1
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-57188
THIS PRELIMINARY PROSPECTUS SUPPLEMENT RELATES TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, BUT IT IS NOT COMPLETE AND MAY BE
CHANGED. THIS PRELIMINARY PROSPECTUS SUPPLEMENT 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.
SUBJECT TO COMPLETION, DATED APRIL 4, 2001
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MARCH 23, 2001
$708,475,000
[CONTINENTAL AIRLINES LOGO]
2001-1 PASS THROUGH TRUSTS
PASS THROUGH CERTIFICATES, SERIES 2001-1
Three classes of the Continental Airlines Pass Through Certificates, Series
2001-1, are being offered under this prospectus supplement: Class A-1, A-2 and
B. A separate trust will be established for each class of certificates. The
proceeds from the sale of certificates will initially be held in escrow. The
trusts will use the escrowed funds to acquire equipment notes. The equipment
notes will be issued to finance the acquisition by Continental Airlines of 21
new Boeing aircraft scheduled for delivery from October 2001 to June 2002. The
aircraft will be leased or purchased by Continental. Payments on the equipment
notes held in each trust will be passed through to the holders of certificates
of such trust.
The equipment notes issued for each aircraft will have a security interest
in such aircraft. Interest on the equipment notes held for the Class A-1, A-2
and B certificates will be payable semiannually on each June 15 and December 15
after issuance, beginning on December 15, 2001. Principal payments on the
equipment notes held for the Class A-1 and B certificates are scheduled on June
15 and December 15 in certain years, beginning on . The entire
principal of the equipment notes held for the Class A-2 certificates will be
scheduled for payment on June 15, 2011.
Continental Airlines expects to privately place Class C certificates after
the issuance of the Class A-1, A-2 and B certificates. The proceeds from the
issuance of Class C certificates also will be used to acquire equipment notes
issued for the aircraft. The issuance of Class C certificates is subject to
certain conditions, including receipt of confirmation from Moody's Investors
Service and Standard & Poor's Rating Services that the terms of the Class C
certificates will not result in a withdrawal, suspension or downgrading of the
ratings of the Class A-1, A-2 or B certificates.
The Class A-1 and A-2 certificates will rank equally in right of
distributions and will rank senior to the other certificates. The Class B
certificates will rank junior to the Class A-1 and A-2 certificates and will
rank senior to the Class C certificates. The Class C certificates, if issued,
will rank junior to the other certificates.
Landesbank Hessen-Thuringen Girozentrale will provide a liquidity facility
for the Class A-1, A-2 and B certificates, in each case in an amount sufficient
to make three semiannual interest payments.
The certificates will not be listed on any national securities exchange.
INVESTING IN THE CERTIFICATES INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
S-20.
PASS THROUGH PRINCIPAL INTEREST FINAL EXPECTED PRICE TO
CERTIFICATES AMOUNT RATE DISTRIBUTION DATE PUBLIC(1)
- ------------ --------- -------- ----------------- ---------
Class A-1......................... $436,433,000 % June 15, 2021 100%
Class A-2......................... 188,440,000 June 15, 2011 100
Class B........................... 83,602,000 December 15, 2015 100
- ------------
(1) Plus accrued interest, if any, from the date of issuance.
The underwriters will purchase all of the Class A-1, A-2 and B certificates
if any are purchased. The aggregate proceeds from the sale of the Class A-1, A-2
and B certificates will be $ . Continental will pay the underwriters a
commission of $ . Delivery of the Class A-1, A-2 and B
certificates in book-entry form only will be made on or about April , 2001.
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
MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY
------------------------
CREDIT SUISSE FIRST BOSTON
JPMORGAN
CREDIT LYONNAIS SECURITIES
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS APRIL , 2001.
