinental (50 by regional
jet) and 47 destinations from Hopkins International (47 by regional jet).
Additional commuter feed traffic is currently provided by other code-sharing
partners. The regional jets average two years of age and seat either 37 or 50
passengers. The turboprop aircraft average approximately 11.7 years of age and
seat 46 or fewer passengers.
Continental believes ExpressJet's regional jet and turboprop service
complements Continental's jet operations by carrying traffic that connects onto
Continental's mainline jets and allowing more frequent service to small cities
than could be provided economically with conventional jet aircraft. Continental
believes that ExpressJet's new regional jets provide greater comfort and enjoy
better customer acceptance than its turboprop aircraft. The regional jets also
allow ExpressJet to serve certain routes that cannot be served by turboprop
aircraft. Continental anticipates that ExpressJet's fleet will be entirely
comprised of regional jets by early 2003.
S-29
See "Recent Developments--Proposed Initial Public Offering of ExpressJet"
for a discussion of the proposed initial public offering of common stock of
ExpressJet Holdings.
DOMESTIC CARRIER ALLIANCES
Continental has entered into and continues to develop alliances with
domestic carriers. Continental has a long-term global alliance (the "Northwest
Alliance") with Northwest Airlines, Inc. ("Northwest Airlines") through 2025,
subject to early termination by either carrier in the event of certain changes
in control of either Northwest Airlines or Continental. The Northwest Alliance
provides that each carrier will place its code on a large number of the flights
of the other and includes reciprocity of frequent flyer programs and executive
lounge access and other joint marketing activities. Northwest Airlines and
Continental also have joint contracts with major corporations and travel agents
designed to create access to a broader product line encompassing the route
systems of both carriers.
The alliance agreement also provides that subject to certain conditions,
including the receipt by Northwest Airlines, KLM Royal Dutch Airlines ("KLM")
and Continental of an adequate grant of antitrust immunity, Continental will
join, as an economic participant, a new transatlantic joint venture with
Northwest Airlines and KLM on terms to be negotiated by the parties in good
faith. If the parties cannot resolve the terms of Continental's entrance into
such a joint venture, the terms of Continental's entrance would be determined by
arbitration in accordance with the alliance agreement's dispute resolution
procedures. Continental has not yet applied for such antitrust immunity and
neither Continental nor Northwest has sought to invoke the arbitration
provisions relating to its joint venture participation.
Continental also has domestic code-sharing agreements with America West
Airlines, Inc., Gulfstream International Airlines, Inc. ("Gulfstream"), Mesaba
Aviation, Inc., Hawaiian Airlines, Inc., Alaska Airlines, Inc., Horizon
Airlines, Inc., Champlain Enterprises, Inc. (CommutAir) and American Eagle
Airlines, Inc. Continental owns 28% of the common equity of Gulfstream.
INTERNATIONAL OPERATIONS
Continental directly serves destinations throughout Europe, Canada, Mexico,
Central and South America and the Caribbean as well as Tokyo, Hong Kong and Tel
Aviv and has extensive operations in the western Pacific conducted by CMI. As
measured by available seat miles for 2001, approximately 38% of Continental's
mainline jet operations, including CMI, were dedicated to international traffic.
As of January 31, 2002, the Company offered 119 weekly departures to 15 European
cities and marketed service to 34 other cities through code-sharing agreements.
Continental's Newark hub is a significant international gateway. From
Newark, at January 31, 2002 Continental served 15 European cities, five Canadian
cities, four Mexican cities, five Central American cities, four South American
cities, 11 Caribbean destinations, Tel Aviv, Hong Kong and Tokyo and marketed
numerous other destinations through code-sharing arrangements with foreign
carriers.
The Company's Houston hub is the focus of its operations in Mexico and
Central America. As of January 31, 2002, Continental flew from Houston to 20
cities in Mexico, every country in Central America, six cities in South America,
two Caribbean destinations, three cities in Canada, two cities in Europe and
Tokyo. In addition, Continental announced that it would begin daily non-stop
service between Houston and Montreal, Quebec effective June 1, 2002.
Continental flies to Montreal, Toronto and two Caribbean destinations from
its hub in Cleveland. In addition, Continental announced that it would resume
daily non-stop service between Cleveland and London Gatwick beginning on April
15, 2002.
CONTINENTAL MICRONESIA
CMI is a United States-certificated international air carrier transporting
passengers, cargo and mail in the western Pacific. From its hub operations based
on the island of Guam as of January 31, 2002, CMI provided
S-30
service to eight cities in Japan, more than any other United States carrier, as
well as other Pacific Rim destinations, including Taiwan, the Philippines, Hong
Kong, Australia and Indonesia.
CMI is the principal air carrier in the Micronesian Islands, where it
pioneered scheduled air service in 1968. CMI's route system is linked to the
United States market through Hong Kong, Tokyo and Honolulu, each of which CMI
serves non-stop from Guam. CMI and Continental also maintain a code-sharing
agreement and coordinate schedules on certain flights from the west coast of the
United States to Honolulu, and from Honolulu to Guam, to facilitate travel from
the United States into CMI's route system.
FOREIGN CARRIER ALLIANCES
Continental seeks to develop international alliance relationships that
complement Continental's own flying and permit expanded service through its hubs
to major international destinations. International alliances assist Continental
in the development of its route structure by enabling Continental to offer more
frequencies in a market, by providing passengers connecting service from
Continental's international flights to other destinations beyond an alliance
partner's hub, or by expanding the product line that Continental may offer in a
foreign destination.
In October 2001, Continental announced a cooperative marketing agreement
with KLM that includes extensive codesharing and reciprocal frequent flyer
program participation and airport lounge access. On December 1, 2001,
Continental placed its code on selected flights to more than 30 European
destinations operated by KLM and KLM Cityhopper beyond its Amsterdam hub, and
KLM placed its code on Continental's flights between New York and Amsterdam, as
well as on selected flights to U.S. destinations operated by us beyond
Continental's New York and Houston hubs. In addition, members of each carrier's
frequent flyer program are able to earn mileage anywhere on the other's global
route network, as well as the global network of Northwest Airlines. This
code-share agreement terminates on May 31, 2002, unless extended by the parties.
Continental has also implemented international code-sharing agreements with
Air Europa, Air China, Emirates (the flag carrier of the United Arab Emirates),
EVA Airways Corporation, an airline based in Taiwan, Virgin Atlantic Airways,
Societe Air France ("Air France"), and Compania Panamena de Aviacion, S.A.
("Copa"). Continental owns 49% of the common equity of Copa.
Certain of Continental's code-sharing agreements involve block-space
arrangements (under which carriers agree to share capacity and bear economic
risk for blocks of seats on certain routes). Continental and Air France purchase
blocks of seats on each other's flights between Houston and Newark and Paris.
Continental and Virgin exchange blocks of seats on each other's flights between
Newark and London, and Continental purchases blocks of seats on eight other
routes flown by Virgin between the United Kingdom and the United States.
Continental's codeshare agreement with Air France will terminate on March 31,
2002.
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DESCRIPTION OF THE POLICY PROVIDER
The information set forth in this section, including any financial
statements incorporated by reference herein, has been provided by Ambac
Assurance Corporation ("Ambac" or the "Policy Provider") for inclusion in this
Prospectus Supplement, and such information has not been independently verified
by Continental, the Underwriters, the Trustees, the Depositary or the Liquidity
Provider. Accordingly, notwithstanding anything to the contrary herein, none of
Continental, the Underwriters, the Trustees, the Depositary or the Liquidity
Provider assumes any responsibility for the accuracy, completeness or
applicability of such information.
Ambac is a Wisconsin-domiciled stock insurance corporation regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin and licensed
to do business in 50 states, the District of Columbia, the Commonwealth of
Puerto Rico and the Territory of Guam. Ambac primarily insures newly-issued
municipal and structured finance obligations. Ambac is a wholly-owned subsidiary
of Ambac Financial Group, Inc. (formerly AMBAC Inc.), a 100% publicly-held
company. Moody's, Standard & Poor's and Fitch, Inc. have each assigned a
triple-A financial strength rating to Ambac.
The following are hereby incorporated by reference into this Prospectus
Supplement and shall be deemed to be a part hereof: (i) the consolidated
financial statements of the Policy Provider and its subsidiaries as of December
31, 2000 and December 31, 1999, and for each of the years in the three-year
period ended December 31, 2000, prepared in accordance with accounting
principles generally accepted in the United States of America, included in the
Annual Report on Form 10-K of Ambac Financial Group, Inc. (which was filed with
the Commission on March 28, 2001, Commission File Number 1-10777), (ii) the
unaudited consolidated financial statements of the Policy Provider and its
subsidiaries as of March 31, 2001 and for the periods ending March 31, 2001 and
March 31, 2000 included in the Quarterly Report on Form 10-Q of Ambac Financial
Group, Inc. (which was filed with the Commission on May 15, 2001); (iii) the
unaudited consolidated financial statements of the Policy Provider and its
subsidiaries as of June 30, 2001 and for the periods ending June 30, 2001 and
June 30, 2000 included in the Quarterly Report on Form 10-Q of Ambac Financial
Group, Inc. (which was filed with the Commission on August 10, 2001); (iv) the
unaudited consolidated financial statements of the Policy Provider and its
subsidiaries as of September 30, 2001 for the periods ending September 30, 2001
and September 30, 2000 included in the Quarterly Report on Form 10-Q of Ambac
Financial Group, Inc. (which was filed with the Commission on November 14,
2001); and (v) the Current Reports on Form 8-K filed with the Commission on
January 24, 2001, March 19, 2001, July 23, 2001, September 17, 2001, September
19, 2001, October 22, 2001, December 4, 2001 and January 25, 2002, as such
reports relate to Ambac. Any statement contained in a document incorporated
herein by reference shall be modified or superseded for the purposes of this
Prospectus Supplement to the extent that a statement contained in this
Prospectus Supplement or in any other document subsequently filed with the
Commission that is also incorporated in this Prospectus Supplement 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 Supplement.
All documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, including any financial statements contained therein,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates, shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of those documents.
S-32
The following table sets forth the capitalization of Ambac as of December
31, 2001 (based on unaudited financial information), December 31, 2000 and
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CAPITALIZATION TABLE
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
Unearned premiums....................................... $1,790 $1,556 $1,442
Other liabilities....................................... 888 581 524
------ ------ ------
Total liabilities....................................... 2,678 2,137 1,966
------ ------ ------
Stockholder's equity:
Common stock............................................ 82 82 82
Additional paid-in capital.............................. 928 760 752
Accumulated other comprehensive income (loss)........... 81 82 (92)
Retained earnings....................................... 2,386 2,002 1,674
------ ------ ------
Total stockholder's equity.............................. 3,477 2,926 2,416
------ ------ ------
Total liabilities and stockholder's equity.............. $6,155 $5,063 $4,382
------ ------ ------
For additional financial information concerning Ambac and its subsidiaries,
see the audited financial statements of Ambac and its subsidiaries incorporated
by reference herein. Copies of the filings with the Commission relating to Ambac
incorporated in this Prospectus Supplement as described above, including the
financial statements of Ambac contained therein, and copies of Ambac's annual
statement for the year ended December 31, 2000 prepared in accordance with
statutory accounting standards are available, without charge, from Ambac. The
address of Ambac's administrative offices and its telephone number are One State
Street Plaza, New York, New York, 10004 and (212) 668-0340.
Ambac makes no representation regarding the Offered Certificates or the
advisability of investing in the Offered Certificates and makes no
representation regarding, nor has it participated in the preparation of, this
Prospectus Supplement other than the information supplied by Ambac and presented
under the heading "Description of the Policy Provider" and in the financial
statements of Ambac and the other filings by Ambac with the Commission
incorporated herein by reference.
S-33
DESCRIPTION OF THE CERTIFICATES
The following summary describes all material terms of the Offered
Certificates and supplements (or, to the extent inconsistent therewith,
replaces) the description of the general terms and provisions of the Offered
Certificates set forth in the Prospectus accompanying this Prospectus Supplement
(the "Prospectus"). The summary does not purport to be complete and is qualified
in its entirety by reference to all of the provisions of the Basic Agreement,
which was filed with the Securities and Exchange Commission (the "Commission")
as an exhibit to the Company's Current Report on Form 8-K dated September 25,
1997, and to all of the provisions of the Offered Certificates, the Trust
Supplements for the Offered Certificate Trusts, the Deposit Agreements, the
Escrow Agreements, the Intercreditor Agreement and the trust supplements
applicable to the Successor Trusts, each of which will be filed as an exhibit to
a Current Report on Form 8-K to be filed by Continental.
Except as otherwise indicated, the following summary relates to each of the
Offered Certificate Trusts and the Offered Certificates issued by each such
Trust. The terms and conditions governing each of the Offered Certificate Trusts
will be substantially the same, except as described under "--Subordination" and
"--Purchase Rights of Certificateholders" below and except that the principal
amount and scheduled principal repayments of the Equipment Notes held by each
Offered Certificate Trust and the interest rate and maturity date of the
Equipment Notes held by each Offered Certificate Trust will differ. The
references to Sections in parentheses in the following summary are to the
relevant Sections of the Basic Agreement unless otherwise indicated.
GENERAL
Each Pass Through Certificate (collectively, the "Certificates") will
represent a fractional undivided interest in one of four Continental Airlines
2002-1 Pass Through Trusts (the "Class G-1 Trust", the "Class G-2 Trust", the
"Class H Trust" and the "Class I Trust", collectively, the "Trusts"). The Class
G-1 Trust and the Class G-2 Trust are referred to, collectively, as the "Offered
Certificate Trusts". The Class H Trust and Class I Trust are referred to,
collectively, as the "Subordinated Certificate Trusts". The Trusts will be
formed pursuant to a pass through trust agreement between Continental and
Wilmington Trust Company, as trustee (the "Trustee"), dated as of September 25,
1997 (the "Basic Agreement"), and four separate supplements thereto (each, a
"Trust Supplement" and, together with the Basic Agreement, collectively, the
"Pass Through Trust Agreements") relating to such Trusts between Continental and
the Trustee, as trustee under each Trust. The Certificates to be issued by the
Class G-1 Trust, the Class G-2 Trust, the Class H Trust and the Class I Trust
are referred to herein, respectively, as the "Class G-1 Certificates", the
"Class G-2 Certificates", the "Class H Certificates" and the "Class I
Certificates". The Class G-1 Certificates and the Class G-2 Certificates are
referred to, collectively, as the "Offered Certificates". The Class H
Certificates and the Class I Certificates are referred to, collectively, as the
"Subordinated Certificates".
Each Certificate will represent a fractional undivided interest in the
Trust created by the Basic Agreement and the applicable Trust Supplement
pursuant to which such Certificate is issued. (Section 2.01) The Trust Property
of each Trust (the "Trust Property") will consist of:
- Subject to the Intercreditor Agreement, Equipment Notes acquired under
the Note Purchase Agreement and issued on a recourse basis by Continental
in a separate secured loan transaction in connection with the purchase by
Continental of each Aircraft during the Delivery Period.
- The rights of such Trust to acquire Equipment Notes under the Note
Purchase Agreement.
- In the case of each Offered Certificate Trust, the rights of such Trust
under the applicable Escrow Agreement to request the Escrow Agent to
withdraw from the Depositary funds sufficient to enable such Trust to
purchase Equipment Notes after the Issuance Date on the delivery of an
Aircraft during the Delivery Period.
- The rights of such Trust under the Intercreditor Agreement (including all
monies receivable in respect of such rights).
S-34
- In the case of each Offered Certificate Trust, all monies receivable
under the Liquidity Facilities for such Trust.
- In the case of each Offered Certificate Trust, all monies receivable
under the Policy for such Trust.
- Funds from time to time deposited with the Trustee in accounts relating
to such Trust.
The Offered Certificates will be issued in fully registered form only and
will be subject to the provisions described below under "--Book-Entry; Delivery
and Form". Offered Certificates will be issued only in minimum denominations of
$1,000 or integral multiples thereof, except that one Offered Certificate of
each Trust may be issued in a different denomination. (Section 3.01)
The Certificates represent interests in the respective Trusts, and all
payments and distributions thereon will be made only from the Trust Property of
the related Trust. (Section 3.09) The Certificates do not represent an interest
in or obligation of Continental, the Trustees or any of the Loan Trustees or any
affiliate of any thereof.
Pursuant to the Escrow Agreement applicable to each Offered Certificate
Trust, the Certificateholders of such Trust as holders of the Escrow Receipts
affixed to each Offered Certificate are entitled to certain rights with respect
to the Deposits relating to such Trust. Accordingly, any transfer of an Offered
Certificate will have the effect of transferring the corresponding rights with
respect to the Deposits, and rights with respect to the Deposits may not be
separately transferred by holders of the Offered Certificates (the
"Certificateholders"). Rights with respect to the Deposits and the Escrow
Agreement relating to an Offered Certificate Trust, except for the right to
request withdrawals for the purchase of Equipment Notes, will not constitute
Trust Property of such Trust.
ISSUANCE OF SUBORDINATED CERTIFICATES
Simultaneously with the issuance of the Offered Certificates, Continental
will privately place the Class H and I Certificates. Interest on the Series H
Equipment Notes will be based on LIBOR. Interest on the Series I Equipment Notes
will be a fixed rate. Interest on the Series H and I Equipment Notes will be
payable on February 15, May 15, August 15 and November 15. Principal on such
Equipment Notes would be payable on February 15 and August 15 in certain years.
Regular distribution dates for the Subordinated Certificates would be February
15, May 15, August 15 and November 15 of each year.
Continental may elect to redeem all of the Series H or Series I Equipment
Notes at any time, in any case, without redeeming the Equipment Notes held for
the Offered Certificate Trusts, so long as no Indenture Default or certain
payment or bankruptcy defaults exist under the relevant Indenture. Redemption of
the Series H Equipment Notes is subject to certain additional conditions,
including the requirement that Continental simultaneously issue new Series H
Equipment Notes having terms the same in all material respects as the redeemed
Series H Equipment Notes, except that the interest rate may be changed, the
maturity date may be extended and the principal amount may be increased. In
addition, any such new Series H Equipment Notes must be held by a pass through
trust subject to the same subordination provisions as are applicable to the
Class H Trust, and Continental must obtain confirmation from the Rating Agencies
that the redemption and issuance of the new Series H Equipment Notes will not
result in a withdrawal, suspension or downgrading of the ratings of the Class
G-1 or G-2 Certificates (without regard to the Policies). If the Series I
Equipment Notes are redeemed, new Series I Equipment Notes may not be issued.
There will be no escrow arrangement for the Subordinated Certificates
comparable to the Escrow Agreements. Instead, the holders of the Subordinated
Certificates will be required to provide funds to the Subordinated Certificate
Trusts when necessary to acquire Equipment Notes.
The Subordinated Certificate Trusts will not be entitled to the benefit of
a liquidity facility similar to the Liquidity Facilities or a policy similar to
the Policies.
Continental may also elect to issue Class J Certificates, subject to
certain conditions. See "--Possible Issuance of Class J Certificates".
S-35
SUBORDINATION
The subordination terms of the Certificates vary depending upon whether a
"Triggering Event" has occurred. "Triggering Event" means (x) the occurrence of
an Indenture Default under all Indentures resulting in a PTC Event of Default
with respect to the most senior Class of Certificates then outstanding, (y) the
acceleration of all of the outstanding Equipment Notes (provided that during the
Delivery Period the aggregate principal amount thereof exceeds $140 million) or
(z) certain bankruptcy or insolvency events involving Continental.
BEFORE A TRIGGERING EVENT
On each Regular Distribution Date or Special Distribution Date (each, a
"Distribution Date"), so long as no Triggering Event shall have occurred
(whether or not continuing), all payments received by the Subordination Agent in
respect of Equipment Notes and certain other payments under the related
Indenture will be distributed under the Intercreditor Agreement in the following
order:
- To the Primary Liquidity Providers to the extent required to pay the
Liquidity Expenses and to the Policy Provider to the extent required to
pay Policy Expenses.
- To the Primary Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations (as determined after giving effect
to certain payments by the Policy Provider to the Primary Liquidity
Providers) and to the Policy Provider to the extent required to pay
interest accrued on certain Policy Provider Obligations and, if the
Policy Provider has paid to the Primary Liquidity Providers all
outstanding drawings and interest thereon owing to the Primary Liquidity
Providers, to the Policy Provider to the extent required to reimburse the
Policy Provider for the amount of such payment made to the Primary
Liquidity Providers attributable to interest accrued on such drawings.
- To the Primary Liquidity Providers to the extent required to pay or
reimburse the Primary Liquidity Providers for certain Liquidity
Obligations (other than amounts payable pursuant to the two preceding
clauses and as determined after giving effect to certain payments by the
Policy Provider to the Primary Liquidity Providers), if applicable, to
replenish each Cash Collateral Account up to the Required Amount and, if
the Policy Provider has paid to the Primary Liquidity Providers all
outstanding drawings and interest thereon owing to the Primary Liquidity
Providers, to the Policy Provider to the extent required to reimburse the
Policy Provider for the amount of such payment made to the Primary
Liquidity Providers in respect of principal of drawings under the Primary
Liquidity Facilities.
- If applicable, to the extent necessary to replenish the Above-Cap
Collateral Account up to an amount equal to the Above-Cap Collateral
Amount as recalculated as of such date (less any amount then on deposit
in the Above-Cap Account).
- Except, subject to certain conditions, in the case of a Special
Distribution Date solely on account of the redemption of one or more
Series H Equipment Notes or Series I Equipment Notes, to the trustee for
the Class G-1 Trust (the "Class G-1 Trustee") and the trustee for the
Class G-2 Trust (the "Class G-2 Trustee") to the extent required to pay
Expected Distributions on the Class G-1 Certificates and the Class G-2
Certificates. If available funds are insufficient to pay an Expected
Distribution to each such Class in full, available funds will be
distributed to each of the Class G-1 Trustee and Class G-2 Trustee in the
same proportion as such Trustee's proportionate share of the aggregate
amount of such Expected Distributions.
- To the Policy Provider to the extent required to pay Policy Provider
Obligations (other than amounts payable pursuant to the first three
clauses above and any Excess Reimbursement Obligations).
- To the trustees for the Subordinated Certificate Trusts (the
"Subordinated Certificate Trustees") to the extent required to pay
Expected Distributions on the Subordinated Certificates (subject to
rankings of priority between the Subordinated Certificates).
- To the Policy Provider to the extent required to pay any Excess
Reimbursement Obligations.
S-36
- To the Subordination Agent and each Trustee for the payment of certain
fees and expenses.
- If applicable, to the extent necessary to replenish the Above-Cap
Collateral Account up to an amount equal to the Above-Cap Collateral
Amount as recalculated as of such date.
AFTER A TRIGGERING EVENT
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order:
- To the Subordination Agent, any Trustee, any Certificateholder, any
Primary Liquidity Provider and the Policy Provider to the extent required
to pay Administration Expenses.
- To the Primary Liquidity Providers to the extent required to pay the
Liquidity Expenses and to the Policy Provider to the extent required to
pay Policy Expenses.
- To the Primary Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations (as determined after giving effect
to certain payments by the Policy Provider to the Primary Liquidity
Providers) and to the Policy Provider to the extent required to pay
interest accrued on certain Policy Provider Obligations and, if the
Policy Provider has paid to the Primary Liquidity Providers all
outstanding drawings and interest thereon owing to the Primary Liquidity
Providers, to the Policy Provider to the extent required to reimburse the
Policy Provider for the amount of such payment made to the Primary
Liquidity Providers attributable to interest accrued on such drawings.
- To (i) the Primary Liquidity Providers to the extent required to pay the
outstanding amount of all Liquidity Obligations (as determined after
giving effect to certain payments by the Policy Provider to the Primary
Liquidity Providers), (ii) if applicable, with respect to any particular
Primary Liquidity Facility, unless (x) less than 65% of the aggregate
outstanding principal amount of all Equipment Notes are Performing
Equipment Notes and a Liquidity Event of Default shall have occurred and
is continuing under such Primary Liquidity Facility or (y) a Final
Drawing shall have occurred under such Primary Liquidity Facility, to
replenish the Cash Collateral Account with respect to such Primary
Liquidity Facility up to the Required Amount for the related Class of
Certificates (less the amount of any repayments of Interest Drawings
under such Primary Liquidity Facility while sub-clause (x) of this clause
is applicable) and (iii) if the Policy Provider has paid to the Primary
Liquidity Providers all outstanding drawings and interest thereon owing
to the Primary Liquidity Providers, to the Policy Provider to the extent
required to reimburse the Policy Provider for the amount of such payment
made to the Primary Liquidity Providers in respect of principal of
drawings under the Primary Liquidity Facilities.
- If applicable, unless (x) less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes
and a Liquidity Event of Default shall have occurred and is continuing
under the Primary Liquidity Facility for the Class G-1 Trust or (y) a
Final Drawing shall have occurred under such Primary Liquidity Facility,
to replenish the Above-Cap Collateral Account up to an amount equal to
the Above-Cap Collateral Amount as recalculated as of such date (less any
amount then on deposit in the Above-Cap Account).
- To the Subordination Agent, any Trustee or any Certificateholder to the
extent required to pay certain fees, taxes, charges and other amounts
payable.
- To the Class G-1 Trustee and the Class G-2 Trustee to the extent required
to pay Adjusted Expected Distributions on the Class G-1 Certificates and
the Class G-2 Certificates. If available funds are insufficient to pay an
Adjusted Expected Distribution to each such Class in full, available
funds will be distributed to each of the Class G-1 Trustee and Class G-2
Trustee in the same proportion as such Trustee's proportionate share of
the aggregate amount of such Adjusted Expected Distributions.
- To the Policy Provider to the extent required to pay Policy Provider
Obligations (other than amounts payable pursuant to the first four
clauses above and any Excess Reimbursement Obligations).
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- To the Subordinated Certificate Trustees to the extent required to pay
Adjusted Expected Distributions on the Subordinated Certificates (subject
to rankings of priority between the Subordinated Certificates).
- To the Policy Provider to the extent required to pay any Excess
Reimbursement Obligations.
- If applicable, unless (x) less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes
and a Liquidity Event of Default shall have occurred and is continuing
under the Primary Liquidity Facility for the Class G-1 Trust or (y) a
Final Drawing shall have occurred under such Primary Liquidity Facility,
to replenish the Above-Cap Collateral Account up to an amount equal to
the Above-Cap Collateral Amount as recalculated as of such date.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any Make-Whole
Premium or Break Amount paid on the Equipment Notes held in such Trust that has
not been distributed to the Certificateholders of such Trust (other than such
Make-Whole Premium or Break Amount or a portion thereof applied to the payment
of interest on the Certificates of such Trust or the reduction of the Pool
Balance of such Trust) shall be added to the amount of Expected Distributions or
Adjusted Expected Distributions.
Payments in respect of the Deposits relating to a Trust and monies drawn
under a Liquidity Facility or a Policy will not be subject to the subordination
provisions of the Intercreditor Agreement.
PAYMENTS AND DISTRIBUTIONS
Payments of interest on the Deposits with respect to each Offered
Certificate Trust and payments of principal, premium (if any), Break Amount (if
any) and interest on the Equipment Notes or with respect to other Trust Property
held in each Trust will be distributed by the Paying Agent (in the case of the
Deposits) or by the Trustee (in the case of Trust Property of such Trust) to
Certificateholders of such Trust on the date receipt of such payment is
confirmed, except in the case of certain types of Special Payments.
INTEREST
The Deposits held with respect to each Offered Certificate Trust and the
Equipment Notes held in each Offered Certificate Trust will accrue interest at
the applicable rate per annum for the Offered Certificates to be issued by such
Trust set forth on the cover page of this Prospectus Supplement (the "Stated
Interest Rates"), payable on February 15, May 15, August 15 and November 15 of
each year, commencing on May 15, 2002 (or, in the case of Equipment Notes issued
after such date, commencing with the first such date to occur after initial
issuance thereof). Such interest payments will be distributed to
Certificateholders of such Trust on each such date until the final Distribution
Date for such Trust, subject in the case of payments on the Equipment Notes to
the Intercreditor Agreement. Interest on the Series G-1 Equipment Notes is
calculated on the basis of the actual number of days elapsed over a 360-day
year. Interest on the Series G-2 Equipment Notes is calculated on the basis of a
360-day year consisting of twelve 30-day months.
Interest payable on the Deposits with respect to the Class G-1 Trust and
the Series G-1 Equipment Notes will be determined based on LIBOR. As promptly as
practicable after the determination of LIBOR for an Interest Period under the
Reference Agency Agreement, the Reference Agent will give notice of such
determination of LIBOR to Continental, the Trustees, the Loan Trustees, the
Subordination Agent, the Escrow Agent, the Depositary, the Primary Liquidity
Providers, the Above-Cap Liquidity Provider and the Policy Provider.
Certificateholders may obtain such information from the Trustee or otherwise in
the statements included with each distribution of a Scheduled Payment or Special
Payment.
Payments of interest applicable to the Offered Certificates to be issued by
each of the Offered Certificate Trusts will be supported by a separate Primary
Liquidity Facility and, in the case of the Class G-1 Certificates, an Above-Cap
Liquidity Facility to be provided by the applicable Liquidity Provider for the
benefit of the holders of such Offered Certificates. Each such Primary Liquidity
Facility, together in the case of the Class G-1 Trust with the Above-Cap
Liquidity Facility, is expected to provide an amount sufficient to pay interest
on the Offered Certificates of the related Offered Certificate Trust at the
Stated Interest Rate for such
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Trust on up to six successive Regular Distribution Dates (without regard to any
future payments of principal on such Offered Certificates), except that no
Liquidity Facility will cover interest payable by the Depositary on the
Deposits. The Liquidity Facilities for any Class of Offered Certificates do not
provide for drawings or payments thereunder to pay for principal of or Break
Amount or premium on the Certificates of such Class, any interest on the
Certificates of such Class in excess of the Stated Interest Rates, or,
notwithstanding the subordination provisions of the Intercreditor Agreement,
principal of or interest, premium or Break Amount on the Certificates of any
other Class. Therefore, only the holders of the Offered Certificates to be
issued by a particular Trust will be entitled to receive and retain the proceeds
of drawings under the Primary Liquidity Facility for such Trust and, in the case
of the Class G-1 Trust, withdrawals from the Above-Cap Account. See "Description
of the Liquidity Facilities".
Except in specified circumstances, after use of any available funds under
the Primary Liquidity Facility for any Class of Offered Certificates, the Cash
Collateral Account for such Class of Offered Certificates and, in the case of
the Class G-1 Certificates, the Above-Cap Account, the payment of interest at
the Stated Interest Rate on such Certificates will be supported by the Policy
for such Class provided by the Policy Provider. See "Description of the Policies
and the Policy Provider Agreement--The Policies."
PRINCIPAL
Payments of principal of the Series G-1 Equipment Notes are scheduled to be
received by the Trustee on February 15 and August 15 in certain years, depending
upon the terms of the Equipment Notes held in such Trust. The entire principal
amount of the Series G-2 Equipment Notes is scheduled for payment on February
15, 2012.
Scheduled payments of interest on the Deposits and of interest or principal
on the Equipment Notes are herein referred to as "Scheduled Payments", and
February 15, May 15, August 15 and November 15 of each year are herein referred
to as "Regular Distribution Dates". See "Description of the Equipment
Notes--Principal and Interest Payments". The "Final Maturity Date" for the Class
G-1 Certificates is February 15, 2013, and for the Class G-2 Certificates is
August 15, 2013.
Payment of principal of the Class G-1 and Class G-2 Certificates on the
Final Maturity Date and, in certain limited circumstances, earlier will be
supported by the Policy for such Class provided by the Policy Provider. See
"Description of the Policies and the Policy Provider Agreement--The Policies".
DISTRIBUTIONS
The Paying Agent with respect to each Escrow Agreement will distribute on
each Regular Distribution Date to the Certificateholders of the Offered
Certificate Trust to which such Escrow Agreement relates all Scheduled Payments
received in respect of the related Deposits, the receipt of which is confirmed
by the Paying Agent on such Regular Distribution Date. The Trustee of each
Offered Certificate Trust will distribute, subject to the Intercreditor
Agreement, on each Regular Distribution Date to the Certificateholders of such
Trust all Scheduled Payments received in respect of Equipment Notes held on
behalf of such Trust, the receipt of which is confirmed by the Trustee on such
Regular Distribution Date. Each Certificateholder of each Offered Certificate
Trust will be entitled to receive its proportionate share, based upon its
fractional interest in such Trust, of any distribution in respect of Scheduled
Payments of interest on the Deposits relating to such Trust and, subject to the
Intercreditor Agreement, of principal or interest on Equipment Notes held on
behalf of such Trust. Each such distribution of Scheduled Payments will be made
by the applicable Paying Agent or Trustee to the Certificateholders of record of
the relevant Trust on the record date applicable to such Scheduled Payment
subject to certain exceptions. (Sections 4.01 and 4.02; Escrow Agreements,
Section 2.03) If a Scheduled Payment is not received by the applicable Paying
Agent or Trustee on a Regular Distribution Date but is received within five days
thereafter, it will be distributed on the date received to such holders of
record. If it is received after such five-day period, it will be treated as a
Special Payment and distributed as described below.
Any payment in respect of, or any proceeds of, any Equipment Note or
Collateral under (and as defined in) any Indenture other than a Scheduled
Payment (each, a "Special Payment") will be distributed on, in the
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case of an early redemption of any Equipment Note, the date of such early
redemption (which shall be a Business Day), and otherwise on the Business Day
specified for distribution of such Special Payment pursuant to a notice
delivered by each Trustee as soon as practicable after the Trustee has received
funds for such Special Payment (each, a "Special Distribution Date"). Any such
distribution will be subject to the Intercreditor Agreement. Any unused Deposits
to be distributed after the Delivery Period Termination Date or the occurrence
of a Triggering Event, together with accrued and unpaid interest thereon (each,
also a "Special Payment"), will be distributed on a date 25 days after the
Paying Agent has received notice of the event requiring such distribution (also,
a "Special Distribution Date"). However, if such date is within ten days before
or after a Regular Distribution Date, such Special Payment shall be made on such
Regular Distribution Date.
Each Paying Agent, in the case of the Deposits, and each Trustee, in the
case of Trust Property, will mail a notice to the Certificateholders of the
applicable Offered Certificate Trust stating the scheduled Special Distribution
Date, the related record date, the amount of the Special Payment and the reason
for the Special Payment. In the case of a redemption or purchase of the
Equipment Notes held in the related Trust or any distribution of unused Deposits
after the Delivery Period Termination Date or the occurrence of a Triggering
Event, such notice will be mailed not less than 15 days prior to the date such
Special Payment is scheduled to be distributed, and in the case of any other
Special Payment, such notice will be mailed as soon as practicable after the
Trustee has confirmed that it has received funds for such Special Payment.
(Section 4.02(c); Trust Supplements, Section 3.01; Escrow Agreements, Sections
2.03 and 2.06) Each distribution of a Special Payment, other than a final
distribution, on a Special Distribution Date for any Offered Certificate Trust
will be made by the Paying Agent or the Trustee, as applicable, to the
Certificateholders of record of such Trust on the record date applicable to such
Special Payment. (Section 4.02(b); Escrow Agreements, Section 2.03) See
"--Indenture Defaults and Certain Rights Upon an Indenture Default" and
"Description of the Equipment Notes--Redemption".
Each Pass Through Trust Agreement requires that the Trustee establish and
maintain, for the related Trust and for the benefit of the Certificateholders of
such Trust, one or more non-interest bearing accounts (the "Certificate
Account") for the deposit of payments representing Scheduled Payments received
by such Trustee. Each Pass Through Trust Agreement requires that the Trustee
establish and maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more accounts (the "Special Payments
Account") for the deposit of payments representing Special Payments received by
such Trustee, which shall be non-interest bearing except in certain
circumstances where the Trustee may invest amounts in such account in certain
permitted investments. Pursuant to the terms of each Pass Through Trust
Agreement, the Trustee is required to deposit any Scheduled Payments relating to
the applicable Trust received by it in the Certificate Account of such Trust and
to deposit any Special Payments so received by it in the Special Payments
Account of such Trust. (Section 4.01; Trust Supplements, Section 3.01) All
amounts so deposited will be distributed by the Trustee on a Regular
Distribution Date or a Special Distribution Date, as appropriate. (Section 4.02;
Trust Supplements, Section 3.01)
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the Receiptholders, one or more accounts (the
"Paying Agent Account"), which shall be non-interest bearing. Pursuant to the
terms of the Escrow Agreements, the Paying Agent is required to deposit interest
on Deposits relating to an Offered Certificate Trust and any unused Deposits
withdrawn by the Escrow Agent in the related Paying Agent Account. All amounts
so deposited will be distributed by the Paying Agent on a Regular Distribution
Date or Special Distribution Date, as appropriate.
The final distribution for each Trust will be made only upon presentation
and surrender of the Certificates for such Trust at the office or agency of the
Trustee specified in the notice given by the Trustee of such final distribution.
The Trustee will mail such notice of the final distribution to the
Certificateholders of such Trust, specifying the date set for such final
distribution and the amount of such distribution. (Trust Supplements, Section
7.01) See "--Termination of the Trusts" below. Distributions in respect of
Certificates issued in global form will be made as described in "--Book Entry;
Delivery and Form" below.
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If any Distribution Date is a Saturday, Sunday or other day on which
commercial banks are authorized or required to close in New York, New York,
Houston, Texas, or Wilmington, Delaware, or, if any Series G-1 or Series H
Equipment Note is outstanding, which is not a day for trading by and between
banks in the London interbank Eurodollar market (any other day being a "Business
Day"), distributions scheduled to be made on such Regular Distribution Date or
Special Distribution Date will be made on the next succeeding Business Day, and
interest shall be added for such additional period in the case of the Class G-1
Certificates but not in the case of the Class G-2 Certificates.
POOL FACTORS
The "Pool Balance" for each Trust or for the Certificates issued by any
Trust indicates, as of any date, the original aggregate face amount of the
Certificates of such Trust (or, in the case of the Class H Trust and the Class I
Trust, the original aggregate principal amount of the Equipment Notes purchased
by such Trust on or prior to such date) less the aggregate amount of all
payments made in respect of the Certificates of such Trust or in respect of
Deposits relating to such Trust other than payments made in respect of interest,
Break Amount, Deposit Break Amount, Deposit Make-Whole Premium or premium or
reimbursement of any costs or expenses incurred in connection therewith. The
Pool Balance for each Trust or for the Certificates issued by any Trust as of
any Distribution Date shall be computed after giving effect to any special
distribution with respect to unused Deposits, payment of principal of the
Equipment Notes, any payment under the Policy (other than in respect of interest
on the Certificates) or payment with respect to other Trust Property held in
such Trust and the distribution thereof to be made on that date. (Trust
Supplements, Section 2.01)
The "Pool Factor" for each Trust as of any Distribution Date is the
quotient (rounded to the seventh decimal place) computed by dividing (i) the
Pool Balance by (ii) the original aggregate face amount of the Certificates of
such Trust. The Pool Factor for each Trust or for the Certificates issued by any
Trust as of any Distribution Date shall be computed after giving effect to any
special distribution with respect to unused Deposits, payment of principal of
the Equipment Notes, payment under the Policy (other than in respect of interest
on the Certificates) or payment with respect to other Trust Property held in
such Trust and the distribution thereof to be made on that date. (Trust
Supplements, Section 2.01) The Pool Factor for each Offered Certificate Trust
will be 1.0000000 on the date of issuance of the Offered Certificates;
thereafter, the Pool Factor for each Offered Certificate Trust will decline as
described herein to reflect reductions in the Pool Balance of such Trust.
Because there is no escrow arrangement for the Class H Trust, the Pool Factor
for such Trust will be lower than 1.0000000 on the date of issuance of the Class
H Certificates. Thereafter, the Pool Factor for the Class H Trust will increase
to reflect increases in the Pool Balance of the Class H Trust due to the
purchase by such Trust of Series H Equipment Notes and decrease as described
herein to reflect reductions in the Pool Balance of such Trust. The amount of a
Certificateholder's pro rata share of the Pool Balance of a Trust can be
determined by multiplying the par value of the holder's Certificate of such
Trust by the Pool Factor for such Trust as of the applicable Distribution Date.
Notice of the Pool Factor and the Pool Balance for each Offered Certificate
Trust will be mailed to Certificateholders of such Trust on each Distribution
Date. (Trust Supplements, Section 3.02)
The following table sets forth an illustrative aggregate principal
amortization schedule for the Equipment Notes held in the Class G-1 Trust, the
Class G-2 Trust and the Class H Trust (the "Assumed Amortization Schedule") and
resulting Pool Factors with respect to such Trust. For purposes of the expected
Pool Factors for Class H set forth in the following table, we have assumed that
all the Aircraft will be delivered and the corresponding Series H Equipment
Notes issued on or prior to August 15, 2002. The actual aggregate principal
amortization schedule applicable to the Class G-1 Trust or the Class H Trust and
the resulting Pool Factors with respect to such Trust may differ from those set
forth below, since the amortization schedule for the Series G-1 or Series H
Equipment Notes issued with respect to an Aircraft may vary from such
illustrative amortization schedule if an Aircraft is delivered later than
currently scheduled. In the case of the Class G-2 Trust, the scheduled date for
payment of principal of the applicable Equipment Notes may not be changed under
the Mandatory Economic Terms. However, the scheduled distribution of principal
payments for any Trust would be affected if any Equipment Notes held in such
Trust are redeemed or purchased or if a default
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in payment on such Equipment Notes occurred. Accordingly, the aggregate
principal amortization schedule applicable to a Trust and the resulting Pool
Factors may differ from those set forth in the following table.
CLASS G-1 CLASS G-2 CLASS H
-------------------------- --------------------------- --------------------------
SCHEDULED EXPECTED SCHEDULED EXPECTED SCHEDULED EXPECTED
PRINCIPAL POOL PRINCIPAL POOL PRINCIPAL POOL
DATE PAYMENTS FACTOR PAYMENTS FACTOR PAYMENTS FACTOR
---- -------------- --------- --------------- --------- -------------- ---------
May 15, 2002 ........ $ 0.00 1.0000000 $ 0.00 1.0000000 $ 0.00 Omitted*
August 15, 2002...... 0.00 1.0000000 0.00 1.0000000 0.00 1.0000000
November 15, 2002.... 0.00 1.0000000 0.00 1.0000000 0.00 1.0000000
February 15, 2003.... 10,077,000.00 0.9251582 0.00 1.0000000 2,000,000.00 0.9862858
May 15, 2003......... 0.00 0.9251582 0.00 1.0000000 0.00 0.9862858
August 15, 2003...... 6,242,000.00 0.8787989 0.00 1.0000000 5,000,000.00 0.9520002
November 15, 2003.... 0.00 0.8787989 0.00 1.0000000 0.00 0.9520002
February 15, 2004.... 6,874,000.00 0.8277458 0.00 1.0000000 7,000,000.00 0.9040004
May 15, 2004......... 0.00 0.8277458 0.00 1.0000000 0.00 0.9040004
August 15, 2004...... 9,106,000.00 0.7601156 0.00 1.0000000 9,000,000.00 0.8422864
November 15, 2004.... 0.00 0.7601156 0.00 1.0000000 0.00 0.8422864
February 15, 2005.... 6,670,000.00 0.7105775 0.00 1.0000000 10,000,000.00 0.7737153
May 15, 2005......... 0.00 0.7105775 0.00 1.0000000 0.00 0.7737153
August 15, 2005...... 8,971,000.00 0.6439500 0.00 1.0000000 9,000,000.00 0.7120013
November 15, 2005.... 0.00 0.6439500 0.00 1.0000000 0.00 0.7120013
February 15, 2006.... 6,466,000.00 0.5959270 0.00 1.0000000 8,000,000.00 0.6571444
May 15, 2006......... 0.00 0.5959270 0.00 1.0000000 0.00 0.6571444
August 15, 2006...... 8,834,000.00 0.5303170 0.00 1.0000000 7,000,000.00 0.6091446
November 15, 2006.... 0.00 0.5303170 0.00 1.0000000 0.00 0.6091446
February 15, 2007.... 6,262,000.00 0.4838092 0.00 1.0000000 88,834,000.00 0.0000000
May 15, 2007......... 0.00 0.4838092 0.00 1.0000000 0.00 0.0000000
August 15, 2007...... 8,698,000.00 0.4192092 0.00 1.0000000 0.00 0.0000000
November 15, 2007.... 0.00 0.4192092 0.00 1.0000000 0.00 0.0000000
February 15, 2008.... 6,059,000.00 0.3742090 0.00 1.0000000 0.00 0.0000000
May 15, 2008......... 0.00 0.3742090 0.00 1.0000000 0.00 0.0000000
August 15, 2008...... 8,562,000.00 0.3106191 0.00 1.0000000 0.00 0.0000000
November 15, 2008.... 0.00 0.3106191 0.00 1.0000000 0.00 0.0000000
February 15, 2009.... 5,855,000.00 0.2671341 0.00 1.0000000 0.00 0.0000000
May 15, 2009......... 0.00 0.2671341 0.00 1.0000000 0.00 0.0000000
August 15, 2009...... 8,426,000.00 0.2045542 0.00 1.0000000 0.00 0.0000000
November 15, 2009.... 0.00 0.2045542 0.00 1.0000000 0.00 0.0000000
February 15, 2010.... 5,651,000.00 0.1625843 0.00 1.0000000 0.00 0.0000000
May 15, 2010......... 0.00 0.1625843 0.00 1.0000000 0.00 0.0000000
August 15, 2010...... 8,290,000.00 0.1010145 0.00 1.0000000 0.00 0.0000000
November 15, 2010.... 0.00 0.1010145 0.00 1.0000000 0.00 0.0000000
February 15, 2011.... 5,447,000.00 0.0605597 0.00 1.0000000 0.00 0.0000000
May 15, 2011......... 0.00 0.0605597 0.00 1.0000000 0.00 0.0000000
August 15, 2011...... 8,154,000.00 0.0000000 0.00 1.0000000 0.00 0.0000000
November 15, 2011.... 0.00 0.0000000 0.00 1.0000000 0.00 0.0000000
February 15, 2012.... 0.00 0.0000000 194,522,000.00 0.0000000 0.00 0.0000000
---------------
* Omitted as not comparable, since the Pool Factor for the Class H Trust does
not reflect the full principal amount of Series H Equipment Notes expected to
be purchased until all Aircraft have been financed.
The Pool Factor and Pool Balance of each Trust will be recomputed if there
has been an early redemption, purchase or default in the payment of principal or
interest in respect of one or more of the Equipment Notes held in a Trust, as
described in "--Indenture Defaults and Certain Rights Upon an Indenture Default"
and "Description of the Equipment Notes--Redemption", or a special distribution
attributable to unused Deposits after the Delivery Period Termination Date or
the occurrence of a Triggering Event, as described in "Description of the
Deposit Agreements". If the principal payments scheduled for a Regular
Distribution Date prior to the Delivery Period Termination Date are changed,
notice thereof will be mailed to the Certificateholders by no later than the
15th day prior to such Regular Distribution Date. In the event of (i) any other
change in the scheduled repayments from the Assumed Amortization Schedule or
(ii) any such redemption, purchase, default or special distribution, the Pool
Factors and the Pool Balances of
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each Trust so affected will be recomputed after giving effect thereto and notice
thereof will be mailed to the Certificateholders of such Trust promptly after
the Delivery Period Termination Date in the case of clause (i) and promptly
after the occurrence of any event described in clause (ii).
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the applicable Paying Agent and Trustee of the
Offered Certificate Trusts will include with each distribution by it of a
Scheduled Payment or Special Payment to Certificateholders of the related Trust
a statement setting forth the following information (per $1,000 aggregate
principal amount of Certificate for such Trust, except as to the amounts
described in items (a), (f) and (g) below):
(a) The aggregate amount of funds distributed on such Distribution
Date under the Pass Through Trust Agreement and under the Escrow Agreement,
indicating the amount allocable to each source, including any portion
thereof paid by the Primary Liquidity Provider or the Policy Provider or
withdrawn from the Above-Cap Account.
(b) The amount of such distribution under the Pass Through Trust
Agreement allocable to principal and the amount allocable to premium and
Break Amount, if any.
(c) The amount of such distribution under the Pass Through Trust
Agreement allocable to interest.
(d) The amount of such distribution under the Escrow Agreement
allocable to interest.
(e) The amount of such distribution under the Escrow Agreement
allocable to unused Deposits, if any.
(f) The Pool Balance and the Pool Factor for such Trust.
(g) In the case of the Class G-1 Trust, the LIBOR rates for the
current and immediately preceding Interest Periods, as determined by the
Reference Agent. (Trust Supplements, Section 3.01(a))
So long as the Offered Certificates are registered in the name of DTC or
its nominee, on the record date prior to each Distribution Date, the applicable
Trustee will request from DTC a securities position listing setting forth the
names of all DTC Participants reflected on DTC's books as holding interests in
the Offered Certificates on such record date. On each Distribution Date, the
applicable Paying Agent and Trustee will mail to each such DTC Participant the
statement described above and will make available additional copies as requested
by such DTC Participant for forwarding to Certificate Owners. (Trust
Supplements, Section 3.01(a))
In addition, after the end of each calendar year, the applicable Trustee
and Paying Agent will furnish to each Certificateholder of each Offered
Certificate Trust at any time during the preceding calendar year a report
containing the sum of the amounts determined pursuant to clauses (a), (b), (c),
(d) and (e) above with respect to the Trust for such calendar year or, in the
event such person was a Certificateholder during only a portion of such calendar
year, for the applicable portion of such calendar year, and such other items as
are readily available to such Trustee and which a Certificateholder shall
reasonably request as necessary for the purpose of such Certificateholder's
preparation of its U.S. federal income tax returns. (Trust Supplements, Section
3.01(b)) Such report and such other items shall be prepared on the basis of
information supplied to the applicable Trustee by the DTC Participants and shall
be delivered by such Trustee to such DTC Participants to be available for
forwarding by such DTC Participants to Certificate Owners in the manner
described above. (Trust Supplements, Section 3.01(b)) At such time, if any, as
the Offered Certificates are issued in the form of definitive certificates, the
applicable Paying Agent and Trustee will prepare and deliver the information
described above to each Certificateholder of record of each Offered Certificate
Trust as the name and period of ownership of such Certificateholder appears on
the records of the registrar of the Certificates.
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INDENTURE DEFAULTS AND CERTAIN RIGHTS UPON AN INDENTURE DEFAULT
Since the Equipment Notes issued under an Indenture will be held in more
than one Trust, a continuing event of default under such Indenture (an
"Indenture Default") would affect the Equipment Notes held by each such Trust.
There are no cross-default provisions in the Indentures. Consequently, events
resulting in an Indenture Default under any particular Indenture may or may not
result in an Indenture Default under any other Indenture. If an Indenture
Default occurs in fewer than all of the Indentures, notwithstanding the
treatment of Equipment Notes issued under any Indenture under which an Indenture
Default has occurred, payments of principal and interest on all of the Equipment
Notes will continue to be distributed to the holders of the Certificates as
originally scheduled, subject to the Intercreditor Agreement. See "Description
of the Intercreditor Agreement--Priority of Distributions".