2
PRESENTATION OF INFORMATION
These offering materials consist of two documents: (a) this Prospectus
Supplement, which describes the terms of the certificates that we are currently
offering, and (b) the accompanying Prospectus, which provides general
information about our pass through certificates, some of which may not apply to
the certificates that we are currently offering. The information in this
Prospectus Supplement replaces any inconsistent information included in the
accompanying Prospectus.
We have given certain capitalized terms specific meanings for purposes of
this Prospectus Supplement. The "Index of Terms" attached as Appendix I to this
Prospectus Supplement lists the page in this Prospectus Supplement on which we
have defined each such term.
At 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.
REFERENCES TO CLASS C CERTIFICATES
We are offering only the Class A-1, A-2 and B Certificates pursuant to this
Prospectus Supplement. We expect to privately place the Class C Certificates
described in this Prospectus Supplement at a later date, but only if we receive
written confirmation from Moody's and Standard & Poor's that the terms of the
Class C Certificates will not result in a withdrawal, suspension or downgrading
of the rating of the Class A-1, A-2 or B Certificates.
You should consider all references to Class C Certificates in this
Prospectus Supplement to mean the "Class C Certificates when issued" and all
references to the Class C Trust to mean the "Class C Trust when formed". Unless
the Class C Certificates are issued, no Series C Equipment Notes will be issued,
and you should consider all references to Series C Equipment Notes in this
Prospectus Supplement to mean "Series C Equipment Notes when issued".
S-2
3
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-17
RISK FACTORS.................................... S-20
Risk Factors Relating to the Company.......... S-20
Risk Factors Relating to the Airline
Industry.................................... S-21
Risk Factors Relating to the Certificates and
the Offering................................ S-22
USE OF PROCEEDS................................. S-24
THE COMPANY..................................... S-25
Domestic Operations........................... S-25
International Operations...................... S-26
DESCRIPTION OF THE CERTIFICATES................. S-28
General....................................... S-28
Expected Issuance of Class C Certificates..... S-29
Subordination................................. S-31
Payments and Distributions.................... S-32
Pool Factors.................................. S-34
Reports to Certificateholders................. S-37
Indenture Defaults and Certain Rights Upon an
Indenture Default........................... S-38
Purchase Rights of Certificateholders......... S-40
PTC Event of Default.......................... S-40
Merger, Consolidation and Transfer of
Assets...................................... S-40
Modifications of the Pass Through Trust
Agreements and Certain Other Agreements..... S-41
Obligation to Purchase Equipment Notes........ S-43
Possible Issuance of Class D Certificates..... S-48
Liquidation of Original Trusts................ S-48
Termination of the Trusts..................... S-48
The Trustees.................................. S-49
Book-Entry; Delivery and Form................. S-49
DESCRIPTION OF THE DEPOSIT AGREEMENTS........... S-50
General....................................... S-50
Unused Deposits............................... S-50
Distribution if Class C Certificates Not
Issued...................................... S-51
Distribution Upon Occurrence of Triggering
Event....................................... S-51
DESCRIPTION OF THE ESCROW AGREEMENTS............ S-52
DESCRIPTION OF THE LIQUIDITY FACILITIES......... S-53
General....................................... S-53
Drawings...................................... S-53
Reimbursement of Drawings..................... S-56
Liquidity Events of Default................... S-57
Offered Certificate Liquidity Provider........ S-58
DESCRIPTION OF THE INTERCREDITOR AGREEMENT...... S-59
PAGE
----
Intercreditor Rights.......................... S-59
Priority of Distributions..................... S-60
Voting of Equipment Notes..................... S-64
Addition of Trustee for Class D
Certificates................................ S-64
The Subordination Agent....................... S-64
DESCRIPTION OF THE AIRCRAFT AND THE
APPRAISALS.................................... S-65
The Aircraft.................................. S-65
The Appraisals................................ S-66
Deliveries of Aircraft........................ S-67
Substitute Aircraft........................... S-67
DESCRIPTION OF THE EQUIPMENT
NOTES......................................... S-68
General....................................... S-68
Subordination................................. S-69
Principal and Interest Payments............... S-70
Redemption.................................... S-70
Security...................................... S-71
Loan to Value Ratios of Equipment Notes....... S-72