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential conflict of interest upon an
Indenture Default. In such event, each Trustee has indicated that it would
resign as Trustee of one or all such Trusts, and a successor trustee would be
appointed in accordance with the terms of the applicable Pass Through Trust
Agreement. Wilmington Trust Company will be the initial Trustee under each
Trust.
Upon the occurrence and continuation of an Indenture Default, the
Controlling Party will direct the Indenture Trustee under such Indenture in the
exercise of remedies thereunder and may accelerate and sell all (but not less
than all) of the Equipment Notes issued under such Indenture to any person,
subject to certain limitations. See "Description of the Intercreditor
Agreement--Intercreditor Rights--Sale of Equipment Notes or Aircraft". The
proceeds of such sale will be distributed pursuant to the provisions of the
Intercreditor Agreement. Any such proceeds so distributed to any Trustee upon
any such sale shall be deposited in the applicable Special Payments Account and
shall be distributed to the Certificateholders of the applicable Trust on a
Special Distribution Date. (Sections 4.01 and 4.02) The market for Equipment
Notes at the time of the existence of an Indenture Default may be very limited
and there can be no assurance as to the price at which they could be sold. If
any such Equipment Notes held in the Offered Certificate Trusts are sold for
less than their outstanding principal amount, the holders of the Offered
Certificates, absent payments under the related Policy, would receive a smaller
amount of principal distributions than anticipated and would not have any claim
for the shortfall against Continental, any Liquidity Provider or any Trustee.
Any amount, other than Scheduled Payments received on a Regular
Distribution Date or within five days thereafter, distributed to the Trustee of
any Offered Certificate Trust by the Subordination Agent on account of any
Equipment Note or Collateral under (and as defined in) any Indenture held in
such Trust following an Indenture Default will be deposited in the Special
Payments Account for such Trust and will be distributed to the
Certificateholders of such Trust on a Special Distribution Date. (Sections 4.01
and 4.02; Trust Supplements, Section 3.01)
Any funds representing payments received with respect to any defaulted
Equipment Notes, or the proceeds from the sale of any Equipment Notes, held by
the Trustee in the Special Payments Account for such Trust will, to the extent
practicable, be invested and reinvested by such Trustee in certain permitted
investments pending the distribution of such funds on a Special Distribution
Date. (Section 4.04) Such permitted investments are defined as obligations of
the United States or agencies or instrumentalities thereof for the payment of
which the full faith and credit of the United States is pledged and which mature
in not more than 60 days or such lesser time as is required for the distribution
of any such funds on a Special Distribution Date. (Section 1.01)
Each Pass Through Trust Agreement for an Offered Certificate Trust provides
that the applicable Trustee will, within 90 days after the occurrence of any
default known to the Trustee, give to the Certificateholders of such Trust
notice, transmitted by mail, of such uncured or unwaived default with respect to
such Trust known to it, provided that, except in the case of default in a
payment of principal, premium, if any, Break Amount, if any, or interest on any
of the Equipment Notes held in such Trust, the applicable Trustee will be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interests of such Certificateholders.
(Section 7.02) The term "default" as used in this paragraph only with respect to
any Offered Certificate Trust means the occurrence of an Indenture Default
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under any Indenture pursuant to which Equipment Notes held by such Trust were
issued, as described above, except that in determining whether any such
Indenture Default has occurred, any grace period or notice in connection
therewith will be disregarded.
Each Pass Through Trust Agreement for an Offered Certificate Trust contains
a provision entitling the applicable Trustee, subject to the duty of such
Trustee during a default to act with the required standard of care, to be
offered reasonable security or indemnity by the holders of the Certificates of
such Trust before proceeding to exercise any right or power under such Pass
Through Trust Agreement at the request of such Certificateholders. (Section
7.03(e))
Subject to certain qualifications set forth in each Pass Through Trust
Agreement for an Offered Certificate Trust and to the Intercreditor Agreement,
the Certificateholders of each Offered Certificate Trust holding Certificates
evidencing fractional undivided interests aggregating not less than a majority
in interest in such Trust shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee with
respect to such Trust or pursuant to the terms of the Intercreditor Agreement,
or exercising any trust or power conferred on such Trustee under such Pass
Through Trust Agreement or the Intercreditor Agreement, including any right of
such Trustee as Controlling Party under the Intercreditor Agreement or as holder
of the Equipment Notes. (Section 6.04)
In certain cases, the holders of the Certificates of an Offered Certificate
Trust evidencing fractional undivided interests aggregating not less than a
majority in interest of such Trust may on behalf of the holders of all the
Certificates of such Trust waive any past "event of default" under such Trust
(i.e., any Indenture Default under any Indenture pursuant to which Equipment
Notes held by such Trust were issued) and its consequences or, if the Trustee of
such Trust is the Controlling Party, may direct the Trustee to instruct the
applicable Loan Trustee to waive any past Indenture Default and its
consequences, except (i) a default in the deposit of any Scheduled Payment or
Special Payment or in the distribution thereof, (ii) a default in payment of the
principal, premium or Break Amount, if any, or interest with respect to any of
the Equipment Notes and (iii) a default in respect of any covenant or provision
of the Pass Through Trust Agreement that cannot be modified or amended without
the consent of each Certificateholder of such Trust affected thereby. (Section
6.05) Each Indenture will provide that, with certain exceptions, the holders of
the majority in aggregate unpaid principal amount of the Equipment Notes issued
thereunder may on behalf of all such holders waive any past default or Indenture
Default thereunder. Notwithstanding such provisions of the Indentures, pursuant
to the Intercreditor Agreement only the Controlling Party will be entitled to
waive any such past default or Indenture Default.
PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event, with
ten days' written notice to the Trustee and each Certificateholder of the same
Class:
- If the Class G-1 or Class G-2 Certificateholders are then represented by
the Controlling Party, the Certificateholders of such other Class will
have the right to purchase all of such Class of Certificates represented
by the Controlling Party.
- The Subordinated Certificateholders will have the right to purchase all
of the Class G-1 and Class G-2 Certificates (subject to certain purchase
rights between the Subordinated Certificateholders).
- Whether or not any Class of Certificateholders has purchased or elected
to purchase the Class G-1 or Class G-2 Certificates, the Policy Provider
(except in the event of a Policy Provider Default) shall have the right
to purchase all of the Class G-1 and Class G-2 Certificates if it is the
Controlling Party and 180 days have elapsed since the occurrence of a
Triggering Event that is continuing.
In each case the purchase price will be equal to the Pool Balance of the
relevant Class or Classes of Certificates plus accrued and unpaid interest
thereon to the date of purchase, without premium, but including any other
amounts then due and payable to the Certificateholders of such Class or Classes.
Such purchase right may be exercised by any Certificateholder of the Class or
Classes entitled to such right. In each case, if prior to the end of the ten-day
notice period, any other Certificateholder of the same Class notifies the
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purchasing Certificateholder that the other Certificateholder wants to
participate in such purchase, then such other Certificateholder may join with
the purchasing Certificateholder to purchase the Certificates pro rata based on
the interest in the Trust held by each Certificateholder. If Continental or any
of its Affiliates is a Certificateholder, it will not have the purchase rights
described above. (Trust Supplements, Section 4.01)
PTC EVENT OF DEFAULT
A Pass Through Certificate Event of Default (a "PTC Event of Default")
under each Pass Through Trust Agreement means the failure to pay:
- The outstanding Pool Balance of the applicable Class of Certificates
within ten Business Days of the Final Maturity Date for such Class
(unless, in the case of the Class G-1 or G-2 Certificates, the
Subordination Agent shall have made a drawing under the applicable Policy
in an aggregate amount sufficient to pay such outstanding Pool Balance
and shall have distributed such amount to the Trustee entitled thereto).
- Interest due on such Class of Certificates within ten Business Days of
any Distribution Date (unless the Subordination Agent shall have made
Interest Drawings, withdrawals from the Cash Collateral Account,
withdrawals from the Above-Cap Account or drawings under the Policy for
such Class of Certificates, with respect thereto in an aggregate amount
sufficient to pay such interest and shall have distributed such amount to
the Trustee entitled thereto). (Section 1.01)
Any failure to make expected principal distributions with respect to any
Class of Certificates on any Regular Distribution Date (other than the Final
Maturity Date) will not constitute a PTC Event of Default with respect to such
Certificates. A PTC Event of Default with respect to the most senior outstanding
Class of Certificates resulting from an Indenture Default under all Indentures
will constitute a Triggering Event. See "Description of the Intercreditor
Agreement--Priority of Distributions" for a discussion of the consequences of
the occurrence of a Triggering Event.
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Continental will be prohibited from consolidating with or merging into any
other corporation or transferring substantially all of its assets as an entirety
to any other corporation unless:
- The surviving successor or transferee corporation shall be validly
existing under the laws of the United States or any state thereof or the
District of Columbia.
- The surviving successor or transferee corporation shall be a "citizen of
the United States" (as defined in Title 49 of the United States Code
relating to aviation (the "Transportation Code")) holding an air carrier
operating certificate issued pursuant to Chapter 447 of Title 49, United
States Code, if, and so long as, such status is a condition of
entitlement to the benefits of Section 1110 of the Bankruptcy Code.
- The surviving successor or transferee corporation shall expressly assume
all of the obligations of Continental contained in the Basic Agreement
and any Trust Supplement, the Note Purchase Agreement, the Indentures,
the Participation Agreements and any other operative documents.
- Continental shall have delivered a certificate and an opinion or opinions
of counsel indicating that such transaction, in effect, complies with
such conditions.
In addition, after giving effect to such transaction, no Indenture Default
shall have occurred and be continuing. (Section 5.02; Indentures, Section 4.07)
The Basic Agreement, the Trust Supplements, the Note Purchase Agreement,
the Indentures and the Participation Agreements will not contain any covenants
or provisions which may afford the applicable Trustee or Certificateholders
protection in the event of a highly leveraged transaction, including
transactions effected by management or affiliates, which may or may not result
in a change in control of Continental.
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MODIFICATIONS OF THE PASS THROUGH TRUST AGREEMENTS AND CERTAIN OTHER AGREEMENTS
Each Pass Through Trust Agreement with respect to the Offered Certificates
contains provisions permitting, at the request of the Company, the execution of
amendments or supplements to such Pass Through Trust Agreement or, if
applicable, to the Deposit Agreements, the Escrow Agreements, the Intercreditor
Agreement, the Note Purchase Agreement, the Liquidity Facilities, the Policies
or the Policy Provider Agreement, without the consent of the holders of any of
the Certificates of such Trust:
- To evidence the succession of another corporation to Continental and the
assumption by such corporation of Continental's obligations under such
Pass Through Trust Agreement, the Policies Provider Agreement or the Note
Purchase Agreement.
- To add to the covenants of Continental for the benefit of holders of such
Certificates or to surrender any right or power conferred upon
Continental in such Pass Through Trust Agreement, the Intercreditor
Agreement, the Note Purchase Agreement, the Liquidity Facilities, the
Policies or the Policy Provider Agreement.
- To correct or supplement any provision of such Pass Through Trust
Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement, the Liquidity
Facilities, the Policies or the Policy Provider Agreement which may be
defective or inconsistent with any other provision in such Pass Through
Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Liquidity Facilities, the Policies or the
Policy Provider Agreement, as applicable, or to cure any ambiguity or to
modify any other provision with respect to matters or questions arising
under such Pass Through Trust Agreement, the Deposit Agreements, the
Escrow Agreements, the Intercreditor Agreement, the Note Purchase
Agreement, the Liquidity Facilities, the Policies or the Policy Provider
Agreement, provided that such action shall not materially adversely
affect the interests of the holders of such Certificates; to correct any
mistake in such Pass Through Trust Agreement, the Deposit Agreements, the
Escrow Agreements, the Intercreditor Agreement, the Liquidity Facilities,
the Policies or the Policy Provider Agreement; or, as provided in the
Intercreditor Agreement, to give effect to or provide for a Replacement
Facility.
- To comply with any requirement of the Commission, any applicable law,
rules or regulations of any exchange or quotation system on which the
Certificates are listed, or any regulatory body.
- To modify, eliminate or add to the provisions of such Pass Through Trust
Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement, the Liquidity
Facilities, the Policies or the Policy Provider Agreement to such extent
as shall be necessary to continue the qualification of such Pass Through
Trust Agreement (including any supplemental agreement) under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), or any
similar federal statute enacted after the execution of such Pass Through
Trust Agreement, and to add to such Pass Through Trust Agreement, the
Deposit Agreements, the Escrow Agreements, the Intercreditor Agreement,
the Note Purchase Agreement, the Liquidity Facilities, the Policies or
the Policy Provider Agreement such other provisions as may be expressly
permitted by the Trust Indenture Act.
- To evidence and provide for the acceptance of appointment under such Pass
Through Trust Agreement, the Deposit Agreements, the Escrow Agreements,
the Intercreditor Agreement, the Note Purchase Agreement, the Liquidity
Facilities, the Policies or the Policy Provider Agreement by a successor
Trustee and to add to or change any of the provisions of such Pass
Through Trust Agreement, the Deposit Agreements, the Escrow Agreements,
the Intercreditor Agreement, the Note Purchase Agreement, the Liquidity
Facilities, the Policies or the Policy Provider Agreement as shall be
necessary to provide for or facilitate the administration of the Trusts
under the Basic Agreement by more than one Trustee.
- To provide for the issuance of new "Class H Certificates" or Class J
Certificates after the Issuance Date, provided that (i) the Rating
Agencies have given written confirmation that the terms of such Class of
Certificates (including such amendments and supplements) will not result
in a withdrawal,
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suspension or downgrading of the rating of any Class of Offered
Certificates (without regard to the Policies) and (ii) Continental
certifies to the Trustees that any such amendment or supplement does not
materially and adversely affect the Certificateholders (other than, in
the case of the issuance of new "Class H Certificates", the holders of
the outstanding Class H Certificates).
In each case, such modification or supplement may not adversely affect the
status of the Trust as a grantor trust under Subpart E, Part I of Subchapter J
of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended (the
"Code"), for U.S. federal income tax purposes. (Section 9.01; Trust Supplements,
Section 6.02)
Each Pass Through Trust Agreement also contains provisions permitting the
execution, with the consent of the holders of the Certificates of the related
Trust evidencing fractional undivided interests aggregating not less than a
majority in interest of such Trust, of amendments or supplements adding any
provisions to or changing or eliminating any of the provisions of such Pass
Through Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement, the Liquidity Facilities,
the Policies or the Policy Provider Agreement to the extent applicable to such
Certificateholders or of modifying the rights and obligations of such
Certificateholders under such Pass Through Trust Agreement, the Deposit
Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement, the Liquidity Facilities, the Policies or the Policy
Provider Agreement. No such amendment or supplement may, without the consent of
the holder of each Certificate so affected thereby:
- Reduce in any manner the amount of, or delay the timing of, any receipt
by the Trustee (or, with respect to the Deposits, the Receiptholders) of
payments with respect to the Equipment Notes held in such Trust or
distributions in respect of any Certificate related to such Trust (or,
with respect to the Deposits, payments upon the Deposits) or with respect
to payments on the Policy, or change the date or place of any payment in
respect of any Certificate, or make distributions payable in coin or
currency other than that provided for in such Certificates, or impair the
right of any Certificateholder of such Trust to institute suit for the
enforcement of any such payment when due.
- Permit the disposition of any Equipment Note held in such Trust, except
as provided in such Pass Through Trust Agreement, or otherwise deprive
such Certificateholder of the benefit of the ownership of the applicable
Equipment Notes.
- Alter the priority of distributions specified in the Intercreditor
Agreement in a manner materially adverse to such Certificateholders.
- Reduce the percentage of the aggregate fractional undivided interests of
the Trust provided for in such Pass Through Trust Agreement, the consent
of the holders of which is required for any such supplemental trust
agreement or for any waiver provided for in such Pass Through Trust
Agreement.
- Modify any of the provisions relating to the rights of the
Certificateholders in respect of the waiver of events of default or
receipt of payment.
- Adversely affect the status of any Trust as a grantor trust under Subpart
E, Part I of Subchapter J of Chapter 1 of Subtitle A of the Code for U.S.
federal income tax purposes. (Section 9.02; Trust Supplements, Section
6.03)
In the event that a Trustee, as holder (or beneficial owner through the
Subordination Agent) of any Equipment Note in trust for the benefit of the
Certificateholders of the relevant Trust or as Controlling Party under the
Intercreditor Agreement, receives (directly or indirectly through the
Subordination Agent) a request for a consent to any amendment, modification,
waiver or supplement under any Indenture, any Participation Agreement, any
Equipment Note or any other related document, the Trustee shall forthwith send a
notice of such proposed amendment, modification, waiver or supplement to each
Certificateholder of
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the relevant Trust as of the date of such notice. The Trustee shall request from
the Certificateholders a direction as to:
- Whether or not to take or refrain from taking (or direct the
Subordination Agent to take or refrain from taking) any action which a
holder of such Equipment Note or the Controlling Party has the option to
direct.
- Whether or not to give or execute (or direct the Subordination Agent to
give or execute) any waivers, consents, amendments, modifications or
supplements as a holder of such Equipment Note or as Controlling Party.
- How to vote (or direct the Subordination Agent to vote) any Equipment
Note if a vote has been called for with respect thereto.
Provided such a request for Certificateholder direction shall have been
made, in directing any action or casting any vote or giving any consent as the
holder of any Equipment Note (or in directing the Subordination Agent in any of
the foregoing):
- Other than as Controlling Party, the Trustee shall vote for or give
consent to any such action with respect to such Equipment Note in the
same proportion as that of (x) the aggregate face amount of all
Certificates actually voted in favor of or for giving consent to such
action by such direction of Certificateholders to (y) the aggregate face
amount of all outstanding Certificates of the relevant Trust.
- As the Controlling Party, the Trustee shall vote as directed in such
Certificateholder direction by the Certificateholders evidencing
fractional undivided interests aggregating not less than a majority in
interest in the relevant Trust.
For purposes of the immediately preceding paragraph, a Certificate shall
have been "actually voted" if the Certificateholder has delivered to the Trustee
an instrument evidencing such Certificateholder's consent to such direction
prior to one Business Day before the Trustee directs such action or casts such
vote or gives such consent.
Notwithstanding the foregoing, but subject to certain rights of the
Certificateholders under the relevant Pass Through Trust Agreement and subject
to the Intercreditor Agreement, the Trustee may, in its own discretion and at
its own direction, consent and notify the relevant Loan Trustee of such consent
(or direct the Subordination Agent to consent and notify the relevant Loan
Trustee of such consent) to any amendment, modification, waiver or supplement
under the relevant Indenture, Participation Agreement, any relevant Equipment
Note or any other related document, if an Indenture Default under any Indenture
shall have occurred and be continuing, or if such amendment, modification,
waiver or supplement will not materially adversely affect the interests of the
Certificateholders. (Section 10.01)
OBLIGATION TO PURCHASE EQUIPMENT NOTES
The Trustees will be obligated to purchase the Equipment Notes issued with
respect to the Aircraft during the Delivery Period, subject to the terms and
conditions of a note purchase agreement (the "Note Purchase Agreement"). Under
the Note Purchase Agreement, Continental agrees to enter into a secured debt
financing with respect to each Aircraft. The Note Purchase Agreement provides
for the relevant parties to enter into a participation agreement (each, a
"Participation Agreement") and an indenture (each, an "Indenture") relating to
the financing of each Aircraft in substantially the form attached to the Note
Purchase Agreement.
The description of such financing agreements in this Prospectus Supplement
is based on the forms of such agreements attached to the Note Purchase
Agreement. However, the terms of the financing agreements actually entered into
may differ from the forms of such agreements and, consequently, may differ from
the description of such agreements contained in this Prospectus Supplement. See
"Description of the Equipment Notes". Although such changes are permitted, under
the Note Purchase Agreement, the terms of such agreements are required (a) to
contain the Mandatory Document Terms and (b) not to vary the Mandatory
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Economic Terms for the Offered Certificates. In addition, Continental is
obligated to certify to the Trustees that any such modifications do not
materially and adversely affect the Certificateholders. Continental must also
obtain written confirmation from each Rating Agency that the use of financing
agreements modified in any material respect from the forms attached to the Note
Purchase Agreement will not result in a withdrawal, suspension or downgrading of
the rating of any Class of Offered Certificates.
Under the Note Purchase Agreement, it is a condition precedent to the
obligation of each Offered Certificate Trustee to purchase the Equipment Notes
related to the financing of an Aircraft that:
- The required amount of Series H Equipment Notes relating to such Aircraft
specified in the Note Purchase Agreement shall have been concurrently
purchased by the Class H Trustee.
- No Triggering Event shall have occurred.
The Trustees will have no right or obligation to purchase Equipment Notes after
the Delivery Period Termination Date.
The "Mandatory Economic Terms", as defined in the Note Purchase Agreement,
require, among other things, that:
- The principal amount of the Series G-1, G-2, H and I Equipment Notes
issued with respect to an Aircraft shall equal (or, in the case of the
Series I, not exceed) the amounts set forth in the following table:
REQUIRED REQUIRED REQUIRED
PRINCIPAL PRINCIPAL PRINCIPAL MAXIMUM
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
SCHEDULED SERIES G-1 SERIES G-2 SERIES H EQUIPMENT
MANUFACTURER'S DELIVERY EQUIPMENT EQUIPMENT EQUIPMENT SERIES I
AIRCRAFT TYPE(1) SERIAL NUMBER MONTH NOTES NOTES NOTES NOTES
---------------- -------------- ------------- ----------- ----------- ----------- ----------
Boeing 757-324....... 32812 February 2002 $13,236,852 $19,123,458 $14,336,941 $3,932,400
Boeing 757-324....... 32813 February 2002 13,236,852 19,123,458 14,336,941 3,932,400
Boeing 767-424ER..... 29456 March 2002 20,053,877 28,972,107 21,720,516 5,957,600
Boeing 767-424ER..... 29457 March 2002 20,053,877 28,972,107 21,720,516 5,957,600
Boeing 767-424ER..... 29458 April 2002 20,053,877 28,972,107 21,720,516 5,957,600
Boeing 767-424ER..... 29459 April 2002 20,053,877 28,972,107 21,720,516 5,957,600
Boeing 767-424ER..... 29460 May 2002 20,053,877 28,972,107 21,720,516 5,957,600
Boeing 767-424ER..... 29461 May 2002 20,053,877 28,972,107 21,720,516 5,957,600
Boeing 777-224ER..... 31679 March 2002 27,954,788 40,386,656 30,278,054 8,304,800
Boeing 777-224ER..... 31680 April 2002 27,954,788 40,386,656 30,278,054 8,304,800
---------------
(1) Includes all Boeing 767-424ER and 777-224ER aircraft from which
Continental will choose the Aircraft to be financed in the Offering,
subject to the terms of the Note Purchase Agreement.
- The LTV for the Series G-1, G-2 and H Equipment Notes issued for each
Aircraft computed on the date of issuance thereof (with value for such
Aircraft for these purposes initially equal to its value (the "Assumed
Appraised Value") set forth under "Description of the Aircraft and the
Appraisals--The Appraisals" in the column "Appraised Value" and
thereafter based on such value after giving effect to the Depreciation
Assumption) will not exceed as of the issuance date of such Equipment
Notes and any Regular Distribution Date thereafter (assuming no default
in the payment of the Equipment Notes and after giving effect to
scheduled payments) the LTV for such series of Equipment Notes set forth
below (or such lower percentages as shall be set forth in the Note
Purchase Agreement):
SERIES G-1 SERIES G-2 SERIES H
EQUIPMENT NOTE EQUIPMENT NOTE EQUIPMENT NOTE
-------------- -------------- --------------
52.9% 52.9% 76.3%
- As of the Delivery Period Termination Date and each Regular Distribution
Date thereafter, the LTV for each of the Class G-1 Certificates, the
Class G-2 Certificates and the Class H Certificates
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(computed as of any such date on the basis of the Assumed Appraised Value
of all Aircraft that have been financed pursuant to the Note Purchase
Agreement and the Depreciation Assumption) will not exceed (assuming no
default in the payment of the Equipment Notes and after giving effect to
scheduled payments) the applicable percentage set forth below (or such
lower percentages as shall be set forth in the Note Purchase Agreement):
CLASS G-1 CLASS G-2 CLASS H
CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------
52.6% 52.6% 75.9%
- The initial average life of the Series G-1 and H Equipment Notes for any
Aircraft shall not extend beyond 5.0 and 4.1 years, respectively, from
the Issuance Date.
- As of the Delivery Period Termination Date, the average life of the Class
G-1 and the Class H Certificates shall not be more than 5.0 and 4.1
years, respectively, from the Issuance Date (computed without regard to
the acceleration of any Equipment Notes and after giving effect to any
special distribution on the Certificates thereafter required in respect
of unused Deposits).
- The final expected distribution date of each Class of Offered
Certificates shall be as set forth on the cover page of this Prospectus
Supplement.
- The final expected distribution date of the Class H Certificates shall be
February 15, 2007.
- The final maturity date of the Series G-2 Equipment Notes shall be
February 15, 2012, and there shall be no scheduled amortization of such
Equipment Notes.
- The original aggregate principal amount of all of the Equipment Notes of
each Series shall not exceed the original aggregate face amount of the
Certificates issued by the corresponding Trust.
- The interest rate applicable to each Series of Equipment Notes must be
equal to the rate applicable to the Certificates issued by the
corresponding Trust.
- The payment dates for the Series G-1, G-2, H and I Equipment Notes must
be February 15, May 15, August 15 and November 15.
- The amounts payable under the all-risk aircraft hull insurance maintained
with respect to each Aircraft must be sufficient to pay 110% of the
unpaid principal amount of the related Series G-1 and H Equipment Notes
plus the unpaid principal amount of the related Series G-2 Equipment
Notes together with six months of interest accrued thereon, subject to
certain rights of self-insurance.
- (a) The past due rate in the Indentures, (b) the Break Amount or
Make-Whole Premium payable under the Indentures, (c) the provisions
relating to the redemption of Equipment Notes in the Indentures and (d)
the indemnification of the Loan Trustees, Subordination Agent, Liquidity
Providers, Trustees, Escrow Agents, Policy Provider and registered
holders of the Equipment Notes (in such capacity, the "Note Holders")
with respect to certain taxes and expenses, in each case shall be
provided as set forth in the forms of Participation Agreement and
Indenture attached as exhibits to the Note Purchase Agreement
(collectively, the "Aircraft Operative Agreements").
The "Mandatory Document Terms" prohibit modifications in any material
adverse respect to certain specified provisions of the Aircraft Operative
Agreements contemplated by the Note Purchase Agreement, as follows:
- In the case of the Indentures, modifications are prohibited (i) to the
Granting Clause of the Indentures so as to deprive the Note Holders under
all the Indentures of a first priority security interest in the Aircraft
and certain of Continental's rights under its purchase agreement with the
Aircraft manufacturer or to eliminate the obligations intended to be
secured thereby, (ii) to certain provisions relating to the issuance,
redemption, payments, and ranking of the Equipment Notes (including the
obligation to pay the Break Amount or Make-Whole Premium in certain
circumstances), (iii) to certain provisions regarding Indenture Defaults
and remedies relating thereto, (iv) to certain provisions
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relating to any replaced airframe or engines with respect to an Aircraft
and (v) to the provision that New York law will govern the Indentures.
- In the case of the Participation Agreements, modifications are prohibited
(i) to certain conditions to the obligations of the Trustees to purchase
the Equipment Notes issued with respect to an Aircraft involving good
title to such Aircraft, obtaining a certificate of airworthiness with
respect to such Aircraft, entitlement to the benefits of Section 1110
with respect to such Aircraft and filings of certain documents with the
FAA, (ii) to the provisions restricting the Note Holder's ability to
transfer such Equipment Notes, (iii) to certain provisions requiring the
delivery of legal opinions and (iv) to the provision that New York law
will govern the Participation Agreement.
- In the case of all of the Aircraft Operative Agreements, modifications
are prohibited in any material adverse respect as regards the interest of
the Note Holders, the Subordination Agent, the Liquidity Provider, the
Policy Provider or the Loan Trustee in the definitions of "Break Amount"
and "Make-Whole Premium".
Notwithstanding the foregoing, any such Mandatory Document Term may be
modified to correct or supplement any such provision which may be defective or
to cure any ambiguity or correct any mistake, provided that any such action
shall not materially adversely affect the interests of the Note Holders, the
Subordination Agent, the Liquidity Provider, the Policy Provider, the Loan
Trustee or the Certificateholders.
POSSIBLE ISSUANCE OF CLASS J CERTIFICATES
Continental may elect to issue Series J Equipment Notes in connection with
the financing of Aircraft, which will be funded from sources other than this
Offering. If Series J Equipment Notes are issued, they will be funded through
the sale of Pass Through Certificates (the "Class J Certificates") issued by a
Class J Continental Airlines 2002-1 Pass Through Trust (the "Class J Trust").
Continental will not issue any Series J Equipment Notes at any time prior to the
consummation of this Offering. The Note Purchase Agreement provides that
Continental's ability to issue any Series J Equipment Notes is contingent upon
its obtaining written confirmation from each Rating Agency that the issuance of
such Series J Equipment Notes will not result in a withdrawal or downgrading of
the rating of any Class of Offered Certificates (without regard to the
Policies). If the Class J Certificates are issued, the Trustee with respect to
such Certificates will become a party to the Intercreditor Agreement. Regular
Distribution Dates for the Class J Certificates will be February 15, May 15,
August 15 and November 15 of each year.
LIQUIDATION OF ORIGINAL TRUSTS
On the earlier of (i) the first Business Day after August 31, 2002 or, if
later, the fifth Business Day after the Delivery Period Termination Date and
(ii) the fifth Business Day after the occurrence of a Triggering Event (such
Business Day, the "Transfer Date"), each of the Offered Certificate Trusts
established on the Issuance Date (the "Original Trusts") will transfer and
assign all of its assets and rights to a newly created successor trust (each, a
"Successor Trust") with substantially identical terms, except that (i) the
Successor Trusts will not have the right to purchase new Equipment Notes and
(ii) Delaware law will govern the Original Trusts and New York law will govern
the Successor Trusts. The institution acting as Trustee of each of the Original
Trusts (each, an "Original Trustee") will also act as Trustee of the
corresponding Successor Trust (each, a "New Trustee"). Each New Trustee will
assume the obligations of the related Original Trustee under each transaction
document to which such Original Trustee was a party. Upon the effectiveness of
such transfer, assignment and assumption, each of the Original Trusts will be
liquidated and each of the Offered Certificates will represent the same
percentage interest in the Successor Trust as it represented in the Original
Trust immediately prior to such transfer, assignment and assumption. Unless the
context otherwise requires, all references in this Prospectus Supplement to the
Offered Certificate Trusts, the applicable Trustees, the Pass Through Trust
Agreements and similar terms shall apply to the Original Trusts until the
effectiveness of such transfer, assignment and assumption, and thereafter shall
be applicable with respect to the Successor Trusts. If for any reason such
transfer, assignment and assumption cannot be effected to any Successor Trust,
the related Original Trust will continue in existence until it is effected. The
Original Trusts may be treated as
S-52
partnerships for U.S. federal income tax purposes. The Successor Trusts will, in
the opinion of Tax Counsel, be treated as grantor trusts. See "Certain U.S.
Federal Income Tax Consequences".
TERMINATION OF THE TRUSTS
The obligations of Continental and the applicable Trustee with respect to
an Offered Certificate Trust will terminate upon the distribution to
Certificateholders of such Trust of all amounts required to be distributed to
them pursuant to the applicable Pass Through Trust Agreement and the disposition
of all property held in such Trust. The applicable Trustee will send to each
Certificateholder of such Trust notice of the termination of such Trust, the
amount of the proposed final payment and the proposed date for the distribution
of such final payment for such Trust. The final distribution to any
Certificateholder of such Trust will be made only upon surrender of such
Certificateholder's Certificates at the office or agency of the applicable
Trustee specified in such notice of termination. (Trust Supplements, Section
7.01)
THE TRUSTEES
The Trustee for each Trust will be Wilmington Trust Company. The Trustees'
address is Wilmington Trust Company, Rodney Square North, 1100 North Market
Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust
Administration.
BOOK-ENTRY; DELIVERY AND FORM
Upon issuance, each Class of Offered Certificates will be represented by
one or more fully registered global certificates. Each global certificate will
be deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of Cede & Co. ("Cede"), the nominee of DTC. DTC was
created to hold securities for its participants ("DTC Participants") and
facilitate the clearance and settlement of securities transactions between DTC
Participants through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Interests in a
global certificate may also be held through the Euroclear System and
Clearstream, Luxembourg. See "Description of the Certificates--Book-Entry
Registration" in the Prospectus for a discussion of the book-entry procedures
applicable to the Offered Certificates and the limited circumstances under which
definitive certificates may be issued for the Offered Certificates.
So long as such book-entry procedures are applicable, no person acquiring
an interest in the Offered Certificates ("Certificate Owner") will be entitled
to receive a certificate representing such person's interest in such
Certificates. Unless and until definitive certificates are issued under the
limited circumstances described in the Prospectus, all references to actions by
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants, and all references herein to distributions, notices, reports
and statements to Certificateholders shall refer, as the case may be, to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of such Certificates, or to DTC Participants for distribution to
Certificate Owners in accordance with DTC procedures.
S-53
DESCRIPTION OF THE DEPOSIT AGREEMENTS
The following summary describes all material terms of the Deposit
Agreements. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Deposit Agreements, each
of which will be filed as an exhibit to a Current Report on Form 8-K to be filed
by Continental with the Commission. The provisions of the Deposit Agreements are
substantially identical except as otherwise indicated.
GENERAL
Under the Escrow Agreements, the Escrow Agent with respect to each Offered
Certificate Trust will enter into a separate Deposit Agreement with the
Depositary. Pursuant to the Escrow Agreements, the Depositary will establish
separate accounts into which the proceeds of this offering (the "Offering")
attributable to Certificates of the applicable Trust, to the extent not used to
purchase Equipment Notes on the Issuance Date, will be deposited (each, a
"Deposit") on behalf of such Escrow Agent. Pursuant to the Deposit Agreement
with respect to each Offered Certificate Trust (each, a "Deposit Agreement"), on
each Regular Distribution Date the Depositary will pay to the Paying Agent on
behalf of the applicable Escrow Agent, for distribution to the
Certificateholders of such Trust, an amount equal to interest accrued on the
Deposits relating to such Trust during the relevant interest period at a rate
per annum equal to the interest rate applicable to the Certificates issued by
such Trust. After the Issuance Date, upon each delivery of an Aircraft during
the Delivery Period, the Trustee for each Offered Certificate Trust will request
the Escrow Agent relating to such Trust to withdraw from the Deposits relating
to such Trust funds sufficient to enable the Trustee of such Trust to purchase
the Equipment Note of the series applicable to such Trust issued with respect to
such Aircraft. Accrued but unpaid interest on all such Deposits withdrawn will
be paid on the next Regular Distribution Date. Any portion of any Deposit
withdrawn which is not used to purchase such Equipment Note will be re-deposited
by each Trustee into an account relating to the applicable Trust. The Deposits
relating to each Offered Certificate Trust and interest paid thereon will not be
subject to the subordination provisions of the Intercreditor Agreement and will
not be available to pay any other amount in respect of the Certificates.
UNUSED DEPOSITS
The Trustees' obligations to purchase the Equipment Notes issued with
respect to each Aircraft are subject to satisfaction of certain conditions at
the time of financing, as set forth in the Note Purchase Agreement. See
"Description of the Certificates--Obligation to Purchase Equipment Notes". Since
the Aircraft are scheduled for delivery from time to time during the Delivery
Period, no assurance can be given that all such conditions will be satisfied at
the time of delivery for each such Aircraft. Moreover, since the Aircraft will
be newly manufactured, their delivery as scheduled is subject to delays in the
manufacturing process and to the Aircraft manufacturer's right to postpone
deliveries under its agreement with Continental. See "Description of the
Aircraft and Appraisals--Deliveries of Aircraft".
If any funds remain as Deposits with respect to any Offered Certificate
Trust at the end of the Delivery Period or, if earlier, upon the acquisition by
the Offered Certificate Trusts of the Equipment Notes with respect to all of the
Aircraft (the "Delivery Period Termination Date"), such funds will be withdrawn
by the Escrow Agent and distributed, with accrued and unpaid interest thereon
and, in the case of the Class G-1 Trust, Deposit Break Amount, if any, or, in
the case of the Class G-2 Trust, the Deposit Make-Whole Premium, to the
Certificateholders of such Trust after at least 15 days' prior written notice.
Continental will be obligated to pay any Deposit Break Amount and Deposit
Make-Whole Premium.
"Deposit Break Amount" means, with respect to the distribution to holders
of Class G-1 Certificates of any Deposits held for them that are not used to
purchase Equipment Notes, as of the date the Depositary is obligated to pay the
amount of such unused Deposits to the Paying Agent for purposes of such
distribution (the "Applicable Date"), an amount determined by the Reference
Agent on the date that is two Business Days prior to the Applicable Date
pursuant to the formula set forth below, provided, however, that no Deposit
Break Amount will be payable (x) if the Deposit Break Amount, as calculated
pursuant to the formula set
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forth below, is equal to or less than zero or (y) on or in respect of any
Applicable Date that is a Regular Distribution Date.
Deposit Break Amount = Z-Y
Where:
X = with respect to any applicable Interest Period, the sum of
(i) the amount of such unused Deposits plus (ii) interest
payable thereon during such entire Interest Period at then
effective LIBOR.
Y = X, discounted to present value from the last day of the then
applicable Interest Period to the Applicable Date, using
then effective LIBOR as the discount rate.
Z = X, discounted to present value from the last day of the then
applicable Interest Period to the Applicable Date, using a
rate equal to the applicable London interbank offered rate
for a period commencing on the Applicable Date and ending on
the last day of the then applicable Interest Period,
determined by the Reference Agent as of two Business Days
prior to the Applicable Date as the discount rate.
"Deposit Make-Whole Premium" means, with respect to the distribution to
holders of Class G-2 Certificates of any Deposits held for them that are not
used to purchase Equipment Notes, as of any date of determination, an amount
equal to the excess, if any, of (a) the present value of the excess of (i) the
scheduled payment of principal and interest to maturity of the Equipment Notes,
assuming the maximum principal amount thereof were issued, on each remaining
Regular Distribution Date for such Class under the Assumed Amortization Schedule
over (ii) the scheduled payment of principal and interest to maturity of the
Equipment Notes in the amount of the remaining Deposits for such Class on each
such Regular Distribution Date under the Assumed Amortization Schedule (assuming
a pro rata reduction in the amortization amounts), such present value computed
by discounting such excess on a quarterly basis on each Regular Distribution
Date (assuming a 360-day year of twelve 30-day months) using a discount rate
equal to the Treasury Yield over (b) the amount of such Deposits to be
distributed to the holders of such Certificates plus accrued and unpaid interest
to but excluding the date of determination from and including the preceding
Regular Distribution Date (or if such date of determination precedes the first
Regular Distribution Date, the date of issuance of the Certificates). The date
of determination of the Deposit Make-Whole Amount shall be the third Business
Day prior to the applicable distribution date.
DISTRIBUTION UPON OCCURRENCE OF TRIGGERING EVENT
If a Triggering Event shall occur prior to the Delivery Period Termination
Date, the Escrow Agent for each Offered Certificate Trust will withdraw any
funds then held as Deposits with respect to such Trust and cause such funds,
with accrued and unpaid interest thereon but without any premium, to be
distributed to the Certificateholders of such Trust by the Paying Agent on
behalf of the Escrow Agent, after at least 15 days' prior written notice.
Accordingly, if a Triggering Event occurs prior to the Delivery Period
Termination Date, the Trusts will not acquire Equipment Notes issued with
respect to Aircraft delivered after the occurrence of such Triggering Event.
DEPOSITARY
Credit Suisse First Boston, New York branch, will act as depositary (the
"Depositary"). Credit Suisse First Boston ("CSFB") is a Swiss bank with total
consolidated assets of approximately Sfr 674.1 billion ($412.4 billion) and
total consolidated shareholder's equity of approximately Sfr 18.9 billion ($11.5
billion), excluding minority interests of Sfr 10.4 billion ($6.4 billion), in
each case at December 31, 2000. CSFB was founded in 1856 in Zurich. CSFB's
registered head office is in Zurich, Switzerland.
CSFB has been licensed by the Superintendent of Banks of the State of New
York to operate a branch in New York. It is also subject to review and
supervision by the Federal Reserve Bank.
S-55
CSFB has long-term unsecured debt ratings of A1 from Moody's Investors
Service, Inc. ("Moody's") and AA from Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's", and together
with Moody's, the "Rating Agencies"), and short-term unsecured debt ratings of
P-1 from Moody's and A-1+ from Standard & Poor's.
CSFB's New York branch has executive offices at Eleven Madison Avenue, New
York, New York 10010, (212) 325-9000. A copy of the Annual Report of CSFB for
the year ended December 31, 2000 may be obtained from CSFB by delivery of a
written request to its New York branch, Attention: Corporate Affairs.
REPLACEMENT OF DEPOSITARY
If the Depositary's short-term unsecured debt rating falls below A-1+ from
Standard & Poor's or P-1 from Moody's then the Company must, within 30 days of
such event occurring, replace the Depositary with a new depositary bank that has
short-term unsecured debt ratings of at least A-1+ from Standard & Poor's and
P-1 from Moody's (or lower ratings if the Policy Provider consents), subject to
receipt of written confirmation from each Rating Agency that such replacement
will not result in a withdrawal, suspension or downgrading of the ratings for
any class of Certificates then rated by such Rating Agency without regard to any
downgrading of any rating of the Depositary being replaced and without regard to
the Policies.
S-56
DESCRIPTION OF THE ESCROW AGREEMENTS
The following summary describes all material terms of the escrow and paying
agent agreements (the "Escrow Agreements"). The summary does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Escrow Agreements, each of which will be filed as an exhibit to a Current
Report on Form 8-K to be filed by Continental with the Commission. The
provisions of the Escrow Agreements are substantially identical except as
otherwise indicated.
Wells Fargo Bank Northwest, N.A., as escrow agent in respect of each
Offered Certificate Trust (the "Escrow Agent"), Wilmington Trust Company, as
paying agent on behalf of the Escrow Agent in respect of each Offered
Certificate Trust (the "Paying Agent"), each Trustee of an Offered Certificate
Trust and the Underwriters will enter into a separate Escrow Agreement for the
benefit of the Certificateholders of each Offered Certificate Trust as holders
of the Escrow Receipts affixed thereto (in such capacity, a "Receiptholder").
The cash proceeds of the offering of Certificates of each Offered Certificate
Trust, to the extent not used to purchase Equipment Notes on the Issuance Date,
will be deposited on behalf of the Escrow Agent (for the benefit of
Receiptholders) with the Depositary as Deposits relating to such Trust. Each
Escrow Agent shall permit the Trustee of the related Trust to cause funds to be
withdrawn from such Deposits on or prior to the Delivery Period Termination Date
to allow such Trustee to purchase the related Equipment Notes pursuant to the
Note Purchase Agreement. In addition, the Escrow Agent shall direct the
Depositary to pay interest on the Deposits accrued in accordance with the
Deposit Agreement to the Paying Agent for distribution to the Receiptholders.
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the related Receiptholders, one or more Paying
Agent Account(s), which shall be non-interest-bearing. The Paying Agent shall
deposit interest on Deposits and any unused Deposits withdrawn by the Escrow
Agent in the related Paying Agent Account. The Paying Agent shall distribute
these amounts on a Regular Distribution Date or Special Distribution Date, as
appropriate.
Upon receipt by the Depositary of cash proceeds from this Offering, the
Escrow Agent will issue one or more escrow receipts ("Escrow Receipts") which
will be affixed by the relevant Trustee to each Offered Certificate. Each Escrow
Receipt evidences a fractional undivided interest in amounts from time to time
deposited into the Paying Agent Account and is limited in recourse to amounts
deposited into such account. An Escrow Receipt may not be assigned or
transferred except in connection with the assignment or transfer of the
Certificate to which it is affixed. Each Escrow Receipt will be registered by
the Escrow Agent in the same name and manner as the Certificate to which it is
affixed.
S-57
DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes all material terms of the Liquidity
Facilities and certain provisions of the Intercreditor Agreement relating to the
Liquidity Facilities. The summary supplements (and, to the extent inconsistent
therewith, replaces) the description of the general terms and provisions
relating to the Primary Liquidity Facilities and the Intercreditor Agreement set
forth in the Prospectus. The summary does not purport to be complete and is
qualified in its entirety by reference to all of the provisions of the Liquidity
Facilities and the Intercreditor Agreement, each of which will be filed as an
exhibit to a Current Report on Form 8-K to be filed by Continental with the
Commission. The provisions of the Primary Liquidity Facilities are substantially
identical except as otherwise indicated. The term "Liquidity Facilities" refers
to the Primary Liquidity Facilities and the Above-Cap Liquidity Facility.
PRIMARY LIQUIDITY FACILITIES
GENERAL
Landesbank Hessen-Thuringen Girozentrale (the "Liquidity Provider") will
enter into a separate revolving credit agreement (each, a "Primary Liquidity
Facility") with the Subordination Agent with respect to each Offered Certificate
Trust. On any Regular Distribution Date, if, after giving effect to the
subordination provisions of the Intercreditor Agreement, the Subordination Agent
does not have sufficient funds for the payment of interest on any Class of
Offered Certificates, the Primary Liquidity Provider under the relevant Primary
Liquidity Facility will make an advance (an "Interest Drawing") in the amount
needed to fund such interest shortfall up to the Maximum Available Commitment.
The maximum amount of Interest Drawings available under the Primary
Liquidity Facility for an Offered Certificate Trust, together, in the case of
the Class G-1 Trust, with the amounts in the Above-Cap Account (if any), are
expected to provide an amount sufficient to pay interest on the related Class of
Certificates on up to six consecutive quarterly Regular Distribution Dates
(without regard to any expected future payments of principal on such
Certificates) at the Stated Interest Rates. If interest payment defaults occur
which exceed the amount covered by and available under the Primary Liquidity
Facility for any Offered Certificate Trust and, in the case of the Class G-1
Trust, funds available in the Above-Cap Account, the Certificateholders of such
Trust will bear their allocable share of the deficiencies to the extent that
there are no other sources of funds. The initial Primary Liquidity Provider with
respect to each Offered Certificate Trust may be replaced by one or more other
entities with respect to any of such Trusts under certain circumstances.
DRAWINGS
The aggregate amount available under the Primary Liquidity Facility for
each Offered Certificate Trust at August 15, 2002, the first Regular
Distribution Date after the Aircraft expected to be financed in the Offering are
scheduled to have been delivered, assuming that such aircraft are so financed,
that Equipment Notes in the maximum principal amount with respect to all such
aircraft are acquired by the Trusts and that all interest and principal due on
or prior to August 15, 2002 is paid, will be as follows:
TRUST AVAILABLE AMOUNT
----- ----------------
Class G-1............................................ $15,998,793
Class G-2............................................ 19,149,718
Except as otherwise provided below, the Primary Liquidity Facility for each
Offered Certificate Trust will enable the Subordination Agent to make Interest
Drawings thereunder promptly on or after any Regular Distribution Date if, after
giving effect to the subordination provisions of the Intercreditor Agreement
and, following a Policy Provider Election with respect to an Equipment Note,
certain payments by the Policy Provider representing interest on such Equipment
Note, there are insufficient funds available to the Subordination Agent to pay
interest on the Certificates of such Trust at the Stated Interest Rate for such
Trust; provided, however, that the maximum amount available to be drawn under
the Primary Liquidity Facility with respect to any Offered Certificate Trust on
any Regular Distribution Date to fund any shortfall of
S-58
interest on Certificates of such Trust will not exceed the then Maximum
Available Commitment under such Primary Liquidity Facility.
The "Maximum Available Commitment" at any time under each Primary Liquidity
Facility is an amount equal to the then Required Amount of such Primary
Liquidity Facility less the aggregate amount of each Interest Drawing
outstanding under such Primary Liquidity Facility at such time, provided that,
in the case of the Primary Liquidity Facility for the Class G-1 Trust, for
purposes of calculating the amount of any Non-Extension Drawing, Downgrade
Drawing or Final Drawing, the Maximum Available Commitment shall be an amount
equal to (a) the then Required Amount of such Primary Liquidity Facility,
calculated for this purpose using the maximum Capped Interest Rate at any time
thereafter, less (b) the aggregate amount of each Interest Drawing outstanding
under such Primary Liquidity Facility at such time and provided, further, that
following a Non-Extension Drawing, a Downgrade Drawing or a Final Drawing under
a Primary Liquidity Facility, the Maximum Available Commitment under such
Primary Liquidity Facility shall be zero.
The "Required Amount" in relation to the Primary Liquidity Facility for any
Offered Certificate Trust will be equal, on any day, to the sum of the aggregate
amount of interest, calculated for each relevant period, at the rate per annum
equal to the Stated Interest Rate for such Trust (or, in the case of the Class
G-1 Trust, the relevant Capped Interest Rate), that would be payable on such
Class of Certificates on each six consecutive quarterly Regular Distribution
Dates immediately following such day or, if such day is a Regular Distribution
Date, on such day and the succeeding five quarterly Regular Distribution Dates,
in each case calculated on the basis of the Pool Balance of the corresponding
Class of Certificates on such day and without regard to expected future payments
of principal on such Class of Certificates. The Pool Balance for purposes of the
definition of Required Amount with respect to the Primary Liquidity Facility for
any Class of Offered Certificates shall, in the event of any Policy Provider
Election with respect to such Class, be deemed to be reduced by the amount by
which (a) the then outstanding principal balance of each Equipment Note in
respect of which such Policy Provider Election has been made shall exceed (b)
the amount of any Policy Drawings previously paid by the Policy Provider in
respect of principal on such Equipment Note.
For each Regular Distribution Date, the "Capped Interest Rate" is equal to
the Capped LIBOR for such date plus the margin for the Class G-1 Certificates
shown on the cover page of this Prospectus Supplement. The "Capped LIBOR" will
be determined pursuant to the table below.