Limitation of Liability....................... S-75
Indenture Defaults, Notice and Waiver......... S-76
Remedies...................................... S-77
Modification of Indentures and Leases......... S-79
Owner Participant's Right to Restructure...... S-80
Indemnification............................... S-80
The Leases and Certain Provisions of the Owned
Aircraft Indentures......................... S-80
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES.... S-88
General....................................... S-88
Tax Status of the Trusts...................... S-88
Taxation of Certificateholders Generally...... S-89
Effect of Reallocation of Payments under the
Intercreditor Agreement..................... S-90
Dissolution of Original Trusts and Formation
of New Trusts............................... S-91
Sale or Other Disposition of the
Certificates................................ S-91
Foreign Certificateholders.................... S-91
Backup Withholding............................ S-92
CERTAIN DELAWARE TAXES.......................... S-92
CERTAIN ERISA CONSIDERATIONS.................... S-92
UNDERWRITING.................................... S-95
LEGAL MATTERS................................... S-96
EXPERTS......................................... S-96
INDEX OF TERMS........................... Appendix I
APPRAISAL LETTERS........................ Appendix II
MANDATORY ECONOMIC TERMS--MAXIMUM LTV FOR
SERIES A-1, A-2 AND B EQUIPMENT NOTES.. Appendix III
S-3
4
TABLE OF CONTENTS--(CONTINUED)
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..................... 3
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............................ 13
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................................ 17
Modifications of the Basic Agreement.... 17
Modification of Indenture and Related
Agreements............................ 18
Cross-Subordination Issues.............. 18
Termination of the Pass Through
Trusts................................ 19
Delayed Purchase of Equipment Notes..... 19
PAGE
----
Liquidity Facility...................... 19
The Pass Through Trustee................ 19
DESCRIPTION OF THE EQUIPMENT NOTES........ 21
General................................. 21
Principal and Interest Payments......... 21
Redemption.............................. 21
Security................................ 21
Ranking of Equipment Notes.............. 23
Payments and Limitation of Liability.... 23
Defeasance of the Indentures and the
Equipment Notes in Certain
Circumstances......................... 24
Assumption of Obligations by
Continental........................... 24
Liquidity Facility...................... 24
Intercreditor Issues.................... 25
U.S. INCOME TAX MATTERS................... 26
General................................. 26
Tax Status of the Pass Through Trusts... 26
Taxation of Certificateholders
Generally............................. 26
Effects 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
5
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information from this Prospectus
Supplement and the accompanying Prospectus and may not contain all of the
information that is important to you. For more complete information about the
Certificates and Continental Airlines, you should read this entire Prospectus
Supplement and the accompanying Prospectus, as well as the materials filed with
the Securities and Exchange Commission that are considered to be part of this
Prospectus Supplement and the Prospectus. See "Incorporation of Certain
Documents by Reference" in the Prospectus.
SUMMARY OF TERMS OF CERTIFICATES*
EXPECTED SERIES
CLASS A-1 CLASS A-2 CLASS B CLASS C
CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES(1)
---------------- ---------------- ---------------- ----------------
Aggregate Face Amount........... $436,433,000 $188,440,000 $83,602,000 $192,283,000
Ratings:
Moody's....................... Aa3 Aa3 A2 Not rated
Standard & Poor's............. AA+ AA+ AA- Not rated
Initial Loan to Aircraft Value
(cumulative)(2)............... 41.8% 41.8% 47.3% 59.1%
Expected Highest Loan to
Aircraft Value
(cumulative)(3)............... 41.8% 41.8% 47.3% 59.1%
Expected Principal Distribution
Window (in years)............. 0.7-20.2 10.2 0.7-14.7 0.7-10.2
Initial Average Life (in years
from Issuance Date)........... 10.5 10.2 8.3 7.0
Regular Distribution Dates...... June 15 and June 15 and June 15 and March 15, June
December 15 December 15 December 15 15, September 15
and December 15
Final Expected Regular
Distribution Date............. June 15, 2021 June 15, 2011 December 15, June 15, 2011
2015
Final Maturity Date............. December 15, December 15, June 15, 2017 December 15,
2022 2012 2012
Minimum Denomination............ $1,000 $1,000 $1,000 --
Section 1110 Protection......... Yes Yes Yes Yes
Liquidity Facility Coverage..... 3 semiannual 3 semiannual 3 semiannual 6 quarterly
interest interest interest interest
payments payments payments payments
- ------------
* The Classes and amounts of Certificates offered and the terms of such
Certificates are indicative only and subject to change.