FIRST DAY OF INTEREST PERIOD CAPPED
OCCURS ON OR AFTER* LIBOR
---------------------------- ------
March 26, 2002....................................... 7.00%
May 15, 2002......................................... 7.05
August 15, 2002...................................... 7.15
November 15, 2002.................................... 7.15
February 15, 2003.................................... 7.25
May 15, 2003......................................... 7.25
August 15, 2003...................................... 7.40
November 15, 2003.................................... 7.40
February 15, 2004.................................... 7.60
May 15, 2004......................................... 7.60
August 15, 2004...................................... 7.85
November 15, 2004.................................... 7.85
February 15, 2005.................................... 8.15
May 15, 2005......................................... 8.15
August 15, 2005...................................... 8.50
November 15, 2005.................................... 8.50
February 15, 2006.................................... 8.90
May 15, 2006......................................... 8.90
August 15, 2006...................................... 9.35
November 15, 2006.................................... 9.35
February 15, 2007.................................... 9.85
May 15, 2007......................................... 9.85
August 15, 2007...................................... 10.35
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FIRST DAY OF INTEREST PERIOD CAPPED
OCCURS ON OR AFTER* LIBOR
---------------------------- ------
November 15, 2007.................................... 10.35
February 15, 2008.................................... 10.85
May 15, 2008......................................... 10.85
August 15, 2008...................................... 11.40
November 15, 2008.................................... 11.40
February 15, 2009.................................... 12.10
May 15, 2009......................................... 12.10
August 15, 2009...................................... 12.65
November 15, 2009.................................... 12.65
February 15, 2010.................................... 13.35
May 15, 2010......................................... 13.35
August 15, 2010...................................... 14.10
November 15, 2010.................................... 14.10
February 15, 2011.................................... 14.75
May 15, 2011......................................... 14.75
August 15, 2011...................................... 15.00
November 15, 2011.................................... 15.00
February 15, 2012.................................... 15.00
May 15, 2012......................................... 15.00
August 15, 2012...................................... 15.00
November 15, 2012.................................... 15.00
February 15, 2013.................................... 15.00
May 15, 2013......................................... 15.00
August 15, 2013...................................... 15.00
---------------
* Subject to adjustments in accordance with the "Following Business Day
Convention" (as used in the 2000 ISDA Definitions as published by the
International Swaps and Derivatives Associations, Inc.)
The Primary Liquidity Facility for any Class of Offered Certificates does
not provide for drawings thereunder to pay for principal of or premium on, or
Break Amount with respect to, the Certificates of such Class or principal of or
interest or premium on, or Break Amount (if any) with respect to the
Certificates of any other Class. The Primary Liquidity Facility for the Class
G-1 Certificates does not provide for drawings thereunder to pay any interest
thereon in excess of an amount equal to six full quarterly installments of
interest calculated at the Capped Interest Rate thereon. The Primary Liquidity
Facility for the Class G-2 Certificates does not provide for drawings thereunder
to pay any interest on the Class G-2 Certificates in excess of the Stated
Interest Rate for such Class or more than six quarterly installments of interest
thereon. (Primary Liquidity Facilities, Section 2.02; Intercreditor Agreement,
Section 3.6) In addition, the Primary Liquidity Facility with respect to each
Offered Certificate Trust does not provide for drawings thereunder to pay any
amounts payable with respect to the Deposits relating to such Trust.
Each payment by a Primary Liquidity Provider reduces by the same amount the
Maximum Available Commitment under the related Primary Liquidity Facility,
subject to reinstatement as hereinafter described. With respect to any Interest
Drawings, upon reimbursement of the applicable Primary Liquidity Provider in
full or in part for the amount of such Interest Drawings plus interest thereon,
the Maximum Available Commitment under the applicable Primary Liquidity Facility
will be reinstated to an amount not to exceed the then Required Amount of such
Primary Liquidity Facility. However, such Primary Liquidity Facility will not be
so reinstated at any time if (i) a Liquidity Event of Default shall have
occurred and be continuing and (ii) less than 65% of the then aggregate
outstanding principal amount of all Equipment Notes are Performing Equipment
Notes. Any amounts paid by the Policy Provider to a Primary Liquidity Provider
as described in "Description of the Intercreditor Agreement--Intercreditor
Rights--Controlling Party" will not reinstate the relevant Primary Liquidity
Facility but any reimbursement of such amounts received by the Policy Provider
under the distribution provisions of the Intercreditor Agreement will reinstate
the relevant Primary Liquidity Facility to the extent of such reimbursement
unless (i) a Liquidity Event of Default shall have occurred and be continuing
and (ii) less than 65% of the then aggregate outstanding principal amount of all
Equipment
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Notes are Performing Equipment Notes. With respect to any other drawings under
such Primary Liquidity Facility, amounts available to be drawn thereunder are
not subject to reinstatement. The Required Amount of the Primary Liquidity
Facility for any Offered Certificate Trust will be automatically reduced or
increased from time to time to an amount equal to the next six successive
quarterly interest payments due on the Certificates of such Trust (without
regard to expected future payment of principal of such Certificates) at the
Stated Interest Rate for such Trust (or, in the case of the Class G-1 Trust, the
Capped Interest Rate). (Primary Liquidity Facilities, Section 2.04(a);
Intercreditor Agreement, Section 3.6(j))
"Performing Equipment Note" means an Equipment Note with respect to which
no payment default has occurred and is continuing (without giving effect to any
acceleration); provided that in the event of a bankruptcy proceeding under the
U.S. Bankruptcy Code in which Continental is a debtor any payment default
existing during the 60-day period under Section 1110(a)(2)(A) of the U.S.
Bankruptcy Code (or such longer period as may apply under Section 1110(b) of the
U.S. Bankruptcy Code or as may apply for the cure of such payment default under
Section 1110(a)(2)(B) of the U.S. Bankruptcy Code) shall not be taken into
consideration until the expiration of the applicable period.
If at any time the short-term unsecured debt rating of the Primary
Liquidity Provider then issued by either Rating Agency is lower than the
Threshold Rating for the relevant Class (except under certain circumstances
subject to written confirmation of the Rating Agencies that such circumstances
will not result in the downgrading, withdrawal or suspension of the ratings of
the relevant Class of Offered Certificates (without regard to the Policies)),
and such Primary Liquidity Facility is not replaced with a Replacement Facility
within ten days after notice of such downgrading and as otherwise provided in
the Intercreditor Agreement, such Primary Liquidity Facility will be drawn in
full up to the then Maximum Available Commitment under such Primary Liquidity
Facility (the "Downgrade Drawing"). The proceeds of a Downgrade Drawing will be
deposited into a cash collateral account (the "Cash Collateral Account") for
such Class of Certificates and used for the same purposes and under the same
circumstances and subject to the same conditions as cash payments of Interest
Drawings under such Primary Liquidity Facility would be used. (Primary Liquidity
Facilities, Section 2.02(c); Intercreditor Agreement, Section 3.6(c)) If a
qualified Replacement Facility is subsequently provided, the balance of the Cash
Collateral Account will be repaid to the replaced Primary Liquidity Provider.
A "Replacement Facility" for any Primary Liquidity Facility will mean an
irrevocable liquidity facility (or liquidity facilities) in substantially the
form of the replaced Primary Liquidity Facility, including reinstatement
provisions, or in such other form (which may include a letter of credit) as
shall permit the Rating Agencies to confirm in writing their respective ratings
then in effect for the Offered Certificates (before downgrading of such ratings,
if any, as a result of the downgrading of the applicable Primary Liquidity
Provider but without regard to the Policy), which shall have been consented to
by the Policy Provider, which consent shall not be unreasonably withheld or
delayed, in a face amount (or in an aggregate face amount) equal to the amount
of interest payable on the Offered Certificates of such Trust (at the Stated
Interest Rate for such Trust (or, in the case of the Class G-1 Trust, the Capped
Interest Rate), and without regard to expected future principal payments) on the
six Regular Distribution Dates following the date of replacement of such Primary
Liquidity Facility and issued by a person (or persons) having unsecured
short-term debt ratings issued by both Rating Agencies which are equal to or
higher than the Threshold Rating for the relevant Class. (Intercreditor
Agreement, Section 1.1) The provider of any Replacement Facility will have the
same rights (including, without limitation, priority distribution rights and
rights as "Controlling Party") under the Intercreditor Agreement as the
applicable initial Primary Liquidity Provider.
"Threshold Rating" means the short-term unsecured debt rating of P-1 by
Moody's and A-1 by Standard & Poor's.
The Primary Liquidity Facility for each Offered Certificate Trust provides
that the applicable Primary Liquidity Provider's obligations thereunder will
expire on the earliest of:
- 364 days after the initial issuance date of the Offered Certificates (the
"Issuance Date") (counting from, and including, the Issuance Date).
S-61
- The date on which the Subordination Agent delivers to such Primary
Liquidity Provider a certification that all of the Offered Certificates
of such Trust have been paid in full.
- The date on which the Subordination Agent delivers to such Primary
Liquidity Provider a certification that a Replacement Facility has been
substituted for such Primary Liquidity Facility.
- The fifth Business Day following receipt by the Subordination Agent of a
Termination Notice from such Primary Liquidity Provider (see "--Liquidity
Events of Default").
- The date on which no amount is or may (by reason of reinstatement) become
available for drawing under such Primary Liquidity Facility.
Each Primary Liquidity Facility provides that it may be extended for
additional 364-day periods by mutual agreement of the relevant Primary Liquidity
Provider and the Subordination Agent. Under certain circumstances the Primary
Liquidity Provider may extend its Primary Liquidity Facilities to the date that
is 15 days after the Final Maturity Date for the relevant Class of Offered
Certificates.
The Intercreditor Agreement will provide for the replacement of the Primary
Liquidity Facility for any Offered Certificate Trust if such Primary Liquidity
Facility is scheduled to expire earlier than 15 days after the Final Maturity
Date for the Certificates of such Trust and such Primary Liquidity Facility is
not extended at least 25 days prior to its then scheduled expiration date. If
such Primary Liquidity Facility is not so extended or replaced by the 25th day
prior to its then scheduled expiration date, such Primary Liquidity Facility
will be drawn in full up to the then Maximum Available Commitment under such
Primary Liquidity Facility (the "Non-Extension Drawing"). The proceeds of the
Non-Extension Drawing will be deposited in the Cash Collateral Account for the
related Class of Certificates as cash collateral to be used for the same
purposes and under the same circumstances, and subject to the same conditions,
as cash payments of Interest Drawings under such Primary Liquidity Facility
would be used. (Primary Liquidity Facilities, Section 2.02(b); Intercreditor
Agreement, Section 3.6(d))
Subject to certain limitations, Continental may, at its option, arrange for
a Replacement Facility at any time to replace the Primary Liquidity Facility for
any Offered Certificate Trust (including without limitation any Replacement
Facility described in the following sentence). In addition, if any Primary
Liquidity Provider shall determine not to extend any Primary Liquidity Facility
for an Offered Certificate Trust, then such Primary Liquidity Provider may, at
its option, arrange for a Replacement Facility to replace such Primary Liquidity
Facility (i) during the period no earlier than 40 days and no later than 25 days
prior to the then scheduled expiration date of such Primary Liquidity Facility
and (ii) at any time after such scheduled expiration date. The Primary Liquidity
Provider may also arrange for a Replacement Facility to replace any of its
Primary Liquidity Facilities at any time after it has extended such Primary
Liquidity Facility to the date that is 15 days after the Final Maturity Date for
the relevant class of Offered Certificates or at any time after a Downgrade
Drawing under such Primary Liquidity Facility. If any Replacement Facility is
provided at any time after a Downgrade Drawing or a Non-Extension Drawing under
any Primary Liquidity Facility, the funds with respect to such Primary Liquidity
Facility on deposit in the Cash Collateral Account for such Trust will be
returned to the Primary Liquidity Provider being replaced. (Intercreditor
Agreement, Section 3.6(e))
Upon receipt by the Subordination Agent of a Termination Notice with
respect to any Primary Liquidity Facility from the relevant Primary Liquidity
Provider, the Subordination Agent shall request a final drawing (a "Final
Drawing") under such Primary Liquidity Facility in an amount equal to the then
Maximum Available Commitment thereunder. The Subordination Agent will hold the
proceeds of the Final Drawing in the Cash Collateral Account for the related
Trust as cash collateral to be used for the same purposes and under the same
circumstances, and subject to the same conditions, as cash payments of Interest
Drawings under such Primary Liquidity Facility would be used. (Primary Liquidity
Facilities, Section 2.02(d); Intercreditor Agreement, Section 3.6(i))
Drawings under any Primary Liquidity Facility will be made by delivery by
the Subordination Agent of a certificate in the form required by such Primary
Liquidity Facility. Upon receipt of such a certificate, the relevant Primary
Liquidity Provider is obligated to make payment of the drawing requested thereby
in immediately available funds. Upon payment by the relevant Primary Liquidity
Provider of the amount
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specified in any drawing under any Primary Liquidity Facility, such Primary
Liquidity Provider will be fully discharged of its obligations under such
Primary Liquidity Facility with respect to such drawing and will not thereafter
be obligated to make any further payments under such Primary Liquidity Facility
in respect of such drawing to the Subordination Agent or any other person.
REIMBURSEMENT OF DRAWINGS
The Subordination Agent must reimburse amounts drawn under any Primary
Liquidity Facility by reason of an Interest Drawing, Final Drawing, Downgrade
Drawing or Non-Extension Drawing and interest thereon, but only to the extent
that the Subordination Agent has funds available therefor.
Interest Drawings and Final Drawings
Amounts drawn by reason of an Interest Drawing or Final Drawing under a
Primary Liquidity Facility will be immediately due and payable, together with
interest on the amount of such drawing. From the date of the drawing to (but
excluding) the third business day following the applicable Primary Liquidity
Provider's receipt of the notice of such Interest Drawing, interest will accrue
at the Base Rate plus 1.50% per annum. Thereafter, interest will accrue at
Liquidity Facility LIBOR for the applicable interest period plus 1.50% per
annum. In the case of the Final Drawing, however, the Subordination Agent may
convert the Final Drawing into a drawing bearing interest at the Base Rate plus
1.50% per annum on the last day of an interest period for such Drawing.
"Base Rate" means a fluctuating interest rate per annum in effect from time
to time, which rate per annum shall at all times be equal to (a) the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or, if such day is not a business day, for the next preceding business day)
by the Federal Reserve Bank of New York, or if such rate is not so published for
any day that is a business day, the average of the quotations for such day for
such transactions received by the applicable Primary Liquidity Provider from
three Federal funds brokers of recognized standing selected by it, plus (b)
one-quarter of one percent 1/4 of 1%).
"Liquidity Facility LIBOR" means, with respect to any interest period, (i)
the rate per annum appearing on display page 3750 (British Bankers
Association--LIBOR) of the Dow Jones Markets Service (or any successor or
substitute therefor) at approximately 11:00 A.M. (London time) two business days
before the first day of such interest period, as the rate for dollar deposits
with a maturity comparable to such interest period, or (ii) if the rate
calculated pursuant to clause (i) above is not available, the average (rounded
upwards, if necessary, to the next 1/16 of 1%) of the rates per annum at which
deposits in dollars are offered for the relevant interest period by three banks
of recognized standing selected by the applicable Primary Liquidity Provider in
the London interbank market at approximately 11:00 A.M. (London time) two
business days before the first day of such interest period in an amount
approximately equal to the principal amount of the LIBOR Advance to which such
interest period is to apply and for a period comparable to such interest period.
Downgrade Drawings and Non-Extension Drawings
The amount drawn under any Primary Liquidity Facility by reason of a
Downgrade Drawing or a Non-Extension Drawing will be treated as follows:
- Such amount will be released on any Distribution Date to the applicable
Primary Liquidity Provider to the extent that such amount exceeds the
Required Amount (calculated, in the case of the Class G-1 Primary
Liquidity Facility, using the maximum Capped Interest Rate at any time
thereafter).
- Any portion of such amount withdrawn from the Cash Collateral Account for
such Certificates to pay interest on such Certificates will be treated in
the same way as Interest Drawings.
- The balance of such amount will be invested in certain specified eligible
investments.
Any Downgrade Drawing under any of the Primary Liquidity Facilities, other
than any portion thereof applied to the payment of interest on the Certificates,
will bear interest (x) subject to clause (y) below, at a
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rate equal to Liquidity Facility LIBOR for the applicable interest period plus a
specified margin on the outstanding amount from time to time of such Downgrade
Drawing and (y) from and after the date, if any, on which it is converted into a
Final Drawing as described below under "--Liquidity Events of Default", at a
rate equal to Liquidity Facility LIBOR for the applicable interest period (or,
as described in the first paragraph under "--Interest Drawings and Final
Drawings", the Base Rate) plus 1.50% per annum.
Any Non-Extension Drawing under any of the Primary Liquidity Facilities,
other than any portion thereof applied to the payment of interest on the
Certificates, will bear interest (x) subject to clause (y) below, in an amount
equal to the investment earnings on amounts deposited in the Cash Collateral
Account attributable to such Primary Liquidity Facility plus a specified margin
on the outstanding amount from time to time of such Non-Extension Drawing and
(y) from and after the date, if any, on which it is converted into a Final
Drawing as described below under "--Liquidity Events of Default", at a rate
equal to Liquidity Facility LIBOR for the applicable interest period (or, as
described in the first paragraph under "--Interest Drawings and Final Drawings",
the Base Rate) plus 1.50% per annum.
LIQUIDITY EVENTS OF DEFAULT
Events of Default under each Primary Liquidity Facility (each, a "Liquidity
Event of Default") will consist of:
- The acceleration of all the Equipment Notes (provided, that if such
acceleration occurs during the Delivery Period, the aggregate principal
amount thereof exceeds $140 million).
- Certain bankruptcy or similar events involving Continental. (Primary
Liquidity Facilities, Section 1.01)
If (i) any Liquidity Event of Default under any Primary Liquidity Facility
has occurred and is continuing and (ii) less than 65% of the aggregate
outstanding principal amount of all Equipment Notes are Performing Equipment
Notes, the applicable Primary Liquidity Provider may, in its discretion, give a
notice of termination of such Primary Liquidity Facility (a "Termination
Notice"). The Termination Notice will have the following consequences:
- The related Primary Liquidity Facility will expire on the fifth Business
Day after the date on which such Termination Notice is received by the
Subordination Agent.
- The Subordination Agent will promptly request, and the applicable Primary
Liquidity Provider will make, a Final Drawing thereunder in an amount
equal to the then Maximum Available Commitment thereunder.
- Any Drawing remaining unreimbursed as of the date of termination will be
automatically converted into a Final Drawing under such Primary Liquidity
Facility.
- All amounts owing to the applicable Primary Liquidity Provider
automatically will be accelerated.
Notwithstanding the foregoing, the Subordination Agent will be obligated to
pay amounts owing to the Primary Liquidity Provider only to the extent of funds
available therefor after giving effect to the payments in accordance with the
provisions set forth under "Description of the Intercreditor Agreement--Priority
of Distributions". (Liquidity Facilities, Section 6.01) Upon the circumstances
described below under "Description of the Intercreditor Agreement--Intercreditor
Rights", a Primary Liquidity Provider may become the Controlling Party with
respect to the exercise of remedies under the Indentures. (Intercreditor
Agreement, Section 2.6(c))
PRIMARY LIQUIDITY PROVIDER
The initial Primary Liquidity Provider for the Offered Certificates will be
Landesbank Hessen-Thuringen Girozentrale. Landesbank Hessen-Thuringen
Girozentrale has short-term unsecured debt ratings of P-1 from Moody's and A-1+
from Standard & Poor's.
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ABOVE-CAP LIQUIDITY FACILITY
GENERAL
The Subordination Agent and the Above-Cap Liquidity Provider will enter
into an irrevocable interest rate cap agreement with respect to the Class G-1
Trust (the "Above-Cap Liquidity Facility"). There will be no Above-Cap Liquidity
Facility with respect to the Class G-2 Trust.
PAYMENTS
Under the Above-Cap Liquidity Facility, the Above-Cap Liquidity Provider
will make payments on any Regular Distribution Date if (i) after giving effect
to the provisions of the Intercreditor Agreement (but without regard to drawings
under the Primary Liquidity Facility for the Class G-1 Trust or withdrawals from
the related Cash Collateral Account or Above-Cap Account), the Subordination
Agent does not have sufficient funds for the payment of interest on the Class
G-1 Certificates, and (ii) then effective LIBOR exceeds the Capped LIBOR, in an
amount (an "Above-Cap Payment") equal to (regardless of whether any portion of
such amount has been or is being funded by the Primary Liquidity Provider as an
Interest Drawing) the product of (x) the excess of LIBOR over the Capped LIBOR,
multiplied by (y) the Pool Balance of the Class G-1 Certificates, multiplied by
(z) actual days elapsed in the applicable interest period divided by 360.
An Above-Cap Payment will be made to the Subordination Agent which will
immediately deposit such Above-Cap Payment in the Above-Cap Account to be
available for withdrawals as described in "--Above-Cap Account" below.
The Above-Cap Liquidity Facility will be available to make payments only as
long as the Primary Liquidity Facility for the G-1 Trust is available to be
drawn or there are amounts in the related Cash Collateral Account or in the
Above-Cap Account available to be withdrawn.
The Above-Cap Liquidity Facility does not provide for payments thereunder
to pay, directly or indirectly, principal of or premium on, or Break-Amount (if
any) with respect to, the Class G-1 Certificates or principal of or interest or
premium on, or Break-Amount (if any) with respect to, the Certificates of any
other Class. (Intercreditor Agreement, Section 3.6) In addition, the Above-Cap
Liquidity Facility does not provide for payments thereunder to pay any amounts
payable with respect to Deposits. The Subordination Agent will have no
obligation to reimburse the Above-Cap Liquidity Provider for any Above-Cap
Payment.
If at any time (i) the short-term unsecured debt rating of an Above-Cap
Liquidity Provider (or, in the case of the initial Above-Cap Liquidity Facility,
the Above-Cap Liquidity Guarantor) then issued by either Rating Agency is lower
than the Threshold Rating (ii) in the case of the initial Above-Cap Liquidity
Facility, the Above-Cap Liquidity Guarantor's guarantee of the initial Above-Cap
Liquidity Provider's obligations thereunder becoming invalid or unenforceable,
or (iii) the occurrence of certain other events relating to certain changes in
law or other circumstances, then the Above-Cap Liquidity Facility may be
replaced by a replacement Above-Cap Facility to be provided by one or more
financial institutions having such short-term unsecured debt ratings issued by
both Rating Agencies which are equal to or higher than the Threshold Rating. If
the Above-Cap Liquidity Facility is not replaced within ten days after notice of
such downgrading, the Above-Cap Liquidity Provider will pay to the Subordination
Agent for deposit into an account (the "Above-Cap Collateral Account") for the
benefit of the Class G-1 Certificates an amount in cash (the "Above-Cap
Collateral Amount") equal to the product of:
- 1.528, multiplied by
- 20% per annum minus Capped LIBOR then in effect, multiplied by
- the Pool Balance of the Class G-1 Certificates,
plus all other unpaid amounts then due under the Above-Cap Liquidity Facility.
Upon such payment, the Above-Cap Liquidity Facility shall terminate. The
Above-Cap Liquidity Provider will have the right to replace the Above-Cap
Liquidity Facility by a replacement Liquidity Facility or to terminate the
Above-Cap
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Liquidity Facility by paying the Above-Cap Collateral Amount upon the occurrence
of certain events relating to deduction or withholding for tax.
The Above-Cap Collateral Amount will be used for the same purposes and
under the same circumstances, and subject to the same conditions, as cash
payments of "Above-Cap Payments" under the Above-Cap Liquidity Facility (were
such Liquidity Facility still in effect) would be used. Cash deposited into the
account will be invested in certain specified eligible investments.
The Above-Cap Liquidity Facility provides that the Above-Cap Liquidity
Provider's obligations thereunder will expire on the earlier of the first
Business Day after (i) the Final Maturity Date for the Class G-1 Certificates
and (ii) the date on which the Pool Balance of the Class G-1 Certificates equals
zero.
ABOVE-CAP ACCOUNT
The Subordination Agent will maintain an account (the "Above-Cap Account")
for the Class G-1 Trust into which Above-Cap Payments made by the Above-Cap
Liquidity Provider will be deposited.
If, on any Regular Distribution Date, after giving effect to the
subordination provisions of the Intercreditor Agreement and after giving effect
to any Interest Drawing under the Primary Liquidity Facility for the Class G-1
Trust or withdrawals from the related Cash Collateral Account, there are
insufficient funds available to the Subordination Agent to pay interest on the
Class G-1 Certificates (regardless of whether LIBOR is lower or higher than
Capped LIBOR), the Subordination Agent shall make a withdrawal from the
Above-Cap Account to fund such shortfall to the extent funds are available in
the Above-Cap Account (after giving effect to any Above-Cap Payment).
Amounts deposited into the Above-Cap Account are not available to pay
principal of or any premium on, or Break Amount (if any) with respect to, the
Certificates of any Class. On the earlier of the first Business Day after (i)
the Final Maturity Date for the Class G-1 Certificates and (ii) the date of
payment of Final Distributions with respect to such Certificates, the
Subordination Agent will pay to the Above-Cap Liquidity Provider an amount equal
to the sum of the amounts remaining in the Above-Cap Account and the Above-Cap
Collateral Account, if any.
Amounts in the Above-Cap Account (if any), together with the maximum amount
of Interest Drawings available under the Primary Liquidity Facility for the
Class G-1 Trust, are expected to provide an amount sufficient to pay interest
(calculated at the Stated Interest Rate for the Class G-1 Certificates) on the
Class G-1 Certificates on up to six consecutive Regular Distribution Dates
(without regard to any expected future payments of principal on such
Certificates).
Notwithstanding the subordination provisions of the Intercreditor
Agreement, the holders of the Class G-1 Certificates will be entitled to receive
and retain the proceeds of withdrawals from the Above-Cap Account.
INITIAL ABOVE-CAP LIQUIDITY PROVIDER
The initial Above-Cap Liquidity Provider will be Merrill Lynch Capital
Services, Inc. (the "Above-Cap Liquidity Provider" and, together with the
Primary Liquidity Provider, the "Liquidity Providers"). The obligations of the
initial Above-Cap Liquidity Provider under the Above-Cap Liquidity Facility will
be guaranteed by its parent company, Merrill Lynch & Co., Inc. (the "Above-Cap
Liquidity Guarantor"). The Above-Cap Liquidity Guarantor has short-term
unsecured debt ratings of P-1 from Moody's and A-1+ from Standard & Poor's.
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DESCRIPTION OF THE POLICIES AND THE POLICY PROVIDER AGREEMENT
The following summary describes all material terms of the Policies and
certain provisions of the Policy Provider Agreement. The summary supplements
(and, to the extent inconsistent therewith, replaces) the description of the
general terms and provisions relating to the Intercreditor Agreement set forth
in the Prospectus. The summary does not purport to be complete and is qualified
in its entirety by reference to all of the provisions of the Policies and the
Policy Provider Agreement, each of which will be filed as an exhibit to a
Current Report on Form 8-K to be filed by Continental with the Commission. The
provisions of the Policies are substantially identical except as otherwise
indicated.
THE POLICIES
The Policy Provider will issue a certificate guarantee insurance policy
(each, a "Policy") in favor of the Subordination Agent with respect to each
Offered Certificate Trust for the benefit of the Trustee for such Trust and the
holders of the Certificates issued by such Trust (and the holders of the Escrow
Receipts attached to such Certificates in respect of interest only). The
Policies do not cover any amounts payable on the Subordinated Certificates. The
Intercreditor Agreement directs the Subordination Agent to make a drawing under
the Policy for a Class of Offered Certificates under the following five
circumstances:
INTEREST DRAWINGS
If on any Regular Distribution Date (other than the applicable Final
Maturity Date) for a Class of Offered Certificates after giving effect to the
subordination provisions of the Intercreditor Agreement and to the application
of any amounts received by the Escrow Agent in the Paying Agent Account for such
Class in respect of accrued interest on the Deposits for such Class on such
Distribution Date, any drawing paid under the Primary Liquidity Facility for
such Class in respect of interest due on the Certificates of such Class on such
Distribution Date, any withdrawal of funds from the Cash Collateral Account for
such Class in respect of such interest and, in the case of the Class G-1
Certificates, any withdrawal from the Above-Cap Account (collectively, "Prior
Funds"), the Subordination Agent does not then have sufficient funds available
for the payment of all amounts due and owing in respect of accrued interest on
the Certificates for such Class at the applicable Stated Interest Rate and,
without duplication, accrued and unpaid interest on any Deposit relating to the
Escrow Receipts attached to such Certificates (together, "Accrued Interest"),
the Subordination Agent is to request a Policy Drawing under the Policy for such
Class in an amount sufficient to enable the Subordination Agent to pay such
Accrued Interest.
PROCEEDS DEFICIENCY DRAWING
If, except as provided under "--No Proceeds Drawing" below, on any Special
Distribution Date for a Class of Offered Certificates established by the
Subordination Agent by reason of its receipt of a Special Payment constituting
the proceeds of any Equipment Note held by the Trust for such Class or the
related Collateral under (and as defined in) the related Indenture, as the case
may be (each, a "Disposition"), after giving effect to the subordination
provisions of the Intercreditor Agreement and to the application of any Prior
Funds, the Subordination Agent does not then have sufficient funds available for
a reduction in the outstanding Pool Balance for such Class by an amount equal to
the outstanding principal amount of such Equipment Note (determined immediately
prior to the receipt of such proceeds) plus accrued and unpaid interest on the
amount of such reduction at the applicable Stated Interest Rate for the period
from the immediately preceding Regular Distribution Date to such Special
Distribution Date, the Subordination Agent is to request a Policy Drawing under
the Policy for such Class in an amount sufficient to enable the Subordination
Agent to pay the amount of such reduction plus such accrued interest.
NO PROCEEDS DRAWING
On the first Business Day (which shall be a Special Distribution Date) that
is 24 months after the last date on which any payment was made in full on any
Equipment Note held by an Offered Certificate Trust as to which there has
subsequently been a failure to pay principal or that has subsequently been
accelerated, if
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the Subordination Agent has not received a Special Payment constituting proceeds
from the Disposition of or in respect of that Equipment Note, the Subordination
Agent is to request a Policy Drawing under the Policy for such Trust in an
amount equal to the then outstanding principal amount of such Equipment Note
plus accrued and unpaid interest thereon at the applicable Stated Interest Rate
from the immediately preceding Regular Distribution Date to that Special
Distribution Date. Unless a Policy Provider Election has been made with respect
to such Equipment Note, the Subordination Agent is to give prompt notice to the
Trustee for such Trust and the Policy Provider setting forth the non-receipt of
any such Special Payment, which notice is to be given not less than 25 days
prior to such Special Distribution Date. After the payment by the Policy
Provider in full of such amount of principal and accrued interest for such
Policy Drawing, the Subordination Agent will have no right to request any
further Policy Drawing in respect of any subsequent sale or other disposition of
such Equipment Note except for Preference Amounts.
Notwithstanding the foregoing, under each Policy, the Policy Provider has
the right, so long as no Policy Provider Default shall have occurred and be
continuing, to make a "Policy Provider Election" instead by giving notice to the
Subordination Agent at least 35 days prior to the end of any such 24-month
period, in which case:
- On the Special Distribution Date established pursuant to the preceding
paragraph, the Policy Provider shall pay an amount equal to any shortfall
in the scheduled principal and interest payable on such Equipment Note
(without regard to the acceleration thereof) during such 24-month period
(reduced by the amount of funds received from the Primary Liquidity
Facility for such Class, the Cash Collateral Account for such Class and,
in the case of the Class G-1 Certificates, the Above-Cap Account, in each
case with respect to such interest).
- On each Regular Distribution Date that occurs after such Special
Distribution Date, the Policy Provider shall permit drawings under the
Policy for such Class for an amount equal to the scheduled principal and
interest that were to become due on such Equipment Note on the related
payment date (without regard to any acceleration thereof or any funds
available under any Primary Liquidity Facility, any Cash Collateral
Account or the Above-Cap Account) until the establishment of an Election
Distribution Date or a Special Distribution Date elected by the Policy
Provider upon 20 days' notice.
- On an Election Distribution Date or a Special Distribution Date elected
by the Policy Provider upon 20 days' notice, the Subordination Agent
shall be required to request a Policy Drawing for an amount equal to the
then outstanding principal balance of such Equipment Note and accrued
interest thereon at the applicable Stated Interest Rate from the
immediately preceding Regular Distribution Date to such Election
Distribution Date or such Special Distribution Date less any Policy
Drawings previously paid by the Policy Provider in respect of principal
on such Equipment Note, without derogation of the Policy Provider's
continuing obligations for all previous requests for Policy Drawings that
remain unpaid in respect of such Equipment Note.
The Intercreditor Agreement instructs the Subordination Agent to make each
such drawing under the Policy.
In addition, regardless of whether or not the Policy Provider makes a
Policy Provider Election, the Policy Provider will honor drawings under the
Policy for any Class of Offered Certificates by the Primary Liquidity Provider
for such Class to cover the payment to such Primary Liquidity Provider of
interest (other than default interest) accruing on the outstanding drawings
under the related Primary Liquidity Facility from and after the end of such
24-month period as and when such interest becomes due in accordance with such
Primary Liquidity Facility.
FINAL POLICY DRAWING
If on the Final Maturity Date of any Class of Offered Certificates after
giving effect to the subordination provisions of the Intercreditor Agreement and
to the application of any Prior Funds, the Subordination Agent does not then
have sufficient funds available for the payment in full of the Final
Distributions (calculated as of such date but excluding any accrued and unpaid
Make-Whole Premium or Break Amount) on such Certificates, the Subordination
Agent is to request a Policy Drawing under the Policy for such class in an
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amount sufficient to enable the Subordination Agent to pay the Final
Distributions (calculated as of such date but excluding any accrued and unpaid
Make-Whole Premium or Break Amount) on such Certificates.
AVOIDANCE DRAWING
If at any time the Subordination Agent has actual knowledge of the issuance
of any Order, the Subordination Agent is to give prompt notice to each Trustee,
each Liquidity Provider and the Policy Provider of such Order and, prior to the
expiration of the Policy for any Offered Certificate Trust, to request a Policy
Drawing for the relevant Preference Amount and to deliver to the Policy Provider
a copy of the documentation required by the Policy for such Trust with respect
to such Order. To the extent that any portion of such Preference Amount is to be
paid to the Subordination Agent (and not to any receiver, conservator,
debtor-in-possession or trustee in bankruptcy as provided in such Policy), the
Subordination Agent shall establish as a Special Distribution Date the date that
is the earlier of three Business Days after the date of the expiration of such
Policy and the Business Day that immediately follows the 25th day after that
notice for distribution of such portion of the proceeds of such Policy Drawing.
With respect to that Special Distribution Date, the Subordination Agent is to
request a Policy Drawing for the relevant Preference Amount and to deliver to
such Policy Provider a copy of the documentation required by such Policy with
respect to such Order.
GENERAL
All requests by the Subordination Agent for a Policy Drawing under any
Policy are to be made by it no later than 1:00 p.m. (New York City time) on the
applicable Distribution Date and in the form required by such Policy and
delivered to the Policy Provider in accordance with such Policy. All proceeds of
any Policy Drawing under the Policy for any Offered Certificate Trust are to be
deposited by the Subordination Agent in a separate policy account and from there
paid to the Trustee for such Trust (or the Escrow Agent, as the case may be) for
distribution to the holders of the Certificates issued by such Trust (or the
Escrow Receipts attached to such certificates, as the case may be) without
regard to the subordination provisions of the Intercreditor Agreement. In the
case of any Preference Amounts, however, all or part of the Policy Drawing will
be paid directly to the bankruptcy receiver, conservator, debtor-in-possession
or trustee to the extent such amounts have not been paid by the
Certificateholders. If any request for a Policy Drawing is rejected as not
meeting the requirements of any Policy, the Subordination Agent is to resubmit
such request so as to meet such requirements.
Each Policy provides that if such a request for a Policy Drawing is
properly submitted or resubmitted it will pay to the Subordination Agent for
deposit in a separate policy account the applicable payment under such Policy no
later than 4:00 p.m. on the later of the relevant Distribution Date and the date
the request is received by the Policy Provider (if the request is received by
1:00 p.m. on such date) or the next Business Day (if the request is received
after that time).
Once any payment under a Policy is paid to the Subordination Agent, the
Policy Provider will have no further obligation in respect of those payments.
THE POLICY PROVIDER SHALL NOT BE REQUIRED TO MAKE ANY PAYMENT EXCEPT AT THE
TIMES AND IN THE AMOUNTS AND UNDER THE CIRCUMSTANCES EXPRESSLY SET FORTH IN THE
POLICIES.
The Policy for any Offered Certificate Trust does not cover (i) shortfalls,
if any, attributable to the liability of such Trust, the Trustee of such Trust
or the Subordination Agent for withholding taxes, if any (including interest and
penalties in respect of that liability), (ii) any premium on prepayment or other
acceleration payment payable in respect of the Certificates issued by such Trust
or the related Escrow Receipts, (iii) any Break Amount, Make-Whole Premium,
Deposit Break Amount or Deposit Make-Whole Premium or (iv) any failure of the
Subordination Agent or the Trustee of such Trust to make any payment due to the
holders of the Certificates issued by such Trust from funds received.
The Policy Provider's obligation under the Policy for such Trust will be
discharged to the extent that funds are received by the Subordination Agent for
distribution to the Trustee of such Trust and the holders of Certificates issued
by such Trust or the applicable Escrow Agent and the holders of Escrow Receipts
attached to such certificates, whether or not the funds are properly distributed
by the Subordination Agent, the applicable Escrow Agent or the Trustee of such
Trust.
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Each Policy is noncancellable. The Policy for each Trust expires and
terminates without any action on the part of the Policy Provider or any other
person on the date (the "Termination Date") that is one year and one day
following the date on which Final Distributions are made on the Certificates
issued by such Trust, unless an Insolvency Proceeding has commenced and has not
been concluded or dismissed on the Termination Date, in which case on the later
of (i) the date of the conclusion or dismissal of such Insolvency Proceeding
without continuing jurisdiction by the court in such Insolvency Proceeding and
(ii) the date on which the Policy Provider has made all payments required to be
made under the terms of such Policy in respect of Preference Amounts. No portion
of the premium under any Policy is refundable for any reason including payment
or provision being made for payment.
Each Policy is issued under and pursuant to, and shall be construed under,
the laws of the State of New York.
DEFINITIONS
"Order" means the order referred to in the definition of the term
"Preference Amount".
"Election Distribution Date" means, with respect to any Policy, any Special
Distribution Date specified by the Subordination Agent upon 20 days' notice, by
reason of (i) the occurrence and continuation of a Policy Provider Default under
such Policy occurring after a Policy Provider Election or (ii) the receipt of a
Special Payment constituting the proceeds of a Disposition relating to any
Equipment Note as to which a Policy Provider Election has been given under such
Policy.
"Insolvency Proceeding" means the commencement, after the Issuance Date, of
any bankruptcy, insolvency, readjustment of debt, reorganization, marshalling of
assets and liabilities or similar proceedings by or against Continental or any
Liquidity Provider and the commencement, after the Issuance Date, of any
proceedings by Continental or any Liquidity Provider for the winding up or
liquidation of its affairs or the consent, after the Issuance Date, to the
appointment of a trustee, conservator, receiver or liquidator in any bankruptcy,
insolvency, readjustment of debt, reorganization, marshalling of assets and
liabilities or similar proceedings of or relating to Continental or any
Liquidity Provider.
"Preference Amount" means, with respect to a Policy relating to any Offered
Certificate Trust, any payment of principal of, or interest at the applicable
Stated Interest Rate on, the Equipment Notes held by such Trust made to the
Trustee for such Trust or the Subordination Agent or (without duplication) any
payment of the Pool Balance of, or interest at the applicable Stated Interest
Rate on, the Certificates issued by such Trust or any payment of the proceeds of
any drawing under the Primary Liquidity Facility for such Trust or, in the case
of the Class G-1 Trust, the Above-Cap Account made to a holder which has become
recoverable or been recovered from the Trustee for such Trust, the Subordination
Agent or the holders of the Certificates issued by such Trust (as the case may
be) as a result of such payment being determined or deemed a preferential
transfer pursuant to the United States Bankruptcy Code or otherwise rescinded or
requested to be returned in accordance with a final, nonappealable order of a
court of competent jurisdiction exercising jurisdiction in an insolvency
proceeding.
THE POLICY PROVIDER AGREEMENT
The Subordination Agent, Continental and the Policy Provider will enter
into an insurance and indemnity agreement (the "Policy Provider Agreement") to
be dated as of the Issuance Date pursuant to which Continental agrees to
reimburse the Policy Provider for amounts paid pursuant to claims made under
each Policy. Pursuant to the Policy Provider Agreement, Continental agrees to
pay the Policy Provider a premium for each Policy based on the Pool Balance of
the related Certificates and a fee in connection with any prepayment of such
Certificates (including by reason of an acceleration of the underlying Equipment
Notes, but excluding a prepayment associated with an event of loss of an
Aircraft) and to reimburse the Policy Provider for certain expenses.
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DESCRIPTION OF THE INTERCREDITOR AGREEMENT
The following summary describes all material provisions of the
Intercreditor Agreement (the "Intercreditor Agreement") among the Trustees, the
Liquidity Providers, the Policy Provider and Wilmington Trust Company, as
subordination agent (the "Subordination Agent"). The summary supplements (and,
to the extent inconsistent therewith, replaces) the description of the general
terms and provisions relating to the Intercreditor Agreement set forth in the
Prospectus. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Intercreditor Agreement,
which will be filed as an exhibit to a Current Report on Form 8-K to be filed by
Continental with the Commission.
INTERCREDITOR RIGHTS
CONTROLLING PARTY
Each Loan Trustee will be directed in taking, or refraining from taking,
any action under an Indenture or with respect to the Equipment Notes issued
under such Indenture, by the holders of at least a majority of the outstanding
principal amount of the Equipment Notes issued under such Indenture, so long as
no Indenture Default shall have occurred and be continuing thereunder. For so
long as the Subordination Agent is the registered holder of the Equipment Notes,
the Subordination Agent will act with respect to the preceding sentence in
accordance with the directions of the Trustees for whom the Equipment Notes
issued under such Indenture are held as Trust Property, to the extent
constituting, in the aggregate, directions with respect to the required
principal amount of the Equipment Notes, except that so long as the Final
Distributions on the Offered Certificates have not been made or any Policy
Provider Obligations remain outstanding and no Policy Provider Default shall
have occurred and be continuing, the Subordination Agent shall request
directions from the Policy Provider rather than the Class G-1 Trustee with
respect to the Series G-1 Equipment Notes or the Class G-2 Trustee with respect
to the Series G-2 Equipment Notes (subject to the proviso contained in "--
Voting of Equipment Notes").
After the occurrence and during the continuance of an Indenture Default
under an Indenture, each Loan Trustee will be directed in taking, or refraining
from taking, any action thereunder or with respect to the Equipment Notes issued
under such Indenture, including acceleration of such Equipment Notes or
foreclosing the lien on the related Aircraft, by the Controlling Party, subject
to the limitations described below. See "Description of the
Certificates--Indenture Defaults and Certain Rights Upon an Indenture Default"
for a description of the rights of the Certificateholders of each Trust to
direct the respective Trustees.
The "Controlling Party" will be:
- Policy Provider or, if a Policy Provider Default is continuing:
(1) The Class G-1 Trustee or Class G-2 Trustee, whichever represents the
Class with the larger principal amount of Certificates outstanding at
the time that the Indenture Default occurs.
(2) Upon payment of Final Distributions to the holders of such larger
Class, the other of the Class G-1 Trustee or Class G-2 Trustee.
- Upon payment of Final Distributions to the holders of Class G-1 and G-2
Certificates and (unless a Policy Provider Default is continuing) of any
obligations to the Policy Provider, the Trustees for the Subordinated
Certificates (subject to certain ranking provisions between such
Trustees).
- Under certain circumstances, and notwithstanding the foregoing, the
Primary Liquidity Provider with the largest amount owed to it, as
discussed in the next paragraph.
At any time after 18 months from the earliest to occur of (x) the date on
which the entire Required Amount as of such date (in the case of the Primary
Liquidity Facility for the Class G-1 Trust, calculated on the basis of the
applicable Capped Interest Rate on each of the six successive Regular
Distribution Dates immediately following such date or, if such date is a Regular
Distribution Date, on such date and the succeeding five Regular Distribution
Dates) under any Primary Liquidity Facility shall have been drawn (excluding a
Downgrade Drawing or Non-Extension Drawing but including a Final Drawing or a
Downgrade
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Drawing or a Non-Extension Drawing that has been converted to a Final Drawing
under such Primary Liquidity Facility) and remain unreimbursed, (y) the date on
which the portion of any Downgrade Drawing or Non-Extension Drawing equal to the
Required Amount as of such date (in the case of the Primary Liquidity Facility
for the Class G-1 Trust, calculated on the basis of the applicable Capped
Interest Rate on each of the six successive Regular Distribution Dates
immediately following such date or, if such date is a Regular Distribution Date,
on such date and the succeeding five Regular Distribution Dates) under any
Primary Liquidity Facility shall have been withdrawn from the relevant Cash
Collateral Account to pay interest on the relevant Class of Certificates and
remain unreimbursed, and (z) the date on which all Equipment Notes under all
Indentures shall have been accelerated (provided that (1) if such acceleration
occurs prior to the Delivery Period Termination Date, the aggregate principal
amount thereof exceeds $140 million, and (2) in the event of a bankruptcy
proceeding under the U.S. Bankruptcy Code in which Continental is a debtor, such
acceleration shall not be considered until the expiration of the applicable
initial period under Section 1110 of the U.S. Bankruptcy Code), the Primary
Liquidity Provider with the highest outstanding amount of Liquidity Obligations
(so long as such Primary Liquidity Provider has not defaulted in its obligation
to make any advance under any Primary Liquidity Facility) shall have the right
to become the Controlling Party with respect to any Indenture, provided that if
the Policy Provider pays to each Primary Liquidity Provider all outstanding
drawings and interest thereon owing to such Primary Liquidity Provider under the
Primary Liquidity Facilities including all interest accrued thereon to such
date, the Policy Provider shall be the Controlling Party so long as the Policy
Provider shall pay to each Primary Liquidity Provider all drawings under the
related Primary Liquidity Facility outstanding from time to time thereafter and
interest thereon and so long as no Policy Provider Default has occurred and is
continuing.
For purposes of giving effect to the rights of the Controlling Party, the
Trustees (other than the Controlling Party) shall irrevocably agree, and the
Certificateholders (other than the Certificateholders represented by the
Controlling Party) will be deemed to agree by virtue of their purchase of
Certificates, that the Subordination Agent, as record holder of the Equipment
Notes, shall exercise its voting rights in respect of the Equipment Notes as
directed by the Controlling Party. (Intercreditor Agreement, Section 2.6) For a
description of certain limitations on the Controlling Party's rights to exercise
remedies, see "Description of the Equipment Notes--Remedies".
"Policy Provider Default" shall mean the occurrence of any of the following
events: (a) the Policy Provider fails to make a payment required under any
Policy in accordance with its terms and such failure remains unremedied for two
Business Days following the delivery of written notice of such failure to the
Policy Provider or (b) the Policy Provider (i) files any petition or commences
any case or proceeding under any provisions of any federal or state law relating
to insolvency, bankruptcy, rehabilitation, liquidation or reorganization, (ii)
makes a general assignment for the benefit of its creditors or (iii) has an
order for relief entered against it under any federal or state law relating to
insolvency, bankruptcy, rehabilitation, liquidation or reorganization that is
final and nonappealable, or (c) a court of competent jurisdiction, the Wisconsin
Department of Insurance or another competent regulatory authority enters a final
and nonappealable order, judgment or decree (i) appointing a custodian, trustee,
agent or receiver for the Policy Provider or for all or any material portion of
its property (ii) authorizing the taking of possession by a custodian, trustee,
agent or receiver of the Policy Provider (or taking of possession of all or any
material portion of the Policy Provider's property).
"Final Distributions" means, with respect to the Certificates of any Trust
on any Distribution Date, the sum of (x) the aggregate amount of all accrued and
unpaid interest on such Certificates (excluding interest payable on the Deposits
relating to such Trust) and (y) the Pool Balance of such Certificates as of the
immediately preceding Distribution Date (less the amount of the Deposits for
such Class of Certificates as of such preceding Distribution Date other than any
portion of such Deposits thereafter used to acquire Equipment Notes pursuant to
the Note Purchase Agreement). For purposes of calculating Final Distributions
with respect to the Certificates of any Trust, any premium paid on the Equipment
Notes held in such Trust which has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
such Final Distributions.
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SALE OF EQUIPMENT NOTES OR AIRCRAFT
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the immediately following sentence, sell all (but not less than
all) of the Equipment Notes (including the Equipment Notes held by the Trusts
for the Subordinated Certificates) issued under such Indenture to any person. So
long as any Certificates are outstanding, during nine months after the earlier
of (x) the acceleration of the Equipment Notes under any Indenture and (y) the
bankruptcy or insolvency of Continental, without the consent of each Trustee, no
Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes (including the Equipment Notes
held by the Trusts for the Subordinated Certificates).
"Minimum Sale Price" means, with respect to any Aircraft or the Equipment
Notes issued in respect of such Aircraft, at any time, the lesser of (1) 75% of
the Appraised Current Market Value of such Aircraft and (2) the aggregate
outstanding principal amount of such Equipment Notes, plus accrued and unpaid
interest thereon.
PRIORITY OF DISTRIBUTIONS
BEFORE A TRIGGERING EVENT
So long as no Triggering Event shall have occurred (whether or not
continuing), all payments in respect of the Equipment Notes and certain other
payments received on any Distribution Date will be promptly distributed by the
Subordination Agent on such Distribution Date in the following order of
priority:
- To the Primary Liquidity Providers to the extent required to pay the
Liquidity Expenses and to the Policy Provider to the extent required to
pay Policy Expenses.
- To the Primary Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations (as determined after giving effect
to certain payments by the Policy Provider to the Primary Liquidity
Provider) and to the Policy Provider to the extent required to pay
interest accrued on certain Policy Provider Obligations and, if the
Policy Provider has paid to the Primary Liquidity Providers all
outstanding drawings and interest thereon owing to the Primary Liquidity
Providers, to the Policy Provider to the extent required to reimburse the
Policy Provider for the amount of such payment made to the Primary
Liquidity Providers attributable to interest accrued on the drawings.
- To the Primary Liquidity Providers to the extent required to pay or
reimburse the Primary Liquidity Providers for certain Liquidity
Obligations (other than amounts payable pursuant to the two preceding
clauses and as determined after giving effect to certain payments by the
Policy Provider to the Primary Liquidity Providers), if applicable, to
replenish each Cash Collateral Account up to the Required Amount and, if
the Policy Provider has paid to the Primary Liquidity Providers all
outstanding drawings and interest thereon owing to the Primary Liquidity
Providers, to the Policy Provider to the extent required to reimburse the
Policy Provider for the amount of the payment made to the Primary
Liquidity Providers in respect of principal of drawings under the Primary
Liquidity Facilities.
- If applicable, to the extent necessary to replenish the Above-Cap
Collateral Account up to an amount equal to the Above-Cap Collateral
Amount as recalculated as of such date (less any amount then on deposit
in the Above-Cap Account).