(1) Continental expects to privately place Class C Certificates after the
issuance of the Offered Certificates. The Class C Certificates are expected
to have the terms set forth above. However, the terms of the Class C
Certificates may be changed and, under certain circumstances, the Class C
Certificates might not be issued. The issuance of any Class C Certificates
is subject to certain conditions, including receipt of confirmation from the
Rating Agencies that the terms of the Class C Certificates will not result
in a withdrawal, suspension or downgrading of the ratings of the Class A-1,
A-2 or B Certificates. See "Description of the Certificates--Expected
Issuance of Class C Certificates".
(2) These percentages are calculated assuming that the first 21 aircraft
scheduled for delivery among the 31 aircraft from which Continental may
choose are financed hereunder and are determined as of June 15, 2002, the
first Regular Distribution Date after such aircraft are scheduled to have
been delivered. In calculating these percentages, we have assumed that all
such aircraft are delivered prior to such date, that the maximum principal
amount of Equipment Notes is issued and that the aggregate appraised value
of such aircraft is $1,436,306,667 as of such date. The appraised value is
only an estimate and reflects certain assumptions. See "Description of the
Aircraft and the Appraisals--The Appraisals".
(3) See "--Loan to Aircraft Value Ratios".
S-5
6
EQUIPMENT NOTES AND THE AIRCRAFT
The 21 Boeing aircraft to be financed pursuant to this offering will
consist of nine Boeing 737-824 aircraft, five Boeing 737-924 aircraft, six
Boeing 767-424ER aircraft and one Boeing 777-224ER aircraft. Continental will
select the aircraft to be financed from among twelve Boeing 737-824 aircraft,
seven Boeing 737-924 aircraft, ten Boeing 767-424ER aircraft and two Boeing
777-224ER aircraft. The relevant aircraft are scheduled for delivery from
October 2001 to June 2002. See "Description of the Aircraft and the Appraisals--
The Appraisals" for a description of the 31 aircraft from which Continental may
select the 21 aircraft 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 the aircraft expected to secure such
Equipment Notes (assuming for purposes of the chart below that the first 21
aircraft scheduled for delivery among the 31 aircraft from which Continental may
choose are financed hereunder):
MAXIMUM
PRINCIPAL AMOUNT
EXPECTED SCHEDULED OF SERIES A-1, A-2
REGISTRATION MANUFACTURER'S DELIVERY AND B EQUIPMENT APPRAISED
AIRCRAFT TYPE NUMBER SERIAL NUMBER MONTH(1) NOTES(2) VALUE(3)
- ------------------------------- ------------ -------------- ------------- ------------------ ------------
Boeing 737-824................. N76269 31588 October 2001 $26,884,000 $ 48,880,000
Boeing 737-824................. N73270 31632 October 2001 26,884,000 48,880,000
Boeing 737-824................. N35271 31589 November 2001 26,931,667 48,966,667
Boeing 737-824................. N36272 31590 November 2001 26,931,667 48,966,667
Boeing 737-824................. N37273 31591 December 2001 26,981,167 49,056,667
Boeing 737-824................. N37274 31592 January 2002 27,120,500 49,310,000
Boeing 737-824................. N73275 31593 February 2002 27,168,167 49,396,667
Boeing 737-824................. N73276 31594 February 2002 27,168,167 49,396,667
Boeing 737-824................. N37277 31595 March 2002 27,215,833 49,483,333
Boeing 737-924................. N37408 30125 October 2001 27,694,333 50,353,333
Boeing 737-924................. N37409 30126 November 2001 27,743,833 50,443,333
Boeing 737-924................. N75410 30127 December 2001 27,791,500 50,530,000
Boeing 737-924................. N71411 30128 January 2002 27,907,000 50,740,000
Boeing 737-924................. N31412 30129 March 2002 28,022,500 50,950,000
Boeing 767-424ER............... N66057 29452 January 2002 55,104,500 100,190,000
Boeing 767-424ER............... N67058 29453 January 2002 55,104,500 100,190,000
Boeing 767-424ER............... N69059 29454 February 2002 55,220,000 100,400,000
Boeing 767-424ER............... N78060 29455 February 2002 55,220,000 100,400,000
Boeing 767-424ER............... N68061 29456 March 2002 55,335,500 100,610,000
Boeing 767-424ER............... N76062 29457 March 2002 55,335,500 100,610,000
Boeing 777-224ER............... N78017 31679 March 2002 76,204,333 138,553,333
- ------------
(1) The delivery deadline for purposes of financing an aircraft pursuant to this
offering is September 30, 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 actual principal amount issued for an Aircraft may be less depending on
the circumstances of the financing of such Aircraft. The aggregate principal
amount of all of the Equipment Notes will not exceed the aggregate face
amount of the Certificates. For information concerning the maximum principal
amount of Equipment Notes applicable to the other Boeing 737-824, 737-924,
767-424ER and 777-224ER aircraft that Continental may choose to finance
pursuant to this offering in lieu of an aircraft of such models listed
above, see "Description of the Certificates--Obligation to Purchase
Equipment Notes". Continental also expects that Series C Equipment Notes
will be issued with respect to each Aircraft, which will be purchased with
the proceeds of the sale of the Class C Certificates. See "Description of
the Certificates--Expected Issuance of Class C 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. 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 737-824, 737-924, 767-424ER and 777-224ER aircraft that Continental
may choose to finance pursuant to this offering is higher 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
7
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 expected Class C Certificates as
of June 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 December 15 Regular Distribution Date thereafter. The LTVs
for any Class of Certificates for the period prior to June 15, 2002 are not
meaningful, since during such period all of the Equipment Notes expected to be
acquired by the Trusts and the related Aircraft will not be included in the
calculation. The table should not be considered a forecast or prediction of
expected or likely LTVs but simply a mathematical calculation based on one set
of assumptions. See "Risk Factors--Risk Factors Relating to the Certificates and
the Offering--Appraisals and Realizable Value of Aircraft".