- Except, subject to certain conditions, in the case of a Special
Distribution Date solely on account of the redemption of one or more
Series H Equipment Notes or Series I Equipment Notes, to the Class G-1
Trustee and the Class G-2 Trustee to the extent required to pay Expected
Distributions on the Class G-1 Certificates and the Class G-2
Certificates. If available funds are insufficient to pay an Expected
Distribution to each such Class in full, available funds will be
distributed to each of the Class G-1 Trustee and Class G-2 Trustee in the
same proportion as such Trustee's proportionate share of the aggregate
amount of such Expected Distributions.
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- To the Policy Provider to the extent required to pay Policy Provider
Obligations (other than amounts payable pursuant to the first three
clauses above and any Excess Reimbursement Obligations).
- To the Subordinated Certificate Trustees to the extent required to pay
Expected Distributions on the Subordinated Certificates (subject to
rankings of priority between the Subordinated Certificates).
- To the Policy Provider to the extent required to pay any Excess
Reimbursement Obligations.
- To the Subordination Agent and each Trustee for the payment of certain
fees and expenses.
- If applicable, to the extent necessary to replenish the Above-Cap
Collateral Account up to an amount equal to the Above-Cap Collateral
Amount as recalculated as of such date.
"Liquidity Obligations" means the obligations to reimburse or to pay the
Primary Liquidity Providers all principal, interest, fees and other amounts
owing to them under each Primary Liquidity Facility or certain other agreements.
"Liquidity Expenses" means the Liquidity Obligations other than any
interest accrued thereon or the principal amount of any drawing under the
Primary Liquidity Facilities.
"Policy Provider Obligations" means all reimbursement and other amounts,
including fees and indemnities (to the extent not included in Policy Expenses)
due to the Policy Provider under the Policy Provider Agreement and, if the
Primary Liquidity Provider has failed to honor any Interest Drawing, interest on
any Policy Drawing made to cover the shortfall attributable to such failure by
the Primary Liquidity Provider in an amount equal to the amount of interest that
would have accrued on such Interest Drawing if such Interest Drawing had been
made at the interest rate applicable to such Interest Drawing until such Policy
Drawing has been repaid in full. Except as provided in the definition of Policy
Provider Obligations, no interest will accrue on any Policy Drawing.
"Policy Expenses" means all amounts (including amounts in respect of
premiums, fees, expenses or indemnities) owing to the Policy Provider under the
Policy Provider Agreement or certain other agreements other than (i) the amount
of any Excess Reimbursement Obligations, (ii) any Policy Drawing, (iii) any
interest accrued on any Policy Provider Obligation, (iv) certain specified fees
payable to the Policy Provider and (v) reimbursement of and interest on the
Liquidity Obligations in respect of the Primary Liquidity Facilities paid by the
Policy Provider to the Primary Liquidity Providers, provided that if, at the
time of determination, a Policy Provider Default exists, Policy Expenses will
not include any indemnity payments owed to the Policy Provider.
"Policy Drawing" means any payment of a claim under the Policy.
"Excess Reimbursement Obligations" means, (a) in the event of any Policy
Provider Election, the portion of the Policy Provider Obligations that
represents, when added to that portion of any Liquidity Obligations that
represents, interest on the Equipment Note in respect of which the Policy
Provider Election has been made in excess of 24 months of interest at the
interest rate applicable to such Equipment Note and (b) any interest on the
Liquidity Obligations in respect of the Primary Liquidity Facilities paid by the
Policy Provider to the Primary Liquidity Providers from and after the end of the
24-month period referred to under the caption "Description of the Policy and the
Policy Provider Agreement--The Policy--No Proceeds Drawing".
"Expected Distributions" means, with respect to the Certificates of any
Trust on any Distribution Date (the "Current Distribution Date"), the sum of (1)
accrued and unpaid interest on the outstanding Pool Balance of such Certificates
(less the amount of interest, if any, payable with respect to any Deposits
relating to such Trust) and (2) the difference between:
(A) the Pool Balance of such Certificates as of the immediately
preceding Distribution Date (or, if the Current Distribution Date is the
first Distribution Date, as of the Issuance Date) (plus, in the case of the
Subordinated Certificate Trusts, the original aggregate principal amount of
the Equipment Notes purchased by such Trust after the immediately preceding
Distribution Date (or, if the Current
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Distribution Date is the first Distribution Date, the Issuance Date) and
prior to or on the Current Distribution Date) and
(B) the Pool Balance of such Certificates as of the Current
Distribution Date calculated on the basis that (i) the principal of the
Equipment Notes held in such Trust has been paid when due (whether at
stated maturity, upon redemption, prepayment, purchase, acceleration or
otherwise) and such payments have been distributed to the holders of such
Certificates and (ii) the principal of any Equipment Notes formerly held in
such Trust that have been sold pursuant to the Intercreditor Agreement has
been paid in full and such payments have been distributed to the holders of
such Certificates, but without giving effect to any reduction in the Pool
Balance as a result of any distribution attributable to Deposits occurring
after the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, occurring after the
initial issuance of the Certificates of such Trust).
For purposes of determining the priority of distributions on account of the
redemption, purchase or prepayment of all of the Equipment Notes issued pursuant
to an Indenture, clause (1) of the definition of Expected Distributions shall be
deemed to read as follows: "(1) accrued, due and unpaid interest on the
outstanding Pool Balance of such Certificates together with (without
duplication) accrued and unpaid interest on a portion of the outstanding Pool
Balance of such Certificates equal to the outstanding principal amount of the
Equipment Notes held in such Trust and being redeemed, purchased or prepaid
(immediately prior to such redemption, purchase or prepayment), in each case
less the amount of interest, if any, payable with respect to any Deposits
relating to such Trust".
AFTER A TRIGGERING EVENT
Subject to the terms of the Intercreditor Agreement, upon the occurrence of
a Triggering Event and at all times thereafter, all funds received by the
Subordination Agent in respect of the Equipment Notes and certain other payments
will be promptly distributed by the Subordination Agent in the following order
of priority:
- To the Subordination Agent, any Trustee, any Certificateholder, any
Primary Liquidity Provider and the Policy Provider to the extent required
to pay certain out-of-pocket costs and expenses actually incurred by the
Subordination Agent or any Trustee or to reimburse any Certificateholder,
any Primary Liquidity Provider or the Policy Provider in respect of
payments made to the Subordination Agent or any Trustee in connection
with the protection or realization of the value of the Equipment Notes or
any Collateral under (and as defined in) any Indenture (collectively, the
"Administration Expenses").
- To the Primary Liquidity Providers to the extent required to pay the
Liquidity Expenses and to the Policy Provider to pay the Policy Expenses.
- To the Primary Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations (as determined after giving effect
to certain payments by the Policy Provider to the Primary Liquidity
Providers) and to the Policy Provider to the extent required to pay
interest accrued on certain Policy Provider Obligations and, if the
Policy Provider has paid to the Primary Liquidity Providers all
outstanding drawings and interest thereon owing to the Primary Liquidity
Providers, to the Policy Provider to the extent required to reimburse the
Policy Provider for the amount of such payment made to the Primary
Liquidity Providers attributable to interest accrued on such drawings.
- To (i) the Primary Liquidity Providers to the extent required to pay the
outstanding amount of all Liquidity Obligations (as determined after
giving effect to certain payments by the Policy Provider to the Primary
Liquidity Providers), (ii) if applicable, with respect to any particular
Primary Liquidity Facility, unless (x) less than 65% of the aggregate
outstanding principal amount of all Equipment Notes are Performing
Equipment Notes and a Liquidity Event of Default shall have occurred and
is continuing under such Primary Liquidity Facility or (y) a Final
Drawing shall have occurred under such Primary Liquidity Facility, to
replenish the Cash Collateral Account with respect to such Primary
Liquidity Facility up to the Required Amount for the related Class of
Certificates (less the amount of any repayments of Interest Drawings
under such Primary Liquidity Facility while sub-clause (x) of
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this clause is applicable) and (iii) if the Policy Provider has paid to
the Primary Liquidity Providers all outstanding drawings and interest
thereon owing to the Primary Liquidity Providers, to the Policy Provider
to the extent required to reimburse the Policy Provider for the amount of
such payment made to such Primary Liquidity Provider in respect of
principal of drawings under the Primary Liquidity Facilities.
- If applicable, unless (x) less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes
and a Liquidity Event of Default shall have occurred and is continuing
under the Primary Liquidity Facility for the Class G-1 Trust or (y) a
Final Drawing shall have occurred under such Primary Liquidity Facility,
to replenish the Above-Cap Collateral Account up to an amount equal to
the Above-Cap Collateral Amount as recalculated as of such date (less any
amount then on deposit in the Above-Cap Account).
- To the Subordination Agent, any Trustee or any Certificateholder to the
extent required to pay certain fees, taxes, charges and other amounts
payable.
- To the Class G-1 Trustee and the Class G-2 Trustee to the extent required
to pay Adjusted Expected Distributions on the Class G-1 Certificates and
the Class G-2 Certificates. If available funds are insufficient to pay an
Adjusted Expected Distribution to each such Class in full, available
funds will be distributed to each of the Class G-1 Trustee and Class G-2
Trustee in the same proportion as such Trustee's proportionate share of
the aggregate amount of such Adjusted Expected Distributions.
- To the Policy Provider to the extent required to pay Policy Provider
Obligations (other than amounts payable pursuant to the first four
clauses above and any Excess Reimbursement Obligations).
- To the Subordinated Certificate Trustees to the extent required to pay
Adjusted Expected Distributions on the Subordinated Certificates (subject
to rankings of priority between the Subordinated Certificates).
- To the Policy Provider to the extent required to pay any Excess
Reimbursement Obligations.
- If applicable, unless (x) less than 65% of the aggregate outstanding
principal amount of all Equipment Notes are Performing Equipment Notes
and a Liquidity Event of Default shall have occurred and is continuing
under the Primary Liquidity Facility for the Class G-1 Trust or (y) a
Final Drawing shall have occurred under such Primary Liquidity Facility,
to replenish the Above-Cap Collateral Account up to an amount equal to
the Above-Cap Collateral Amount as recalculated as of such date.
"Adjusted Expected Distributions" means, with respect to the Certificates
of any Trust on any Current Distribution Date, the sum of (1) accrued and unpaid
interest on the outstanding Pool Balance of such Certificates (less the amount
of interest, if any, payable with respect to any Deposits relating to such
Trust) and (2) the greater of:
(A) the difference between (x) the Pool Balance of such Certificates
as of the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, as of the Issuance Date)
(plus, in the case of the Subordinated Certificate Trusts, the original
aggregate principal amount of the Equipment Notes purchased by such Trust
after the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, the Issuance Date) and
prior to or on the Current Distribution Date), and (y) the Pool Balance of
such Certificates as of the Current Distribution Date calculated on the
basis that (i) the principal of the Equipment Notes other than Performing
Equipment Notes (the "Non-Performing Equipment Notes") held in such Trust
has been paid in full and such payments have been distributed to the
holders of such Certificates, (ii) the principal of the Performing
Equipment Notes held in such Trust has been paid when due (but without
giving effect to any acceleration of Performing Equipment Notes) and such
payments have been distributed to the holders of such Certificates and
(iii) the principal of any Equipment Notes formerly held in such Trust that
have been sold pursuant to the Intercreditor Agreement has been paid in
full and such payments have been distributed to the holders of such
Certificates, but without giving effect to any reduction in the Pool
Balance as a result of any distribution attributable to Deposits occurring
after the immediately
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preceding Distribution Date (or, if the Current Distribution Date is the
first Distribution Date, occurring after the initial issuance of the
Certificates of such Trust), and
(B) the amount of the excess, if any, of (i) the Pool Balance of such
Class of Certificates as of the immediately preceding Distribution Date
(or, if the Current Distribution Date is the first Distribution Date, as of
the Issuance Date) (plus, in the case of the Subordinated Certificate
Trusts, the original aggregate principal amount of the Equipment Notes
purchased by such Trust after the immediately preceding Distribution Date
(or, if the Current Distribution Date is the first Distribution Date, the
Issuance Date) and prior to or on the Current Distribution Date), less the
amount of any Deposits for such Class of Certificates as of such preceding
Distribution Date (or, if the Current Distribution Date is the first
Distribution Date, the original aggregate amount of any Deposits for such
Class of Certificates) other than any portion of such Deposits thereafter
used to acquire Equipment Notes pursuant to the Note Purchase Agreement
(the amount described in this clause (i), the "Current Pool Balance"), over
(ii) the Aggregate LTV Collateral Amount for such Class of Certificates for
the Current Distribution Date;
provided that, until the date of the initial LTV Appraisals, clause (B)
shall not apply.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any Make-Whole
Premium or Break Amount paid on the Equipment Notes held in such Trust that has
not been distributed to the Certificateholders of such Trust (other than such
Make-Whole Premium or Break Amount or a portion thereof applied to the payment
of interest on the Certificates of such Trust or the reduction of the Pool
Balance of such Trust) shall be added to the amount of Expected Distributions or
Adjusted Expected Distributions.
"Aggregate LTV Collateral Amount" for any Class of Certificates for any
Distribution Date means the product of (A) (i) the sum of the applicable LTV
Collateral Amounts for each Aircraft, minus (ii) the Pool Balance for each Class
of Certificates, if any, senior to such Class, after giving effect to any
distribution of principal on such Distribution Date with respect to such senior
Class or Classes, multiplied by (B) (i) in the case of the Class G-1
Certificates or Class G-2 Certificates, a fraction the numerator of which equals
the Current Pool Balance for the Class G-1 Certificates or Class G-2
Certificates, as the case may be, and the denominator of which equals the
aggregate Current Pool Balance for the Class G-1 Certificates and Class G-2
Certificates, and (ii) in the case of the Subordinated Certificates, 1.0.
"LTV Collateral Amount" of any Aircraft for any Class of Certificates
means, as of any Distribution Date, the lesser of (i) the LTV Ratio for such
Class of Certificates multiplied by the Appraised Current Market Value of such
Aircraft (or with respect to any such Aircraft which has suffered an Event of
Loss under and as defined in the relevant Indenture, the amount of the insurance
proceeds paid to the related Loan Trustee in respect thereof to the extent then
held by such Loan Trustee (and/or on deposit in the Special Payments Account) or
payable to such Loan Trustee in respect thereof) and (ii) the outstanding
principal amount of the Equipment Notes secured by such Aircraft after giving
effect to any principal payments of such Equipment Notes on or before such
Distribution Date.
"LTV Ratio" means for the Class G-1 Certificates, the Class G-2
Certificates and the Class H Certificates as of any Distribution Date, the
percentages set forth in the following table:
CLASS G-1 CLASS G-2 CLASS H
CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------
52.6% 75.9%
52.6%
"Appraised Current Market Value" of any Aircraft means the lower of the
average and the median of the most recent three LTV Appraisals of such Aircraft.
After a Triggering Event occurs and any Equipment Note becomes a Non-Performing
Equipment Note, the Subordination Agent shall obtain LTV Appraisals of all of
the Aircraft as soon as practicable and additional LTV Appraisals on or prior to
each anniversary of the date of such initial LTV Appraisals; provided that if
the Controlling Party reasonably objects to the appraised value of the Aircraft
shown in such LTV Appraisals, the Controlling Party shall have the right to
obtain or cause to be
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obtained substitute LTV Appraisals (including LTV Appraisals based upon physical
inspection of such Aircraft).
"LTV Appraisal" means a current fair market value appraisal (which may be a
"desk-top" appraisal) performed by any Appraiser or any other nationally
recognized appraiser on the basis of an arm's-length transaction between an
informed and willing purchaser under no compulsion to buy and an informed and
willing seller under no compulsion to sell and both having knowledge of all
relevant facts.
Interest Drawings under the Primary Liquidity Facilities, withdrawals from
the Cash Collateral Account and drawings under the Policy, in each case in
respect of interest on the Certificates of any Offered Certificate Trust, and,
in the case of the Class G-1 Trust, withdrawals from the Above-Cap Account will
be distributed to the Trustee for such Trust, notwithstanding the priority of
distributions set forth in the Intercreditor Agreement and otherwise described
herein. All amounts on deposit in the Cash Collateral Account for any Trust that
are in excess of the Required Amount will be paid to the applicable Primary
Liquidity Provider.
VOTING OF EQUIPMENT NOTES
In the event that the Subordination Agent, as the registered holder of any
Equipment Note, receives a request for its consent to any amendment, supplement,
modification, consent or waiver under such Equipment Note or the related
Indenture (or, if applicable, the related Participation Agreement or other
related document), (i) if no Indenture Default shall have occurred and be
continuing with respect to such Indenture, the Subordination Agent shall request
directions from the Trustee(s) (except that, so long as the Final Distributions
on the Offered Certificates have not been made or any Policy Provider
Obligations remain outstanding and no Policy Provider Default shall have
occurred and be continuing, the Subordination Agent shall request directions
from the Policy Provider rather than the Trustee for any Offered Certificate
Trust with respect to the Equipment Notes held in such Trust) and shall vote or
consent in accordance with such directions and (ii) if any Indenture Default
shall have occurred and be continuing with respect to such Indenture, the
Subordination Agent will exercise its voting rights as directed by the
Controlling Party, subject to certain limitations; provided that no such
amendment, modification, consent or waiver shall, without the consent of the
Primary Liquidity Providers and the Policy Provider, reduce the amount of
principal or interest payable by Continental under any Equipment Note.
(Intercreditor Agreement, Section 9.1(b))
ADDITION OF TRUSTEE FOR CLASS J CERTIFICATES
If the Class J Certificates are issued, the Class J Trustee will become a
party to the Intercreditor Agreement.
THE SUBORDINATION AGENT
Wilmington Trust Company will be the Subordination Agent under the
Intercreditor Agreement. Continental and its affiliates may from time to time
enter into banking and trustee relationships with the Subordination Agent and
its affiliates. The Subordination Agent's address is Wilmington Trust Company,
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Corporate Trust Administration.
The Subordination Agent may resign at any time, in which event a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. The Controlling Party may remove the Subordination Agent for cause as
provided in the Intercreditor Agreement. In such circumstances, a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. Any resignation or removal of the Subordination Agent and appointment
of a successor Subordination Agent does not become effective until acceptance of
the appointment by the successor Subordination Agent. (Intercreditor Agreement,
Section 8.1)
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DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft consist of two Boeing 757-324 aircraft, four Boeing 767-424ER
aircraft and one Boeing 777-224ER aircraft (collectively, the "Aircraft"), all
of which will be newly delivered by the manufacturer during the Delivery Period
(except for the two Boeing 757-324 aircraft which were delivered in February
2002). The Aircraft have been designed to be in compliance with Stage 3 noise
level standards, which are the most restrictive regulatory standards currently
in effect in the United States for aircraft noise abatement.
BOEING 757-324 AIRCRAFT
The Boeing 757-324 aircraft is a medium-range aircraft with a seating
capacity of approximately 210 passengers. The engine type utilized on
Continental's 757-324 aircraft is the Rolls-Royce Model RB211-535E4B37.
BOEING 767-424ER AIRCRAFT
The Boeing 767-424ER aircraft is a long-range aircraft with a seating
capacity of approximately 235 passengers. The engine type utilized on
Continental's 767-424ER aircraft is the General Electric CF6-80C2B8F.
BOEING 777-224ER AIRCRAFT
The Boeing 777-224ER aircraft is a long-range aircraft with a seating
capacity of approximately 283 passengers. The engine type utilized on
Continental's 777-224ER aircraft is the General Electric GE90-90B.
THE APPRAISALS
The table below sets forth the appraised values of the aircraft that may be
financed with the proceeds of this Offering, as determined by AVITAS, Inc.
("AVITAS"), BK Associates, Inc. ("BK") and Morten Beyer and Agnew, Inc. ("MBA"),
independent aircraft appraisal and consulting firms (the "Appraisers"). Under
the Note Purchase Agreement, Continental will select to be financed pursuant to
this Offering four of the six Boeing 767-424ER aircraft and one of the two
Boeing 777-224ER aircraft listed below. Each of the two Boeing 757-324 aircraft
listed below will be financed pursuant to this Offering, subject to the terms of
the Note Purchase Agreement.
EXPECTED SCHEDULED APPRAISER'S VALUATIONS
REGISTRATION MANUFACTURER'S DELIVERY ------------------------------------------ APPRAISED
AIRCRAFT TYPE NUMBER SERIAL NUMBER MONTH(1) AVITAS BK MBA VALUE(2)
------------- ------------ -------------- ------------- ------------ ------------ ------------ ------------
Boeing 757-324 N75853 32812 February 2002 $ 60,300,000 $ 62,800,000 $ 61,840,000 $ 61,646,667
Boeing 757-324 N75854 32813 February 2002 60,300,000 62,800,000 61,840,000 61,646,667
Boeing 767-424ER N68061 29456 March 2002 92,700,000 92,200,000 97,790,000 92,700,000
Boeing 767-424ER N76062 29457 March 2002 92,700,000 92,200,000 97,790,000 92,700,000
Boeing 767-424ER N69063 29458 April 2002 93,400,000 92,400,000 97,990,000 93,400,000
Boeing 767-424ER N76064 29459 April 2002 93,400,000 92,400,000 97,990,000 93,400,000
Boeing 767-424ER N76065 29460 May 2002 93,400,000 92,400,000 98,190,000 93,400,000
Boeing 767-424ER N77066 29461 May 2002 93,400,000 92,400,000 98,190,000 93,400,000
Boeing 777-224ER N78017 31679 March 2002 127,100,000 130,200,000 133,650,000 130,200,000
Boeing 777-224ER N37018 31680 April 2002 128,000,000 130,200,000 133,920,000 130,200,000
---------------
(1) The Boeing 757-324 aircraft were delivered to Continental during February
2002. The actual delivery date for the other aircraft may be subject to
delay or acceleration. See "--Deliveries of Aircraft".
(2) The appraised value of each aircraft for purposes of this Offering is the
lesser of the average and median values of such aircraft as appraised by the
Appraisers.
For purposes of the foregoing chart, AVITAS, BK and MBA each was asked to
provide its opinion as to the appraised value of each aircraft projected as of
the scheduled delivery month of each such aircraft. As part
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of this process, all three Appraisers performed "desk-top" appraisals without
any physical inspection of the aircraft. The appraisals are based on various
assumptions and methodologies, which vary among the appraisals. The Appraisers
have delivered letters summarizing their respective appraisals, copies of which
are annexed to this Prospectus Supplement as Appendix II. For a discussion of
the assumptions and methodologies used in each of the appraisals, reference is
hereby made to such summaries.
An appraisal is only an estimate of value. It is not indicative of the
price at which an aircraft may be purchased from the manufacturer. Nor should it
be relied upon as a measure of realizable value. The proceeds realized upon a
sale of any Aircraft may be less than its appraised value. The value of the
Aircraft in the event of the exercise of remedies under the applicable Indenture
will depend on market and economic conditions, the availability of buyers, the
condition of the Aircraft and other similar factors. Accordingly, there can be
no assurance that the proceeds realized upon any such exercise with respect to
the Equipment Notes and the Aircraft pursuant to the applicable Indenture would
equal the appraised value of such Aircraft or be sufficient to satisfy in full
payments due on such Equipment Notes or the Certificates.
In addition, the value of the Aircraft may be negatively affected as a
consequence of the events of September 11, 2001 referred to under "Risk
Factors--Recent Developments--Last Year's Terrorist Attacks Adversely Affected,
and May Continue to Adversely Affect, Continental's Financial Condition, Results
of Operations and Prospects". Each of the appraisals indicates that current
market values of aircraft have been adversely affected by such events. However,
the appraised values set forth in the appraisals generally assume a stable
market environment and certain other market conditions. Accordingly, the extent
to which the September 11 events have been taken into account in determining
these appraised values varies among the appraisals, as discussed in the attached
appraisal letters. Each of the appraisals notes that the long-term impact on
aircraft values of these events is uncertain.
DELIVERIES OF AIRCRAFT
The aircraft that may be financed with the proceeds of this Offering are
scheduled for delivery under Continental's purchase agreements with The Boeing
Company ("Boeing") from March 2002 through May 2002. See the table under "--The
Appraisals" for the scheduled month of delivery of each such aircraft. The two
Boeing 757-324 Aircraft were delivered to Continental in February 2002. Under
such purchase agreements, delivery of an aircraft may be delayed due to
"excusable delay", which is defined to include, among other things, acts of God,
governmental acts or failures to act, strikes or other labor troubles, inability
to procure materials, or any other cause beyond Boeing's control or not
occasioned by Boeing's fault or negligence.
The Note Purchase Agreement provides that the delivery period (the
"Delivery Period") will expire on August 31, 2002, subject to extension if the
Equipment Notes relating to all of the Aircraft (or Substitute Aircraft in lieu
thereof) have not been purchased by the Trustees on or prior to such date due to
any reason beyond the control of Continental and not occasioned by Continental's
fault or negligence, to the earlier of (i) the date on which the Trustees
purchase Equipment Notes relating to the last Aircraft (or a Substitute Aircraft
in lieu thereof) and (ii) November 30, 2002. In addition, if a labor strike
occurs at Boeing prior to the scheduled expiration of the Delivery Period, the
expiration date of the Delivery Period will be extended by the number of days
that such strike continued in effect.
If delivery of any Aircraft is delayed by more than 30 days after the month
scheduled for delivery or beyond August 31, 2002, Continental has the right to
replace such Aircraft with a Substitute Aircraft, subject to certain conditions.
See "--Substitute Aircraft". If delivery of any Aircraft is delayed beyond the
Delivery Period Termination Date and Continental does not exercise its right to
replace such Aircraft with a Substitute Aircraft, there will be unused Deposits
that will be distributed to Certificateholders together with accrued and unpaid
interest thereon and, in the case of the Class G-1 Trust, Deposit Break Amount,
if any, or, in the case of the Class G-2 Trust, the Deposit Make-Whole Premium,
if any. See "Description of the Deposit Agreements--Unused Deposits".
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SUBSTITUTE AIRCRAFT
If the delivery date for any Aircraft is delayed (i) more than 30 days
after the month scheduled for delivery or (ii) beyond August 31, 2002,
Continental may identify for delivery a substitute aircraft (each, together with
the substitute aircraft referred to below, a "Substitute Aircraft") therefor
meeting the following conditions:
- A Substitute Aircraft must be a Boeing 757-300, 767-400ER or 777-200ER
aircraft manufactured after the Issuance Date.
- One or more Substitute Aircraft of the same or different types may be
substituted for one or more Aircraft of the same or different types so
long as after giving effect thereto the maximum principal amount of
Equipment Notes of each Series issued in respect of the Substitute
Aircraft under the Mandatory Economic Terms would not exceed the maximum
principal amount of the Equipment Notes of each Series that could have
been issued under the Mandatory Economic Terms in respect of the replaced
Aircraft.
- Continental will be obligated to obtain written confirmation from each
Rating Agency that substituting such Substitute Aircraft for the replaced
Aircraft will not result in a withdrawal, suspension or downgrading of
the ratings of any Class of Certificates.
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DESCRIPTION OF THE EQUIPMENT NOTES
The following summary describes all material terms of the Equipment Notes
and supplements (and, to the extent inconsistent therewith, replaces) the
description of the general terms and provisions relating to the Equipment Notes,
the Indentures, the Participation Agreements and the Note Purchase Agreement set
forth in the Prospectus. The summaries make use of terms defined in and are
qualified in their entirety by reference to all of the provisions of the
Equipment Notes, the Indentures, the Participation Agreements and the Note
Purchase Agreement, each of which will be filed as an exhibit to a Current
Report on Form 8-K to be filed by Continental with the Commission. Except as
otherwise indicated, the following summaries relate to the Equipment Notes, the
Indenture and the Participation Agreement that may be applicable to each
Aircraft.
Under the Note Purchase Agreement, Continental will enter into a secured
debt financing with respect to each Aircraft. The Note Purchase Agreement
provides for the relevant parties to enter into a Participation Agreement and an
Indenture relating to the financing of each Aircraft. The description of such
financing agreements in this Prospectus Supplement is based on the forms of such
agreements annexed to the Note Purchase Agreement. However, the terms of the
financing agreements actually entered into may differ from the forms of such
agreements and, consequently, may differ from the description of such agreements
contained in this Prospectus Supplement. Although such changes are permitted,
under the Note Purchase Agreement the terms of such agreements are required (i)
to contain the Mandatory Document Terms and (ii) not to vary the Mandatory
Economic Terms for the Offered Certificates. In addition, Continental will be
obligated to certify to the Trustees that any such modifications do not
materially and adversely affect the Certificateholders. Continental must also
obtain written confirmation from each Rating Agency that the use of financing
agreements modified in any material respect from the forms attached to the Note
Purchase Agreement would not result in a withdrawal, suspension or downgrading
of the ratings of any Class of Certificates. See "Description of the
Certificates--Obligation to Purchase Equipment Notes".
GENERAL
Equipment Notes will be issued in four series with respect to each Aircraft
(the "Series G-1 Equipment Notes", the "Series G-2 Equipment Notes", the "Series
H Equipment Notes" and the "Series I Equipment Notes"; collectively, the
"Equipment Notes" and the Series H Equipment Notes and Series I Equipment Notes,
together, the "Subordinated Equipment Notes"). Continental may elect to issue a
fifth series of Equipment Notes with respect to an Aircraft (the "Series J
Equipment Notes"), which will be funded from sources other than this Offering.
See "Description of the Certificates--Possible Issuance of Class J
Certificates". The Equipment Notes with respect to each Aircraft will be issued
under a separate Indenture between Continental and Wilmington Trust Company, as
indenture trustee thereunder (each, a "Loan Trustee"). The Indentures will not
provide for defeasance, or discharge upon deposit of cash or certain obligations
of the United States, notwithstanding the description of defeasance in the
Prospectus.
Continental's obligations under the Equipment Notes will be general
obligations of Continental.
SUBORDINATION
The Indentures provide for the following subordination provisions
applicable to the Equipment Notes:
- Series G-1 and Series G-2 Equipment Notes issued in respect of an
Aircraft will rank equally in right of payment and will rank senior to
other Equipment Notes issued in respect of such Aircraft.
- Subordinated Equipment Notes issued in respect of an Aircraft will rank
junior in right of payment to the Series G-1 and Series G-2 Equipment
Notes issued in respect of such Aircraft.
- If Continental elects to issue Series J Equipment Notes with respect to
an Aircraft, they will be subordinated in right of payment to the Series
G-1, G-2, H and I Equipment Notes issued with respect to such Aircraft.
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PRINCIPAL AND INTEREST PAYMENTS
Subject to the provisions of the Intercreditor Agreement, interest paid on
the Equipment Notes held in each Offered Certificate Trust will be passed
through to the Certificateholders of such Trust on the dates and at the rate per
annum set forth on the cover page of this Prospectus Supplement with respect to
Certificates issued by such Trust until the final expected Regular Distribution
Date for such Trust. Subject to the provisions of the Intercreditor Agreement,
principal paid on the Equipment Notes held in each Offered Certificate Trust
will be passed through to the Certificateholders of such Trust in scheduled
amounts on the dates set forth herein until the final expected Regular
Distribution Date for such Trust. See "--Determination of LIBOR" for a
discussion of the determination of LIBOR.
Interest will be payable on the unpaid principal amount of each Series G-1
and Series G-2 Equipment Note at the rate applicable to such Equipment Note on
February 15, May 15, August 15 and November 15 of each year, commencing on the
first such date to occur after initial issuance thereof. Interest on the Series
G-1 Equipment Notes is calculated on the basis of the actual number of days
elapsed over a 360-day year. Interest on the Series G-2 Equipment Notes is
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Scheduled principal payments on the Series G-1 Equipment Notes will be made
on February 15 and August 15 in certain years. The entire principal amount of
the Series G-2 Equipment Notes is scheduled to be paid on February 15, 2012. See
"Description of the Certificates--Pool Factors" for a discussion of the
scheduled payments of principal of the Equipment Notes and possible revisions
thereto.
If any date scheduled for a payment of principal, premium (if any) or
interest with respect to the Equipment Notes is not a Business Day, such payment
will be made on the next succeeding Business Day, and interest shall be added
for such additional period in the case of the Series G-1 Equipment Notes but not
in the case of the Series G-2 Equipment Notes.
DETERMINATION OF LIBOR
LIBOR ("LIBOR") for the period commencing on and including the Issuance
Date and ending on but excluding the first Regular Distribution Date (the
"Initial Interest Period" and an "Interest Period") will be determined on the
second Business Day preceding the Issuance Date as the rate for deposits in U.S.
dollars for a period of three months that appears on the display designated as
page "3750" on the Telerate Monitor.
For the purpose of calculating LIBOR for the periods from and including a
Regular Distribution Date to but excluding the next succeeding Regular
Distribution Date (each, also an "Interest Period"), Continental will enter into
a Reference Agency Agreement (the "Reference Agency Agreement") with Wilmington
Trust Company, as reference agent (the "Reference Agent"), the Subordination
Agent and the Escrow Agent. The Reference Agent will determine LIBOR for each
Interest Period following the Initial Interest Period, on a date (the "Reference
Date") that is two London banking days (meaning days on which commercial banks
are open for general business in London, England) before the Regular
Distribution Date on which such Interest Period commences.
On each Reference Date, the Reference Agent will determine LIBOR as the
rate for deposits in U.S. dollars for a period of three months that appears on
the display designated as page "3750" on the Telerate Monitor (or such other
page or service as may replace it) as of 11:00 a.m. (London time).
If the rate determined as described in the foregoing paragraph does not
appear on the Telerate Page 3750, the Reference Agent will determine LIBOR on
the basis of the rates at which deposits in U.S. Dollars are offered by certain
reference banks as described in the Reference Agency Agreement at approximately
11:00 a.m., London time, on the Reference Date for such Interest Period to prime
banks in the London interbank market for a period of three months commencing on
the first day of such Interest Period and in an amount that is representative
for a single transaction in the London interbank market at the relevant time.
The Reference Agent will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that Interest Period will be the
arithmetic mean of the quotations. If fewer than two quotations are provided,
the interest rate for the next Interest Period
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shall be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Reference Agent in good faith and in a commercially
reasonable manner, at approximately 11:00 a.m., New York City time, on the first
day of such Interest Period for loans in U.S. Dollars to leading European banks
for a period of three months commencing on the first day of such Interest Period
and in an amount that is representative for a single transaction in the New York
market at the relevant time, except that, if the banks so selected by the
Reference Agent are not quoting as mentioned above, LIBOR shall be the floating
rate of interest in effect for the last preceding Interest Period.
The Reference Agent's determination of LIBOR (in the absence of negligence,
willful default, bad faith or manifest error) will be conclusive and binding
upon all parties.
As promptly as is practicable after the determination thereof, the
Reference Agent will give notice of its determination of LIBOR for the relevant
Interest Period to Continental, the Trustees, the Loan Trustees, the
Subordination Agent, the Escrow Agent, the Depositary, the Primary Liquidity
Providers, the Above-Cap Liquidity Provider and the Policy Provider.
Certificateholders may obtain such information from the Trustee or otherwise in
the statements included with each distribution of a Scheduled Payment or Special
Payment.
Continental reserves the right to terminate the appointment of the
Reference Agent at any time on 30 days' notice and to appoint a replacement
reference agent in its place. Notice of any such termination will be given to
the holders of the Certificates. The Reference Agent may not be removed or
resign its duties without a successor having been appointed.
REDEMPTION
If an Event of Loss occurs with respect to an Aircraft and such Aircraft is
not replaced by Continental under the related Indenture, the Equipment Notes
issued with respect to such Aircraft will be redeemed, in whole, in each case at
a price equal to the aggregate unpaid principal amount thereof, together with
accrued interest thereon to, but not including, the date of redemption, and, in
the case of the Series G-1 Equipment Notes, Break Amount, if any, but without
premium, on a Special Distribution Date. (Indentures, Section 2.10)
All of the Equipment Notes issued with respect to an Aircraft may be
redeemed prior to maturity at any time at the option of Continental at a price
equal to the aggregate unpaid principal amount thereof, together with accrued
and unpaid interest thereon to, but not including, the date of redemption, plus,
in the case of the Series G-1 and G-2 Equipment Notes, a Make-Whole Premium, if
any, and, in the case of the Series G-1 Equipment Notes, Break Amount, if any.
Continental may elect to redeem all of the Series H or Series I Equipment Notes
at any time, in any case, without redeeming the Series G-1 or G-2 Equipment
Notes, so long as no Indenture Default or certain payment or bankruptcy defaults
exist under the relevant Indenture. Redemption of the Series H Equipment Notes
is subject to certain additional conditions, including the requirement that
Continental simultaneously issue new Series H Equipment Notes having terms the
same in all material respects as the redeemed Series H Equipment Notes, except
that the interest rate may be changed, the maturity date may be extended and the
principal amount may be increased. In addition, any such new Series H Equipment
Notes must be held by a pass through trust subject to the same subordination
provisions as are applicable to the Class H Trust, and Continental must obtain
confirmation from the Rating Agencies that the redemption and issuance of the
new Series H Equipment Notes will not result in a withdrawal, suspension or
downgrading of the ratings of the Class G-1 or G-2 Certificates (without regard
to the Policies). If the Series I Equipment Notes are redeemed, new Series I
Equipment Notes may not be issued. (Indentures, Section 2.11)
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"Break Amount" means, as of any date of payment, redemption or acceleration
for any Series G-1 Equipment Note (the "Applicable Date"), an amount determined
by the Reference Agent on the date that is two Business Days prior to the
Applicable Date pursuant to the formula set forth below.
The Break Amount will be calculated as follows:
Break Amount = Z-Y
Where:
X = with respect to any applicable Interest Period, the sum of (i) the
amount of the outstanding principal amount of such Equipment Note as
of the first day of the then applicable Interest Period and (ii)
interest payable thereon during such entire Interest Period at then
effective LIBOR.
Y = X, discounted to present value from the last day of the then
applicable Interest Period to the Applicable Date, using then
effective LIBOR as the discount rate.
Z = X, discounted to present value from the last day of the then
applicable Interest Period to the Applicable Date, using a rate
equal to the applicable London interbank offered rate for a period
commencing on the Applicable Date and ending on the last day of the
then applicable Interest Period, determined by the Reference Agent
as of two Business Days prior to the Applicable Date as the discount
rate.
No Break Amount will be payable (x) if the Break Amount, as calculated
pursuant to the formula set forth above, is equal to or less than zero or (y) on
or in respect of any Applicable Date that is a Regular Distribution Date.
"Make-Whole Premium" means, (i) with respect to any Series G-1 Equipment
Note, the following percentage of the principal amount of such Equipment Note:
if redeemed before the first anniversary of the Issuance Date, 1.5%; if redeemed
on or after such first anniversary and before the second anniversary of the
Issuance Date, 1.0%; and if redeemed on or after such second anniversary and
before the third anniversary of the Issuance Date, 0.5%; and (ii) with respect
to any Series G-2 Equipment Note, an amount (as determined by an independent
investment bank of national standing) equal to the excess, if any, of (a) the
present value of the remaining scheduled payments of principal and interest to
maturity of such Equipment Note computed by discounting such payments on a
quarterly basis on each payment date under the applicable Indenture (assuming a
360-day year of twelve 30-day months) using a discount rate equal to the
Treasury Yield over (b) the outstanding principal amount of such Equipment Note
plus accrued interest to the date of determination.
For purposes of determining the Make-Whole Premium, "Treasury Yield" means,
at the date of determination with respect to any Equipment Note, the interest
rate (expressed as a decimal and, in the case of United States Treasury bills,
converted to a bond equivalent yield) determined to be the per annum rate equal
to the quarterly yield to maturity for United States Treasury securities
maturing on the Average Life Date of such Equipment Note and trading in the
public securities markets either as determined by interpolation between the most
recent weekly average yield to maturity for two series of United States Treasury
securities trading in the public securities markets, (A) one maturing as close
as possible to, but earlier than, the Average Life Date of such Equipment Note
and (B) the other maturing as close as possible to, but later than, the Average
Life Date of such Equipment Note, in each case as published in the most recent
H.15(519) or, if a weekly average yield to maturity for United States Treasury
securities maturing on the Average Life Date of such Equipment Note is reported
in the most recent H.15(519), such weekly average yield to maturity as published
in such H.15(519). "H.15(519)" means the weekly statistical release designated
as such, or any successor publication, published by the Board of Governors of
the Federal Reserve System. The date of determination of a Make-Whole Premium
shall be the third Business Day prior to the applicable payment or redemption
date and the "most recent H.15(519)" means the H.15(519) published prior to the
close of business on the third Business Day prior to the applicable payment or
redemption date.
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"Average Life Date" for any Equipment Note shall be the date which follows
the time of determination by a period equal to the Remaining Weighted Average
Life of such Equipment Note. "Remaining Weighted Average Life" on a given date
with respect to any Equipment Note shall be the number of days equal to the
quotient obtained by dividing (a) the sum of each of the products obtained by
multiplying (i) the amount of each then remaining scheduled payment of principal
of such Equipment Note by (ii) the number of days from and including such
determination date to but excluding the date on which such payment of principal
is scheduled to be made, by (b) the then outstanding principal amount of such
Equipment Note.
SECURITY
AIRCRAFT
The Equipment Notes issued with respect to each Aircraft will be secured by
a security interest in such Aircraft and each of the other Aircraft for which
Equipment Notes are outstanding and an assignment to the Loan Trustee of certain
of Continental's rights under its purchase agreement with the Aircraft
manufacturer.
Since the Equipment Notes are cross-collateralized, any proceeds from the
sale of an Aircraft securing Equipment Notes or other exercise of remedies under
an Indenture with respect to such Aircraft will (subject to the provisions of
the Bankruptcy Code) be available for application to shortfalls with respect to
obligations due under the other Equipment Notes at the time such proceeds are
received. In the absence of any such shortfall, excess proceeds will be held as
additional collateral by the Loan Trustee under such Indenture for such other
Equipment Notes.
CASH
Cash, if any, held from time to time by the Loan Trustee with respect to
any Aircraft, including funds held as the result of an Event of Loss to such
Aircraft, will be invested and reinvested by such Loan Trustee, at the direction
of Continental, in investments described in the related Indenture. (Indentures,
Section 6.06)
LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The following tables set forth illustrative loan to Aircraft value ratios
for the Series G-1, Series G-2 and Series H Equipment Notes issued in respect of
an Aircraft as of August 15, 2002 and the August 15 Regular Distribution Dates
thereafter, assuming that the Series G-1, G-2 and Series H Equipment Notes in
the required principal amount are issued in respect of each such Aircraft and
the Aircraft are delivered as currently scheduled. These examples were utilized
by Continental in preparing the Assumed Amortization Schedule, although the
amortization schedule for the Series G-1 and Series H Equipment Notes issued
with respect to an Aircraft may vary from such assumed schedule if an Aircraft
is delivered later than currently scheduled. Accordingly, the schedules set
forth below may not be applicable in the case of any particular Aircraft. The
LTV was obtained by dividing (i) the outstanding balance (assuming no payment
default) of such Equipment Notes determined immediately after giving effect to
the payments scheduled to be made on each such Regular Distribution Date by (ii)
the assumed value (the "Assumed Aircraft Value") of the Aircraft securing such
Equipment Notes.
The following tables are based on the assumption (the "Depreciation
Assumption") that the value of each Aircraft set forth opposite the initial
Regular Distribution Date included in each table depreciates by approximately 3%
of the initial appraised value per year for the first ten years after the year
of delivery of such Aircraft. Other rates or methods of depreciation would
result in materially different loan to Aircraft value ratios, and no assurance
can be given (i) that the depreciation rates and method assumed for the purposes
of the tables are the ones most likely to occur or (ii) as to the actual future
value of any Aircraft. Thus, the tables
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should not be considered a forecast or prediction of expected or likely loan to
Aircraft value ratios, but simply a mathematical calculation based on one set of
assumptions.
BOEING 757-324 BOEING 767-424ER
-------------------------------------- --------------------------------------
SERIES G-1, SERIES G-1,
G-2 AND H G-2 AND H
EQUIPMENT EQUIPMENT
NOTES ASSUMED NOTES ASSUMED
OUTSTANDING AIRCRAFT OUTSTANDING AIRCRAFT
BALANCE VALUE LOAN TO BALANCE VALUE LOAN TO
DATE (MILLIONS) (MILLIONS) VALUE RATIO (MILLIONS) (MILLIONS) VALUE RATIO
---- ----------- ---------- ----------- ----------- ---------- -----------
August 15, 2002................... $46.70 $61.65 75.7% $70.75 $93.40 75.7%
August 15, 2003................... 44.40 59.80 74.3 67.27 90.60 74.3
August 15, 2004................... 41.26 57.95 71.2 62.51 87.80 71.2
August 15, 2005................... 37.86 56.10 67.5 57.35 84.99 67.5
August 15, 2006................... 34.88 54.25 64.3 52.84 82.19 64.3
August 15, 2007................... 24.67 52.40 47.1 37.38 79.39 47.1
August 15, 2008................... 23.24 50.55 46.0 35.20 76.59 46.0
August 15, 2009................... 21.83 48.70 44.8 33.07 73.79 44.8
August 15, 2010................... 20.46 46.85 43.7 31.00 70.98 43.7
August 15, 2011................... 19.12 45.00 42.5 28.97 68.18 42.5
BOEING 777-224ER
--------------------------------------
SERIES G-1,
G-2 AND H
EQUIPMENT
NOTES ASSUMED
OUTSTANDING AIRCRAFT
BALANCE VALUE LOAN TO
DATE (MILLIONS) (MILLIONS) VALUE RATIO
---- ----------- ---------- -----------
August 15, 2002..................................... $98.62 $130.20 75.7%
August 15, 2003..................................... 93.78 126.29 74.3
August 15, 2004..................................... 87.14 122.39 71.2
August 15, 2005..................................... 79.95 118.48 67.5
August 15, 2006..................................... 73.66 114.58 64.3
August 15, 2007..................................... 52.11 110.67 47.1
August 15, 2008..................................... 49.07 106.76 46.0
August 15, 2009..................................... 46.10 102.86 44.8
August 15, 2010..................................... 43.21 98.95 43.7
August 15, 2011..................................... 40.39 95.05 42.5
LIMITATION OF LIABILITY
Except as otherwise provided in the Indentures, each Loan Trustee, in its
individual capacity, will not be answerable or accountable under the Indentures
or under the Equipment Notes under any circumstances except, among other things,
for its own willful misconduct or gross negligence.
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will include:
- The failure by Continental to pay any interest, principal, Break Amount,
if any, or Make-Whole Premium, if any, when due, under such Indenture or
under any Equipment Note issued thereunder that continues for more than
ten Business Days, in the case of principal, interest or Make-Whole
Premium, and, in all other cases, ten Business Days after Continental
receives written demand from the related Loan Trustee or holder of an
Equipment Note.
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- Any representation or warranty made by Continental in such Indenture, the
related Participation Agreement or certain related documents furnished to
the Loan Trustee or any holder of an Equipment Note pursuant thereto
being false or incorrect in any material respect when made that continues
to be material and adverse to the interests of the Loan Trustee or Note
Holders and remains unremedied after notice and specified cure periods.
- Failure by Continental to perform or observe any covenant or obligation
for the benefit of the Loan Trustee or holders of Equipment Notes under
such Indenture or certain related documents that continues after notice
and specified cure periods.
- The lapse or cancellation of insurance required under such Indenture.
- The occurrence of certain events of bankruptcy, reorganization or
insolvency of Continental. (Indentures, Section 5.01)
There will not be cross-default provisions in the Indentures. Consequently,
events resulting in an Indenture Default under any particular Indenture may or
may not result in an Indenture Default occurring under any other Indenture.
The holders of a majority in principal amount of the outstanding Equipment
Notes issued with respect to any Aircraft, by notice to the Loan Trustee, may on
behalf of all the holders waive any existing default and its consequences under
the Indenture with respect to such Aircraft, except a default in the payment of
the principal of, or premium, Break Amount or interest on, any such Equipment
Notes or a default in respect of any covenant or provision of such Indenture
that cannot be modified or amended without the consent of each holder of
Equipment Notes. (Indentures, Section 5.06)
REMEDIES
If an Indenture Default occurs and is continuing under an Indenture, the
related Loan Trustee or the holders of a majority in principal amount of the
Equipment Notes outstanding under such Indenture may declare the principal of
all such Equipment Notes issued thereunder immediately due and payable, together
with all accrued but unpaid interest thereon and Break Amount, if any. The
holders of a majority in principal amount of Equipment Notes outstanding under
an Indenture may rescind any declaration of acceleration of such Equipment Notes
at any time before the judgment or decree for the payment of the money so due
shall be entered if (i) there has been paid to the related Loan Trustee an
amount sufficient to pay all principal, interest, Break Amount, if any, and
premium, if any, on any such Equipment Notes, to the extent such amounts have
become due otherwise than by such declaration of acceleration and (ii) all other
Indenture Defaults and incipient Indenture Defaults with respect to any covenant
or provision of such Indenture have been cured. (Indentures, Section 5.02(b))
Each Indenture provides that if an Indenture Default under such Indenture
has occurred and is continuing, the related Loan Trustee may exercise certain
rights or remedies available to it under such Indenture or under applicable law.
If the Equipment Notes issued in respect of one Aircraft are in default,
the Equipment Notes issued in respect of the other Aircraft may not be in
default, and, if not, no remedies will be exercisable under the applicable
Indentures with respect to such other Aircraft.
In the case of Chapter 11 bankruptcy proceedings in which an air carrier is
a debtor, Section 1110 of the U.S. Bankruptcy Code ("Section 1110") provides
special rights to holders of security interests with respect to "equipment"
(defined as described below). Under Section 1110, the right of such holders to
take possession of such equipment in compliance with the provisions of a
security agreement is not affected by any provision of the U.S. Bankruptcy Code
or any power of the bankruptcy court. Such right to take possession may not be
exercised for 60 days following the date of commencement of the reorganization
proceedings. Thereafter, such right to take possession may be exercised during
such proceedings unless, within the 60-day period or any longer period consented
to by the relevant parties, the debtor agrees to perform its future obligations
and cures
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all existing and future defaults on a timely basis. Defaults resulting solely
from the financial condition, bankruptcy, insolvency or reorganization of the
debtor need not be cured.
"Equipment" is defined in Section 1110, in part, as an aircraft, aircraft
engine, propeller, appliance or spare part (as defined in Section 40102 of Title
49 of the U.S. Code) that is subject to a security interest granted by, leased
to, or conditionally sold to a debtor that, at the time such transaction is
entered into, holds an air carrier operating certificate issued pursuant to
chapter 447 of Title 49 of the U.S. Code for aircraft capable of carrying ten or
more individuals or 6,000 pounds or more of cargo. Rights under Section 1110 are
subject to certain limitations in the case of equipment first placed in service
on or prior to October 22, 1994.
It is a condition to the Trustees' obligation to purchase Equipment Notes
with respect to each Aircraft that outside counsel to Continental, which is
expected to be Hughes Hubbard & Reed LLP, provide its opinion to the Trustees
that the Loan Trustee will be entitled to the benefits of Section 1110 with
respect to the airframe and engines comprising such Aircraft, assuming that, at
the time of such transaction, Continental holds an air carrier operating
certificate issued pursuant to chapter 447 of Title 49 of the U.S. Code for
aircraft capable of carrying ten or more individuals or 6,000 pounds or more of
cargo. For a description of certain limitations on the Loan Trustee's exercise
of rights contained in the Indenture, see "--Indenture Defaults, Notice and
Waiver".
The opinion of Hughes Hubbard & Reed LLP will not address the possible
replacement of an Aircraft after an Event of Loss in the future, the
consummation of which is conditioned upon the contemporaneous delivery of an
opinion of counsel to the effect that the related Loan Trustee will be entitled
to Section 1110 benefits with respect to such replacement unless there is a
change in law or court interpretation that results in Section 1110 not being
available. See "--Certain Provisions of the Indentures--Events of Loss". The
opinion of Hughes Hubbard & Reed LLP will also not address the availability of
Section 1110 with respect to any possible lessee of an Aircraft if it is leased
by Continental.
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the related Loan Trustee may be applied to reimburse
such Loan Trustee for any tax, expense or other loss incurred by it and to pay
any other amounts due to such Loan Trustee prior to any payments to holders of
the Equipment Notes issued under such Indenture. (Indentures, Section 3.03)
MODIFICATION OF INDENTURES
Without the consent of holders of a majority in principal amount of the
Equipment Notes outstanding under any Indenture, the provisions of such
Indenture and the related Participation Agreement may not be amended or
modified, except to the extent indicated below.
Any Indenture may be amended without the consent of the holders of
Equipment Notes to, among other things, cure any defect or inconsistency in such
Indenture or the Equipment Notes issued thereunder, provided that such change
does not adversely affect the interests of any such holder. (Indentures, Section
10.01)
Without the consent of the Primary Liquidity Providers and the holder of
each Equipment Note outstanding under any Indenture affected thereby, no
amendment or modification of such Indenture may among other things (a) reduce
the principal amount of, or Break Amount, if any, premium, if any, or interest
payable on, any Equipment Notes issued under such Indenture or change the date
on which any principal, Break Amount, if any, premium, if any, or interest is
due and payable, (b) permit the creation of any security interest with respect
to the property subject to the lien of such Indenture, except as provided in
such Indenture, or deprive any holder of an Equipment Note issued under such
Indenture of the benefit of the lien of such Indenture upon the property subject
thereto or (c) modify the percentage of holders of Equipment Notes issued under
such Indenture required to take or approve any action under such Indenture.
(Indentures, Section 10.01(a))
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INDEMNIFICATION
Continental will be required to indemnify each Loan Trustee, each Primary
Liquidity Provider, the Above-Cap Liquidity Provider, the Subordination Agent,
the Escrow Agent, the Policy Provider and each Trustee, but not the holders of
Certificates, for certain losses, claims and other matters.
CERTAIN PROVISIONS OF THE INDENTURES
MAINTENANCE
Continental is obligated under each Indenture, among other things and at
its expense, to keep each Aircraft duly registered and insured, and to maintain,
service, repair and overhaul the Aircraft so as to keep it in as good an
operating condition as when delivered to Continental, ordinary wear and tear
excepted, and in such condition as required to maintain the airworthiness
certificate for the Aircraft in good standing at all times. (Indentures, Section
4.02)
POSSESSION, LEASE AND TRANSFER
Each Aircraft may be operated by Continental or, subject to certain
restrictions, by certain other persons. Normal interchange and pooling
agreements customary in the commercial airline industry with respect to any
Airframe or Engine are permitted. Leases are also permitted to U.S. air carriers
and foreign air carriers that have their principal executive office in certain
specified countries, subject to a reasonably satisfactory legal opinion that,
among other things, such country would recognize the Loan Trustee's security
interest in respect of the applicable Aircraft. In addition, a lessee may not be
subject to insolvency or similar proceedings at the commencement of such lease.
(Indentures, Section 4.02) Permitted foreign air carriers are not limited to
those based in a country that is a party to the Convention on the International
Recognition of Rights in Aircraft (Geneva 1948) (the "Convention"). It is
uncertain to what extent the relevant Loan Trustee's security interest would be
recognized if an Aircraft is registered or located in a jurisdiction not a party
to the Convention. Moreover, in the case of an Indenture Default, the ability of
the related Loan Trustee to realize upon its security interest in an Aircraft
could be adversely affected as a legal or practical matter if such Aircraft were
registered or located outside the United States.
REGISTRATION
Continental is required to keep each Aircraft duly registered under the
Transportation Code with the FAA and to record each Indenture and certain other
documents under the Transportation Code. (Indentures, Section 4.02(e)) Such
recordation of the Indenture and certain other documents with respect to each
Aircraft will give the relevant Loan Trustee a first-priority, perfected
security interest in such Aircraft whenever it is located in the United States
or any of its territories and possessions. The Convention provides that such
security interest will also be recognized, with certain limited exceptions, in
those jurisdictions that have ratified or adhere to the Convention.
So long as no Indenture Default exists, Continental has the right to
register any Aircraft in a country other than the United States at its own
expense in connection with a permitted lease of the Aircraft to a permitted
foreign air carrier, subject to certain conditions set forth in the related
Indenture. These conditions include a requirement that an opinion of counsel be
provided that the lien of the applicable Indenture will continue as a first
priority security interest in the applicable Aircraft. (Indentures, Section
4.02(e))
LIENS
Continental is required to maintain each Aircraft free of any liens, other
than the rights of the relevant Loan Trustee, the holders of the related
Equipment Notes and Continental arising under the applicable Indenture or the
other operative documents related thereto, and other than certain limited liens
permitted under such documents, including but not limited to (i) liens for taxes
either not yet due or being contested in good faith by appropriate proceedings;
(ii) materialmen's, mechanics' and other similar liens arising in the ordinary
course of business and securing obligations that either are not yet delinquent
for more than 60 days or
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are being contested in good faith by appropriate proceedings; (iii) judgment
liens so long as such judgment is discharged or vacated within 60 days or the
execution of such judgment is stayed pending appeal or discharged, vacated or
reversed within 60 days after expiration of such stay; and (iv) any other lien
as to which Continental has provided a bond or other security adequate in the
reasonable opinion of the Loan Trustee; provided that in the case of each of the
liens described in the foregoing clauses (i), (ii) and (iii), such liens and
proceedings do not involve any material risk of the sale, forfeiture or loss of
such Aircraft or the interest of the Loan Trustee therein or impair the lien of
the relevant Indenture. (Indentures, Section 4.01)
REPLACEMENT OF PARTS; ALTERATIONS
Continental is obligated to replace all parts at its expense that may from
time to time be incorporated or installed in or attached to any Aircraft and
that may become lost, damaged beyond repair, worn out, stolen, seized,
confiscated or rendered permanently unfit for use. Continental or any permitted
lessee has the right, at its own expense, to make such alterations,
modifications and additions with respect to each Aircraft as it deems desirable
in the proper conduct of its business and to remove parts which it deems to be
obsolete or no longer suitable or appropriate for use, so long as such
alteration, modification, addition or removal does not materially diminish the
fair market value, utility, condition or useful life of the related Aircraft or
Engine or invalidate the Aircraft's airworthiness certificate. (Indentures,
Section 4.04(d))
INSURANCE
Continental is required to maintain, at its expense (or at the expense of a
permitted lessee), all-risk aircraft hull insurance covering each Aircraft, at
all times in an amount not less than 110% of the unpaid principal amount of the
related Series G-1 and H Equipment Notes plus the unpaid principal amount of the
related Series G-2 Equipment Notes together with six months of interest accrued
thereon (the "Debt Balance"). However, after giving effect to self-insurance
permitted as described below, the amount payable under such insurance may be
less than such amounts payable with respect to the Equipment Notes. In the event
of a loss involving insurance proceeds in excess of $5,000,000 per occurrence in
the case of a Boeing 757-324 aircraft or $7,500,000 per occurrence in the case
of a Boeing 767-424ER or 777-224ER aircraft, such proceeds up to the Debt
Balance of the relevant Aircraft will be payable to the applicable Loan Trustee,
for so long as the relevant Indenture shall be in effect. In the event of a loss
involving insurance proceeds of up to $5,000,000 per occurrence in the case of a
Boeing 757-324 aircraft or $7,500,000 per occurrence in the case of a Boeing
767-424ER or 777-224ER aircraft, such proceeds will be payable directly to
Continental so long as no Indenture Default exists under the related Indenture.
So long as the loss does not constitute an Event of Loss, insurance proceeds
will be applied to repair or replace the property. (Indentures, Section 4.06 and
Annex B)
In addition, Continental is obligated to maintain comprehensive airline
liability insurance at its expense (or at the expense of a permitted lessee),
including, without limitation, passenger liability, baggage liability, cargo and
mail liability, hangarkeeper's liability and contractual liability insurance
with respect to each Aircraft. Such liability insurance must be underwritten by
insurers of nationally or internationally recognized responsibility. The amount
of such liability insurance coverage per occurrence may not be less than the
amount of comprehensive airline liability insurance from time to time applicable
to aircraft owned or leased and operated by Continental of the same type and
operating on similar routes as such Aircraft. (Indentures, Section 4.06 and
Annex B)
Continental is also required to maintain war-risk, hijacking or allied
perils insurance if it (or any permitted lessee) operates any Aircraft, Airframe
or Engine in any area of recognized hostilities or if Continental (or any
permitted lessee) maintains such insurance with respect to other aircraft
operated on the same international routes or areas on or in which the Aircraft
is operated. (Indentures, Section 4.06 and Annex B)
Continental may self-insure under a program applicable to all aircraft in
its fleet, but the amount of such self-insurance in the aggregate may not exceed
50% of the largest replacement value of any single aircraft in Continental's
fleet or 1 1/2% of the average aggregate insurable value (during the preceding
policy year) of all
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aircraft on which Continental carries insurance, whichever is less, unless an
insurance broker of national standing shall certify that the standard among all
other major U.S. airlines is a higher level of self-insurance, in which case
Continental may self-insure the Aircraft to such higher level. In addition,
Continental may self-insure to the extent of any applicable deductible per
Aircraft that does not exceed industry standards for major U.S. airlines.
(Indentures, Section 4.06 and Annex B)
In respect of each Aircraft, Continental is required to name as additional
insured parties the Loan Trustees, the holders of the Equipment Notes, the
Liquidity Providers and the Policy Provider under all liability, hull and
property and war risk, hijacking and allied perils insurance policies required
with respect to such Aircraft. In addition, the insurance policies will be
required to provide that, in respect of the interests of such additional insured
persons, the insurance shall not be invalidated or impaired by any act or
omission of Continental, any permitted lessee or any other person. (Indentures,
Section 4.06 and Annex B)
EVENTS OF LOSS
If an Event of Loss occurs with respect to the Airframe or the Airframe and
Engines of an Aircraft, Continental must elect within 45 days after such
occurrence either to make payment with respect to such Event of Loss or to
replace such Airframe and any such Engines. Not later than the first Business
Day following the earlier of (i) the 120th day following the date of occurrence
of such Event of Loss, and (ii) the fourth Business Day following the receipt of
the insurance proceeds in respect of such Event of Loss, Continental must either
(i) pay to the Loan Trustee the outstanding principal amount of the Equipment
Notes, together with certain additional amounts and, in the case of the Series
G-1 Equipment Notes, Break Amount, if any, but, in any case, without any
Make-Whole Premium or (ii) unless an Indenture Event of Default or failure to
pay principal or interest under the Indenture or certain bankruptcy defaults
shall have occurred and is continuing, substitute an airframe (or airframe and
one or more engines, as the case may be) for the Airframe, or Airframe and
Engine(s), that suffered such Event of Loss. (Indentures, Sections 2.10 and
4.05(a))
If Continental elects to replace an Airframe (or Airframe and one or more
Engines, as the case may be) that suffered such Event of Loss, it shall subject
such an airframe (or airframe and one or more engines) to the lien of the
Indenture, and such replacement airframe or airframe and engines must be the
same model as the Airframe or Airframe and Engines to be replaced or an improved
model, with a value, utility and remaining useful life (without regard to hours
or cycles remaining until the next regular maintenance check) at least equal to
the Airframe or Airframe and Engines to be replaced, assuming that such Airframe
and such Engines had been maintained in accordance with the related Indenture.
Continental is also required to provide to the relevant Loan Trustee reasonably
acceptable opinions of counsel to the effect, among other things, that (i)
certain specified documents have been duly filed under the Transportation Code
and (ii) such Loan Trustee will be entitled to receive the benefits of Section
1110 of the U.S. Bankruptcy Code with respect to any such replacement airframe
(unless, as a result of a change in law or court interpretation, such benefits
are not then available). (Indentures, Section 4.05(c))
If Continental elects not to replace such Airframe, or Airframe and
Engine(s), then upon payment of the outstanding principal amount of the
Equipment Notes issued with respect to such Aircraft, together with all
additional amounts then due and unpaid with respect to such Aircraft, which must
be at least sufficient to pay in full as of the date of payment thereof the
aggregate unpaid principal amount under such Equipment Notes together with
accrued but unpaid interest thereon and all other amounts due and owing in
respect of such Equipment Notes, the lien of the Indenture shall terminate with
respect to such Aircraft, the obligation of Continental thereafter to make
interest and principal payments with respect thereto shall cease. The payments
made under the Indenture by Continental shall be deposited with the applicable
Loan Trustee. Amounts in excess of the amounts due and owing under the Equipment
Notes issued with respect to such Aircraft will be distributed by such Loan
Trustee to Continental. (Indentures, Sections 2.10, 3.02 and 4.05(a)(ii))
If an Event of Loss occurs with respect to an Engine alone, Continental
will be required to replace such Engine within 60 days after the occurrence of
such Event of Loss with another engine, free and clear of all liens (other than
certain permitted liens). Such replacement engine shall be the same make and
model as the
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Engine to be replaced, or an improved model, suitable for installation and use
on the Airframe, and having a value, utility and remaining useful life (without
regard to hours or cycles remaining until overhaul) at least equal to the Engine
to be replaced, assuming that such Engine had been maintained in accordance with
the relevant Indenture. (Indentures, Section 4.05)
An "Event of Loss" with respect to an Aircraft, Airframe or any Engine
means any of the following events with respect to such property:
- The destruction of such property, damage to such property beyond economic
repair or rendition of such property permanently unfit for normal use.
- The actual or constructive total loss of such property or any damage to
such property or requisition of title or use of such property which
results in an insurance settlement with respect to such property on the
basis of a total loss or a constructive or compromised total loss.
- Any theft, hijacking or disappearance of such property for a period of
180 consecutive days or more.
- Any seizure, condemnation, confiscation, taking or requisition of title
to such property by any governmental entity or purported governmental
entity (other than a U.S. government entity) for a period exceeding 180
consecutive days.
- As a result of any law, rule, regulation, order or other action by the
FAA or any governmental entity, the use of such property in the normal
course of Continental's business of passenger air transportation is
prohibited for 180 consecutive days, unless Continental, prior to the
expiration of such 180-day period, shall have undertaken and shall be
diligently carrying forward steps which are necessary or desirable to
permit the normal use of such property by Continental, but in any event
if such use shall have been prohibited for a period of two consecutive
years, provided that no Event of Loss shall be deemed to have occurred if
such prohibition has been applicable to Continental's entire U.S.
registered fleet of similar property and Continental, prior to the
expiration of such two-year period, shall have conformed at least one
unit of such property in its fleet to the requirements of any such law,
rule, regulation, order or other action and commenced regular commercial
use of the same and shall be diligently carrying forward, in a manner
which does not discriminate against applicable property in so conforming
such property, steps which are necessary or desirable to permit the
normal use of such property by Continental, but in any event if such use
shall have been prohibited for a period of three years.
- With respect to any Engine, any divestiture of title to such Engine in
connection with pooling or certain other arrangements shall be treated as
an Event of Loss. (Indentures, Annex A)
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary describes all material generally applicable U.S.
federal income tax consequences to Certificateholders of the purchase, ownership
and disposition of the Offered Certificates and in the opinion of Hughes Hubbard
& Reed LLP, special tax counsel to Continental ("Tax Counsel"), is accurate in
all material respects with respect to the matters discussed therein. This
summary supplements (and, to the extent inconsistent therewith, replaces) the
summary of U.S. federal income tax consequences set forth in the Prospectus.
Except as otherwise specified, the summary is addressed to beneficial owners of
Offered Certificates ("U.S. Certificateholders") that are citizens or residents
of the United States, corporations, partnerships or other entities created or
organized in or under the laws of the United States or any state therein,
estates the income of which is subject to U.S. federal income taxation
regardless of its source, or trusts that meet the following two tests: (a) a
U.S. court is able to exercise primary supervision over the administration of
the trust and (b) one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust ("U.S. Persons") that will hold the Offered
Certificates as capital assets. This summary does not address the tax treatment
of U.S. Certificateholders that may be subject to special tax rules, such as
banks, insurance companies, dealers in securities or commodities, holders
subject to the mark-to-market rules, tax-exempt entities, holders that will hold
Offered Certificates as part of a straddle or holders that have a "functional
currency" other than the U.S. Dollar, nor, except as specifically indicated,
does it address the tax treatment of U.S. Certificateholders that do not acquire
Offered Certificates at the public offering price as part of the initial
offering. The summary does not purport to be a comprehensive description of all
of the tax considerations that may be relevant to a decision to purchase Offered
Certificates. This summary does not describe any tax consequences arising under
the laws of any state, locality or taxing jurisdiction other than the United
States.
The summary is based upon the tax laws and practice of the United States as
in effect on the date of this Prospectus Supplement, as well as judicial and
administrative interpretations thereof (in final or proposed form) available on
or before such date. All of the foregoing are subject to change, which change
could apply retroactively. We have not sought any ruling from the U.S. Internal
Revenue Service (the "IRS") with respect to the tax consequences described
below, and we cannot assure you that the IRS will not take contrary positions.
The Trusts are not indemnified for any U.S. federal income taxes that may be
imposed upon them, and the imposition of any such taxes on a Trust could result
in a reduction in the amounts available for distribution to the
Certificateholders of such Trust. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE OFFERED
CERTIFICATES.
TAX STATUS OF THE TRUSTS
In the opinion of Tax Counsel, while there is no authority addressing the
characterization of entities that are similar to the Offered Certificate Trusts
in all material respects, each of the Original Trusts should be classified as a
grantor trust for U.S. federal income tax purposes. If, as may be the case, the
Original Trusts are not classified as grantor trusts, they will, in the opinion
of Tax Counsel, be classified as partnerships for U.S. federal income tax
purposes and will not be classified as publicly traded partnerships taxable as
corporations provided that at least 90% of each Original Trust's gross income
for each taxable year of its existence is "qualifying income" (which is defined
to include, among other things, interest income, gain from the sale or
disposition of capital assets held for the production of interest income, and
income derived with respect to a business of investing in securities). Tax
Counsel believes that income derived by the Original Trusts from the Equipment
Notes will constitute qualifying income and that the Original Trusts therefore
will meet the 90% test, assuming that the Original Trusts operate in accordance
with the terms of the Pass Through Trust Agreements and other agreements to
which they are parties. In the opinion of Tax Counsel, the Successor Trusts will
be classified as grantor trusts.
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TAXATION OF CERTIFICATEHOLDERS GENERALLY
TRUSTS CLASSIFIED AS GRANTOR TRUSTS
Assuming that an Offered Certificate Trust is classified as a grantor
trust, a U.S. Certificateholder will be treated as owning its pro rata undivided
interest in the relevant Deposits and each of the Equipment Notes held by the
Trust, the Trust's contractual rights and obligations under the Note Purchase
Agreement, and any other property held by the Trust. Accordingly, each U.S.
Certificateholder's share of interest paid on Equipment Notes will be taxable as
ordinary income, as it is paid or accrued, in accordance with such U.S.
Certificateholder's method of accounting for U.S. federal income tax purposes,
and a U.S. Certificateholder's share of premium, if any, paid on redemption of
an Equipment Note will be treated as capital gain. Deposit Make-Whole Premium,
if any, paid by us with respect to any unused Deposits will be ordinary income.
The Deposits will likely be subject to the original issue discount and
contingent payment rules, with the result that a U.S. Certificateholder will be
required to include interest income from a Deposit using the accrual method of
accounting regardless of its normal method and with a possible slight deferral
in the timing of income recognition as compared to holding a single debt
instrument with terms comparable to an Offered Certificate. Any amounts received
by an Offered Certificate Trust under a Liquidity Facility or Policy in order to
make interest payments will be treated for U.S. federal income tax purposes as
having the same characteristics as the payments they replace.
In the case of a subsequent purchaser of an Offered Certificate, the
purchase price for the Offered Certificate should be allocated among the
relevant Deposits and the assets held by the relevant Trust (including the
Equipment Notes and the rights and obligations under the Note Purchase Agreement
with respect to Equipment Notes not theretofore issued) in accordance with their
relative fair market values at the time of purchase. Any portion of the purchase
price allocable to the right and obligation under the Note Purchase Agreement to
acquire an Equipment Note should be included in the purchaser's basis in its
share of the Equipment Note when issued. Although the matter is not entirely
clear, in the case of a purchaser after initial issuance of the Offered
Certificates but prior to the Delivery Period Termination Date, if the purchase
price reflects a "negative value" associated with the obligation to acquire an
Equipment Note pursuant to the Note Purchase Agreement being burdensome under
conditions existing at the time of purchase (e.g., as a result of the interest
rate on the unissued Equipment Notes being below market at the time of purchase
of an Offered Certificate), such negative value probably would be added to such
purchaser's basis in its interest in the Deposits and the remaining assets of
the Trust and reduce such purchaser's basis in its share of the Equipment Notes
when issued. The preceding two sentences do not apply to purchases of Offered
Certificates following the Delivery Period Termination Date.
A U.S. Certificateholder who is treated as purchasing an interest in a
Deposit or an Equipment Note at a market discount (generally, at a cost less
than its remaining principal amount) that exceeds a statutorily defined de
minimis amount will be subject to the "market discount" rules of the Code. These
rules provide, in part, that gain on the sale or other disposition of a debt
instrument with a term of more than one year and partial principal payments
(including partial redemptions) on such a debt instrument are treated as
ordinary income to the extent of accrued but unrecognized market discount. The
market discount rules also provide for deferral of interest deductions with
respect to debt incurred to purchase or carry a debt instrument that has market
discount. A U.S. Certificateholder who purchases an interest in a Deposit or an
Equipment Note at a premium may elect to amortize the premium as an offset to
interest income on the Deposit or Equipment Note under rules prescribed by the
Code and Treasury regulations promulgated under the Code.
Each U.S. Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding Trust as provided in Section 162 or 212 of the Code.
Certain fees and expenses, including fees paid to the Trustee, the Primary
Liquidity Provider, the Above-Cap Liquidity Provider and the Policy Provider,
will be borne by parties other than the Certificateholders. It is possible that
such fees and expenses will be treated as constructively received by the Trust,
in which event a U.S. Certificateholder will be required to include in income
and will be entitled to deduct its pro rata share of such fees and expenses. If
a U.S. Certificateholder is an individual, estate or trust, the deduction for
such holder's share of such fees or expenses will be allowed only to the extent
that all of such
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holder's miscellaneous itemized deductions, including such holder's share of
such fees and expenses, exceed 2% of such holder's adjusted gross income. In
addition, in the case of U.S. Certificateholders who are individuals, certain
otherwise allowable itemized deductions will be subject generally to additional
limitations on itemized deductions under applicable provisions of the Code.
ORIGINAL TRUSTS CLASSIFIED AS PARTNERSHIPS
If an Original Trust is classified as a partnership (and not as a publicly
traded partnership taxable as a corporation) for U.S. federal income tax
purposes, income or loss with respect to the assets held by the Trust will be
calculated at the Trust level but the Trust itself will not be subject to U.S.
federal income tax. A U.S. Certificateholder would be required to report its
share of the Trust's items of income and deduction on its tax return for its
taxable year within which the Trust's taxable year (which should be a calendar
year) ends as well as income from its interest in the relevant Deposits. A U.S.
Certificateholder's basis in its interest in the Trust would be equal to its
purchase price therefor (including its share of any funds withdrawn from the
Depositary and used to purchase Equipment Notes), plus its share of the Trust's
net income, minus its share of any net losses of the Trust, and minus the amount
of any distributions from the Trust. In the case of an original purchaser of an
Offered Certificate that is a calendar year taxpayer, income or loss generally
should be the same as it would be if the Trust were classified as a grantor
trust, except that income or loss would be reported on an accrual basis even if
the U.S. Certificateholder otherwise uses the cash method of accounting. A
subsequent purchaser, however, generally would be subject to tax on the same
basis as an original holder with respect to its interest in the Original Trust,
and would not be subject to the market discount rules or the bond premium rules
during the duration of the Original Trust.
EFFECT OF REALLOCATION OF PAYMENTS UNDER THE INTERCREDITOR AGREEMENT
In the event that the Class G-1 Trust or the Class G-2 Trust receives less
than the full amount of the receipts of interest, principal or premium paid with
respect to the Equipment Notes held by it because of the provisions in the
Intercreditor Agreement requiring that distributions be allocated on a pro rata
basis between Trusts of equal seniority, the corresponding owners of beneficial
interests in the Certificates issued by such Trust (the "Shortfall
Certificateholders") would probably be treated for federal income tax purposes
as if they had:
- received as distributions their full share of interest, principal or
premium;
- paid over to the Class G-2 Certificateholders or Class G-1
Certificateholders (the "Other Certificateholders") an amount equal to
their share of the amount of the shortfall; and
- retained the right to reimbursement of the amount of the shortfall to the
extent of future amounts payable to them on account of the shortfall.
Under this analysis:
- The Shortfall Certificateholders incurring a shortfall would be required
to include as current income any interest or other income of the related
Trust that was a component of the shortfall, even though that amount was
in fact paid to the Other Certificateholders;
- a loss would only be allowed to Shortfall Certificateholders when their
right to receive reimbursement of the shortfall becomes worthless; that
is, when it becomes clear that funds will not be available from any
source to reimburse the shortfall; and
- reimbursement of the shortfall before a claim of worthlessness would not
be taxable income to the Shortfall Certificateholders because the amount
reimbursed would have been previously included in income.
These results should not significantly affect the inclusion of income for
Shortfall Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Shortfall Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
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DISSOLUTION OF ORIGINAL TRUSTS AND FORMATION OF NEW TRUSTS
Assuming that the Original Trusts are classified as grantor trusts, the
dissolution of an Original Trust and distribution of interests in the related
Successor Trust will not be a taxable event to U.S. Certificateholders, who will
continue to be treated as owning their shares of the property transferred from
the Original Trust to the Successor Trust. If the Original Trusts are classified
as partnerships, a U.S. Certificateholder will be deemed to receive its share of
the Equipment Notes and any other property transferred by the Original Trust to
the Successor Trust in liquidation of its interest in the Original Trust in a
non-taxable transaction. In such case, the U.S. Certificateholder's basis in the
property so received will be equal to its basis in its interest in the Original
Trust, allocated among the various assets received based upon their bases in the
hands of the Original Trust and any unrealized appreciation or depreciation in
value in such assets, and the U.S. Certificateholder's holding period for the
Equipment Notes and other property will include the Original Trust's holding
period.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of an Offered Certificate, a
U.S. Certificateholder generally will recognize capital gain or loss (subject to
the possible recognition of ordinary income under the market discount rules)
equal to the difference between the amount realized on the disposition (other
than any amount attributable to accrued interest which will be taxable as
ordinary income and any amount attributable to any Deposits) and the U.S.
Certificateholder's adjusted tax basis in the Note Purchase Agreement, Equipment
Notes and any other property held by the corresponding Trust. Any gain or loss
will be long-term capital gain or loss to the extent attributable to property
held by the Trust for more than one year. In the case of individuals, estates
and trusts, the maximum rate of tax on net long-term capital gains generally is
20%. Any gain with respect to an interest in a Deposit likely will be treated as
ordinary income. Notwithstanding the foregoing, if the Original Trusts are
classified as partnerships, gain or loss with respect to an interest in an
Original Trust will be calculated and characterized by reference to the U.S.
Certificateholder's adjusted tax basis and holding period for its interest in
the Original Trust.
FOREIGN CERTIFICATEHOLDERS
Subject to the discussion of backup withholding below, payments of
principal and interest on the Equipment Notes to, or on behalf of, any
beneficial owner of an Offered Certificate that is not a U.S. Person will not be
subject to U.S. federal withholding tax provided that:
- the non-U.S. Certificateholder does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of
Continental;
- the non-U.S. Certificateholder is not a bank receiving interest pursuant
to a loan agreement entered into in the ordinary course of its trade or
business, or a controlled foreign corporation for U.S. tax purposes that
is related to Continental; and
- certain certification requirements (including identification of the
beneficial owner of the Certificate) are complied with.
Any capital gain realized upon the sale, exchange, retirement or other
disposition of an Offered Certificate or upon receipt of premium paid on an
Equipment Note by a non-U.S. Certificateholder will not be subject to U.S.
federal income or withholding taxes if (i) such gain is not effectively
connected with a U.S. trade or business of the holder and (ii) in the case of an
individual, such holder is not present in the United States for 183 days or more
in the taxable year of the sale, exchange, retirement or other disposition or
receipt.
BACKUP WITHHOLDING
Payments made on the Offered Certificates and proceeds from the sale of
Offered Certificates will not be subject to a backup withholding tax (currently
at a rate of 30%), unless, in general, the Certificateholder fails to comply
with certain reporting procedures or otherwise fails to establish an exemption
from such tax under applicable provisions of the Code.
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CERTAIN DELAWARE TAXES
The Trustee is a Delaware banking corporation with its corporate trust
office in Delaware. In the opinion of Richards, Layton & Finger, Wilmington,
Delaware, counsel to the Trustee, under currently applicable law, assuming that
the Offered Certificate Trusts will not be taxable as corporations, but, rather,
will be classified as grantor trusts under subpart E, Part I of Subchapter J of
the Code or as partnerships under Subchapter K of the Code, (i) the Offered
Certificate Trusts will not be subject to any tax (including, without
limitation, net or gross income, tangible or intangible property, net worth,
capital, franchise or doing business tax), fee or other governmental charge
under the laws of the State of Delaware or any political subdivision thereof and
(ii) Certificateholders that are not residents of or otherwise subject to tax in
Delaware will not be subject to any tax (including, without limitation, net or
gross income, tangible or intangible property, net worth, capital, franchise or
doing business tax), fee or other governmental charge under the laws of the
State of Delaware or any political subdivision thereof as a result of
purchasing, holding (including receiving payments with respect to) or selling an
Offered Certificate.
Neither the Trusts nor the Certificateholders will be indemnified for any
state or local taxes imposed on them, and the imposition of any such taxes on a
Trust could result in a reduction in the amounts available for distribution to
the Certificateholders of such Trust. In general, should a Certificateholder or
any Trust be subject to any state or local tax which would not be imposed if the
Trustee were located in a different jurisdiction in the United States, the
Trustee will resign and a new Trustee in such other jurisdiction will be
appointed.
CERTAIN ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on employee benefit plans subject to Title I of
ERISA ("ERISA Plans"), and on those persons who are fiduciaries with respect to
ERISA Plans. Investments by ERISA Plans are subject to ERISA's general fiduciary
requirements, including, but not limited to, the requirement of investment
prudence and diversification and the requirement that an ERISA Plan's
investments be made in accordance with the documents governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code, such
as individual retirement accounts (together with ERISA Plans, "Plans")) and
certain persons (referred to as "parties in interest" or "disqualified persons")
having certain relationships to such Plans, unless a statutory or administrative
exemption is applicable to the transaction. A party in interest or disqualified
person who engages in a prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code.
The Department of Labor has promulgated a regulation, 29 CFR Section
2510.3-101 (the "Plan Asset Regulation"), describing what constitutes the assets
of a Plan with respect to the Plan's investment in an entity for purposes of
ERISA and Section 4975 of the Code. Under the Plan Asset Regulation, if a Plan
invests (directly or indirectly) in a Certificate, the Plan's assets will
include both the Certificate and an undivided interest in each of the underlying
assets of the corresponding Trust, including the Equipment Notes held by such
Trust, unless it is established that equity participation in the Trust by
benefit plan investors (including but not limited to Plans and entities whose
underlying assets include Plan assets by reason of an employee benefit plan's
investment in the entity) is not "significant" within the meaning of the Plan
Asset Regulation. In this regard, the extent to which there is equity
participation in a particular Trust by, or on behalf of, employee benefit plans
will not be monitored. If the assets of a Trust are deemed to constitute the
assets of a Plan, transactions involving the assets of such Trust could be
subject to the prohibited transaction provisions of ERISA and Section 4975 of
the Code unless a statutory or administrative exemption is applicable to the
transaction.
The fiduciary of a Plan that proposes to purchase and hold any Certificates
should consider, among other things, whether such purchase and holding may
involve (i) the direct or indirect extension of credit to a party
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in interest or a disqualified person, (ii) the sale or exchange of any property
between a Plan and a party in interest or a disqualified person, and (iii) the
transfer to, or use by or for the benefit of, a party in interest or a
disqualified person, of any Plan assets. Such parties in interest or
disqualified persons could include, without limitation, Continental and its
affiliates, the Underwriters, the Trustees, the Escrow Agent, the Depositary,
the Policy Provider and the Liquidity Provider. In addition, whether or not the
assets of a Trust are deemed to be Plan assets under the Plan Asset Regulation,
if Certificates are purchased by a Plan and Certificates of a subordinate Class
are held by a party in interest or a disqualified person with respect to such
Plan, the exercise by the holder of the subordinate Class of Certificates of its
right to purchase the senior Classes of Certificates upon the occurrence and
during the continuation of a Triggering Event could be considered to constitute
a prohibited transaction unless a statutory or administrative exemption were
applicable. Depending on the identity of the Plan fiduciary making the decision
to acquire or hold Certificates on behalf of a Plan, Prohibited Transaction
Class Exemption ("PTCE") 91-38 (relating to investments by bank collective
investment funds), PTCE 84-14 (relating to transactions effected by a "qualified
professional asset manager"), PTCE 95-60 (relating to investments by an
insurance company general account), PTCE 96-23 (relating to transactions
directed by an in-house professional asset manager) or PTCE 90-1 (relating to
investments by insurance company pooled separate accounts) (collectively, the
"Class Exemptions") could provide an exemption from the prohibited transaction
provisions of ERISA and Section 4975 of the Code. However, there can be no
assurance that any of these Class Exemptions or any other exemption will be
available with respect to any particular transaction involving the Certificates.
Governmental plans and certain church plans, while not subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of ERISA and Section 4975 of the Code, may nevertheless be subject to
state or other federal laws that are substantially similar to the foregoing
provisions of ERISA and the Code. Fiduciaries of any such plans should consult
with their counsel before purchasing any Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase any
Certificates should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 of the Code to such an investment, and to confirm that such
purchase and holding will not constitute or result in a non-exempt prohibited
transaction or any other violation of an applicable requirement of ERISA.
In addition to the Class Exemptions referred to above, an individual
exemption may apply to the purchase, holding and secondary market sale of Class
G-1 Certificates and Class G-2 Certificates by Plans, provided that certain
specified conditions are met. In particular, the Department of Labor has issued
individual administrative exemptions to the Underwriters (or their predecessors)
which are substantially the same as the administrative exemptions issued to
First Boston Corporation, Prohibited Transaction Exemption 89-90 (54 Fed. Reg.
42,597 (1989)), Chase Manhattan Bank, Prohibited Transaction Exemption 90-31 (55
Fed. Reg. 23,144 (1990)), Merrill Lynch, Pierce, Fenner & Smith, Inc.,
Prohibited Transaction Exemption 90-29 (55 Fed. Reg. 21, 455 (1990)), and
Salomon Brothers Inc., Prohibited Transaction Exemption 89-89 et al. (54 Fed.
Reg. 42,589 (1989)), each as amended (together, the "Underwriter Exemption").
The Underwriter Exemption generally exempts from the application of certain, but
not all, of the prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Code certain transactions relating to the initial purchase,
holding and subsequent secondary market sale of pass through certificates which
represent an interest in a trust that holds secured credit instruments that bear
interest or are purchased at a discount in transactions by or between business
entities (including equipment notes secured by leases) and certain other assets,
provided that certain conditions set forth in the Underwriter Exemption are
satisfied.
The Underwriter Exemption sets forth a number of general and specific
conditions which must be satisfied for a transaction involving the initial
purchase, holding or secondary market sale of certificates representing a
beneficial ownership interest in a trust to be eligible for exemptive relief
thereunder. In particular, the Underwriter Exemption requires that the
acquisition of certificates by a Plan be on terms that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an unrelated
party; the rights and interests evidenced by the certificates not be
subordinated to the rights and interests evidenced by other certificates of the
same trust estate; the certificates at the time of acquisition by the Plan be
rated in one of the three highest generic rating categories by Moody's, Standard
& Poor's, Duff & Phelps Inc. or Fitch
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Investors Service, Inc.; and the investing Plan be an accredited investor as
defined in Rule 501(a) (1) of Regulation D of the Commission under the
Securities Act of 1933, as amended.
In addition, the trust corpus generally must be invested in qualifying
receivables, such as the Equipment Notes, but may not in general include a
pre-funding account (except for a limited amount of pre-funding which is
invested in qualifying receivables within a limited period of time following the
closing not to exceed three months).
With respect to the investment restrictions set forth in the Underwriter
Exemption, an investment in a Certificate will evidence both an interest in the
respective Original Trust as well as an interest in the Deposits held in escrow
by an Escrow Agent for the benefit of the Certificateholder. Under the terms of
the Escrow Agreements, the proceeds from the Offering of each Class of Offered
Certificates, to the extent not used to purchase Equipment Notes on the Issuance
Date, will be paid over by the Underwriters to the Depositary on behalf of the
Escrow Agent (for the benefit of such Certificateholders as the holders of the
Escrow Receipts) and will not constitute property of the Original Trusts. Under
the terms of each Escrow Agreement, the Escrow Agent will be irrevocably
instructed to enter into the Deposit Agreements with the Depositary and to
effect withdrawals upon the receipt of appropriate notice from the relevant
Trustee so as to enable such Trustee to purchase the identified Equipment Notes
on the terms and conditions set forth in the Note Purchase Agreement. Interest
on the Deposits relating to each Offered Certificate Trust will be paid to the
Certificateholders of such Trust as Receiptholders through a Paying Agent
appointed by the Escrow Agent. Pending satisfaction of such conditions and
withdrawal of such Deposits, the Escrow Agent's rights with respect to the
Deposits will remain plan assets subject to the fiduciary responsibility and
prohibited transaction provisions of ERISA and Section 4975 of the Code.
There can be no assurance that the Department of Labor would determine that
the Underwriter Exemption would be applicable to Class G-1 Certificates and
Class G-2 Certificates in these circumstances. In particular, the Department of
Labor might assert that the escrow arrangement is tantamount to an impermissible
pre-funding rendering the Underwriter Exemption inapplicable. In addition, even
if all of the conditions of the Underwriter Exemption are satisfied with respect
to the Class G-1 Certificates and Class G-2 Certificates, no assurance can be
given that the Underwriter Exemption would apply with respect to all
transactions involving the Class G-1 Certificates or the Class G-2 Certificates
or the assets of the Class G-1 Trust or the Class G-2 Trust. In particular, it
appears that the Underwriter Exemption would not apply to the purchase by
holders of Subordinated Certificates of Class G-1 Certificates or Class G-2
Certificates in connection with the exercise of their rights upon the occurrence
and during the continuance of a Triggering Event. Therefore, the fiduciary of a
Plan considering the purchase of a Class G-1 Certificate or Class G-2
Certificate should consider the availability of the exemptive relief provided by
the Underwriter Exemption, as well as the availability of any other exemptions
that may be applicable, such as the Class Exemptions.
Each person who acquires or accepts a Certificate or an interest therein,
will be deemed by such acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been used to purchase such
Certificate or an interest therein or (ii) the purchase and holding of such
Certificate or an interest therein are exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated March 11, 2002, the underwriters listed below (the
"Underwriters") have agreed with Continental to purchase from the Trustee the
following respective principal amounts of Offered Certificates.
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF CLASS G-1 OF CLASS G-2
UNDERWRITER CERTIFICATES CERTIFICATES
----------- ---------------- ----------------
Credit Suisse First Boston Corporation................ $ 26,932,000 $ 38,906,000
J.P. Morgan Securities Inc. .......................... 26,928,000 38,904,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.... 26,928,000 38,904,000
Salomon Smith Barney Inc. ............................ 26,928,000 38,904,000
Morgan Stanley & Co. Incorporated..................... 26,928,000 38,904,000
------------ ------------
Total............................................ $134,644,000 $194,522,000
============ ============
The underwriting agreement provides that the Underwriters will be obligated
to purchase all of the Offered Certificates if any are purchased. If an
Underwriter defaults on its purchase commitment, the purchase commitments of the
non-defaulting Underwriters may be increased or the offering of the Offered
Certificates may be terminated.
The aggregate proceeds from the sale of the Offered Certificates will be
$329,166,000. Continental will pay the Underwriters compensation totaling
$3,000,000, representing underwriting commission, as well as certain structuring
and advisory fees. Continental estimates that its expenses associated with the
offer and sale of the Offered Certificates will be approximately $1,500,000
(including certain expenses of the Underwriters and the Policy Provider required
to be reimbursed by Continental).
The Underwriters propose to offer the Offered Certificates initially at the
public offering prices on the cover page of this Prospectus Supplement and to
selling group members at those prices less the concessions set forth below. The
Underwriters and selling group members may allow a discount to other
broker/dealers set forth below. After the initial public offering, the
Underwriters may change public offering prices and concessions and discounts.
PASS THROUGH TO SELLING DISCOUNT TO
CERTIFICATES DESIGNATION GROUP MEMBERS BROKER/DEALERS
------------------------ ------------- --------------
2002-1G-1................................................ 0.50% 0.25%
2002-1G-2................................................ 0.50 0.25
The Offered Certificates are a new issue of securities with no established
trading market. Continental does not intend to apply for the listing of the
Offered Certificates on a national securities exchange. One or more of the
Underwriters currently intend to make a secondary market for the Offered
Certificates. However, they are not obligated to do so and may discontinue any
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Offered Certificates.
Continental has agreed to indemnify the Underwriters against liabilities
under the Securities Act, or contribute to payments which the Underwriters may
be required to make in that respect.
Credit Suisse First Boston, New York branch, an affiliate of Credit Suisse
First Boston Corporation, will act as the Depositary. Merrill Lynch Capital
Services, Inc. and Merrill Lynch & Co., Inc., affiliates of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, will act as the Above-Cap Liquidity
Provider and the Above-Cap Liquidity Guarantor, respectively. From time to time,
several of the Underwriters or their affiliates perform investment banking and
advisory services for, and provide general financing and banking services to,
Continental and its affiliates. In particular, affiliates of Credit Suisse First
Boston Corporation, J.P. Morgan Securities Inc. and Salomon Smith Barney Inc.
are lenders to Continental.
Certain of the Underwriters will make securities available for distribution
on the Internet through a proprietary Web site and/or a third-party system
operated by Market Axess Inc., an Internet-based communications technology
provider. Market Axess Inc. is providing the system as a conduit for
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communications between those Underwriters and their customers and is not a party
to any transactions. Market Axess Inc. will not function as an underwriter or
agent of the issuer, nor will Market Axess Inc. act as a broker for any customer
of those Underwriters. Market Axess Inc., a registered broker-dealer, will
receive compensation from certain of the Underwriters based on transactions
those Underwriters conduct through the system. Those Underwriters will make
securities available to their customers through the Internet distributions,
whether made through a proprietary or third party system, on the same terms as
distributions made through other channels.
Continental expects that delivery of the Offered Certificates will be made
against payment therefor on or about the closing date specified on the cover
page of this Prospectus Supplement, which will be the tenth business day
following the date hereof (this settlement cycle being referred to as T+ 10).
Under Rule 15c6-1 of the Commission under the Securities Exchange Act of 1934,
trades in the secondary market generally are required to settle in three
business days, unless the parties to the trade expressly agree otherwise.
Accordingly, purchasers who wish to trade Offered Certificates on the date
hereof or the next six succeeding business days will be required, by virtue of
the fact that the Offered Certificates initially will settle in T+ 10, to
specify an alternate settlement cycle at the time of any trade to prevent a
failed settlement and should consult their own advisor.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the Offered
Certificates in the open market after the distribution has been completed
in order to cover syndicate short positions.
- Penalty bids permit the Underwriters to reclaim a selling concession from
a syndicate member when the Offered Certificates originally sold by such
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
Such stabilizing transactions, syndicate covering transactions and penalty bids
may cause the prices of the Offered Certificates to be higher than they would
otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Offered Certificates in Canada is being made only
on a private placement basis exempt from the requirement that Continental
prepare and file a prospectus with the securities regulatory authorities in each
province where trades of the Offered Certificates are made. Any resale of the
Offered Certificates in Canada must be made under applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made under available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the Offered
Certificates.
REPRESENTATIONS OF PURCHASERS
By purchasing Offered Certificates in Canada and accepting a purchase
confirmation, a purchaser is representing to Continental and the dealer from
whom the purchase confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the Offered Certificates without the benefit of a prospectus
qualified under those securities laws,
- where required by law, that the purchaser is purchasing as principal and
not as agent, and
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- the purchaser has reviewed the text above under "--Resale Restrictions".
RIGHTS OF ACTION--ONTARIO PURCHASERS ONLY
Under Ontario securities legislation, a purchaser who purchases a security
offered by this prospectus supplement during the period of distribution will
have a statutory right of action for damages, or while still the owner of the
securities, for rescission against Continental in the event that this prospectus
supplement contains a misrepresentation. A purchaser will be deemed to have
relied on the misrepresentation. The right of action for damages is exercisable
not later than the earlier of 180 days from the date the purchaser first had
knowledge of the facts giving rise to the cause of action and three years from
the date on which payment is made for the securities. The right of action for
rescission is exercisable not later than 180 days from the date on which payment
is made for the securities. If a purchaser elects to exercise the right of
action for rescission, the purchaser will have no right of action for damages
against Continental. In no case will the amount recoverable in any action exceed
the price at which the securities were offered to the purchaser and if the
purchaser is shown to have purchased the securities with knowledge of the
misrepresentation, Continental will have no liability. In the case of an action
for damages, Continental will not be liable for all or any portion of the
damages that are proven to not represent the depreciation in value of the
securities as a result of the misrepresentation relied upon. These rights are in
addition to, and without derogation from, any other rights or remedies available
at law to an Ontario purchaser. The foregoing is a summary of the rights
available to an Ontario purchaser. Ontario purchasers should refer to the
complete text of the relevant statutory provisions.
ENFORCEMENT OF LEGAL RIGHTS
All of Continental's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon
Continental or those persons. All or a substantial portion of the assets of
Continental and those persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against Continental or those
persons in Canada or to enforce a judgment obtained in Canadian courts against
Continental or those persons outside of Canada.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Offered Certificates should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
Offered Certificates in their particular circumstances and about the eligibility
of the Offered Certificates for investment by the purchaser under relevant
Canadian legislation.
LEGAL MATTERS
The validity of the Offered Certificates is being passed upon for
Continental by Hughes Hubbard & Reed LLP, New York, New York, and for the
Underwriters by Milbank, Tweed, Hadley & McCloy LLP, New York, New York.
Milbank, Tweed, Hadley & McCloy LLP will rely on the opinion of Richards, Layton
& Finger, Wilmington, Delaware, counsel for Wilmington Trust Company, as
Trustee, as to matters of Delaware law relating to the Pass Through Trust
Agreements.
EXPERTS
The consolidated financial statements (including the financial statement
schedule) of Continental Airlines, Inc. appearing in Continental Airlines,
Inc.'s Annual Report (Form 10-K), as amended, for the year ended December 31,
2001 have been audited by Ernst & Young LLP, independent auditors, as set forth
in their reports thereon included therein and incorporated herein by reference.
Such consolidated financial statements (including the financial statement
schedule) are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
S-103
The consolidated financial statements of Ambac and subsidiaries as of
December 31, 2000 and 1999 and for each of the years in the three-year period
ended December 31, 2000 are incorporated by reference in this Prospectus
Supplement in reliance on the report of KPMG LLP, independent certified public
accountants, upon the authority of that firm as experts in accounting and
auditing.
The references to AVITAS, BK and MBA, and to their respective appraisal
reports, dated as of December 31, 2001, January 2, 2002 and February 20, 2002,
respectively, are included herein in reliance upon the authority of each such
firm as an expert with respect to the matters contained in its appraisal report.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Continental with the Commission (File No.
0-9781) are incorporated by reference in this Prospectus Supplement:
FILING DATE FILED
------ -----------------
Annual Report on Form 10-K for the year ended December 31,
2001...................................................... February 21, 2002
Amendment to Annual Report on Form 10-K/A-1 for the year
ended December 31, 2001................................... March 1, 2002
Current Report on Form 8-K.................................. January 2, 2002
Current Report on Form 8-K.................................. January 10, 2002
Current Report on Form 8-K.................................. January 16, 2002
Current Report on Form 8-K.................................. January 23, 2002
Current Report on Form 8-K.................................. February 1, 2002
Current Report on Form 8-K.................................. February 11, 2002
Current Report on Form 8-K.................................. February 28, 2002
Current Report on Form 8-K.................................. March 1, 2002
Reference is made to the information under "Incorporation of Certain
Documents by Reference" in the accompanying Prospectus. All documents filed
under the Securities Exchange Act of 1934 with the Commission prior to January
1, 2002 and incorporated by reference in the Prospectus have been superseded by
the above-listed documents and shall not be deemed to constitute a part of the
Prospectus or this Prospectus Supplement.