OUTSTANDING BALANCE(2) LTV(3)
ASSUMED ------------------------------------------------------------ ------------
AGGREGATE EXPECTED
AIRCRAFT CLASS A-1 CLASS A-2 CLASS B CLASS C CLASS A-1
DATE VALUE(1) CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES(4) CERTIFICATES
- ----------------------- -------------- ------------ ------------ ------------ --------------- ------------
June 15, 2002.......... $1,436,306,667 $411,314,171 $188,440,000 $79,693,603 $168,997,864 41.8%
December 15, 2002...... 1,393,217,467 367,397,532 188,440,000 79,525,171 168,943,797 39.9
December 15, 2003...... 1,350,128,267 337,696,616 188,440,000 78,965,735 155,491,953 39.0
December 15, 2004...... 1,307,039,067 310,623,338 188,440,000 78,406,299 147,036,254 38.2
December 15, 2005...... 1,263,949,867 286,558,202 188,440,000 78,406,299 142,770,387 37.6
December 15, 2006...... 1,220,860,667 265,501,208 188,440,000 72,537,510 133,429,462 37.2
December 15, 2007...... 1,177,771,467 244,444,214 188,440,000 58,768,245 124,729,111 36.8
December 15, 2008...... 1,134,682,267 225,724,711 188,440,000 49,891,758 105,991,996 36.5
December 15, 2009...... 1,091,593,067 206,270,434 188,440,000 34,387,610 89,027,036 36.2
December 15, 2010...... 1,048,503,867 186,086,259 188,440,000 18,603,744 19,423,168 35.7
December 15, 2011...... 550,242,000 186,086,259 0 10,711,811 0 33.8
December 15, 2012...... 526,660,200 186,086,259 0 8,656,400 0 35.3
December 15, 2013...... 503,078,400 186,086,259 0 6,543,894 0 37.0
December 15, 2014...... 479,496,600 185,186,629 0 4,317,199 0 38.6
December 15, 2015...... 455,914,800 179,927,486 0 0 0 39.5
December 15, 2016...... 432,333,000 161,799,093 0 0 0 37.4
December 15, 2017...... 400,890,600 138,457,021 0 0 0 34.5
December 15, 2018...... 369,448,200 121,985,930 0 0 0 33.0
December 15, 2019...... 338,005,800 105,051,144 0 0 0 31.1
December 15, 2020...... 268,000,200 50,709,009 0 0 0 18.9
December 15, 2021...... NA 0 0 0 0 NA
LTV(3)
---------------------------------------------
EXPECTED
CLASS A-2 CLASS B CLASS C
DATE CERTIFICATES CERTIFICATES CERTIFICATES(4)
- ----------------------- ------------ ------------ ---------------
June 15, 2002.......... 41.8% 47.3% 59.1%
December 15, 2002...... 39.9 45.6 57.7
December 15, 2003...... 39.0 44.8 56.3
December 15, 2004...... 38.2 44.2 55.4
December 15, 2005...... 37.6 43.8 55.1
December 15, 2006...... 37.2 43.1 54.1
December 15, 2007...... 36.8 41.7 52.3
December 15, 2008...... 36.5 40.9 50.2
December 15, 2009...... 36.2 39.3 47.5
December 15, 2010...... 35.7 37.5 39.3
December 15, 2011...... NA 35.8 NA
December 15, 2012...... NA 37.0 NA
December 15, 2013...... NA 38.3 NA
December 15, 2014...... NA 39.5 NA
December 15, 2015...... NA NA NA
December 15, 2016...... NA NA NA
December 15, 2017...... NA NA NA
December 15, 2018...... NA NA NA
December 15, 2019...... NA NA NA
December 15, 2020...... NA NA NA
December 15, 2021...... NA NA NA
- ------------
* The periodic outstanding balances and the resulting LTVs for each Class of
Certificates are indicative only and subject to change.
(1) We have assumed that the initial appraised value of each Aircraft,
determined as described under "--Equipment Notes and the Aircraft", declines
by approximately 3% per year for the first fifteen years after the year of
delivery of such Aircraft and by approximately 4% per year thereafter. 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.
(2) In calculating the outstanding balances, we have assumed that the Trusts
will acquire the maximum principal amount of Equipment Notes for all
Aircraft.
(3) The LTVs for each Class of Certificates were obtained for each Regular
Distribution Date by dividing (i) the expected outstanding balance of such
Class together with the expected outstanding balance of all other Classes
equal or senior in right of payment to such Class after giving effect to the
distributions expected to be made on such date, by (ii) the assumed value of
all of the Aircraft on such date based on the assumptions described above.
The outstanding balances and LTVs may change if, among other things, the
aggregate principal amount of the Equipment Notes acquired by the Trusts is
less than the maximum permitted under the terms of this offering or the
amortization of the Equipment Notes differs from the assumed amortization
schedule calculated for purposes of this Prospectus Supplement.