S-104
APPENDIX I --INDEX OF TERMS
PAGE
----
Above-Cap Account.................... S-66
Above-Cap Collateral Account......... S-65
Above-Cap Collateral Amount.......... S-65
Above-Cap Liquidity Facility......... S-65
Above-Cap Liquidity Guarantor........ S-66
Above-Cap Liquidity Provider......... S-66
Above-Cap Payment.................... S-65
Accrued Interest..................... S-67
Adjusted Expected Distributions...... S-76
Administration Expenses.............. S-75
Aggregate LTV Collateral Amount...... S-77
Air France........................... S-31
Aircraft............................. S-79
Aircraft Operative Agreements........ S-51
Ambac................................ S-32
Applicable Date...................... S-54
Appraised Current Market Value....... S-77
Appraisers........................... S-79
Assumed Aircraft Value............... S-86
Assumed Amortization Schedule........ S-41
Assumed Appraised Value.............. S-50
Average Life Date.................... S-86
Aviation Security Act................ S-22
AVITAS............................... S-79
Base Rate............................ S-63
Basic Agreement...................... S-34
BK................................... S-79
Boeing............................... S-80
Break Amount......................... S-85
Bush Intercontinental................ S-29
Business Day......................... S-41
Capped Interest Rate................. S-59
Capped LIBOR......................... S-59
Cash Collateral Account.............. S-61
Cede................................. S-53
Certificate Account.................. S-40
Certificate Owner.................... S-53
Certificateholders................... S-35
Certificates......................... S-34
Class Exemptions..................... S-99
Class G-1 Certificates............... S-34
Class G-1 Trust...................... S-34
PAGE
----
Class G-1 Trustee.................... S-36
Class G-2 Certificates............... S-34
Class G-2 Trust...................... S-34
Class G-2 Trustee.................... S-36
Class H Certificates................. S-34
Class H Trust........................ S-34
Class I Certificates................. S-34
Class I Trust........................ S-34
Class J Certificates................. S-52
Class J Trust........................ S-52
CMI.................................. S-29
Code................................. S-48
Commission........................... S-34
Company.............................. S-29
Continental.......................... S-29
Controlling Party.................... S-71
Convention........................... S-90
Copa................................. S-31
CSFB................................. S-55
Current Distribution Date............ S-74
Current Pool Balance................. S-77
Debt Balance......................... S-91
Delivery Period...................... S-80
Delivery Period Termination Date..... S-54
Deposit.............................. S-54
Deposit Agreement.................... S-54
Deposit Break Amount................. S-54
Deposit Make-Whole Premium........... S-55
Depositary........................... S-55
Depreciation Assumption.............. S-86
Disposition.......................... S-67
disqualified persons................. S-98
Distribution Date.................... S-36
Downgrade Drawing.................... S-61
DTC.................................. S-53
DTC Participants..................... S-53
Election Distribution Date........... S-70
Embraer.............................. S-23
Equipment............................ S-89
Equipment Notes...................... S-82
ERISA................................ S-98
ERISA Plans.......................... S-98
I-1
PAGE
----
Escrow Agent......................... S-57
Escrow Agreements.................... S-57
Escrow Receipts...................... S-57
Event of Loss........................ S-93
Excess Reimbursement Obligations..... S-74
Expected Distributions............... S-74
ExpressJet........................... S-28
Express Jet Holdings................. S-28
FAA.................................. S-21
Final Distributions.................. S-72
Final Drawing........................ S-62
Final Maturity Date.................. S-39
Gulfstream........................... S-30
H.15(519)............................ S-85
Hopkins International................ S-29
Indenture............................ S-49
Indenture Default.................... S-44
Initial Interest Period.............. S-83
Insolvency Proceeding................ S-70
Intercreditor Agreement.............. S-71
Interest Drawing..................... S-58
Interest Period...................... S-83
IRS.................................. S-94
Issuance Date........................ S-61
KLM.................................. S-30
LIBOR................................ S-83
Liquidity Event of Default........... S-64
Liquidity Expenses................... S-74
Liquidity Facilities................. S-58
Liquidity Facility LIBOR............. S-63
Liquidity Obligations................ S-74
Liquidity Provider................... S-58
Liquidity Providers.................. S-66
Loan Trustee......................... S-82
LTV Appraisal........................ S-78
LTV Collateral Amount................ S-77
LTV Ratio............................ S-77
LTVs................................. S-7
Make-Whole Premium................... S-85
Mandatory Document Terms............. S-51
Mandatory Economic Terms............. S-50
Maximum Available Commitment......... S-59
MBA.................................. S-79
Minimum Sale Price................... S-73
PAGE
----
Moody's.............................. S-56
most recent H.15(519)................ S-85
New Trustee.......................... S-52
Newark............................... S-29
Non-Extension Drawing................ S-62
Non-Performing Equipment Notes....... S-76
Northwest Airlines................... S-30
Northwest Alliance................... S-30
Note Holders......................... S-51
Note Purchase Agreement.............. S-49
Offered Certificate Trusts........... S-34
Offered Certificates................. S-34
Offering............................. S-54
Order................................ S-70
Original Trustee..................... S-52
Original Trusts...................... S-52
Other Certificateholders............. S-96
Participation Agreement.............. S-49
parties in interest.................. S-98
Pass Through Trust Agreements........ S-34
Paying Agent......................... S-57
Paying Agent Account................. S-40
Performing Equipment Note............ S-61
Plan Asset Regulation................ S-98
Plans................................ S-98
Policy............................... S-67
Policy Drawing....................... S-74
Policy Expenses...................... S-74
Policy Provider...................... S-32
Policy Provider Agreement............ S-70
Policy Provider Default.............. S-72
Policy Provider Election............. S-68
Policy Provider Obligations.......... S-74
Pool Balance......................... S-41
Pool Factor.......................... S-41
Preference Amount.................... S-70
Primary Liquidity Facility........... S-58
Prior Funds.......................... S-67
Prospectus........................... S-34
PTC Event of Default................. S-46
PTCE................................. S-99
Rating Agencies...................... S-56
Receiptholder........................ S-57
Reference Agency Agreement........... S-83
I-2
PAGE
----
Reference Agent...................... S-83
Reference Date....................... S-83
Regular Distribution Dates........... S-39
Remaining Weighted Average Life...... S-86
Replacement Facility................. S-61
Required Amount...................... S-59
Scheduled Payments................... S-39
Section 1110......................... S-88
Series G-1 Equipment Notes........... S-82
Series G-2 Equipment Notes........... S-82
Series H Equipment Notes............. S-82
Series I Equipment Notes............. S-82
Series J Equipment Notes............. S-82
Shortfall Certificateholders......... S-96
Special Distribution Date............ S-40
Special Payment...................... S-39
Special Payments Account............. S-40
Stabilization Act.................... S-21
Standard & Poor's.................... S-56
Stated Interest Rates................ S-38
Subordinated Certificate Trustees.... S-36
Subordinated Certificate Trusts...... S-34
PAGE
----
Subordinated Certificates............ S-34
Subordinated Equipment Notes......... S-82
Subordination Agent.................. S-71
Substitute Aircraft.................. S-81
Successor Trust...................... S-52
Tax Counsel.......................... S-94
Termination Date..................... S-70
Termination Notice................... S-64
Threshold Rating..................... S-61
Transfer Date........................ S-52
Transportation Code.................. S-46
Treasury Yield....................... S-85
Triggering Event..................... S-36
Trust Indenture Act.................. S-47
Trust Property....................... S-34
Trust Supplement..................... S-34
Trustee.............................. S-34
Trusts............................... S-34
U.S. Certificateholders.............. S-94
U.S. Persons......................... S-94
Underwriter Exemption................ S-99
Underwriters......................... S-101
I-3
APPENDIX II - APPRAISAL LETTERS
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CONTINENTAL AIRLINES DECEMBER 31, 2001
--------------------------------------------------------------------------------
INTRODUCTION
AVITAS, Inc. has been retained by Continental Airlines (the "Client") to
provide its opinion as to the Base Value and Market Value for two (2) Boeing
757-300, six (6) 767-400ER and two (2) 777-200ER aircraft. The subject aircraft
are identified and their values are set forth in Figure 1 on page 3.
The opinions expressed in this report reflect the latest analysis from AVITAS
of the effect on values of the events of September 11, 2001. Since then,
uncertainty in the commercial aircraft market is at an unprecedented level,
with trading activity at a minimum, and it will be some time before a volume of
transaction information can confirm to us how far the market has fallen. We
have, however, adapted our methodology to take account of recent extraordinary
events and this has allowed us to predict the magnitude of the effects of the
economy and traffic on asset value. The market is changing rapidly and will
lead us to constantly update our opinions as more information becomes available.
The values presented in this report assume that the aircraft will be in new,
"flyaway" condition and fully certificated for commercial operations. We have
further assumed that the subject aircraft will be operated under the air
transport regulations of a major nation.
The values presented in this report do not take into consideration fleet sales,
attached leases, tax considerations or other factors that might be considered
in structuring the terms and conditions of a specific transaction. These
factors do not directly affect the value of the aircraft itself but can affect
the economics of the transaction. Therefore, the negotiated striking price in
an aircraft transaction may take into consideration factors such as the present
value of the future lease stream, the terms and conditions of the specific
lease agreement and the impact of tax considerations.
DEFINITIONS
AVITAS's value definitions, conform to those of the International Society of
Transport Aircraft Trading
---------------- [MAP GRAPHIC] ----------------- ("ISTAT") adopted in January
1994, and are as follows:
WORLD HEADQUARTERS: 14520 Avion Pkwy, Chantilly,
VA 20151 USA * Telephone: (703) 476-2300 Fax: *BASE VALUE is the appraiser's
(703) 860-5855 Email: avitas@dnv.com opinion of the underlying
economic value of an aircraft
AVITAS EUROPE: Palace House, 3 Cathedral St. in an open, unrestricted,
London SE1 9DE * Telephone: 0171-716-6621 stable market environment
Fax: 0717-357-6873 Email: avitas@dnv.com with a reasonable balance of
supply and demand and assumes
AVITAS ENGINEERING: 5040 N.W. 7th Street, #900 full consideration of its
Miami, FL 33126 * Telephone: (305) 476-9650 "highest and best use." An
Fax: (305) 476-9915 Email: avitas@dnv.com aircraft's Base Value is
founded in the historical
trend of values and in the
A DET NORSKE VERITAS COMPANY projection of value trends
------------------------------------------------- and presumes an arm's-length,
cash transaction between
willing and knowledgeable parties, acting prudently, with an absence of duress
and with a reasonable period of time for marketing. Base Value typically assumes
that an aircraft's
[AVITAS LOGO]
CONTINENTAL AIRLINES DECEMBER 31, 2001
--------------------------------------------------------------------------------
physical condition is average for an aircraft of its type and age, and its
maintenance time status is at mid-life, mid-time (or benefiting from an
above-average maintenance status if it is new or nearly new).
*MARKET VALUE (or CURRENT MARKET VALUE if the value pertains to the time of the
analysis) is the appraiser's opinion of the most likely trading price that may
be generated for an aircraft under the market conditions that are perceived to
exist at the time in question. Market Value assumes that the aircraft is valued
for its highest, best use, that the parties to the hypothetical transaction are
willing, able, prudent and knowledgeable, and under no unusual pressure for a
prompt sale, and that the transaction would be negotiated in an open and
unrestricted market on an arm's-length basis, for cash or equivalent
consideration, and given an adequate amount of time for effective exposure to
prospective buyers. Market Value assumes that an aircraft's physical condition
is average for an aircraft of its type and age, and its maintenance time status
is at mid-life, mid-time (or benefiting from an above-average maintenance
status if it is new or nearly new). Market Value is synonymous with Fair Market
Value in that both reflect the state of supply and demand in the market that
exists at the time.
*ADJUSTED (CURRENT) MARKET VALUE indicates the Market Value of the aircraft
adjusted for the actual technical status and maintenance condition of the
aircraft, but still assuming the same market conditions and transaction
circumstances as described above.
*DISTRESS VALUE is the appraiser's opinion of the price at which an aircraft
could be sold under abnormal conditions, such as an artificially limited
marketing time period, the perception of the seller being under duress to sell,
an auction, a liquidation, commercial restrictions, legal complications or
other such factors that significantly reduce the bargaining leverage of the
seller and give the buyer a significant advantage that can translate into
heavily discounted actual trading prices. Apart from the fact that the seller
is uncommonly motivated, the parties to the transaction are otherwise assumed
to be willing, able, prudent and knowledgeable, negotiating under the market
conditions that are perceived to exist at the time, not in an idealized
balanced market. While Distress Value normally implies that the seller is under
some duress, there are occasions when buyers, not sellers, are distressed and,
therefore, willing to pay a premium price.
2
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CONTINENTAL AIRLINES DECEMBER 31, 2001
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SECURITIZED VALUE OR LEASE - Encumbered Value is the appraiser's opinion of
the value of an aircraft under lease, given a specified lease payment stream
(rents and term), an estimated future residual value at lease termination and
an appropriate discount rate. The Securitized Value or Lease -- Encumbered
Value may be more or less than the appraiser's opinion of Market Value. The
appraiser may not be fully aware of the credit risks associated with the
parties involved, nor the time-value of money to those parties, nor with
possible tax consequences pertaining to the parties involved, nor with all of
the provisions of the lease that may pertain to items such as security
deposits, purchase options at various dates, term extensions, sub-lease rights,
repossession rights, reserve payments and return conditions.
AIRCRAFT VALUE
AVITAS's opinion as to the value of the subject aircraft is presented below in
millions of U.S. dollars. With regard to new aircraft, AVITAS considers the
Base Value and the Market Value to be the same. The Base Value of a new
aircraft is the typical price paid by an average operator in a single unit or
small lot sale. Actual transaction prices may be either above or below that
level due to a number of factors. For example, a launch order or a large fleet
order may result in discounts, whereas a single unit sale to a small operator
who needs a substantial amount of support may be approaching the list price.
Furthermore, implicit in these values is AVITAS's assumption that the new
aircraft will remain with the original operator for at least two years. If a
newly delivered aircraft comes onto the market, the seller is at an immediate
disadvantage as he is likely to be in competition with the manufacturer who can
offer training and support.
FIGURE 1
CONTINENTAL AIRLINES
AIRCRAFT DESCRIPTION & SUMMARY OF AIRCRAFT VALUES
IN US$ DOLLARS
--------------------------------------------------------------------------------------------------------------------
NO. AIRCRAFT ENGINE TYPE SERIAL NUMBER TAIL NUMBER MTOW (LBS) DELIVERY DATE BASE VALUE
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
1 B757-324 RB211-535E4B 32812 N75853 272,500 February-02 $ 60.3
--------------------------------------------------------------------------------------------------------------------
2 B757-324 RB211-535E4B 32813 N75854 272,500 February-02 60.3
====================================================================================================================
3 B767-424ER CF6-80C2B8F 29456 N68061 450,000 March-02 92.7
--------------------------------------------------------------------------------------------------------------------
4 B767-424ER CF6-80C2B8F 29457 N76062 450,000 March-02 92.7
--------------------------------------------------------------------------------------------------------------------
5 B767-424ER CF6-80C2B8F 29458 N69063 450,000 April-02 93.4
--------------------------------------------------------------------------------------------------------------------
6 B767-424ER CF6-80C2B8F 29459 N76064 450,000 April-02 93.4
--------------------------------------------------------------------------------------------------------------------
7 B767-424ER CF6-80C2B8F 29460 N76065 450,000 May-02 93.4
--------------------------------------------------------------------------------------------------------------------
8 B767-424ER CF6-80C2B8F 29461 N77066 450,000 May-02 93.4
====================================================================================================================
9 B777-224ER GE90-90B 31679 N78017 648,000 March-02 127.1
--------------------------------------------------------------------------------------------------------------------
10 B777-224ER GE90-90B 31680 N37018 648,000 April-02 128.0
--------------------------------------------------------------------------------------------------------------------
3
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CONTINENTAL AIRLINES DECEMBER 31, 2001
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GENERAL MARKET OVERVIEW
INTRODUCTION
The events of September 11, 2001, in which several high profile targets within
the U.S. were the subject of terrorist action, have had a considerable impact on
the world's commercial aviation industry. AVITAS is continuing to analyze the
depth of these effects, but it is already clear that the implications for civil
aviation will be extremely serious. The last major downturn in commercial air
transport, in the early 1990s, occurred with a combination of a massive
overbooking of new aircraft orders, higher fuel prices and a slump in the demand
for air travel exacerbated by the Gulf War and the threat of terrorist action.
On this occasion, the threat has become a reality and its consequences for the
aircraft industry will be far-reaching. The depth of these consequences will be
better understood as we monitor the performance of the industry through 2002.
MARKET OVERVIEW
While the continuation of the economic boom through 2000 took most observers by
surprise, the downturn in the commercial aircraft market became well
established. In addition to the steady increase in the number of aircraft
advertised as available for sale or lease, the U.S. major airlines have, on the
whole, experienced an extremely difficult first quarter.
NARROWBODIES
The market for aircraft in this class declined in the mid-1990s as the effects
of recession and the aftermath of the Gulf War were felt. Orders recovered
dramatically in the second half of the decade, but dropped sharply again in 1999
as expectations of another cyclical downturn mounted. However, while sales
remained relatively strong in 2000, declines were experienced in 2001 and are
expected again in 2002.
WIDEBODIES
Although economic recovery in the Far East is now sustained, weaker demand for
larger aircraft is still apparent. Widebody orders also peaked in the mid-1990s,
but had declined very markedly by 1999 and 2000 and 2001 are predicted to be the
poorest years for sales in the last decade, with around 130 widebody units
ordered in each year. The success of the A380 program will depend to a large
extent on commitments to it from carriers based in Asia or operating to cities
there, while types such as the longer-range variants of the 777 will help to
open up new trans-Pacific routes and boost frequencies in existing markets.
AIRCRAFT AVAILABILITY
In the days immediately following the terrorist attacks against the U.S., a
majority of carriers in the country had announced widespread reductions in
capacity and the grounding or permanent withdrawal of large numbers of aircraft.
Older narrowbodies were particularly hard hit. Faced with a massive slump in
traffic, operators moved quickly to divest themselves of unneeded lift. The
727-200, DC-9, MD-80 and
4
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CONTINENTAL AIRLINES DECEMBER 31, 2001
--------------------------------------------------------------------------------
737-200 were the types most affected. Overall, at least 1,200 aircraft of all
types are likely to be retired from the fleet or placed in some cases in
temporary storage. Prior to September 2001, the number of aircraft available
for either sale or lease had been growing substantially, although this was
partially a result of the passing of the Stage 3 noise gate at the end of 1999.
Other types, for example, the 737-300/-400, 757-200 and 767-200/-300, may also
find favor as freighters a little earlier than anticipated, if conversion
programs become established.
RETIREMENTS
The passing of the Stage 3 noise gate at the end of 1999 contributed
significantly to an acceleration in aircraft retirements, especially among
older narrowbodies. Some passenger widebodies were also affected and
retirements occurred somewhat earlier than might have been expected in a number
of cases, such as with the DC-10, the A300 and the 747-200. The events of
September 2001 resulted almost immediately in the announcement of the
withdrawal from service of large numbers of aircraft, many of which will leave
the active fleet permanently. Prospects are particularly bleak for the 727-200,
737-200 and DC-9 while large numbers of other aircraft types - such as the
MD-80, which had been expected to remain in widespread use for some time to
come - could initially be stored but may eventually encounter serious
difficulty in finding new operators as the market recovers.
BACKGROUND - BOEING 757-300
The Boeing 757-300 was launched in early 1996 with an order for 12 aircraft
from the German charter airline Condor Flugdienst. The 757-300 is a stretched
version of the -200 with 160 inches added in front of the wing and 120 inches
added behind the wing. The 757-300 also has a new interior and the landing
gear, high lift system and fuselage have been strengthened to accommodate the
larger size and heavier weight. The 757-300 received type certification from
the FAA and was also recommended for type validation by the JAA in January
1999. The first aircraft was delivered in March 1999 and seats 240 passengers
in a mixed-class layout with a range of 3,500 nautical miles. The -300 has
ETOPS capability and offers 10% lower seat-mile costs than the -200.
CURRENT MARKET - BOEING 757-300
CURRENT MARKET
Prior to September 11, 2001, AVITAS considered the market for the 757-300
stable with some recent large orders from major carriers and one leasing
company. The launch customer, Condor, took delivery of its first aircraft in
1999.
Due to the recent tragic events on September 11th of this year, the market for
all aircraft are in an uncertain state. While trading activity is at a minimum,
it is clear that prices and lease rates will come under some pressure with
airlines cutting capacity, deferring orders and parking many aircraft. AVITAS
expects that older aircraft will be more severely affected than newer equipment.
5
[AVITAS LOGO]
CONTINENTAL AIRLINES DECEMBER 31, 2001
________________________________________________________________________________
RECENT FLEET DEVELOPMENTS
In March 2001, Tyco Capital Corporation ordered five 757-300s and optioned
another five and became the first leasing company to place an order for the
type.
In January 2001, Northwest Airlines announced an order for 20 Pratt & Whitney
powered 757-300 aircraft from Boeing. Northwest, which already operates a fleet
of 48 757-200s, confirmed the purchase of 24 A330-300s, six A319s and two
747-400s at the same time. The 757-300s, which will be delivered between 2002
and 2004, will reportedly be used to replace the carrier's fleet of 21
DC-10-40s.
AVAILABILITY
As of October 2001, AVITAS was aware of two 757-300 being advertised for sale
or lease by Arkia Israeli Airlines and Condor. Both aircraft have been marketed
for 4-5 months.
RECENT TRANSACTIONS AND OPERATING LEASE RATES
Since the aircraft has not been in service for long, a secondary market has yet
to develop. The Boeing list price for the Boeing 757-300 is $81.0 - $89.5
million, which is $8.5 - $9 million higher than the list price for the 757-200.
The 757-300 should command similar or slightly higher lease rates than the
757-200, whose operating lease rates have been reported at mid $300,000 to low
$400,000 per month. We expect lease rates to come under pressure in the current
weak economic environment.
CURRENT OPERATOR BASE AND BACKLOG
As of October 2001, there were 22 aircraft in service among four airlines and
one listed as in service with the manufacturer. Regarding future deliveries,
there were 39 Boeing 757-300s on firm order and options for 19 more.
6
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CONTINENTAL AIRLINES DECEMBER 31, 2001
--------------------------------------------------------------------------------
FIGURE 2
--------------------------------------------------------------------------------
757-300 CURRENT FLEET & BACKLOG
AS OF OCTOBER 2001
--------------------------------------------------------------------------------
OPERATOR/ORDERHOLDER IN SERVICE FIRM ORDERS OPTIONS TOTAL
--------------------------------------------------------------------------------
CONDOR 13 11 24
--------------------------------------------------------------------------------
NORTHWEST AIRLINES 16 16
--------------------------------------------------------------------------------
CONTINENTAL AIRLINES 15 15
--------------------------------------------------------------------------------
AMERICAN TRANS AIR 4 5 9
--------------------------------------------------------------------------------
TYCO CAPITAL CORP. 1 5 6
--------------------------------------------------------------------------------
JMC AIRLINES 2 3 5
--------------------------------------------------------------------------------
ARKIA 2 2
--------------------------------------------------------------------------------
ICELANDAIR 2 2
--------------------------------------------------------------------------------
BOEING 1 1
--------------------------------------------------------------------------------
GRAND TOTAL 22 39 19 80
--------------------------------------------------------------------------------
Source: BACK Information Services
OUTLOOK AND FUTURE ASSET RISK ANALYSIS
The 757-200 and -300 competes with the Airbus A321-100 and -200 which is
somewhat smaller than the Boeing product. Airbus has enjoyed a great deal of
success in the past several years with its narrowbody family and has received
several large and strategically important orders from traditional Boeing
customers. Competition is also coming from other Boeing products such as the
737-800, which already has a large fleet and a solid backlog. For the 757-300,
we believe that it is unlikely that the type will sell as well as the -200.
Unless the orderbook significantly expands, the type may be considered a niche
aircraft and its values will suffer.
FIGURE 3
---------------------------------------------------------------------------------------------------------
BOEING 757-300 COMPETITIVE PROFILE
AS OF OCTOBER 2001
---------------------------------------------------------------------------------------------------------
AIRCRAFT TYPE EIS IN SERVICE FIRM ORDERS OPERATORS/ORDERHOLDERS RANGE (nm) SEAT CAPACITY
---------------------------------------------------------------------------------------------------------
757-200 non-ETOPS 1982 865* 26 77 2,700 w/194 pax 194-239
---------------------------------------------------------------------------------------------------------
757-200 ETOPS 1982 865* 26 77 3,900 w/194 pax 194-239
---------------------------------------------------------------------------------------------------------
737-800 1998 535 300 63 2,940 w/162 pax 162-189
---------------------------------------------------------------------------------------------------------
A321-200 1997 128 103 36 3,000 w/185 pax 185-220
---------------------------------------------------------------------------------------------------------
A321-100 1994 88 85 17 2,350 w/185 pax 185-220
---------------------------------------------------------------------------------------------------------
757-300 1999 22 39 9 3,450 w/243 pax 243-289
---------------------------------------------------------------------------------------------------------
737-900 2001 18 28 5 2,728 w/177 pax 177-189
---------------------------------------------------------------------------------------------------------
* Data include both non-ETOPS and ETOPS aircraft
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BACKGROUND - BOEING 767-400
The 767-400ER, a stretched version of the 767-300ER, was launched in April 1997
for Delta Air Lines as a replacement for their L-1011s on domestic services. In
addition to the 21 foot stretch, 11 feet forward of the wing and 10 feet aft of
the wing, are numerous changes and enhancements to the aircraft. The wing
includes an all new 7 foot raked wing tip and a strengthened wing box. The
aircraft features an upgraded flight deck, new modernized 777-style interior
and longer main landing gear with 777-type wheels, tires and brakes. Unlike the
767-300ER only PW and GE engines are offered as powerplants for this model. The
upgrades and changes have reduced the commonality of this aircraft with its
other family members. The aircraft can carry 304 passengers in a standard
two-class configuration or 245 passengers in a standard three-class
configuration. In a three-class configuration the aircraft has a range of 5,635
nautical miles. The first of these new derivatives rolled out of the factory in
August 1999.
All versions of the Boeing 767 meet the noise abatement requirements outlined
in U.S. FAR Part 36, Stage 3, and ICAO Annex 16, Chapter 3.
CURRENT MARKET - BOEING 767-400ER
CURRENT MARKET
Prior to September 11, 2001, AVITAS believed that the Boeing 767-400ER market
was stable. The aircraft was launched by Delta Air Lines in 1997 and the first
entered service in 2000. The carrier is replacing its 48 L1011s with the type
over the next couple of years. The 767-400ER is a 21-foot stretch of the
767-300ER of which there are 447 aircraft in service, along with 42 firm orders.
Due to the recent tragic events on September 11th of this year, the market for
all aircraft are in an uncertain state. We are not aware of any transactions
since then, however it is clear that prices and lease rates will come under some
pressure with airlines cutting capacity, deferring orders and parking many
aircraft. AVITAS expects that older aircraft will be more severely affected than
newer equipment.
RECENT FLEET DEVELOPMENTS
In March 2000, Kenya Airways announced its order of three 767-400ERs to replace
its A310 fleet. Deliveries are expected to begin in May 2004.
RECENT TRANSACTIONS & LEASE RATES
Since the aircraft has just entered airline service, there is little
transaction data available. The Boeing list price for the Boeing 767-400ER is
$125.5 - $138.5 million, which is $11 million higher than the list price for
the 767-300ER. We are aware of operating lease rates for new 767-300ER in the
range of $650,000 to $700,000 for average lease terms. The 767-400ER should
fetch similar or slightly higher rates; however, we expect all lease rates to
come under pressure in the current softening economic environment.
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CURRENT OPERATOR BASE AND BACKLOG
As of October 2001, there are 23 aircraft in service among two airlines, Delta
Airlines and Continental Airlines and one with the manufacturer. There are 25
firm orders and 24 options among three airlines. The GE CF6-80C2B7 engines will
power all aircraft currently on order. Pratt & Whitney engines are also
available however, no orders have been placed.
FIGURE 4
--------------------------------------------------------------------------------
BOEING 767-400ER CURRENT FLEET & BACKLOG
AS OF OCTOBER 2001
--------------------------------------------------------------------------------
OPERATOR/ORDERHOLDER IN SERVICE FIRM ORDERS OPTIONS TOTAL
--------------------------------------------------------------------------------
Delta Air Lines 16 4 24 44
Continental Airlines 6 18 24
Kenya Airways 3 3
Boeing 1 1
--------------------------------------------------------------------------------
GRAND TOTAL 23 25 24 72
--------------------------------------------------------------------------------
Source: BACK Information Services
OUTLOOK AND FUTURE ASSET RISK ANALYSIS
The Boeing 767-400ER competes with the A330-200, which has greater range and is
also heavier than the 767-400ER. The -400ER is a stretched and updated
derivative of the 767-300ER, which has been a successful product with airlines
and leasing companies. It was designed to replace older L-1011s, DC-10-30s and
A300s. Unless the orderbook for the 767-400ER expands markedly, the type will
most likely become a niche aircraft with suffering values.
FIGURE 5
--------------------------------------------------------------------------------------------
BOEING 767-300/-300ER PASSENGER AIRCRAFT COMPETITIVE PROFILE
AS OF OCTOBER 2001
--------------------------------------------------------------------------------------------
AIRCRAFT EIS SEAT CAPACITY RANGE (nm) MTOW (lbs) IN SERVICE FIRM ORDERS
--------------------------------------------------------------------------------------------
A300-600R 1988 230-361 4,100 w/266 pax 378,535 159 3
A330-200 1998 253-380 6,400 w/253 pax 507,000 94 132
A330-300 1994 295-400 5,600 w/335 pax 507,000 113 53
767-300 1986 218-325 4,300 w/261 pax 351,000 103 --
767-300ER 1988 218-325 6,150 w/218 pax 412,000 447 42
767-400ER 2000 245-375 5,635 w/245 pax 450,000 23 25
--------------------------------------------------------------------------------------------
Source: BACK Information Services, Airbus, Boeing
9
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CONTINENTAL AIRLINES DECEMBER 31, 2001
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BACKGROUND - BOEING 777
The 777 is a very large, twin-engine, two-crew cockpit, Stage 3 noise compliant
airliner. It was designed with considerable consultation between Boeing and its
initial customers. Five models are currently offered: the 777-200, -200ER and
-200LR and the stretched 777-300 and 777-300ER. All use fly-by-wire control
systems, have an advanced wing design and use advanced lightweight alloys and
composites to reduce structural weight. Boeing has worked with its customers,
engine manufacturers and regulatory authorities in order to achieve 180-minute
ETOPS certification of the aircraft upon introduction into service.
Boeing has designed the 777 to offer considerable flexibility in seating,
galley and lavatory configurations. Both the -200 and -200ER models offer
seating capacities of 305 to 440 passengers. As many as 32 LD-3 containers or
ten 96-inch by 125-inch pallets can be accommodated below the main deck. A
106-inch wide aft cargo door is optional to permit loading of pallets.
The 777-200ER model, formerly known as the 777-200IGW (increased gross weight),
is the intercontinental model offering range of over 7,000 nautical miles. For
the long-range 777-200ER, competing aircraft include the 747SP, DC-10-30, MD-11
and A340-300. Maximum gross takeoff weights range from 580,000 to 648,500
pounds with fuel capacity of 45,220 U.S. gallons. Available engines are the
PW4000, GE90 and Trent 800. At a takeoff weight of 632,500 pounds with 305
passengers, Boeing estimates a range of 7,400 nautical miles. Routes such as
New York-Beijing, London-Singapore and Tokyo-London are possible.
CURRENT MARKET - BOEING 777
CURRENT MARKET
It is the opinion of AVITAS that the market for the 777-200ER is stable and
that the values for the less popular 777-200 and 777-300 may come under some
pressure from not being the preferred models. The range capability of the
777-200ER has made it the clear favorite by giving operators the flexibility to
use the aircraft on routes of various lengths including the long range Pacific
flights. The limited range capability of 777-200 and the 777-300 has reduced
their market appeal.
While the events of September 11, 2001 have had a severe softening effect on
values of many aircraft types, few major airlines to date have announced the
parking or phase out of the 777 from its fleet as a result of the terrorist
attacks. However, some operators have or will announce the deferral of upcoming
deliveries.
The 777 fills the gap between the 767 and the 747 and is replacing aircraft
such as the 747-200 and first generation tri-jets, which are being phased out
by many carriers. The two-engine economics and ETOPS capability of the 777 make
it an ideal aircraft for both trans Pacific and Atlantic operations. If the
Boeing "fragmentation theory" for the Pacific transpires like it did on the
North Atlantic, then the 777 is positioned extremely well to benefit from this
outcome. According to Boeing, like on the North Atlantic,
10
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CONTINENTAL AIRLINES DECEMBER 31, 2001
--------------------------------------------------------------------------------
point-to-point service will grow in place of the hub and spoke arrangement
requiring smaller aircraft to provide service on these less dense routes. Only
the 777 can offer twin engine economics with the long-range capability to
perform the Pacific routes. The new A340-500 and -600 will compete with the 777
in this market and will not be limited by ETOPS constraints of a two engine
aircraft but has the added expense of a four engine aircraft.
AVAILABILITY
As of October 2001, AVITAS was aware of two Boeing 777-200ERs being offered for
either sale or lease. GECAS is advertising one 777-200ER available for lease
from 2003. Lauda Air is also offering a newly-delivered 777-200ER with GE90s
for sale or lease. Over the last 12 months, the number of 777s being offered
for either sale or lease has never been more than four. A total of 250 Boeing
777-200ER aircraft were in service as of October 2001.
RECENT TRANSACTIONS
The transactions and lease rates stated below have been publicly reported;
however, AVITAS may be aware of additional proprietary transactions and lease
rates, which we use in formulating our value opinion but cannot disclose in
this report.
In June 2000, Boeing said that it had sold a 1994-vintage 777-2000 powered by
Rolls-Royce Trent 892 engines to Cathay Pacific Airways in the low $80 million
range. The 777 is a former test aircraft and had been reworked prior to sale.
In terms of operating lease rates for the Boeing 777-200ER aircraft, we are
aware of rates between $900,000 to $1,050,000 per month. We expect lease rates
to come under pressure in the current softening economic environment.
RECENT FLEET DEVELOPMENTS
In November 2001, it has been reported that Singapore Airlines is in
negotiations with Boeing to postpone deliveries of 13 777-200ER. The airline
has also negotiated with Airbus to defer deliveries of A340-500s on order. Also
in November 2001, Emirates Airlines signed a letter of intent to purchase 25
Boeing 777 aircraft. The operator is already flying 13 various 777s.
In October 2001, Pakistan International Airlines was expected to be granted a
loan from the US Export-Import Bank for the purchase of four new Boeing 777 to
be delivered throughout 2002. These aircraft were originally ordered by other
airlines that canceled the deliveries after the September 11 terrorist attacks.
Three 777-200ERs on firm order and due for delivery by the end of 2002 to
Malaysia Airlines are in question. The airline has stated that it does not need
the aircraft and that they may be grounded or wet leased out.
11
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CONTINENTAL AIRLINES DECEMBER 31, 2001
________________________________________________________________________________
In June 2001, it was reported that Garuda Indonesia Airways was negotiating to
cancel orders held for six 777-200ERs and was planning to substitute them for
the purchase of 737-800s. Also in June 2001, Japan Airlines announced an order
with Boeing for three more 777-200ERs powered by PW4000 engines. The aircraft
will replace DC-10-40s.
In April 2001, Air France leased a new 777-200ER from ILFC, which will be
delivered in second quarter 2002. Also in April 2001, El Al announced it will
acquire a fourth 777-200ER and Saudi Arabian took delivery of one 777-200ER.
CURRENT OPERATOR BASE AND BACKLOG
Displayed below is the Boeing 777 series current fleet and backlog by model.
The 777-200ER has the largest current fleet, backlog and the greatest number of
operators.
FIGURE 6
BOEING 777 CURRENT FLEET & BACKLOG
AS OF OCTOBER 2001
-------------------------------------------------------------------------------
MODEL IN SERVICE FIRM ORDERS OPTIONS TOTAL
----------- ---------- ----------- ------- -----
777-200 81 9 16 106
777-200ER 250 138 102 490
777-200LR 3 4 7
777-300 38 12 3 53
777-300ER 46 32 78
----------- ---------- ----------- ------- -----
GRAND TOTAL 369 208 157 734
Source: BACK Information Services
OUTLOOK AND FUTURE ASSET RISK ANALYSIS
The Boeing 777 will continue to replace older widebodies such as the Boeing
747-100/-200 and older tri-jets such as the DC-10 which now have an average age
of over 20 years. The prospects for replacing three and four engine widebody
aircraft with the 777 were enhanced by the FAA decision to extend ETOPS
certification from the current maximum of 180 minutes to 207 minutes effective
March 21, 2000. The FAA later delayed the decision by 45 days due to opposition
from the Allied Pilots Association and Airbus. The extension of ETOPS
certification to 207 minutes allows for more efficient routings of twin-engined
aircraft over the Pacific than are currently available, making the 777 more
attractive to trans-Pacific operators.
AVITAS's opinion is that the values for the Boeing 777 series will hold stable
in the foreseeable future due to the large backlog for the type. The aircraft
holds more firm orders than the A330 and A340-200/-300 aircraft. The Asian
recession slowed down ordering of all widebody aircraft and increased
cancellations, however it appears that the newly launched -200LR and -300ER
aircraft have spurred new
12
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CONTINENTAL AIRLINES DECEMBER 31, 2001
orders from both airlines and leasing companies. The long-range versions of the
777, the -200ER/-200LR and -300ER will most likely be the most successful
aircraft among all the 777s.
COVENANTS
Unless otherwise noted, the values presented in this report assume an
arm's-length, free market transaction for cash between informed, willing and
able parties free of any duress to complete the transaction. If a distress sale
becomes necessary, a substantial discount may be required to quickly dispose of
the equipment.
AVITAS does not have, and does not intend to have, any financial or other
interest in the subject aircraft. Further, this report is prepared for the
exclusive use of the Client and shall not be provided to other parties without
the express consent of the Client.
This report represents the opinion of AVITAS and is intended to be advisory only
in nature. Therefore, AVITAS assumes no responsibility or legal liability for
any action taken, or not taken, by the Client or any other party, with regard to
this equipment. By accepting this report, all parties agree that AVITAS shall
bear no such responsibility or legal liability including liability for special
or consequential damage.
STATEMENT OF INDEPENDENCE
AVITAS hereby states that this valuation report has been independently prepared
and fairly represents AVITAS's opinion of the subject aircraft's value.
/s/ Susanna Blackman
----------------------
Susanna Blackman
Manager-Appraisal Operations
13
[AVITAS LOGO]
APPENDIX A - AVITAS APPRAISAL METHODOLOGY
At AVITAS, we undertake formal periodic value reviews of the approximately ten
dozen aircraft types that we regularly track as well as value updates as market
events and movements require. The primary value opinions we develop are Market
Value, Base Value and Future Base Value. An aircraft's Market Value is the
price at which you could sell the aircraft under the market conditions
prevailing at the time in question and its Base Value is the theoretical value
of the aircraft assuming a balanced market in terms of supply and demand. In
reaching our value opinions, we use data on actual market transactions, various
analytical techniques, a proprietary forecasting model and our own extensive
industry experience. While Market Value and Base Value embody different value
concepts, we are continually cross checking their relationships to determine if
our value opinions are reasonable given existing market conditions.
Our broad aviation industry backgrounds are critically important; they add a
diversity of viewpoints and a high degree of realism to our value opinions. Our
backgrounds include: aircraft design, performance analysis, traffic and yield
forecasting, fleet forecasting, aircraft finance, the negotiation of aircraft
loans, finance leases and operating leases, problem deal workouts,
repossessions, aircraft sales, jetliner manufacturing, maintenance and overhaul
activities, econometric modeling and forecasting, market research, and database
development.
*MARKET VALUE In determining Current Market Values, we use a blend of techniques
and tools. First, through various services and our extensive personal contacts,
we collect as much actual transaction data as possible on aircraft sales,
leases, financings and scrappings. Our published values assume airframes,
engines and landing gear to be halfway through their various overhaul and/or
life cycles. Because sales of half-life aircraft rarely occur, and because
sales can include spare engines, parts, attached lease streams, tax
considerations and other factors, judgment and experience are important in
adjusting actual transaction data to represent clean, half-life Market Values.
In addition, because over the last several years there have been a large number
of aircraft leases, our experience and knowledge of the market is used to
make value inferences from lease rentals and terms.
As a supplement to transaction data, and in some cases in the absence of actual
market activity, we also use other methods to assist in framing Market Value
opinions. We use several analytical tools because we do not believe that there
is any one technique which always results in the "right" number. Replacement
cost analysis can simply be the cost of a new airplane of the same model or it
can be used where it is possible to reproduce an aircraft. It is often helpful
in framing the upper limit of an aircraft's value, particularly for modified or
upgraded aircraft. Examples would be a passenger aircraft such as the 747-100
which can be converted into freighter configuration or a Stage 2 airplane which
can be hushkitted to Stage 3 compliance. Value in use or income analysis is
another technique in which an aircraft's earning capacity over time is
determined and the present value of those earnings is calculated. Because
different operators have different costs, yields and hurdle rates of return,
this technique can yield a range of values. Therefore, the appraiser must use
his judgment to determine what value in that range represents a Market Value
representative of the overall marketplace. Another powerful tool which we use is
should-cost analysis, which is a blend of replacement cost and value in use
analysis. This technique is used when there is little or no market data on a
particular airplane type but there is on similar or competing types. By
analyzing the economic and operational profiles of competing aircraft, the
appraiser is able to impute what the aircraft in question should cost to
position it competitively.
14
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APPENDIX A - AVITAS APPRAISAL METHODOLOGY
-----------------------------------------
Once we have formulated our own internal Market Value opinions, we present them
to a small, select group of outside aviation experts - individuals in the
fields of aircraft manufacturing, sales, remarketing, financing and forecasting
who we know well and regard very highly - for their review and frank comments.
We consider this "reality check," which often results in further value
refinements, to be a critical part of our value process in that it helps us
combat "ivory tower syndrome."
- BASE VALUE The determination of Base Value, an aircraft's balanced market,
long term value, is a highly subjective matter, one in which even the most
skilled appraisers may have widely divergent views. We use three main tools in
developing Base Values. First, we use our own research, judgment and
perceptions of each aircraft type's long term competitive strengths and
weaknesses vis-a-vis both competing aircraft types and the marketplace as a
whole. Second, we utilize a transaction-based computer forecasting model
developed by AVITAS and refined over the years. Based on thousands of actual
market transactions, the model sets forth a series of value curves which
describe the value behaviors of aircraft under different circumstances. Third,
we do a final reality check by comparing our opinion of an aircraft's Base
Value to our opinion of its Current Market Value and current marketplace
conditions.
We analyze each aircraft model to determine its historic, current and projected
competitive position with respect to similar aircraft types in terms of mission
capability (i.e., what are the aircraft's capabilities and to what extent does
the market require those capabilities), economic profile and market penetration.
As a result of weighing those factors, we assign a numerical "strength" to each
aircraft for each year of its economic life, where Strength 10 represents the
strongest value performance and Strength 1 the weakest. The model then takes
those strength factors and translates them into the aircraft's Base and Future
Base Values based on its actual replacement cost (or theoretical replacement
cost if it is no longer in production). After Base Values have been calculated,
we compare them to our Current Market Value opinions as a calibration check of
the computer model. In the infrequent case where the marketplace for that
aircraft is in balance, Base Value and Current Market Value should be the same.
In most cases, though, we must subjectively compare Base Value with Current
Market Value to see if we believe the relationship is reasonable. This may
highlight where Base Value inputs require further refinements. Because of the
dynamics of the aircraft marketplace and our continuing recalibration, Base
Value opinions are not static.
15
[BK ASSOCIATES LETTERHEAD]
January 2, 2002
Mr. Gerald Laderman
Senior Vice President-Finance
Continental Airlines
1600 Smith Street
Houston, TX 77002
Dear Mr. Laderman:
In response to your request, BK Associates, Inc. is pleased to provide this
opinion of the Base Value as of December 31, 2001 on each of 10 commercial jet
transport aircraft, identified as the Continental Airlines EETC Series 2002-1
Portfolio (Aircraft). The Aircraft are further identified in the attached
Figure I by type, manufacturer's serial number, scheduled manufacture date,
engine model and maximum takeoff weight.
Set forth below is a summary of the methodology, considerations and assumptions
utilized in this appraisal.
CURRENT FAIR MARKET VALUE
According to the International Society of Transport Aircraft Trading's (ISTAT)
definition of FMV, to which BK Associates subscribes, the quoted FMV is the
Appraiser's opinion of the most likely trading price that may be generated for
an aircraft under the market circumstances that are perceived to exist at the
time in question. The FMV assumes that the aircraft is valued for its highest
and best use, that the parties to the hypothetical sale transaction are
willing, able, prudent and knowledgeable, and under no unusual pressure for a
prompt sale, and that the transaction would be negotiated in an open and
unrestricted market on an arm's length basis, for cash or equivalent
consideration, and given an adequate amount of time for effective exposure to
prospective buyers, which BK Associates considers to be 12 to 18 months.
BASE VALUE
Base value is the Appraiser's opinion of the underlying economic value of an
aircraft in an open, unrestricted, stable market environment with a reasonable
balance of supply and demand, and assumes full consideration of its "highest
and best use". An aircraft's base value is founded in the historical trend of
values and in the projection of future value trends and presumes an arm's
length, cash transaction between willing, able and knowledgeable parties,
acting prudently, with an absence of duress and with a reasonable period of
time available for marketing.
[BK Associates, Inc. Logo]
January 2, 2002
Page 2
VALUE METHODOLOGY
As the definition suggests, Base Value is determined from historic and future
value trends and is not influenced by current market conditions. It is often
determined as a function of the original cost of the aircraft, technical
characteristics of competing aircraft, and development of new models. BK
Associates has determined from analysis of historic data, a relationship between
aircraft age and its value as a percentage of original value for the average
aircraft. These data form the basis for base value and forecast value
determinations but must be adjusted to reflect the value of engine and gross
weight options and other features of the aircraft.
LIMITING CONDITIONS AND ASSUMPTIONS
BK has neither inspected the Aircraft nor their maintenance records but relied
upon information supplied by Continental Airlines and from BK's own database. In
determining the base value of an aircraft, the following assumptions apply to
the aircraft:
1. Each aircraft is as delivered new from the manufacturer.
2. The aircraft is in compliance under a Federal Aviation Administration
approved airline maintenance program, with all airworthiness directives,
mandatory modifications and applicable service bulletins currently up to
industry standard.
3. The interior of the aircraft is in a standard passenger configuration for
its specific type, with the buyer furnished equipment and options of the
types and models generally accepted and utilized in the industry.
4. The aircraft is in current flight operations.
5. The aircraft is sold for cash without seller financing.
6. The aircraft is in average or better condition.
7. There is no accident damage.
CONCLUSIONS
Our base value opinion stated herein is given after consideration of the
significant event of terrorism that occurred within the United States on
September 11, 2001. During the ensuing days since that event, we have begun to
see how our industry has been adversely
[BK ASSOCIATES, INC. LOGO]
January 2, 2002
Page 3
affected. Passenger demand for air travel has dropped dramatically causing
airlines to reduce flight schedules and ground significant quantities of their
fleets. In response to this initial industry reaction, BK Associates has
selectively reduced our opinion of aircraft current fair market values. Today,
we are unsure of the long-term effect on aircraft values and will continue to
review the industry status. Since our base values, as provided in this
appraisal letter, are derived from historical value trends and are not
immediately influenced by current supply and demand issues, we have not
affected base values at this time.
Based on the above methodology, considerations and assumptions, it is our
opinion that the base value as of December 31, 2001 of each aircraft is as
shown in Figure 1 attached hereto.
BK Associates, Inc. has no present or contemplated future interest in the
Aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation and the time and budget constraints imposed by the client. It is
not given as a recommendation, or as an inducement, for any financial
transaction and further, BK Associates, Inc. assumes no responsibility or legal
liability for any action taken or not taken by the addressee, or any other
party, with regard to the appraised equipment. By accepting this appraisal, the
addressee agrees that BK Associates, Inc. shall bear no such responsibility or
legal liability. This appraisal is prepared for the use of the addressee and
shall not be provided to other parties without the express consent of the
addressee.
Sincerely yours,
BK ASSOCIATES, INC.
/s/ R. L. Britton
R. L. Britton
Vice President
ISTAT Senior Certified Appraiser
RLB/kf
Attachment
[BK ASSOCIATES, INC. LOGO]
CONTINENTAL AIRLINES
EETC SERIES 2002-1
PORTFOLIO
BASE
ACFT SERIAL MFG. MTOW VALUE
TYPE NUMBER DATE ENGINE LBS. ($MIL)
---- ------ ---- ------ ---- ------
1 B757-300 32812 Feb-02 RB211-535E4B 272,500 62.80
2 B757-300 32813 Feb-02 RB211-535E4B 272,500 62.80
3 B767-400ER 29456 Mar-02 CF6-80C2B8F 450,000 92.20
4 B767-400ER 29457 Mar-02 CF6-80C2B8F 450,000 92.20
5 B767-400ER 29458 Apr-02 CF6-80C2B8F 450,000 92.40
6 B767-400ER 29459 Apr-02 CF6-80C2B8F 450,000 92.40
7 B767-400ER 29460 May-02 CF6-80C2B8F 450,000 92.40
8 B767-400ER 29461 May-02 CF6-80C2B8F 450,000 92.40
9 B777-200ER 31679 Mar-02 GE90-90B 648,000 130.20
10 B777-200ER 31680 Apr-02 GE90-90B 648,000 130.20
TOTAL 940.00
MORTEN BEYER & AGNEW
--------------------
AVIATION CONSULTING FIRM
Appraisal of 10 Aircraft
(2002-1 EETC)
PREPARED FOR:
Continental Airlines, Inc.
FEBRUARY 20, 2002
Washington, D.C. London Pacific Rim
2107 Wilson Blvd. Lahinch 62, Lashmere 3-16-16 Higashiooi
Suite 750 Copthorne Shinagawa-ku
Arlington, Virginia 22201 West Sussex Tokyo 140-0011
United States United Kingdom Japan
Phone +703 276 3200 Phone +44 1342 716248 Phone +81 3 3763 6845
Fax +703 276 3201 Fax +44 1342 718967
[MBA LOGO]
I. INTRODUCTION AND EXECUTIVE SUMMARY
MORTEN BEYER & AGNEW (MBA) has been retained by Continental Airlines (the
"Client") to determine the Current Base Value of (2) Boeing 757-300, (6) Boeing
767-400ER and (2) Boeing 777-200ER aircraft, delivered new throughout 2002.
Values of the above aircraft are as of December 31, 2001.
MBA utilized the technical data of the aircraft provided by the Client, but at
Client's request did not independently verify the accuracy of the technical and
specification data so provided.
Section II of this report presents definitions of various terms, such as
Current Base Value, Current Market Value, Future Base Value, and
Lease-Encumbered Value as promulgated by the Appraisal Program of the
International Society of Transport Aircraft Trading (ISTAT). ISTAT is a
non-profit association of management personnel from banks, leasing companies,
airlines, manufacturers, brokers, and others who have a vested interest in the
commercial aviation industry and who have established a technical and ethical
certification program for expert appraisers.
[MBA LOGO]
II. DEFINITIONS
CURRENT MARKET VALUE
ISTAT defines Current Market Value (CMV) as the appraiser's opinion of the most
likely trading price that may be generated for an asset under market
circumstances that are perceived to exist at the time in question. Current
Market Value assumes that the asset is valued for its highest, best use, and
the parties to the hypothetical sale transaction are willing, able, prudent and
knowledgeable and under no unusual pressure for a prompt transaction. It also
assumes that the transaction would be negotiated in an open and unrestricted
market on an arm's-length basis, for cash or equivalent consideration, and
given an adequate amount of time for effective exposure to prospective buyers.
Market Value of a specific asset will tend to be consistent with its Base Value
in a stable market environment. In situations where a reasonable equilibrium
between supply and demand does not exist, trading prices, and therefore Market
Values, are likely to be at variance with the Base Value of the asset. Market
Value may be based upon either the actual (or specified) physical condition or
maintenance time or condition status of the asset, or alternatively upon an
assumed average physical condition and mid-life, mid-time maintenance status.
BASE VALUE
The ISTAT definition of Base Value (BV) has, essentially, the same elements of
Market Value except that the market circumstances are assumed to be in a
reasonable state of equilibrium. Thus, BV pertains to an idealized aircraft and
market combination, but will not necessarily reflect the actual CMV of the
aircraft in question at any point in time. BV is founded in the historical
trend of values and value in use, and is generally used to analyze historical
values or to project future values.
ISTAT defines Base Value as the Appraiser's opinion of the underlying economic
value of an aircraft, engine, or inventory of aircraft parts/equipment
(hereinafter referred to as "the asset"), in an open, unrestricted, stable
market environment with a reasonable balance of supply and demand. Full
consideration is assumed of its "highest and best use". An asset's Base Value
is founded in the historical trend of values and in the projection of value
trends and presumes an arm's-length, cash transaction between willing, able,
and knowledgeable parties, acting prudently, with an absence of duress and with
a reasonable period of time available for marketing. In most cases, the Base
Value of an asset assumes the physical condition is average for an asset of its
type and age. It further assumes the maintenance time/life status is at
mid-time, mid-life (or
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benefiting from an above-average maintenance status if its is new or nearly
new, as the case may be). Since Base Value pertains to a somewhat idealized
asset and market combination it may not necessarily reflect the actual current
value of the asset in question, but is a nominal starting value to which
adjustments may be applied to determine an actual value. Because it is related
to long-term market trends, the Base Value definition is commonly applied to
analyses of historical values and projections of residual values.
FUTURE BASE VALUE
Future Base Values are established by using the Base Value at the beginning of
the current year (present value), from which point the Future Base Values are
projected. The Base Value used for the purpose of projecting the Future Base
Values consider the aircraft to be at mid-life and mid-time conditions
pertaining to the various aspects of the maintenance status.
The Future Base Values are based on aircraft having an approximate life of 35
years from the date of manufacture. The Future Base Values commence from the
present time to the 35th year from the date of manufacture of this aircraft.
DISTRESS VALUE
Distress Value is the Appraiser's opinion of the price at which an asset could
be sold under abnormal conditions, such as an artificially limited marketing
time period, the perception of the seller being under duress to sell, an
auction, bankruptcy liquidation, commercial restrictions, legal complications,
or other such factors that significantly reduce the bargaining leverage of the
seller and give the buyer a significant advantage that can translate into
heavily discounted actual trading prices. Apart from the fact that the seller
is uncommonly motivated, the parties to the transaction are otherwise assumed
to be willing, able, prudent and knowledgeable, negotiating at arm's-length,
normally under the market conditions that are perceived to exist at the time,
not an idealized balanced market. While the Distress Value normally implies
that the seller is under some duress, there are occasions when buyers, not
sellers are under duress or time pressure and, therefore, willing to pay a
premium value.
SECURITIZED VALUE OR LEASE ENCUMBERED VALUE
Securitized Value or Lease Encumbered Value is the Appraiser's opinion of the
value of an asset, under lease, given a specified lease payment stream (rents
and term), and estimated future residual value at lease termination, and an
appropriate discount rate.
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The lease encumbered residual value may include consideration of lease
termination conditions and remaining maintenance reserves, if any. The
Securitized Value or Lease-Encumbered Value may be more or less than the
Appraiser's opinion of Current Market Value, taking into account various
factors, such as, the credit risks associated with the parties involved, the
time-value of money to those parties, provisions of the lease that may pertain
to items such as security deposits, purchase options at various dates, term
extensions, sub-lease rights, repossession rights, reserve payments and return
conditions.
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III.A. CURRENT MARKET CONDITIONS - GENERAL
The Current Base Values in this appraisal are extracted from the MBA's Future
Aircraft Values mid-year 2001 publication, which assumed the market, was in a
state of equilibrium. In light of the recent events, MBA reviewed the Current
Market Values of each aircraft type in the MBA's Future Aircraft Values
mid-year 2001 publication and revised the Market Adjustment Factor, which is
expressed as a percentage of the Base Value. Due to the sharp fall in air
travel caused by the economic recession and psychological factors, current
trends of overproduction of new aircraft, declining demand, and increasing
numbers of new and used jets on the market, MBA believes that most aircraft
models if offered will be selling at Current Market Prices well below the Base
Values.
The demand for and value of new and used jet transport aircraft is driven by
the world economy. In periods of strong prosperity, traffic grows at high
single digit rates, thus creating a demand for additional lift capacity. In
past periods of decline, growth fell toward zero, and actually was negative in
1991 on a worldwide basis. Subsequently, surpluses of aircraft were created.
Over the years, we have seen that traffic growth is almost directly
proportional to the growth in regional and world domestic product, and that the
long term trends are toward slower growth, lower peaks, and deeper declines,
indicating a maturity of the world's economy and of airline traffic. In periods
of decline such as we experienced in the early 1990s, large surpluses of new
and old aircraft build up on the market, with disastrous effects on short-term
prices. However, later on, values returned to normal levels, being driven by
the inherent economies and suitability of the individual aircraft types.
The September 11 terrorist attack on the United States has created a crisis for
the world's aviation industry. A significant aspect of this crisis is the
change in the demand for and prices of new and used aircraft. As a major
appraiser of transport aircraft for over five decades, MBA's principals have
the following perceptions of the current crisis and its effect on the industry.
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To a remarkable degree the world aviation situation is similar to that ten
years ago.
1. The world economy is in the early stages of a recession. In 1990
airline economies were in the beginning of a major downturn, having
declined significantly from the high of 1988. Current airline
economies peaked again in 1998, and in the last 12 months have
experienced the severest declines in history, even before September
11.
2. In the late 1980s airlines had experienced several terrorist attacks,
including PanAm at Lockerbie and two hijackings of TWA. Fear of flying
affected travel, particularly tourists.
3. New aircraft orders had reached unprecedented highs, with some 3,000
aircraft in backlog.
4. Stage III noise restrictions had been enacted by Congress, and the
phase-out of non-compliant aircraft began in 1990.
5. The Gulf War broke out, accompanied by a spike in fuel costs.
Virtually all of the foregoing conditions exist today, waiting to be
exacerbated by the World Trade Center disaster.
1. World economies are stagnant at best.
2. World passenger and cargo traffic is flat, and attempting to rebound.
3. The backlog of unfilled aircraft orders is again at an all-time high,
particularly with regional jets. Large carriers have already deferred
their orders to later dates, but still must take delivery of aircraft
that were to be delivered early this year.
4. The international situation is in turmoil with the instability and
military action in the Middle East.
5. Fuel again is a major concern, with prices volatile and OPEC limiting
production. The possibility of instability is great.
6. Stage IV noise restrictions will be promulgated this year, and may
affect the future useful lives of a percentage of the world's fleet,
while noise restrictions are imminent the application is yet to be
fully determined.
7. With some 800 large jets that were expected to delivered this year
and a similar number scheduled next year, a glut in available capacity
exists, even though all of these aircraft will not be delivered this
year.
8. Around 1,400 jet and turboprop aircraft are on the market, and this
number is increasing rapidly.
Conversely, the majority of aircraft on lease and in operations with major
carriers are likely to continue in service, and barring the bankruptcy of the
lessees are likely to continue being leased at the stipulated rates. In event
of bankruptcies, or voluntary renegotiation by the lessors, the lease rates
may/will be reduced. This may be preferable to leaving them off lease. In the
1990 recession many aircraft, which came off lease due to bankruptcy, were
parted out (B727-100 and DC9-10 aircraft) or re-leased at 40% of previous
rates. Improvements were paid for by lessors and amortized in the new lease -
the re-lease period was generally in excess of one year.
MBA expects significant cancellations and delays of new orders, some of which
are already occurring. In time, the economy will turn around and later model
used aircraft will be in demand. In the short run, we expect most B727, DC9 and
B737-200 aircraft will be retired and scrapped; MD-80 and B737-300/400/500's
prices will decline and then rebound; and later model A320s and
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B737-NGs will suffer temporary price reductions of 20-25%. Old widebodies will
also disappear; mid-life B757, 767, and A300/310s will suffer price reductions,
and a new built aircraft will sustain only modest price declines.
We expect the current backlog to be reduced through cancellations of out-year
orders and postponements of mid-year deliveries. Newly ordered aircraft with
imminent deliveries and substantial deposits tend to be delivered on schedule,
but add to the current glut and accelerate the retirement of older surplus
aircraft. In the early 1990s deliveries declined from 830 in 1991 to 482 by
1995.
The new order rate will diminish even more sharply. In the previous period new
orders fell from 1,213 in 1989 to only 324 in 1994 before picking up to a high
of 1,961 last year. This decline far exceeds the current expectations of Boeing,
Airbus, and the four regional jet manufacturers.
MBA feels that, while it is early to project current base values or evaluate the
economic lives of individual aircraft types, investors should be aware of the
instability in the aircraft asset market. The indirect effects of the recent
events and possible future events might be substantial, including the
possibility of sustained deterioration in consumer, corporate and financial
confidence and thus affecting the Base Values of certain, primarily older,
aircraft types.
In the long term, MBA is confident demand will return to normal, prices will
firm, and aircraft orders will increase sharply to recover from the unduly
severe reaction to the current crisis.
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III.B. CURRENT MARKET CONDITIONS
[AIRPLANE PHOTO] BOEING 757-300
HISTORY & DEVELOPMENT
The 757-300 was introduced as Boeing's answer to the Airbus A321, ten years
later. Taking advantage of the superior design economics of the 757-200, the
23-foot stretch allows for 50 additional seats. Launched by Lufthansa's Condor
Flugdienst, the 757-300 has made an initial home with some charter operators.
Other deliveries have been made to Icelandair, and orders have been placed by
Continental, Northwest and American Trans Air. So far the 757-300 has been a
disappointment to the Boeing line, and has yet to really accumulate any
substantial orders with only 61 since program launch, compared to 987 for the
757-200.
MARKET DEVELOPMENT
The market for the 757-300 is in its infantile stages and will only be
determined by future orders for the aircraft. With only 5 operators and 22
aircraft in operation, the 757-300 retains economic superiority, however, does
not seem to fill any particular market need. As airlines restructure and
reorganize their fleets, it might be the enhanced capacity and range of the
757-300 that may best fit their needs, however, at this point that remains to be
seen.
MARKET OUTLOOK
It is expected that Boeing will eventually discontinue the B757-200 and replace
it with the more economical 757-300 model, as airlines require more capacity.
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[AIRPLANE PHOTO] BOEING 767-400ER
HISTORY & DEVELOPMENT
Delta told Boeing that the 777 was too large for their operations and requested
Boeing to design a larger 767. The 767-400ER was brought into revenue service
halfway through 2000, shortly after Delta took delivery of its first 777, which
it decided to order anyway. The 767-400ER has an increase of 38,000 pounds of
gross-weight over the 767-300ER and can seat up to 375 passengers, 65 less than
the 777. Continental and Delta are the only two operators of the 767-400ER, and
will likely be the only two for a while to come. The -400ER is powered by the
CF6-80, but can be ordered with PW or Rolls-Royce engines as well.
MARKET DEVELOPMENT
The market for the 767-400ER has not matured at this stage, with only 22
delivered, as of November 30, 2001, to two operators. The current market will
remain dormant for the near future. It is likely that this market will remain
highly segmented as Boeing attempted to be the ultimate manufacturer to all of
its major customers and continues to build aircraft to meet specific routes
systems. This aircraft not only competes against the larger Airbus widebody
aircraft, but also on the low end of the Boeing 777 market and the high
gross-weight 767-300ER.
MARKET OUTLOOK
The Boeing 767-400ER is perhaps the quintessential example of Boeing's
propensity to build special models for individual customers, with some 20
different models of aircraft powered by a dozen different engines from five
manufacturers. This inevitably will hamper the used aircraft market, as
operators will find it more and more difficult to find ubiquitous aircraft to
meet their needs in the future as the market for the 767 family has been
drastically segmented.
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----------------
[AIRCRAFT PHOTO] BOEING 777-200ER
----------------
HISTORY & DEVELOPMENT
The very large 777-200ER is the extended range version of the 777-200, or
-200A. With an increased range and gross-weight, this aircraft is the staple of
the transatlantic crossing for many operators who used to operate DC10s and
747s. The new technology and operating economics of the 777 have made it one of
the most popular aircraft of all times.
MARKET DEVELOPMENT
The 777-200ER market is quite strong, and will remain so for a time to come. As
airlines restructure themselves in this time of recession, the 777 will become
a staple of most fleets - offering both the necessary operating economics and
the flexibility to handle many different types of routes. The 777 has become a
replacement for the larger, less efficient, Boeing 747-200s, along with the
older DC10-30s and in many cases the MD-11. It does still, however, compete
head-to-head with the Airbus A330/A340 on range and capacity. The current order
book for the Boeing 777-200 is 482 compared to the Airbus A330/A340s with 722
total orders.
MARKET OUTLOOK
The Boeing 777-200 is clearly Boeing's leading "big boy" versus Airbus, and
will remain so through this decade. The aircraft is larger, heavier and more
expensive to operate than the Airbus A330 with the same seating capacity.
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IV. VALUATION
In developing the Current Base Value of these aircraft, MBA did not inspect the
aircraft or their historical maintenance documentation, but relied on partial
information supplied by the Client and not independently verified by MBA.
Therefore, we used certain assumptions that are generally accepted industry
practice to calculate the value of aircraft when more detailed information is
not available. The principal assumptions for the aircraft are as follows, for
each aircraft:
1. The aircraft is to be delivered new.
2. The overhaul status of the airframe, engines, landing gear and other
major components are the equivalent of new delivery unless otherwise
specified.
3. The specifications of the aircraft are those most common for an
aircraft of this type new delivery.
4. The aircraft is in a standard airline configuration.
5. Its modification status is comparable to that most common for an
aircraft of its type and vintage.
6. No accounting is made for lease obligations or terms of ownership.
Continental Airlines, 2002-1
------------------------------------------------------------------------------------------------------------
Aircraft Engine Serial Tail Manufacture
Type Type Number Number MTOW Date Base Value
------------------------------------------------------------------------------------------------------------
B757-324 RB211-535E4B 32812 N75853 272,500 February-02 61,840,000
B757-324 RB211-535E4B 32813 N75854 272,500 February-02 61,840,000
B767-424ER CF6-80C2B8F 29456 N68061 450,000 March-02 97,790,000
B767-424ER CF6-80C2B8F 29457 N76062 450,000 March-02 97,790,000
B767-424ER CF6-80C2B8F 29458 N69063 450,000 April-02 97,990,000
B767-424ER CF6-80C2B8F 29459 N76064 450,000 April-02 97,990,000
B767-424ER CF6-80C2B8F 29460 N76065 450,000 May-02 98,190,000
B767-424ER CF6-80C2B8F 29461 N77066 450,000 May-02 98,190,000
B777-224ER GE90-90B 31679 N78017 648,000 March-02 133,650,000
B777-224ER GE90-90B 31680 N37018 648,000 April-02 133,920,000
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V. COVENANTS
This report has been prepared for the exclusive use of Continental Airlines and
shall not be provided to other parties by MBA without the express consent of
Continental Airlines. MBA certifies that this report has been independently
prepared and that it fully and accurately reflects MBA's opinion as to the
Current Base Value. MBA further certifies that it does not have, and does not
expect to have, any financial or other interest in the subject or similar
aircraft.
This report represents the opinion of MBA as to the Current Base Value of the
subject aircraft and is intended to be advisory only, in nature. Therefore, MBA
assumes no responsibility or legal liability for any actions taken, or not
taken, by Continental Airlines or any other party with regard to the subject
aircraft. By accepting this report, all parties agree that MBA shall bear no
such responsibility or legal liability.
This report has been prepared by:
/s/ Bryson P. Monteleone
BRYSON P. MONTELEONE
VICE PRESIDENT
Reviewed by:
/s/ Morten S. Beyer
FEBRUARY 20, 2002 MORTEN S. BEYER, APPRAISER FELLOW
CHAIRMAN & CEO
ISTAT CERTIFIED SENIOR APPRAISER
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PROSPECTUS
$1,800,000,000
CONTINENTAL AIRLINES, INC.
PASS THROUGH CERTIFICATES
------------------
This prospectus relates to pass through certificates to be issued by one or
more trusts that we will form, as creator of each pass through trust, with a
national or state bank or trust company, as trustee. The trustee will hold all
property owned by a trust for the benefit of holders of pass through
certificates issued by that trust. Each pass through certificate issued by a
trust will represent a beneficial interest in all property held by that trust.
We will describe the specific terms of any offering of pass through
certificates in a prospectus supplement to this prospectus. You should read this
prospectus and the applicable prospectus supplement carefully before you invest.
This prospectus may not be used to consummate sales of pass through
certificates unless accompanied by a prospectus supplement.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this prospectus is August 23, 2001.
TABLE OF CONTENTS
PAGE
----
WHERE YOU CAN FIND MORE INFORMATION... 1
FORWARD-LOOKING STATEMENTS............ 1
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE........................... 2
SUMMARY............................... 3
The Offering........................ 3
Certificates........................ 3
Pass Through Trusts................. 4
Equipment Notes..................... 4
THE COMPANY........................... 6
USE OF PROCEEDS....................... 6
RATIO OF EARNINGS TO FIXED CHARGES.... 7
DESCRIPTION OF THE CERTIFICATES....... 7
General............................. 7
Book-Entry Registration............. 10
Payments and Distributions.......... 13
Pool Factors........................ 14
Reports to Certificateholders....... 14
Voting of Equipment Notes........... 15
Events of Default and Certain Rights
Upon an Event of Default......... 15
Merger, Consolidation and Transfer
of Assets........................ 18
Modifications of the Basic
Agreement........................ 18
Modification of Indenture and
Related Agreements............... 19
Cross-Subordination Issues.......... 19
Termination of the Pass Through
Trusts........................... 20
Delayed Purchase of Equipment
Notes............................ 20
Liquidity Facility.................. 20
The Pass Through Trustee............ 20
PAGE
----
DESCRIPTION OF THE EQUIPMENT NOTES.... 21
General............................. 21
Principal and Interest Payments..... 21
Redemption.......................... 22
Security............................ 22
Ranking of Equipment Notes.......... 24
Payments and Limitation of
Liability........................ 24
Defeasance of the Indentures and the
Equipment Notes in Certain
Circumstances.................... 24
Assumption of Obligations by
Continental...................... 25
Liquidity Facility.................. 25
Intercreditor Issues................ 25
U.S. INCOME TAX MATTERS............... 26
General............................. 26
Tax Status of the Pass Through
Trusts........................... 26
Taxation of Certificateholders
Generally........................ 26
Effect of Subordination of
Certificateholders of
Subordinated Trusts.............. 27
Original Issue Discount............. 27
Sale or Other Disposition of the
Certificates..................... 27
Foreign Certificateholders.......... 28
Backup Withholding.................. 28
ERISA CONSIDERATIONS.................. 28
PLAN OF DISTRIBUTION.................. 28
LEGAL OPINIONS........................ 30
EXPERTS............................... 30
i
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC under the Securities Exchange Act of 1934. You may read
and copy this information at the following locations of the SEC:
Judiciary Plaza Seven World Trade Center Citicorp Center
450 Fifth Street, N.W. 13th Floor 500 West Madison Street,
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661
You may also obtain copies of this information by mail from the Public
Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the Public
Reference Room by calling the SEC at (800) SEC-0330.
The SEC also maintains an internet world wide web site that contains
reports, proxy statements and other information about issuers, like us, who file
reports electronically with the SEC. The address of that site is
http://www.sec.gov.
You may also inspect reports, proxy statements and other information about
us at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005.
We have filed with the SEC a registration statement on Form S-3, which
registers the securities that we may offer under this prospectus. The
registration statement, including the attached exhibits and schedules, contains
additional relevant information about us and the securities offered. The rules
and regulations of the SEC allow us to omit certain information included in the
registration statement from this prospectus.
FORWARD-LOOKING STATEMENTS
This prospectus, any prospectus supplement delivered with this prospectus
and the documents we incorporate by reference may contain statements that
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include any statements that predict, forecast,
indicate or imply future results, performance or achievements, and may contain
the words "believe," "anticipate," "expect," "estimate," "project," "will be,"
"will continue," "will result," or words or phrases of similar meaning.
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may vary
materially from anticipated results for a number of reasons, including those
stated in our SEC reports incorporated in this prospectus by reference or as
stated in a prospectus supplement to this prospectus under the caption "Risk
Factors".
All forward-looking statements attributable to us are expressly qualified
in their entirety by the cautionary statements above.
1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference information into this
prospectus. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be part of this prospectus, except
for any information that is superseded by subsequent incorporated documents or
by information that is included directly in this prospectus or any prospectus
supplement.
This prospectus includes by reference the documents listed below that we
previously have filed with the SEC and that are not delivered with this
document. They contain important information about our company and its financial
condition.
FILING DATE FILED
------ ----------
Annual Report on Form 10-K for the year ended December 31, February 6, 2001
2000......................................................
Quarterly Report on Form 10-Q for the quarter ended March April 16, 2001
31, 2001..................................................
Quarterly Report on Form 10-Q for the quarter ended June 30, July 16, 2001
2001......................................................
Current Report on Form 8-K.................................. January 19, 2001
Current Report on Form 8-K.................................. February 5, 2001
Current Report on Form 8-K.................................. March 8, 2001
Current Report on Form 8-K.................................. March 20, 2001
Current Report on Form 8-K.................................. April, 17, 2001
Current Report on Form 8-K.................................. May 3, 2001
Current Report on Form 8-K.................................. May 4, 2001
Current Report on Form 8-K.................................. May 10, 2001
Current Report on Form 8-K.................................. June 1, 2001
Current Report on Form 8-K.................................. June 4, 2001
Current Report on Form 8-K.................................. July 3, 2001
Current Report on Form 8-K.................................. July 10, 2001
Current Report on Form 8-K.................................. July 11, 2001
Amendment to Current Report on Form 8-K filed on July 11, July 13, 2001
2001......................................................
Current Report on Form 8-K.................................. July 13, 2001
Current Report on Form 8-K.................................. July 17, 2001
Current Report on Form 8-K.................................. August 2, 2001
Current Report on Form 8-K.................................. August 9, 2001
Current Report on Form 8-K.................................. August 10, 2001
Our SEC file number is 0-9781.
We incorporate by reference additional documents that we may file with the
SEC between the date of this prospectus and the termination of the offering of
securities under this prospectus. These documents include our periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as our proxy statements.
You may obtain any of these incorporated documents from us without charge,
excluding any exhibits to those documents unless the exhibit is specifically
incorporated by reference in such document. You may obtain documents
incorporated by reference in this prospectus by requesting them from us in
writing or by telephone at the following address:
Continental Airlines, Inc.
1600 Smith Street, Dept. HQSEO
Houston, Texas 77002
Attention: Secretary
(713) 324-2950
2
SUMMARY
THE OFFERING
This prospectus describes the pass through certificates that we may offer
from time to time after the date of this prospectus. The proceeds of these
offerings will be used to provide funds for the financing or refinancing of our
aircraft. For convenience, throughout this prospectus, the words we, us, ours or
similar words refer to Continental Airlines, Inc.
This prospectus describes the general terms of the pass through
certificates. The actual terms of any offering of pass through certificates will
be described in a supplement to this prospectus. To the extent that any
provision in any prospectus supplement is inconsistent with any provision in
this prospectus, the provision of the prospectus supplement will control.
CERTIFICATES
Pass through certificates are securities that evidence an ownership
interest in a pass through trust. The holders of the certificates issued by a
pass through trust will be the beneficiaries of that trust. For convenience, we
may refer to pass through certificates as "certificates" and refer to the holder
of a pass through certificate as a "certificateholder."
The beneficial interest in a pass through trust represented by a
certificate will be a percentage interest in the property of that trust equal to
the original face amount of such certificate divided by the original face amount
of all of the certificates issued by that trust. Each certificate will represent
a beneficial interest only in the property of the pass through trust that issued
the certificate. Multiple series of certificates may be issued. If more than one
series of certificates is issued, each series of certificates will be issued by
a separate pass through trust.
The property that will be held by each pass through trust will include
equipment notes secured by aircraft that we own or lease. Payments of principal
and interest on the equipment notes owned by a pass through trust will be passed
through to holders of certificates issued by that trust in accordance with the
terms of the pass through trust agreement pursuant to which the trust was
formed.
If certificates of any series are entitled to the benefits of a liquidity
facility or other form of credit enhancement, the prospectus supplement relating
to that series will describe the terms of the liquidity facility or other form
of credit enhancement. A liquidity facility is a revolving credit agreement,
letter of credit, bank guarantee, insurance policy or other instrument or
agreement under which another person agrees to make certain payments in respect
of the certificates if there is a shortfall in amounts otherwise available for
distribution. While a liquidity facility is designed to increase the likelihood
of the timely payment of certain amounts due under certificates, it is not a
guarantee of timely or ultimate payment.
The rights of a pass through trustee to receive monies payable under
equipment notes held for that pass through trustee may be subject to the effect
of subordination provisions contained in an intercreditor agreement described in
the prospectus supplement for a series of certificates. An intercreditor
agreement will set forth the terms and conditions upon which payments made under
the equipment notes and payments made under any liquidity facility will be
received, shared and distributed among the several pass through trustees and the
liquidity provider.
We may offer and sell up to $1,800,000,000 of aggregate initial offering
price of certificates pursuant to this prospectus and related prospectus
supplements in one or more offerings of certificates. The initial offering price
may be denominated in U.S. dollars or foreign currencies based on the applicable
exchange rate at the time of sale.
3
PASS THROUGH TRUSTS
We will form a separate pass through trust to issue each series of
certificates. Each pass through trust will be formed by us, as creator of each
pass through trust, and a national or state bank or trust company, as trustee.
Unless otherwise stated in a prospectus supplement, Wilmington Trust
Company will be the trustee of each pass through trust. For convenience, we may
refer to the pass through trustee as the trustee.
Each pass through trust will be governed by a trust instrument that creates
the trust and sets forth the powers of the trustee and the rights of the
beneficiaries. The beneficiaries of a pass through trust will be the holders of
certificates issued by that trust. The trust instrument for each pass through
trust will consist of a basic pass through trust agreement between us and the
pass through trustee, which we refer to as the "Basic Agreement", and a
supplement to that basic agreement, which we refer to as a "pass through trust
supplement."
When a pass through trust supplement is signed and delivered, the pass
through trustee, on behalf of the related pass through trust, will enter into
one or more purchase or refunding agreements, referred to as "note purchase
agreements," under which it will agree to purchase one or more promissory notes
secured by aircraft described in the applicable prospectus supplement. These
secured promissory notes are referred to as "equipment notes."
Under the applicable note purchase agreement, the pass through trustee, on
behalf of the related pass through trust, will purchase one or more equipment
notes. The equipment notes that are the property of a pass through trust will
have:
- identical interest rates, in each case equal to the rate applicable to
the certificates issued by such pass through trust; and
- identical priority of payment relative to each of the other equipment
notes held for such pass through trust.
If any portion of the proceeds of an offering of a series of certificates
is not used to purchase equipment notes on the date the certificates are
originally issued, those proceeds will be held for the benefit of the
certificateholders. If any of the proceeds are not later used to purchase
equipment notes by the date specified in the applicable prospectus supplement,
the proceeds will be returned to the certificateholders.
EQUIPMENT NOTES
The equipment notes owned by a pass through trust may consist of any
combination of:
- Equipment notes issued by an owner trustee and secured by an aircraft
owned by that trustee and leased to us. We refer to these equipment notes
as "leased aircraft notes."
- Equipment notes issued by us and secured by an aircraft owned by us. We
refer to these equipment notes as "owned aircraft notes."
Leased Aircraft Notes. Except as specified in a prospectus supplement,
leased aircraft notes will be issued by a bank, trust company, financial
institution or other entity solely in its capacity as owner trustee in a
leveraged lease transaction. In a leveraged lease transaction, one or more
persons will form an owner trust to acquire an aircraft and then that owner
trust will lease the aircraft to us. The investors that are the beneficiaries of
the owner trusts are typically referred to as owner participants. Each owner
participant will contribute a portion of the purchase price of the aircraft to
the owner trust, and the remainder of the purchase price of the aircraft will be
financed, or "leveraged", through the issuance of leased aircraft notes. Leased
aircraft notes may also be issued to refinance an aircraft previously financed
in a leveraged lease transaction or otherwise.
4
The leased aircraft notes will be issued pursuant to a separate indenture
between the owner trustee and a bank, trust company, financial institution or
other entity, as loan trustee. The indenture entered into in connection with the
issuance of leased aircraft notes will be referred to as a "leased aircraft
indenture." The loan trustee under a leased aircraft indenture will act as a
trustee for the holders of the leased aircraft notes issued under that leased
aircraft indenture.
In a leveraged lease transaction, we will pay or advance rent and other
amounts to the owner trustee in its capacity as lessor under the lease. The
owner trustee will use the rent payments and certain other amounts received by
it to make payments of principal and interest on the leased aircraft notes. The
owner trustee also will assign its rights to receive basic rent and certain
other payments to a loan trustee as security for the owner trustee's obligations
to pay principal of, premium, if any, and interest on the leased aircraft notes.
Payments or advances required to be made under a lease and related
agreements will at all times be sufficient to make scheduled payments of
principal of, and interest on, the leased aircraft notes issued to finance the
aircraft subject to that lease. However, we will not have any direct obligation
to pay principal of, or interest on, the leased aircraft notes. No owner
participant or owner trustee will be personally liable for any amount payable
under a leased aircraft indenture or the leased aircraft notes issued under that
indenture.
Owned Aircraft Notes. We may finance or refinance aircraft that we own
through the issuance of owned aircraft notes. Owned aircraft notes relating to
an owned aircraft will be issued under a separate indenture relating to that
owned aircraft. Each separate indenture relating to owned aircraft notes will be
between us and a bank, trust company, financial institution or other entity, as
loan trustee. The indenture entered into in connection with the issuance of
owned aircraft notes will be referred to as an "owned aircraft indenture."
Because we often refer to owned aircraft indentures and leased aircraft
indentures together, we sometimes refer to them collectively as the
"indentures". The loan trustee under an owned aircraft indenture will act as a
trustee for the holders of the owned aircraft notes issued under that owned
aircraft indenture.
Unlike the leased aircraft notes, we will have a direct obligation to pay
the principal of, and interest on, the owned aircraft notes.
5
THE COMPANY
We are a major United States air carrier engaged in the business of
transporting passengers, cargo and mail. We are the fifth largest U.S. airline,
as measured by revenue passenger miles in 2000, and, together with our wholly
owned subsidiaries, ExpressJet Airlines, Inc. and Continental Micronesia, Inc.,
serve 227 airports worldwide. As of June 30, 2001, we flew to 132 domestic and
95 international destinations and offered additional connecting service through
alliances with domestic and foreign air carriers. We directly serve 17 European
cities, 8 South American cities, Tokyo, Hong Kong and Tel Aviv and are one of
the leading airlines providing service to Mexico and Central America, serving
more destinations there than any other U.S. airline. Continental Micronesia
provides extensive service in the western Pacific, including service to more
Japanese cities than any other U.S. carrier.
We operate our route system primarily through domestic hubs at Newark
International Airport, George Bush Intercontinental Airport in Houston and
Hopkins International Airport in Cleveland. We are the primary carrier at each
of these hubs, accounting for 56%, 78% and 51% of average daily jet departures,
respectively, as of June 30, 2001 (in each case excluding regional jets). Each
of our domestic hubs is located in a large business and population center,
contributing to a high volume of "origin and destination" traffic. Continental
Micronesia also operates a Pacific hub on the island of Guam. The Guam hub is
strategically located to provide service from Japanese and other Asian cities to
popular resort destinations in the western Pacific.
We are a Delaware corporation, with executive offices located at 1600 Smith
Street, Houston, Texas 77002. Our telephone number is (713) 324-2950.
USE OF PROCEEDS
Except as set forth in a prospectus supplement for a specific offering of
certificates, the certificates will be issued in order to provide funds for:
- the financing or refinancing of the debt portion and, in certain cases,
the refinancing of some of the equity portion of one or more separate
leveraged lease transactions entered into by us, as lessee, with respect
to the leased aircraft as described in the applicable prospectus
supplement; and
- the financing or refinancing of debt to be issued, or the purchase of
debt previously issued, by us in respect of the owned aircraft as
described in the applicable prospectus supplement.
Except as set forth in a prospectus supplement for a specific offering of
certificates, the proceeds from the sale of the certificates will be used by the
pass through trustee on behalf of the applicable pass through trust or pass
through trusts to purchase either:
- leased aircraft notes issued by one or more owner trustees to finance or
refinance, as specified in the applicable prospectus supplement, the
related leased aircraft; or
- owned aircraft notes issued by us to finance or refinance, as specified
in the applicable prospectus supplement, the related owned aircraft.
If any portion of the proceeds of an offering of a series of certificates is not
used to purchase equipment notes on the date the certificates are issued, those
proceeds will be held for the benefit of the certificateholders. If any of the
proceeds are not later used to purchase equipment notes by the date specified in
the applicable prospectus supplement, the proceeds will be returned to the
certificateholders. See "Description of Certificates--Delayed Purchase of
Equipment Notes".
6
RATIO OF EARNINGS TO FIXED CHARGES
The ratios of our "earnings" to our "fixed charges" for each of the years
1996 through 2000 and for the six months ended June 30, 2001 were:
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
1.81 2.07 1.94 1.80 1.51 1.13
The ratios of earnings to fixed charges are based on continuing operations.
For purposes of the ratios, "earnings" means the sum of:
- our pre-tax income; and
- our fixed charges, net of interest capitalized.
"Fixed charges" represent:
- the interest we pay on borrowed funds;
- the amount we amortize for debt discount, premium and issuance expense
and interest previously capitalized; and
- that portion of rentals considered to be representative of the interest
factor.
DESCRIPTION OF THE CERTIFICATES
The following description is a summary of the terms of the certificates
that we expect will be common to all series of certificates. We will describe
the financial terms and other specific terms of any series of certificates in a
prospectus supplement. To the extent that any provision in any prospectus
supplement is inconsistent with any provision in this prospectus, the provision
of the prospectus supplement will control.
Because the following description is a summary, it does not describe every
aspect of the certificates, and it is subject to and qualified in its entirety
by reference to all the provisions of the pass through trust agreement and the
applicable supplements to the pass through trust agreement. For convenience, we
will refer to the pass through trust agreement between the pass through trustee
and us as the "Basic Agreement," and to the Basic Agreement as supplemented by a
supplement as a "pass through trust agreement." The form of Basic Agreement has
been filed as an exhibit to the registration statement of which this prospectus
is a part. The supplement to the Basic Agreement relating to each series of
certificates and the forms of the other agreements described in this prospectus
and the applicable prospectus supplement will be filed as exhibits to a
post-effective amendment to the registration statement of which this prospectus
is a part, a Current Report on Form 8-K, a Quarterly Report on Form 10-Q or an
Annual Report on Form 10-K, as applicable, filed by us with the SEC.
GENERAL
Except as amended by a supplement to the Basic Agreement, the terms of the
Basic Agreement generally will apply to all of the pass through trusts that we
form to issue certificates. We will create a separate pass through trust for
each series of certificates by entering into a separate supplement to the Basic
Agreement. Each supplement to the Basic Agreement will contain the additional
terms governing the specific pass through trust to which it relates and, to the
extent inconsistent with the Basic Agreement, will supersede the Basic
Agreement.
Certificates for a pass through trust will be issued pursuant to the pass
through trust agreement applicable to such pass through trust. Unless otherwise
stated in the applicable prospectus supplement, each pass through certificate
will be issued in a minimum denomination of $1,000 or a multiple of $1,000,
except that one certificate of each series may be issued in a different
denomination.
7
Each certificate will represent a fractional undivided interest in the
property of the pass through trust that issued the certificate. All payments and
distributions made with respect to a certificate will be made only from the
property owned by the pass through trust that issued the certificate. The
certificates do not represent an interest in or obligation of Continental, the
pass through trustee, any of the owner trustees or loan trustees, in their
individual capacities, or any owner participant. Each certificateholder by its
acceptance of a certificate agrees to look solely to the income and proceeds
from the property of the applicable pass through trust as provided in the pass
through trust agreement.
The property of each pass through trust for which a series of certificates
will be issued will include:
- the equipment notes held for the pass through trust;
- all monies at any time paid under the equipment notes held for the pass
through trust;
- the rights of such pass through trust to acquire equipment notes;
- funds from time to time deposited with the pass through trustee in
accounts relating to that pass through trust; and
- if so specified in the relevant prospectus supplement, rights under
intercreditor agreements relating to cross-subordination arrangements and
monies receivable under a liquidity facility.
The rights of a pass through trustee to receive monies payable under
equipment notes held for that pass through trustee may be subject to the effect
of subordination provisions contained in an intercreditor agreement described in
the prospectus supplement for a series of certificates. An intercreditor
agreement refers to an agreement among the pass through trustees and, if
applicable, a liquidity provider under a liquidity facility, as creditors of the
issuers of the equipment notes owned by the pass through trustees. An
intercreditor agreement will set forth the terms and conditions upon which
payments made under the equipment notes and payments made under any liquidity
facility will be received, shared and distributed among the several pass through
trustees and the liquidity provider. In addition, the intercreditor agreement
will set forth agreements among the pass through trustees and the liquidity
provider relating to the exercise of remedies under the equipment notes and the
indentures.
Cross-subordination refers to an agreement under which payments on a junior
class of equipment notes issued under an indenture are distributed to a pass
through trustee that holds a senior class of equipment notes issued under a
different indenture on which all required payments were not made. The effect of
this distribution mechanism is that holders of certificates of a pass through
trust that owns a junior class of equipment notes will not receive payments made
on that junior class of equipment notes until certain distributions are made on
the certificates of the pass through trust that owns a senior class of equipment
notes.
Equipment notes owned by a pass through trust may be leased aircraft notes,
owned aircraft notes or a combination of leased aircraft notes and owned
aircraft notes.
Leased aircraft notes will be issued in connection with the leveraged lease
of an aircraft to us. Except as set forth in the applicable prospectus
supplement, each leased aircraft will be leased to us under a lease between us,
as lessee, and an owner trustee, as lessor. Each owner trustee will issue leased
aircraft notes on a non-recourse basis under a separate leased aircraft
indenture between it and the applicable loan trustee. The owner trustee will use
the proceeds of the sale of the leased aircraft notes to finance or refinance a
portion of the purchase price paid or to be paid by the owner trustee for the
applicable leased aircraft. The owner trustee will obtain the remainder of the
funding for the leased aircraft from an equity contribution from the owner
participant that is the beneficiary of the owner trust and, to the extent set
forth in the applicable prospectus supplement, additional debt secured by the
applicable leased aircraft or other sources. A leased aircraft also may be
subject to other financing arrangements.
Generally, neither the owner trustee nor the owner participant will be
personally liable for any principal or interest payable under any leased
aircraft indenture or any leased aircraft notes. In some cases, an owner
participant may be required to make payments to an owner trustee that are to be
used by the
8
owner trustee to pay principal of, and interest on, the equipment notes. If an
owner participant is required to make payments to be used by an owner trustee to
pay principal of, and interest on, the equipment notes and the owner participant
fails to make the payment, we will be required to provide the owner trustee with
funds sufficient to make the payment. We will be obligated to make payments or
advances under a lease and the related documents sufficient to pay when due all
scheduled principal and interest payments on the leased aircraft notes issued to
finance the aircraft subject to that lease.
We will issue owned aircraft notes under separate owned aircraft
indentures. Owned aircraft notes will be issued in connection with the financing
or refinancing of an aircraft that we own. Owned aircraft notes will be
obligations that have recourse to us and the related aircraft. Any owned
aircraft may secure additional debt or be subject to other financing
arrangements.
An indenture may provide for the issuance of multiple classes of equipment
notes. If an indenture provides for multiple classes of equipment notes, it may
also provide for differing priority of payments among the different classes.
Equipment notes issued under an indenture may be held in more than one pass
through trust, and one pass through trust may hold equipment notes issued under
more than one indenture. Unless otherwise provided in a prospectus supplement,
only equipment notes having the same priority of payment may be held for the
same pass through trust.
Except as set forth in the prospectus supplement for any series of
certificates, interest payments on the equipment notes held for a pass through
trust will be passed through to the registered holders of certificates of that
pass through trust at the annual rate shown on the cover page of the prospectus
supplement for the certificates issued by that pass through trust. The
certificateholders' right to receive payments made in respect of the equipment
notes is subject to the effect of any cross-subordination provisions described
in the prospectus supplement for a series of certificates.
We refer you to the prospectus supplement that accompanies this prospectus
for a description of the specific series of certificates being offered by this
prospectus and the applicable prospectus supplement, including:
- the specific designation, title and amount of the certificates;
- amounts payable on and distribution dates for the certificates;
- the currency or currencies, including currency units, in which the
certificates may be denominated;
- the specific form of the certificates, including whether or not the
certificates are to be issued in accordance with a book-entry system;
- a description of the equipment notes to be purchased by the pass through
trust issuing that series of certificates, including:
- the period or periods within which, the price or prices at which, and
the terms and conditions upon which the equipment notes may or must be
redeemed or defeased in whole or in part, by us or an owner trustee;
- the payment priority of the equipment notes in relation to any other
equipment notes issued with respect to the related aircraft; and
- any intercreditor or other rights or limitations between or among the
holders of equipment notes of different priorities issued with respect
to the same aircraft;
- a description of the aircraft to be financed with the proceeds of the
issuance of the equipment notes;
- a description of the note purchase agreement setting forth the terms and
conditions upon which that pass through trust will purchase equipment
notes;
- a description of the indentures under which the equipment notes to be
purchased for that pass through trust will be issued;
9
- a description of the events of default, the remedies exercisable upon the
occurrence of events of default and any limitations on the exercise of
those remedies under the indentures pursuant to which the equipment notes
to be purchased for that pass through trust will be issued;
- if the certificates relate to leased aircraft, a description of the
leases to be entered into by the owner trustees and us;
- if the certificates relate to leased aircraft, a description of the
provisions of the leased aircraft indentures governing:
- the rights of the related owner trustee and/or owner participant to cure
our failure to pay rent under the leases; and
- any limitations on the exercise of remedies with respect to the leased
aircraft notes;
- if the certificates relate to leased aircraft, a description of the
participation agreements that will set forth the terms and conditions
upon which the owner participant, the owner trustee, the pass through
trustees, the loan trustee and we agree to enter into a leveraged lease
transaction;
- if the certificates relate to an owned aircraft, a description of the
participation agreements that will set forth the terms and conditions
upon which the applicable pass through trustees, the loan trustee and we
agree to enter into a financing transaction for the owned aircraft;
- a description of the limitations, if any, on amendments to leases,
indentures, pass through trust agreements, participation agreements and
other material agreements entered into in connection with the issuance of
equipment notes;
- a description of any cross-default provisions in the indentures;
- a description of any cross-collateralization provisions in the
indentures;
- a description of any agreement among the holders of equipment notes and
any liquidity provider governing the receipt and distribution of monies
with respect to the equipment notes and the enforcement of remedies under
the indentures, including a description of any applicable intercreditor
and cross-subordination arrangements;
- a description of any liquidity facility or other credit enhancement
relating to the certificates;
- if the certificates relate to aircraft that have not yet been delivered
or financed, a description of any deposit or escrow agreement or other
arrangement providing for the deposit and investment of funds pending the
purchase of equipment notes and the financing of an owned aircraft or
leased aircraft; and
- any other special terms pertaining to the certificates.
The concept of cross-default mentioned above refers to a situation where a
default under one indenture or lease results in a default under other indentures
or leases. We currently do not expect any indentures or leases to contain
cross-default provisions. The concept of cross-collateralization mentioned above
refers to the situation where collateral that secures obligations incurred under
one indenture also serves as collateral for obligations under one or more other
indentures. We currently do not expect any indentures to be
cross-collateralized.
BOOK-ENTRY REGISTRATION
GENERAL
If specified in the applicable prospectus supplement, the certificates will
be subject to the procedures and provisions described below.
Upon issuance, each series of certificates will be represented by one or
more fully registered global certificates. Each global certificate will be
deposited with, or on behalf of, The Depository Trust Company,
10
referred to as DTC, and registered in the name of Cede & Co., the nominee of
DTC. No purchaser of a certificate will be entitled to receive a physical
certificate representing an interest in the global certificates, except as set
forth below under "--Physical Certificates". For convenience, we refer to such
purchasers as "certificate owners". Unless and until physical certificates are
issued under the limited circumstances described below, all references in this
prospectus and any prospectus supplement to actions by certificateholders will
refer to actions taken by DTC upon instructions from DTC participants, and all
references to distributions, notices, reports and statements to
certificateholders will refer, as the case may be, to distributions, notices,
reports and statements to DTC or Cede, as the registered holder of the
certificates, or to DTC participants for distribution to certificateholders in
accordance with DTC procedures.
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
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934.
Under the New York Uniform Commercial Code, a "clearing corporation" is
defined as:
- a person that is registered as a "clearing agency" under the federal
securities laws;
- a federal reserve bank; or
- any other person that provides clearance or settlement services with
respect to financial assets that would require it to register as a
clearing agency under the federal securities laws but for an exclusion or
exemption from the registration requirement, if its activities as a
clearing corporation, including promulgation of rules, are subject to
regulation by a federal or state governmental authority.
A "clearing agency" is an organization established for the execution of
trades by transferring funds, assigning deliveries and guaranteeing the
performance of the obligations of parties to trades.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between DTC participants
through electronic book-entry changes in the accounts of DTC participants. The
ability to execute transactions through book-entry changes in accounts
eliminates the need for transfer of physical certificates. DTC is owned by a
number of DTC participants and by the New York Stock Exchange, the American
Stock Exchange, and the National Association of Securities Dealers. DTC
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Banks, brokers, dealers,
trust companies and other entities that clear through or maintain a custodial
relationship with a DTC participant, either directly or indirectly, are indirect
participants in the DTC system.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of the certificates
among DTC participants on whose behalf it acts with respect to the certificates
and to receive and transmit distributions of principal, premium, if any, and
interest with respect to the certificates. DTC participants and indirect DTC
participants with which certificate owners have accounts similarly are required
to make book-entry transfers and receive and transmit the payments on behalf of
their respective customers. Certificate owners that are not DTC participants or
indirect DTC participants but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, the certificates may do so only through DTC
participants and indirect DTC participants. In addition, certificate owners will
receive all distributions of principal, premium, if any, and interest from the
pass through trustee through DTC participants or indirect DTC participants, as
the case may be.
Under a book-entry format, certificate owners may experience some delay in
their receipt of payments, because payments with respect to the certificates
will be forwarded by the pass through trustee to Cede, as nominee for DTC. DTC
will forward payments in same-day funds to each DTC participant who is credited
with ownership of the certificates in an amount proportionate to the principal
amount of that DTC participant's holdings of beneficial interests in the
certificates, as shown on the records of DTC
11
or its nominee. Each such DTC participant will forward payments to its indirect
DTC participants in accordance with standing instructions and customary industry
practices. DTC participants and indirect DTC participants will be responsible
for forwarding distributions to certificate owners for whom they act.
Accordingly, although certificate owners will not possess physical certificates,
DTC's rules provide a mechanism by which certificate owners will receive
payments on the certificates and will be able to transfer their interests.
Unless and until physical certificates are issued under the limited
circumstances described below, the only physical certificateholder will be Cede,
as nominee of DTC. Certificate owners will not be recognized by the pass through
trustee as registered owners of certificates under the pass through trust
agreement. Certificate owners will be permitted to exercise their rights under
the pass through trust agreement only indirectly through DTC. DTC will take any
action permitted to be taken by a certificateholder under the pass through trust
agreement only at the direction of one or more DTC participants to whose
accounts with DTC the certificates are credited. In the event any action
requires approval by certificateholders of a certain percentage of the
beneficial interests in a pass through trust, DTC will take action only at the
direction of and on behalf of DTC participants whose holdings include undivided
interests that satisfy the required percentage. DTC may take conflicting actions
with respect to other undivided interests to the extent that the actions are
taken on behalf of DTC participants whose holdings include those undivided
interests. DTC will convey notices and other communications to DTC participants,
and DTC participants will convey notices and other communications to indirect
DTC participants in accordance with arrangements among them. Arrangements among
DTC and its direct and indirect participants are subject to any statutory or
regulatory requirements as may be in effect from time to time. DTC's rules
applicable to itself and DTC participants are on file with the SEC.
A certificate owner's ability to pledge the certificates to persons or
entities that do not participate in the DTC system, or otherwise to act with
respect to the certificates, may be limited due to the lack of a physical
certificate to evidence ownership of the certificates, and because DTC can only
act on behalf of DTC participants, who in turn act on behalf of indirect DTC
participants.
Neither we nor the pass through trustee will have any liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the certificates held by Cede, as nominee for DTC, for
maintaining, supervising or reviewing any records relating to the beneficial
ownership interests or for the performance by DTC, any DTC participant or any
indirect DTC participant of their respective obligations under the rules and
procedures governing their obligations.
The applicable prospectus supplement will specify any additional book-entry
registration procedures applicable to certificates denominated in a currency
other than U.S. dollars.
SAME-DAY SETTLEMENT AND PAYMENT
As long as the certificates are registered in the name of DTC or its
nominee, we will make all payments to the loan trustee under any lease or any
owned aircraft indenture in immediately available funds. The pass through
trustee will pass through to DTC in immediately available funds all payments
received from us, including the final distribution of principal with respect to
the certificates of any pass through trust.
Any certificates registered in the name of DTC or its nominee will trade in
DTC's Same-Day Funds Settlement System until maturity. DTC will require
secondary market trading activity in the certificates to settle in immediately
available funds. We cannot give any assurance as to the effect, if any, of
settlement in same-day funds on trading activity in the certificates.
12
PHYSICAL CERTIFICATES
Physical certificates will be issued in paper form to certificateholders or
their nominees, rather than to DTC or its nominee, only if:
- we advise the pass through trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository
with respect to the certificates and we are unable to locate a qualified
successor;
- we elect to terminate the book-entry system through DTC; or
- after the occurrence of certain events of default or other events
specified in the related prospectus supplement, certificateholders owning
at least a majority in interest in a pass through trust advise the
applicable pass through trustee, us and DTC through DTC participants that
the continuation of a book-entry system through DTC or a successor to DTC
is no longer in the certificate owners' best interest.
Upon the occurrence of any of the events described in the three
subparagraphs above, the applicable pass through trustee will notify all
certificate owners through DTC participants of the availability of physical
certificates. Upon surrender by DTC of the global certificates and receipt of
instructions for re-registration, the pass through trustee will reissue the
certificates as physical certificates to certificate owners.