(4) Continental expects to privately place Class C Certificates after the
issuance of the Offered Certificates, although their terms may differ from
those reflected in this table and, under certain circumstances, they may not
be issued. See "Description of the Certificates--Expected Issuance of Class
C Certificates".
The above table was compiled on an aggregate basis. However, the Equipment
Notes for an Aircraft will not have a security interest in any other Aircraft.
This means that any excess proceeds realized from the sale of an Aircraft or
other exercise of remedies will not be available to cover any shortfalls on the
Equipment Notes relating to any other Aircraft. See "Description of the
Equipment Notes--Loan to Value Ratios of Equipment Notes" for examples of LTVs
for the Equipment Notes issued in respect of individual Aircraft, which may be
more relevant in a default situation than the aggregate values shown above.
S-7
8
CASH FLOW STRUCTURE
Set forth below is a diagram illustrating the structure for the offering of
the Certificates and certain cash flows.
[Diagram omitted, which shows that Continental will pay to the Loan Trustee
for Leased Aircraft and Owned Aircraft (a) the lease rental payments, which are
assigned by the Owner Trustee, on Leased Aircraft and (b) the mortgage payments
on Owned Aircraft. From such lease rental payments and mortgage payments, the
Loan Trustee will make Equipment Note payments on the Series A-1 Equipment
Notes, the Series A-2 Equipment Notes, the Series B Equipment Notes and the
Series C Equipment Notes with respect to all Aircraft to the Subordination
Agent. Excess rental payments will be paid by the Loan Trustee to the lessors
for Leased Aircraft. From such Equipment Note payments, the Subordination Agent
will pay principal, premium, if any, and interest distributions to the Class A-1
Trustee, the Class A-2 Trustee, the Class B Trustee and the Class C Trustee, who
will pay such principal, premium, if any, and interest distributions to the
Class A-1 Certificateholders, the Class A-2 Certificateholders, the Class B
Certificateholders and the Class C Certificateholders, respectively. The
Subordination Agent may also receive advances, if any, and pay reimbursements,
if any, to the applicable Liquidity Provider. The Depositary will make interest
payments on the Deposits held for the benefit of the Class A-1, A-2 and B
Certificateholders to the Escrow Agent. From such interest payments, the Escrow
Agent will make payments to the Class A-1 Certificateholders, the Class A-2
Certificateholders and the Class B Certificateholders.]
- ------------
(1) Each Aircraft leased to Continental will be subject to a separate Lease and
a related Indenture; each Aircraft owned by Continental will be subject to a
separate Indenture.
(2) The proceeds of the offering of the Class A-1, A-2 and B 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. The scheduled payments of interest on the Equipment Notes and on
the Deposits relating to a Trust, taken together, will be sufficient to pay
accrued interest on the outstanding Certificates of such Trust. The
Liquidity Facilities will not cover interest on the Deposits.
(3) The Class C Certificates are expected to be issued in a private placement
after issuance of the Offered Certificates, the proceeds of which would be
used to acquire Series C Equipment Notes. See "Description of the
Certificates--Expected Issuance of Class C Certificates".
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THE OFFERING
Certificates Offered.......... - Class A-1 Certificates
- Class A-2 Certificates
- Class B Certificates
Each Class of Certificates will represent a
fractional undivided interest in a related
Trust
Use of Proceeds............... The proceeds from the sale of the Offered
Certificates will initially be held in escrow
and deposited with the Depositary. 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
acquisition by Continental of 21 new Boeing
aircraft.