After physical certificates are issued, the pass through trustee or a
paying agent will make distributions of principal, premium, if any, and interest
with respect to certificates directly to holders in whose names the physical
certificates were registered at the close of business on the applicable record
date. Except for the final payment to be made with respect to a certificate, the
pass through trustee or a paying agent will make distributions by check mailed
to the addresses of the registered holders as they appear on the register
maintained by the pass through trustee. The pass through trustee or a paying
agent will make the final payment with respect to any pass through certificate
only upon presentation and surrender of the applicable pass through certificate
at the office or agency specified in the notice of final distribution to
certificateholders.
Physical certificates will be freely transferable and exchangeable at the
office of the pass through trustee upon compliance with the requirements set
forth in the pass through trust agreement. Neither the pass through trustee nor
any transfer or exchange agent will impose a service charge for any registration
of transfer or exchange. However, the pass through trustee or transfer or
exchange agent will require payment of a sum sufficient to cover any tax or
other governmental charge attributable to a transfer or exchange.
PAYMENTS AND DISTRIBUTIONS
Subject to the effect of any cross-subordination provisions set forth in
the prospectus supplement for a series of certificates:
- Payments of principal, premium, if any, and interest with respect to the
equipment notes held for each pass through trust will be distributed by
the pass through trustee, upon receipt, to certificateholders of that
trust on the dates and in the currency specified in the applicable
prospectus supplement, except in certain cases when some or all of the
equipment notes are in default as described in the applicable prospectus
supplement. Payments of principal of, and interest on, the unpaid
principal 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.
- Each certificateholder of a pass through trust will be entitled to
receive a pro rata share of any distribution in respect of scheduled
payments of principal and interest made on the equipment notes held for
such pass through trust.
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If we elect or are required to redeem equipment notes relating to one or
more aircraft prior to their scheduled maturity date, payments of principal,
premium (if any) and interest received by the pass through trustee as a result
of the early redemption will be distributed on a special distribution date
determined as described in the applicable prospectus supplement. Payments
received by the pass through trustee following a default under the equipment
notes held for a pass through trust will also be distributed on a special
distribution date determined in the same way. However, if following such a
default the pass through trustee receives any scheduled payments on equipment
notes on a regular distribution date or within five days thereafter, the pass
through trustee will distribute those payments on the date they are received. In
addition, if following a default under equipment notes the pass through trustee
receives payments on the equipment notes on a regular distribution date by
making a drawing under any liquidity facility, as described in the applicable
prospectus supplement, those payments will be distributed to certificateholders
on the regular distribution date. The pass through trustee will mail notice to
the certificateholders of record of the applicable pass through trust stating
the anticipated special distribution date.
POOL FACTORS
Unless otherwise described in the applicable prospectus supplement, the
"pool balance" for each pass through trust or for the certificates issued by any
pass through trust indicates, as of any date, the portion of the original
aggregate face amount of the certificates issued by that pass through trust that
has not been distributed to certificateholders (excluding any payments of
interest or premium). The pool balance for each pass through trust as of any
distribution date will be computed after giving effect to any distribution to
certificateholders to be made on that date.
Unless otherwise described in the applicable prospectus supplement, the
"pool factor" for a pass through trust as of any distribution date for that
trust is the quotient (rounded to the seventh decimal place) computed by
dividing (a) the pool balance by (b) the aggregate original face amount of the
certificates issued by that pass through trust. The pool factor for a 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 for that pass
through trust and distribution to certificateholders of the payment of principal
to be made on that date. Each pass through trust will have a separate pool
factor.
The pool factor for a pass through trust initially will be 1.0000000. The
pool factor for a pass through trust will decline as described in this
prospectus and the related prospectus supplement to reflect reductions in the
pool balance of that pass through trust. As of any distribution date for a pass
through trust, a certificate will represent a share of the pool balance of that
pass through trust equal to the product obtained by multiplying the original
face amount of the certificate by the pool factor for the pass through trust
that issued such certificate. The pool factor and pool balance of each past
through trust will be mailed to the certificateholders of the pass through trust
on each distribution date.
The pool factor for each pass through trust will decline in proportion to
the scheduled repayments of principal on the equipment notes held by that pass
through trust, unless there is an early redemption or purchase of equipment
notes held by a pass through trust or if a default occurs in the repayment of
equipment notes held by a pass through trust. In the event of a redemption,
purchase or default, the pool factor and the pool balance of each pass through
trust affected by the redemption, purchase or default will be recomputed, and a
notice will be mailed to the certificateholders of the pass through trust.
REPORTS TO CERTIFICATEHOLDERS
The pass through trustee will include with each distribution of a payment
to certificateholders a statement setting forth the following information:
- the amount of the distribution allocable to principal and the amount
allocable to premium, if any;
- the amount of the distribution allocable to interest; and
- the pool balance and the pool factor for the pass through trust after
giving effect to the distribution.
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As long as the certificates are registered in the name of DTC or its
nominee, on the record date prior to each distribution date, the pass through
trustee will request from DTC a securities position listing setting forth the
names of all DTC participants reflected on DTC's books as holding interests in
the certificates on that record date. On each distribution date, the applicable
pass through trustee will mail to each DTC participant holding certificates the
statement described above and will make available additional copies as requested
by the DTC participants for forwarding to certificate owners.
After the end of each calendar year, each pass through trustee will prepare
a report for each person that was a holder of one or more of its pass through
certificates at any time during the preceding calendar year. This report will
contain the sum of the amount of distributions allocable to principal, premium
and interest with respect to that pass through trust for the preceding calendar
year or, if the person was a holder of a pass through certificate during only a
portion of the preceding calendar year, for the applicable portion of the
preceding calendar year. In addition, each pass through trustee will prepare for
each person that was a holder of one or more of its pass through certificates at
any time during the preceding calendar year any other information that are
readily available to the pass through trustee and which a certificateholder
reasonably requests as necessary for the purpose of preparing its federal income
tax returns. The reports and other items described in this section will be
prepared on the basis of information supplied to the pass through trustee by DTC
participants and will be delivered by the pass through trustee to DTC
participants to be available for forwarding by DTC participants to certificate
owners in the manner described above.
If the certificates of a pass through trust are issued in the form of
physical certificates, the pass through trustee of that pass through trust will
prepare and deliver the information described above to each record holder of a
pass through certificate issued by that pass through trust as the name and
period of ownership of the holder appears on the records of the registrar of the
certificates.
VOTING OF EQUIPMENT NOTES
A pass through trustee has the right to vote and give consents and waivers
with respect to the equipment notes held by that pass through trust. However,
the pass through trustee's right to vote and give consents or waivers may be
restricted or may be exercisable by another person in accordance with the terms
of an intercreditor agreement, as described in the applicable prospectus
supplement. The pass through trust agreement will set forth:
- the circumstances in which a pass through trustee may direct any action
or cast any vote with respect to the equipment notes held for its pass
through trust at its own discretion;
- the circumstances in which a pass through trustee will seek instructions
from its certificateholders; and
- if applicable, the percentage of certificateholders required to direct
the pass through trustee to take action.
If the holders of certificates are entitled to the benefits of a liquidity
facility, and the liquidity facility is used to make any payments to
certificateholders, the provider of the liquidity facility may be entitled to
exercise rights to vote or give consents and waivers with respect to the
equipment notes held for the pass through trust that issued the certificates, as
described in the applicable prospectus supplement.
EVENTS OF DEFAULT AND CERTAIN RIGHTS UPON AN EVENT OF DEFAULT
The prospectus supplement will specify the events of default that can occur
under the pass through trust agreement and under the indentures relating to the
equipment notes held for the related pass through trust. In the case of a leased
aircraft indenture, an indenture default will include events of default under
the related lease. In the case of any equipment notes that are supported by a
liquidity facility, a default may include events of default under that liquidity
facility.
15
Unless otherwise provided in a prospectus supplement, all of the equipment
notes issued under the same indenture will relate to a specific aircraft and
there will be no cross-collateralization or cross-default provisions in the
indentures. As a result, events resulting in a default under any particular
indenture will not necessarily result in an a default under any other indenture.
If a default occurs in fewer than all of the indentures, payments of principal
and interest on the equipment notes issued under the indentures with respect to
which a default has not occurred will continue to be made as originally
scheduled.
As described below under "--Cross-Subordination Issues", a prospectus
supplement may describe the terms of any cross-subordination provisions among
certificateholders of separate pass through trusts. If cross-subordination is
provided, payments made pursuant to an indenture under which a default has not
occurred may be distributed first to the holders of the certificates issued
under the pass through trust which holds the most senior equipment notes issued
under all of the indentures.
The ability of the applicable owner trustee or owner participant under a
leased aircraft indenture to cure a default under the indenture, including a
default that results from the occurrence of a default under the related lease,
will be described in the prospectus supplement. Unless otherwise provided in a
prospectus supplement, with respect to any pass through certificates or
equipment notes entitled to the benefits of a liquidity facility, a drawing
under the liquidity facility for the purpose of making a payment of interest as
a result of our failure to have made a corresponding payment will not cure a
default related to our failure.
The prospectus supplement related to a series of pass through certificates
will describe the circumstances under which the pass through trustee of the
related pass through trust may vote some or all of the equipment notes held in
the pass through trust. The prospectus supplement also will set forth the
percentage of certificateholders of the pass through trust entitled to direct
the pass through trustee to take any action with respect to the equipment notes.
If the equipment notes outstanding under an indenture are held by more than one
pass through trust, then the ability of the certificateholders issued with
respect to any one pass through trust to cause the loan trustee with respect to
any equipment notes held in the pass through trust to accelerate the equipment
notes under the applicable indenture or to direct the exercise of remedies by
the loan trustee under the applicable indenture will depend, in part, upon the
proportion of the aggregate principal amount of the equipment notes outstanding
under that indenture and held in that pass through trust to the aggregate
principal amount of all equipment notes outstanding under that indenture.
In addition, if cross-subordination provisions are applicable to any series
of certificates, then the ability of the certificateholders of any one pass
through trust holding equipment notes issued under an indenture to cause the
loan trustee with respect to any equipment notes held in that pass through trust
to accelerate the equipment notes under that indenture or to direct the exercise
of remedies by the loan trustee under that indenture will depend, in part, upon
the class of equipment notes held in the pass through trust. If the equipment
notes outstanding under an indenture are held by more than one pass through
trust, then each pass through trust will hold equipment notes with different
terms from the equipment notes held in the other pass through trusts and
therefore the certificateholders of each pass through trust may have divergent
or conflicting interests from those of the certificateholders of the other pass
through trusts holding equipment notes issued under the same indenture. In
addition, so long as the same institution acts as pass through trustee of each
pass through trust, in the absence of instructions from the certificateholders
of any pass through trust, the pass through trustee for the pass through trust
could for the same reason be faced with a potential conflict of interest upon a
default under an indenture. In that event, the pass through trustee has
indicated that it would resign as pass through trustee of one or all the pass
through trusts, and a successor trustee would be appointed in accordance with
the terms of the Basic Agreement.
The prospectus supplement for a series of certificates will specify whether
and under what circumstances the pass through trustee may sell for cash to any
person all or part of the equipment notes held in the related pass through
trust. Any proceeds received by the pass through trustee upon a sale will be
deposited in an account established by the pass through trustee for the benefit
of the certificateholders
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of the pass through trust for the deposit of the special payments and will be
distributed to the certificateholders of the pass through trust on a special
distribution date.
The market for equipment notes in default may be very limited, and we
cannot assure you that they could be sold for a reasonable price. Furthermore,
so long as the same institution acts as pass through trustee of multiple pass
through trusts, 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 equipment notes with respect to which a default under an
indenture exists for less than their outstanding principal amount, the
certificateholders of that pass through trust will receive a smaller amount of
principal distributions than anticipated and will not have any claim for the
shortfall against us, any owner trustee, owner participant or the pass through
trustee. Furthermore, neither the pass through trustee nor the
certificateholders of that pass through trust could take any action with respect
to any remaining equipment notes held in that pass through trust so long as no
default under an indenture exists.
Any amount, other than scheduled payments received on a regular
distribution date, distributed to the pass through trustee of any pass through
trust by the loan trustee under any indenture on account of the equipment notes
held in that pass through trust following a default under such indenture will be
deposited in the special payments account for that pass through trust and will
be distributed to the certificateholders of that pass through trust on a special
distribution date. In addition, if a prospectus supplement provides that the
applicable owner trustee may, under circumstances specified in the prospectus
supplement, redeem or purchase the outstanding equipment notes issued under the
applicable indenture, the price paid by the owner trustee to the pass through
trustee of any pass through trust for the equipment notes issued under that
indenture and held in that pass through trust will be deposited in the special
payments account for the pass through trust and will be distributed to the
certificateholders of the pass through trust on a special distribution date.
Any funds representing payments received with respect to any equipment
notes in default held in a pass through trust, or the proceeds from the sale by
the pass through trustee of any of those equipment notes, held by the pass
through trustee in the special payments account for that pass through trust
will, to the extent practicable, be invested and reinvested by the pass through
trustee in permitted investments pending the distribution of the funds on a
special distribution date. Permitted investments will be specified in the
related prospectus supplement.
The Basic Agreement provides that the pass through trustee of each pass
through trust will give to the certificateholders of that pass through trust
notice of all uncured or unwaived defaults known to it with respect to that pass
through trust. The Basic Agreement requires the pass through trustee to provide
the notice of default within 90 days after the occurrence of the default.
However, except in the case of default in the payment of principal, premium, if
any, or interest on any of the equipment notes held for a pass through trust,
the pass through trustee will be protected in withholding a notice of default if
it in good faith determines that withholding the notice is in the interest of
the certificateholders of such pass through trust. The term "default" as used in
this paragraph means only the occurrence of a default under an indenture with
respect to equipment notes held in a pass through trust as described above,
except that in determining whether any default under an indenture has occurred,
any related grace period or notice will be disregarded.
The Basic Agreement requires the pass through trustee to act with a
specified standard of care while a default is continuing under an indenture. In
addition, the Basic Agreement contains a provision entitling the pass through
trustee to require reasonable security or indemnification by the
certificateholders of the pass through trust before proceeding to exercise any
right or power under the Basic Agreement at the request of those
certificateholders.
The prospectus supplement for a series of certificates will specify the
percentage of certificateholders entitled to waive, or to instruct the pass
through trustee to waive, any past default with respect to the related pass
through trust and its consequences. The prospectus supplement for a series of
certificates also will specify the percentage of certificateholders entitled to
waive, or to instruct the pass through trustee or the loan trustee to waive, any
past default under an indenture.
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MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
We will be prohibited from consolidating with or merging into any other
corporation or transferring substantially all of our assets as an entirety to
any other corporation unless the surviving, successor or transferee corporation:
- is validly existing under the laws of the United States or any of its
states;
- is a citizen of the United States, as defined in Title 49 of the U.S.
Code relating to aviation, referred to as the "Transportation Code,"
holding an air carrier operating certificate issued pursuant to Chapter
447 of Title 49, U.S. Code, if, and so long as, that status is a
condition of entitlement to the benefits of Section 1110 of the U.S.
Bankruptcy Code relating to the rights of creditors of an airline in the
event of the airline's bankruptcy; and
- expressly assumes all of our obligations contained in the Basic Agreement
and any pass through trust supplement, the note purchase agreements, any
indentures, any participation agreements and, with respect to aircraft
leased by us, the applicable leases.
In addition, we will be required to deliver a certificate and an opinion or
opinions of counsel indicating that the transaction, in effect, complies with
these conditions.
MODIFICATIONS OF THE BASIC AGREEMENT
The Basic Agreement contains provisions permitting us and the pass through
trustee of each pass through trust to enter into a supplemental trust agreement,
without the consent of the holders of any of the certificates issued by such
pass through trust, in order to do the following, among other things:
- to provide for the formation of such pass through trust and the issuance
of a series of certificates and to set forth the terms of the
certificates;
- to evidence the succession of another corporation to us and the
assumption by that corporation of our obligations under the Basic
Agreement and the pass through trust agreements;
- to add to our covenants for the benefit of holders of such certificates,
or to surrender any right or power in the Basic Agreement conferred upon
us;
- to cure any ambiguity or correct or supplement any defective or
inconsistent provision of the Basic Agreement or any pass through trust
agreement, so long as those changes will not materially adversely affect
the interests of the holders of such certificates, or to cure any
ambiguity or correct any mistake or, to give effect to or provide for
replacement liquidity facilities, if applicable, to such certificates;
- to comply with any requirement of the SEC, any applicable law, rules or
regulations of any exchange or quotation system on which any certificates
may be listed or of any regulatory body;
- to modify, eliminate or add to the provisions of the Basic Agreement to
the extent necessary to continue the qualification of the pass through
trust agreement under the Trust Indenture Act of 1939, and to add to the
Basic Agreement other provisions as may be expressly permitted by the
Trust Indenture Act;
- to provide for a successor pass through trustee or to add to or change
any provision of the Basic Agreement as necessary to facilitate the
administration of the pass through trusts created under the pass through
trust agreement by more than one pass through trustee; and
- to make any other amendments or modifications to the Basic Agreement so
long as those amendments or modifications apply only to certificates of a
series issued after the date of the amendment or modification.
No pass through trust supplement may be made that will adversely affect the
status of any pass through trust as a grantor trust for U.S. federal income tax
purposes.
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The Basic Agreement also contains provisions permitting us and the pass
through trustee of each pass through trust, with the consent of a majority in
interest of the certificateholders of the pass through trust, to execute
supplemental trust agreements adding any provisions to or changing or
eliminating any of the provisions of the Basic Agreement, to the extent relating
to that pass through trust, and the applicable pass through trust supplement, or
modifying the rights of the certificateholders, except that no supplement may,
without the consent of each affected certificateholder:
- 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
the pass through trust or distributions in respect of any pass through
certificate issued by the pass through trust;
- change the date or place of any payment in respect of any pass through
certificate, or make distributions payable in currency other than that
provided for in the certificates, or impair the right of any
certificateholder to institute suit for the enforcement of any payment
when due;
- permit the disposition of any equipment note held in the pass through
trust, except as provided in the pass through trust agreement, or
otherwise deprive any certificateholder of the benefit of the ownership
of the applicable equipment note;
- reduce the percentage of the aggregate fractional undivided interests of
the pass through trust that is required in order for any supplement or
waiver to be approved;
- modify any of the provisions relating to the rights of the
certificateholders in respect of the waiver of events of default or
receipt of payment;
- alter the priority of distributions described in any applicable
intercreditor agreement, in a manner materially adverse to the interests
of the certificateholders of such pass through trust; or
- adversely affect the status of any pass through trust as a grantor trust
for U.S. federal income tax purposes.
MODIFICATION OF INDENTURE AND RELATED AGREEMENTS
The prospectus supplement will specify the pass through trustee's
obligations if a pass through trustee, as the holder of any equipment notes held
for a pass through trust, receives a request for its consent to any amendment,
modification or waiver under the indenture under which the equipment notes were
issued, under the lease relating to the aircraft leased by us that was financed
with the proceeds of the equipment notes or under any liquidity facility.
CROSS-SUBORDINATION ISSUES
The equipment notes issued under an indenture may be held in more than one
pass through trust, and one pass through trust may hold equipment notes issued
under more than one indenture. Unless otherwise provided in a prospectus
supplement, only equipment notes having the same priority for distributions
under the applicable indenture may be held in the same pass through trust. In
that event, payments made on account of a subordinate class of certificates
issued under a prospectus supplement may be subordinated, under circumstances
described in the prospectus supplement, to the prior payment of all amounts
owing to certificateholders of a pass through trust which holds senior equipment
notes issued under the applicable indentures. The prospectus supplement related
to an issuance of certificates will describe the "cross-subordination"
provisions and any related terms, including the percentage of certificateholders
under any pass through trust which are permitted to:
- grant waivers of defaults under any applicable indenture;
- consent to the amendment or modification of any applicable indenture; or
- direct the exercise of remedial actions under any applicable indenture.
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TERMINATION OF THE PASS THROUGH TRUSTS
Our obligations and those of the pass through trustee with respect to a
pass through trust will terminate upon the distribution to certificateholders of
the pass through trust of all amounts required to be distributed to them
pursuant to the applicable pass through trust agreement and the disposition of
all property held in the pass through trust. In no event will any pass through
trust continue beyond 110 years following the date of the execution of the
applicable pass through trust supplement, or any other final expiration date as
may be specified in the pass through trust supplement. The pass through trustee
will send to each certificateholder of record of the pass through trust notice
of the termination of the pass through trust, the amount of the proposed final
payment and the proposed date for the distribution of the final payment for the
pass through trust. The final distribution to any certificateholder of the pass
through trust will be made only upon surrender of that certificateholder's
certificates at the office or agency of the pass through trustee specified in
the notice of termination.
DELAYED PURCHASE OF EQUIPMENT NOTES
On the issuance date of any certificates, if all of the proceeds from the
sale of the certificates are not used to purchase the equipment notes
contemplated to be held in the related pass through trust, the equipment notes
may be purchased by the pass through trustee at any time on or prior to the date
specified in the applicable prospectus supplement. In that event, the proceeds
from the sale of the certificates not used to purchase equipment notes will be
held under an arrangement described in the applicable prospectus supplement
pending the purchase of equipment notes. The arrangements with respect to the
payment of interest on funds so held will be described in the applicable
prospectus supplement. If any proceeds are not used to purchase equipment notes
by the date specified in the applicable prospectus supplement, the proceeds will
be returned to the certificateholders.
LIQUIDITY FACILITY
The related prospectus supplement may provide that one or more payments of
interest on the certificates of one or more series will be supported by a
liquidity facility issued by an institution identified in the related prospectus
supplement. The provider of the liquidity facility may have a claim on money and
property belonging to a pass through trust that is senior to the
certificateholders' as specified in the related prospectus supplement.
THE PASS THROUGH TRUSTEE
Unless otherwise provided in the prospectus supplement for any series of
certificates, the pass through trustee for each series of certificates will be
Wilmington Trust Company. With certain exceptions, the pass through trustee
makes no representations as to the validity or sufficiency of the Basic
Agreement, the pass through trust supplements, the certificates, the equipment
notes, the indentures, the leases or other related documents. The pass through
trustee will not be liable with respect to any series of certificates for any
action taken or omitted to be taken by it in good faith in accordance with the
direction of the holders of a majority in principal amount of outstanding
certificates of that series issued under the Basic Agreement. Subject to those
provisions, the pass through trustee will be under no obligation to exercise any
of its rights or powers under the Basic Agreement at the request of any holders
of certificates issued under that agreement unless they will have offered to the
pass through trustee indemnity satisfactory to it. The Basic Agreement provides
that the pass through trustee in its individual or any other capacity may
acquire and hold certificates and, subject to certain conditions, may otherwise
deal with us and, with respect to the leased aircraft, with any owner trustee
with the same rights it would have if it were not the pass through trustee.
The pass through trustee may resign with respect to any or all of the pass
through trusts at any time, in which event we will be obligated to appoint a
successor trustee. If the pass through trustee ceases to be eligible to continue
as pass through trustee with respect to a pass through trust or becomes
incapable of acting as pass through trustee or becomes insolvent, we may remove
the pass through trustee, or any
20
certificateholder of the pass through trust for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the pass through trustee and the
appointment of a successor trustee. Any resignation or removal of the pass
through trustee with respect to a pass through trust and appointment of a
successor trustee for the pass through trust does not become effective until
acceptance of the appointment by the successor trustee. Pursuant to the
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 should be read to take into account the possibility that the pass
through trusts could have different successor trustees in the event of a
resignation or removal.
The Basic Agreement provides that we will pay the pass through trustee's
fees and expenses and indemnify the pass through trustee against certain
liabilities.
DESCRIPTION OF THE EQUIPMENT NOTES
The statements made under this caption are summaries, and we refer you to
the entire prospectus and detailed information appearing in the applicable
prospectus supplement. Where no distinction is made between the leased aircraft
notes and the owned aircraft notes or between their respective indentures, those
statements refer to any equipment notes and any indenture.
To the extent that any provision in any prospectus supplement is
inconsistent with any provision in this summary, the provision of the prospectus
supplement will control.
GENERAL
The equipment notes will be issued under indentures. Equipment notes
secured by an aircraft that is leased to us will be issued under an indenture
between an owner trustee and a loan trustee. Equipment notes secured by an
aircraft that is owned by us will be issued under an indenture between a loan
trustee and us.
The leased aircraft notes will be non-recourse obligations of the
applicable owner trustee. All of the leased aircraft notes issued under the same
indenture will relate to and will be secured by one or more specific aircraft
leased to us. Unless otherwise specified in the applicable prospectus
supplement, leased aircraft notes will not be secured by any other aircraft.
We will be the issuer of owned aircraft notes. The owned aircraft notes
will be our direct recourse obligations. All of the owned aircraft notes issued
under the same indenture will relate to, and will be secured by, one or more
specific aircraft that we own. Unless otherwise specified in the applicable
prospectus supplement, the owned aircraft notes will not be secured by any other
aircraft.
PRINCIPAL AND INTEREST PAYMENTS
Interest received by the pass through trustee on the equipment notes held
in a pass through trust will be passed through to the certificateholders of that
pass through trust on the dates and at the annual rate set forth in the
applicable prospectus supplement until the final distribution for that pass
through trust. Principal payments received by the pass through trustee on the
equipment notes held in a pass through trust will be passed through to the
certificateholders of that pass through trust in scheduled amounts on the dates
set forth in the applicable prospectus supplement until the final distribution
date for that pass through trust.
If any date scheduled for any payment of principal, premium, if any, or
interest with respect to the equipment notes is not a business day, the payment
will be made on the next succeeding business day without any additional
interest.
21
REDEMPTION
The applicable prospectus supplement will describe the circumstances,
whether voluntary or involuntary, under which the equipment notes may be
redeemed or purchased prior to their stated maturity date, in whole or in part.
The prospectus supplement will also describe the premium, if any, applicable
upon redemptions or purchases and other terms applying to the redemptions or
purchases of the equipment notes.
SECURITY
The leased aircraft notes will be secured by:
- an assignment by the related owner trustee to the related loan trustee of
the owner trustee's rights, except for certain rights described below,
under the lease or leases with respect to the related aircraft, including
the right to receive payments of rent under those leases; and
- a mortgage granted to the loan trustee on the aircraft, subject to our
rights under the lease or leases.
Under the terms of each lease, our obligations in respect of each leased
aircraft will be those of a lessee under a "net lease". Accordingly, we will be
obligated, among other things and at our expense, to cause each leased aircraft
to be duly registered, to pay all costs of operating the aircraft and to
maintain, service, repair and overhaul the aircraft or cause it to be
maintained, serviced, repaired and overhauled. With respect to the leased
aircraft, the assignment by the related owner trustee to the related loan
trustee of its rights under the related lease will exclude, among other things:
- rights of the owner trustee and the related owner participant relating to
indemnification by us for certain matters;
- insurance proceeds payable to the owner trustee in its individual
capacity and to the owner participant under liability insurance
maintained by us pursuant to the lease or by the owner trustee or the
owner participant;
- insurance proceeds payable to the owner trustee in its individual
capacity or to the owner participant under certain casualty insurance
maintained by the owner trustee or the owner participant pursuant to the
lease; and
- any rights of the owner participant or the owner trustee to enforce
payment of the foregoing amounts and their respective rights to the
proceeds of the foregoing.
The owned aircraft notes will be secured by a mortgage granted to the
related loan trustee of all of our right, title and interest in and to the owned
aircraft. Under the terms of each owned aircraft indenture, we will be
obligated, among other things and at our expense, to cause each owned aircraft
to be duly registered, to pay all costs of operating the aircraft and to
maintain, service, repair and overhaul the aircraft or cause it to be
maintained, serviced, repaired and overhauled.
We will be required, except under certain circumstances, to keep each
aircraft registered under the Transportation Code, and to record the indenture
and the lease, if applicable, among other documents, with respect to each
aircraft under the Transportation Code. Recordation of the indenture, the lease,
if applicable, and other documents with respect to each aircraft will give the
related loan trustee a perfected security interest in the related aircraft
whenever it is located in the United States or any of its territories and
possessions. The Convention on the International Recognition of Rights in
Aircraft, referred to as the "Convention," provides that this security interest
will also be recognized, with certain limited exceptions, in those jurisdictions
that have ratified or adhere to the Convention.
We will have the right, subject to certain conditions, at our own expense
to register each aircraft in countries other than the United States. Each
aircraft may also be operated by us or under lease, sublease or interchange
arrangements in countries that are not parties to the Convention. The extent to
which the related loan trustee's security interest would be recognized in an
aircraft located in a country that is not a
22
party to the Convention, and the extent to which the security interest would be
recognized in a jurisdiction adhering to the Convention if the aircraft is
registered in a jurisdiction not a party to the Convention, is uncertain.
Moreover, in the case of a default under an indenture, the ability of the
related loan trustee to realize upon its security interest in an aircraft could
be adversely affected as a legal or practical matter if the aircraft were
registered or located outside the United States.
Unless otherwise specified in the applicable prospectus supplement, the
equipment notes will not be cross-collateralized. Consequently, the equipment
notes issued in respect of any one aircraft will not be secured by any other
aircraft. Unless and until a default under an indenture with respect to a leased
aircraft has occurred and is continuing, the related loan trustee may exercise
only limited rights of the related owner trustee under the related lease.
The loan trustee will invest and reinvest funds, if any, held by it from
time to time under an indenture. The loan trustee will, at our direction, invest
and reinvest funds in certain investments described in the applicable indenture.
We will not be entitled to direct the loan trustee to invest and reinvest funds
with respect to a leased aircraft in the case of a default under the applicable
lease or, with respect to an owned aircraft, in the case of a default under the
applicable indenture. We will pay the net amount of any loss resulting from
these investments.
In the case of Chapter 11 bankruptcy proceedings involving a holder of
"equipment" (defined as described below), Section 1110 of the U.S. Bankruptcy
Code provides special rights to lessors, conditional vendors and holders of
security interests with respect to such equipment. Under Section 1110, the right
of such financing parties to take possession of such equipment in compliance
with the provisions of a lease, conditional sale contract or security agreement
is not affected by any provision of the U.S. Bankruptcy Code or any power of the
bankruptcy court. Ordinarily, such right would be limited by the "automatic
stay" under the Bankruptcy Code. Such right to take possession may not be
exercised for 60 days following the date of commencement of the reorganization
proceedings. Thereafter, such right to take possession may be exercised during
such proceedings unless, within the 60-day period or any longer period consented
to by the relevant parties, the debtor agrees to perform its obligations that
become due on or after that date and cures all defaults on a timely basis.
Defaults resulting solely from the financial condition, bankruptcy, insolvency
or reorganization of the debtor need not be cured.
"Equipment" is defined in Section 1110 of the U.S. Bankruptcy Code, in
part, as an aircraft, aircraft engine, propeller, appliance, or spare part (as
defined in Section 40102 of Title 49 of the U.S. Code) that is subject to a
security interest granted by, leased to, or conditionally sold to a debtor that,
at the time such transaction is entered into, holds an air carrier operating
certificate issued pursuant to chapter 447 of title 49 of the U.S. Code for
aircraft capable of carrying 10 or more individuals or 6,000 pounds of more of
cargo (subject to certain limitations in the case of equipment first placed in
service on or prior to October 22, 1994).
In connection with any issuance of certificates under this prospectus and
the applicable prospectus supplement, it will be a condition to the pass through
trustee's obligation to purchase equipment notes with respect to each aircraft
that our outside counsel provide its opinion (which may assume that we hold, at
the time of the lease or mortgage, as the case may be, an air carrier operating
certificate issued pursuant to chapter 447 of title 49 of the U.S. Code for
aircraft capable of carrying 10 or more individuals or 6,000 pounds or more of
cargo) to the Pass Through Trustee that:
- if the aircraft is a leased aircraft, the owner trustee, as lessor under
the lease for the aircraft, and the loan trustee, as assignee of the
owner trustee's rights under the lease pursuant to the applicable
indenture, will be entitled to the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to the airframe and engines comprising the
aircraft; or
- if the aircraft is an owned aircraft, the loan trustee will be entitled
to the benefits of Section 1110 with respect to the airframe and engines
comprising the owned aircraft.
The opinion will not address the possible replacement of an aircraft after
an "Event of Loss", as defined in the applicable indenture, in the future.
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RANKING OF EQUIPMENT NOTES
Some of the equipment notes related to one or more aircraft, as described
in the related prospectus supplement, may be subordinated and junior in right of
payment to other equipment notes related to the same aircraft. The terms of the
subordination, if any, will be described in the related prospectus supplement.
PAYMENTS AND LIMITATION OF LIABILITY
We will lease each leased aircraft from an owner trustee for a term
commencing on the delivery date of the aircraft to the owner trustee and
expiring on a date no earlier than the latest maturity date of the related
leased aircraft notes, unless previously terminated as permitted by the terms of
the related lease. We will make basic rent and other payments under each lease
to an owner trustee, as lessor. The owner trustee will assign these payments
under the applicable indenture to the related loan trustee to provide the funds
necessary to pay principal of, premium, if any, and interest due from the owner
trustee on the leased aircraft notes issued under the indenture. Each lease will
provide that under no circumstances will our rent payments be less than the
scheduled payments on the related leased aircraft notes. The balance of any
basic rent payment under each lease, after payment of amounts due on the leased
aircraft notes issued under the indenture corresponding to the lease, will be
paid over to the applicable owner trustee. Our obligation to pay rent and to
cause other payments to be made under each lease will be our direct obligation.
Except in circumstances in which we purchase a leased aircraft and assume
the related leased aircraft notes, the leased aircraft notes will not be our
direct obligation. None of the owner trustees, the owner participants or the
loan trustees will be personally liable to any holder of leased aircraft notes
for amounts payable under the leased aircraft notes. Except as provided in the
indentures relating to the leased aircraft notes, no owner trustee or loan
trustee will be liable for or incur any liability under the indentures. Except
in the circumstances described above, all amounts payable under any leased
aircraft notes, other than payments made in connection with an optional
redemption or purchase by the related owner trustee or the related owner
participant, will be made only from:
- the assets subject to the lien of the applicable indenture with respect
to the aircraft or the income and proceeds received by the related loan
trustee from that aircraft, including rent payable by us under the
related lease; or
- if so provided in the related prospectus supplement, the applicable
liquidity facility.
With respect to the leased aircraft notes, except as otherwise provided in
the applicable indenture, no owner trustee will be personally liable for any
amount payable or for any statements, representations, warranties, agreements or
obligations under any indenture or under any leased aircraft notes. None of the
owner participants will have any duty or responsibility under the leased
aircraft indentures or under the leased aircraft notes to the related loan
trustee or to any holder of any leased aircraft note.
Our obligations under each owned aircraft indenture and under the owned
aircraft notes will be our direct obligations.
DEFEASANCE OF THE INDENTURES AND THE EQUIPMENT NOTES IN CERTAIN CIRCUMSTANCES
Unless otherwise specified in the applicable prospectus supplement, an
indenture may provide that the obligations of the related loan trustee, the
related owner trustee or us, as the case may be, under that indenture will be
deemed to have been discharged and paid in full on the 91st day after the date
that money or certain United States government securities, in an aggregate
amount sufficient to pay when due (including as a consequence of redemption in
respect of which notice is given on or prior to the date of the deposit)
principal, premium, if any, and interest on all equipment notes issued under
that indenture, are irrevocably deposited with the related loan trustee. The
discharge may occur only if, among other things, there has been published by the
IRS a ruling to the effect that holders of the equipment notes will not
recognize income, gain or loss for federal income tax purposes as a result of
the deposit, defeasance
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and discharge and will be subject to federal income tax on the same amount and
in the same manner and at the same time as would have been the case if the
deposit, defeasance and discharge had not occurred.
Upon defeasance of the equipment notes, or upon payment in full of the
principal of, premium, if any, and interest on all equipment notes issued under
any indenture on the applicable maturity date, or upon deposit with the
applicable loan trustee of sufficient money no earlier than one year prior to
the date of maturity, the holders of the equipment notes will have no beneficial
interest in or other rights with respect to the related aircraft or other assets
subject to the lien of the indenture and the lien will terminate.
ASSUMPTION OF OBLIGATIONS BY CONTINENTAL
Unless otherwise specified in the applicable prospectus supplement, upon
our purchase of any leased aircraft prior to the end of the applicable term, we
may assume on a full recourse basis all of the obligations of the owner trustee,
other than its obligations in its individual capacity, under the indenture and
the leased aircraft notes relating to that lease. If we assume leased aircraft
notes, provisions relating to maintenance, possession and use of the related
aircraft, liens and insurance will be incorporated into the indenture. If we
assume leased aircraft notes in connection with our purchase of a leased
aircraft, leased aircraft notes issued under the indenture will not be redeemed
and will continue to be secured by the aircraft.
LIQUIDITY FACILITY
The related prospectus supplement may provide that one or more payments of
interest on the related equipment notes of one or more series will be supported
by a liquidity facility issued by an institution identified in the related
prospectus supplement. Unless otherwise provided in the related prospectus
supplement, the provider of the liquidity facility will have a claim upon the
assets securing the equipment notes senior to the claim of the pass through
trustee, as owner of the equipment notes.
INTERCREDITOR ISSUES
Equipment notes may be issued in different classes, which means that the
equipment notes may have different payment priorities even though they are
issued by the same borrower and relate to the same aircraft. If multiple classes
of equipment notes are issued, the related prospectus supplement will describe
the priority of distributions among the equipment notes, any liquidity
facilities, the ability of any class to exercise and/or enforce any or all
remedies with respect to the related aircraft, and, if the equipment notes are
leased aircraft notes, the related lease, and certain other intercreditor terms
and provisions.
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U.S. INCOME TAX MATTERS
GENERAL
Unless otherwise indicated in the applicable prospectus supplement, the
following summary describes all material generally applicable U.S. federal
income tax consequences to certificateholders of the purchase, ownership and
disposition of the certificates offered by this prospectus, and in the opinion
of Hughes Hubbard & Reed LLP, our special tax counsel, is accurate in all
material respects with respect to the matters discussed in this prospectus.
Except as otherwise specified, the summary is addressed to beneficial owners of
certificates that are citizens or residents of the United States, corporations,
partnerships or other entities created or organized in or under the laws of the
United States or any state therein, or estates or trusts the income of which is
subject to U.S. federal income taxation regardless of its source, and that will
hold the certificates as capital assets.
This summary does not address the tax treatment of U.S. certificateholders
that may be subject to special tax rules, such as banks, insurance companies,
dealers in securities or commodities, tax-exempt entities, holders that will
hold certificates as part of a straddle or holders that have a "functional
currency" other than the U.S. dollar, nor, except as specifically indicated,
does it address the tax treatment of U.S. certificateholders that do not acquire
certificates at the public offering price as part of the initial offering. The
summary is not a comprehensive description of all of the tax considerations that
may be relevant to a decision to purchase certificates. This summary does not
describe any tax consequences arising under the laws of any state, locality or
taxing jurisdiction other than the United States.
The summary is based upon the tax laws and practice of the United States as
in effect on the date of this prospectus, as well as judicial and administrative
interpretations, in final or proposed form, available on or before that date.
Changes to the existing laws could apply retroactively and could alter the tax
consequences discussed below. We have not sought any ruling from the IRS with
respect to the federal income tax consequences, discussed below, and we cannot
assure you that the IRS will not take contrary positions. The pass through
trusts are not indemnified for any federal income taxes that may be imposed upon
them, and the imposition of any such taxes on a pass through trust could result
in a reduction in the amounts available for distribution to the
certificateholders of that pass through trust. Prospective investors should
consult their own tax advisors with respect to the federal, state, local and
foreign tax consequences to them of the purchase, ownership and disposition of
the certificates.
TAX STATUS OF THE PASS THROUGH TRUSTS
In the opinion of our special tax counsel, each pass through trust will be
classified as a grantor trust for U.S. federal income tax purposes.
TAXATION OF CERTIFICATEHOLDERS GENERALLY
A U.S. certificateholder will be treated as owning its pro rata undivided
interest in each of the equipment notes and any other property held by the
related pass through trust. Accordingly, each U.S. certificateholder's share of
interest paid on the equipment notes will be taxable as ordinary income, as it
is paid or accrued, in accordance with such U.S. certificateholder's method of
accounting, and a U.S. certificateholder's share of any premium paid on
redemption of an equipment note will be treated as capital gain. If a pass
through trust is supported by a liquidity facility, any amounts received by the
pass through trust under the liquidity facility with respect to unpaid interest
will be treated for U.S. federal income tax purposes as having the same
characteristics as the payments they replace. If we assume an owner trust's
obligations under leased aircraft notes, the assumption would be treated for
federal income tax purposes as a taxable exchange of the leased aircraft notes,
resulting in recognition of gain or loss by the U.S. certificateholder.
Each U.S. certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding pass through trust as provided in Section 162 or 212 of the
Internal Revenue Code of 1986, as amended, referred to herein as the "Code".
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Certain fees and expenses, including fees paid to the pass through trustee and
the provider of the liquidity facility, if applicable, will be paid by parties
other than the certificateholders. These fees and expenses could be treated as
constructively received by the pass through trust, in which event a U.S.
certificateholder will be required to include in income and will be entitled to
deduct its pro rata share of the fees and expenses. If a U.S. certificateholder
is an individual, estate or trust, the deduction for the certificateholder's
share of fees or expenses will be allowed only to the extent that all of the
certificateholder's miscellaneous itemized deductions, including the
certificateholder's share of fees and expenses, exceed 2% of the
certificateholder's adjusted gross income. In addition, in the case of U.S.
certificateholders who are individuals, certain otherwise allowable itemized
deductions will be subject generally to additional limitations on itemized
deductions under applicable provisions of the Code.
EFFECT OF SUBORDINATION OF CERTIFICATEHOLDERS OF SUBORDINATED TRUSTS
If any pass through trust is subordinated in right of payment to any other
pass through trust and the subordinated trust receives less than the full amount
of the interest, principal or premium paid with respect to the equipment notes
held by it because of the subordination of such pass through trust, the
certificateholders of the subordinated trust would probably be treated for
federal income tax purposes as if they had:
- received as distributions their full share of interest, principal, or
premium;
- paid over to the preferred class of certificateholders an amount equal to
their share of the amount of the shortfall; and
- retained the right to reimbursement of the amount of the shortfall to the
extent of future amounts payable to the certificateholders of the
subordinated trust on account of the shortfall.
Under this analysis:
- subordinated certificateholders incurring a shortfall would be required
to include as current income any interest or other income of the
subordinated trust that was a component of the shortfall, even though
that amount was in fact paid to a preferred class of certificateholders;
- a loss would only be allowed to subordinated certificateholders when
their right to receive reimbursement of the shortfall becomes worthless;
that is, when it becomes clear that funds will not be available from any
source to reimburse the shortfall; and
- reimbursement of the shortfall before a claim of worthlessness would not
be taxable income to certificateholders because the amount reimbursed
would have been previously included in income.
These results should not significantly affect the inclusion of income for
certificateholders on the accrual method of accounting, but could accelerate
inclusion of income to certificateholders on the cash method of accounting by,
in effect, placing them on the accrual method.
ORIGINAL ISSUE DISCOUNT
The equipment notes may be issued with original issue discount, referred to
as OID. The prospectus supplement will state whether any equipment notes to be
held by the related pass through trust will be issued with OID. Generally, a
holder of a debt instrument issued with OID that is not negligible must include
the OID in income for federal income tax purposes as it accrues, in advance of
the receipt of the cash attributable to such income, under a method that takes
into account the compounding of interest.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of a certificate, a U.S.
certificateholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the disposition, other than any amount
attributable to accrued interest which will be taxable as ordinary income, and
the U.S. certificateholder's adjusted tax basis in the related equipment notes
and any other property held by the
27
corresponding pass through trust. Any gain or loss will be long-term capital
gain or loss to the extent attributable to property held by the pass through
trust for more than one year. In the case of individuals, estates, and trusts,
the maximum rate of tax on net long-term capital gains generally is 20%.
FOREIGN CERTIFICATEHOLDERS
Subject to the discussion of backup withholding below, payments of
principal and interest (including any OID) on the equipment notes to, or on
behalf of, any beneficial owner of a certificate that is not a U.S. person will
not be subject to U.S. federal withholding tax provided that:
- the non-U.S. certificateholder does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of
an owner participant or us;
- the non-U.S. certificateholder is not a bank receiving interest pursuant
to a loan agreement entered into in the ordinary course of its trade or
business, or a controlled foreign corporation for U.S. tax purposes that
is related to an owner participant or us; and
- certain certification requirements (including identification of the
beneficial owner of the certificate) are complied with.
Any capital gain realized upon the sale, exchange, retirement or other
disposition of a certificate or upon receipt of premium paid on an equipment
note by a non-U.S. certificateholder will not be subject to U.S. federal income
or withholding taxes if (i) such gain is not effectively connected with a U.S.
trade or business of the non-U.S. certificateholder and (ii) in the case of an
individual, such non-U.S. certificateholder is not present in the United States
for 183 days or more in the taxable year of the sale, exchange, retirement or
other disposition or receipt.
BACKUP WITHHOLDING
Payments made on the certificates will not be subject to a backup
withholding tax of 31% unless, in general, the certificateholder fails to comply
with certain reporting procedures or otherwise fails to establish an exemption
from such tax under applicable provisions of the Code.
ERISA CONSIDERATIONS
Unless otherwise indicated in the applicable prospectus supplement, the
certificates may, subject to certain legal restrictions, be purchased and held
by an employee benefit plan subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended, referred to as "ERISA," or an individual
retirement account or an employee benefit plan subject to section 4975 of the
Code. A fiduciary of an employee benefit plan must determine that the purchase
and holding of a certificate is consistent with its fiduciary duties under ERISA
and does not result in a non-exempt prohibited transaction as defined in section
406 of ERISA or section 4975 of the Code. Employee benefit plans which are
governmental plans, as defined in section 3(32) of ERISA, and certain church
plans, as defined in section 3(33) of ERISA, are not subject to Title I of ERISA
or section 4975 of the Code. The certificates may, subject to certain legal
restrictions, be purchased and held by such plans.
PLAN OF DISTRIBUTION
Certificates may be sold to one or more underwriters for public offering
and resale by them. Certificates may also be sold to investors or other persons
directly or through one or more dealers or agents. Any underwriter, dealer or
agent involved in the offer and sale of the certificates will be named in an
applicable prospectus supplement.
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The certificates may be sold:
- at a fixed price or prices, which may be changed;
- at market prices prevailing at the time of sale;
- at prices related to prevailing market prices; or
- at negotiated prices.
Dealer trading may take place in certain of the certificates, including
certificates not listed on any securities exchange. We do not intend to apply
for listing of the certificates on a national securities exchange. From time to
time, we also may authorize underwriters acting as our agents to offer and sell
the certificates upon the terms and conditions as will be set forth in any
prospectus supplement.
In connection with the sale of certificates, underwriters may be deemed to
have received compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of certificates for
whom they may act as agent. Underwriters may sell certificates to or through
dealers, and those dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions, which may
be changed from time to time, from the purchasers for whom they may act as
agent.
If a dealer is used directly by us in the sale of certificates in respect
of which this prospectus is delivered, we will sell the certificates to the
dealer, as principal. The dealer may then resell the certificates to the public
at varying prices to be determined by the dealer at the time of resale. The
dealer will be named in, and the terms of the sale, will be set forth in the
applicable prospectus supplement.
Certificates may be offered and sold through agents designated by us from
time to time. The agent involved in the offer or sale of the certificates will
be named in, and any commissions payable by us to the agent will be set forth
in, the applicable prospectus supplement. Unless otherwise indicated in the
applicable prospectus supplement, the agent will be acting on a best efforts
basis for the period of its appointment.
We may solicit directly offers to purchase certificates, and certificates
may be sold directly to institutional investors or others who may be deemed to
be underwriters within the meaning of the Securities Act with respect to any
resale. The terms of these sales will be described in the applicable prospectus
supplement. Except as set forth in the applicable prospectus supplement, no
director, officer or employee of ours will solicit or receive a commission in
connection with direct sales by us of the certificates, although those persons
may respond to inquiries by potential purchasers and perform ministerial and
clerical work in connection with our direct sales.
Any underwriting compensation that we pay to underwriters, dealers or
agents in connection with the offering of certificates, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in an applicable prospectus supplement.
Underwriters, dealers and agents participating in the distribution of the
certificates may be deemed to be underwriters, and any discounts and commissions
received by them and any profit realized by them on resale of the certificates
may be deemed to be underwriting discounts and commissions under the Securities
Act. Underwriters, dealers and agents may be entitled under agreements with us
to indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act, and to reimbursement by us for
certain expenses.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, us and our subsidiaries in the ordinary course of
business.
If so indicated in an applicable prospectus supplement and subject to
existing market conditions, we will authorize dealers acting as our agents to
solicit offers by certain institutions to purchase certificates from us at the
public offering price set forth in the applicable prospectus supplement pursuant
to delayed delivery contracts. These contracts will provide for payment and
delivery on the date or dates stated in the
29
applicable prospectus supplement. Each contract will be for an amount not less
than, and the aggregate principal amount of certificates sold pursuant to these
contracts will not be less nor more than, the respective amounts stated in the
applicable prospectus supplement. Institutions with whom these contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and other institutions, but will in all cases be subject to our
approval. These contracts will not be subject to any conditions, except for the
condition that the purchase by an institution of the certificates not be
prohibited at the time of delivery under the laws of any jurisdiction in the
United States to which the institution is subject. A commission set forth in the
applicable prospectus supplement will be granted to underwriters and agents
soliciting purchases of certificates pursuant to contracts accepted by us.
Agents and underwriters will have no responsibility in respect of the delivery
or performance of these contracts.
If an underwriter or underwriters is used in the sale of any certificates,
the applicable prospectus supplement will state the intention, if any, of the
underwriters at the date of the prospectus supplement to make a market in the
certificates. We cannot assure you that there will be a market for the
certificates.
The place and time of delivery for the certificates in respect of which
this prospectus is delivered will be set forth in the applicable prospectus
supplement.
LEGAL OPINIONS
Unless otherwise indicated in the applicable prospectus supplement, our
counsel, Hughes Hubbard & Reed LLP, New York, New York, will render an opinion
with respect to the validity of the certificates being offered by such
prospectus supplement. Unless otherwise indicated in the applicable prospectus
supplement, Hughes Hubbard & Reed LLP will rely on the opinion of counsel for
the pass through trustee as to certain matters relating to the authorization,
execution and delivery of the certificates by, and the valid and binding effect
on, the pass through trustee.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K for
the year ended December 31, 2000, as set forth in their reports, which are
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements and schedule are, and audited consolidated
financial statements to be included in subsequently filed documents will be,
incorporated by reference in reliance on Ernst & Young LLP's reports pertaining
to such financial statements, to the extent covered by consents filed with the
SEC, given on their authority as experts in auditing and accounting.
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