Expected Issuance of Class C
Certificates................ Continental expects to privately place Class
C Certificates after issuance of the Class
A-1, A-2 and B Certificates to a special
purpose entity funded by an asset-backed
commercial paper conduit. If the expected
private placement does not occur, Continental
intends to arrange for the sale of Class C
Certificates in another transaction. In such
case, Continental has the option to cause a
special purpose subsidiary of Continental to
purchase the Class C Certificates. The terms
of the Class C Certificates actually issued
may vary from the expected terms described in
this Prospectus Supplement. The issuance of
the Class C Certificates is subject to
receipt of written confirmation from Moody's
and Standard & Poor's that the terms of the
Class C Certificates will not result in a
withdrawal, suspension or downgrading of the
ratings of the Class A-1, A-2 or B
Certificates.
If the Class C Certificates are not issued by
December 31, 2001, Continental will cause to
be distributed to the Class A-1
Certificateholders or Class B
Certificateholders (or both) by such date a
portion of the escrowed Deposits held for
them, together with accrued and unpaid
interest and a Deposit Make-Whole Premium.
Such distribution will be in an amount
sufficient to obtain written confirmation
from Moody's and Standard & Poor's that, upon
effectiveness of such distribution, the
ratings of the Class A-1, A-2 and B
Certificates will not be withdrawn, suspended
or downgraded due to the failure to issue
Class C Certificates.
The escrowed Deposits held for the
Certificateholders may not be used to
purchase any Equipment Notes unless either
(x) the Class C Certificates have been issued
and concurrently with any purchase of Series
A-1, A-2 and B Equipment Notes there is a
purchase of Series C Equipment Notes or (y) a
portion of the escrowed Deposits have been
distributed and the confirmations of the
Rating Agencies described above have been
obtained.
Subordination Agent, Trustee,
Paying Agent and Loan
Trustee..................... Wilmington Trust Company
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Escrow Agent.................. First Security Bank, National Association
Depositary....................
Liquidity Provider for Offered
Certificates................ Landesbank Hessen-Thuringen Girozentrale
Trust Property................ The property of each Trust will include:
- Equipment Notes acquired by such Trust.
- All monies receivable under the Liquidity
Facility for such Trust.
- Funds from time to time deposited with the
Trustee in accounts relating to such
Trust.
Regular Distribution Dates.... June 15 and December 15, commencing on
December 15, 2001.
Record Dates.................. The fifteenth day preceding the related
Distribution Date.
Distributions................. The Trustee will distribute all payments of
principal, premium (if any) and interest
received on the Equipment Notes held in each
Trust to the holders of the Certificates of
such Trust, subject to the subordination
provisions applicable to the Certificates.
Scheduled payments of principal and interest
made on the Equipment Notes will be
distributed on the applicable Regular
Distribution Dates.
Payments of principal, premium (if any) and
interest made on the Equipment Notes
resulting from any early redemption or
purchase of such Equipment Notes will be
distributed on a special distribution date
after not less than 15 days' notice to
Certificateholders.
Subordination................. Distributions on the Certificates will be
made in the following order:
- First, to the holders of the Class A-1 and
Class A-2 Certificates.
- Second, to the holders of the Class B
Certificates.
- Third, to the holders of the Class C
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 will be
entitled to direct the Loan Trustee under
such Indenture in taking action as long as no
Indenture Default is continuing thereunder.
If an Indenture Default is continuing,
subject to certain conditions, the
"Controlling Party" will direct the Loan
Trustees (including in exercising remedies,
such as accelerating
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such Equipment Notes or foreclosing the lien
on the Aircraft securing such Equipment
Notes).
The Controlling Party will be:
- The Class A-1 Trustee or Class A-2
Trustee, whichever represents the Class
with the larger principal amount of
Certificates outstanding at the time that
the Indenture Default occurs.
- Upon payment of final distributions to the
holders of such larger Class, the other of
the Class A-1 Trustee or Class A-2
Trustee.
- Upon payment of final distributions to the
holders of Class A-1 and A-2 Certificates,
the Class B Trustee.
- Upon payment of final distributions to the
holders of Class B Certificates, the Class
C Trustee.
- Under certain circumstances, and
notwithstanding the foregoing, the
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 or modify lease rental payments for
such Aircraft below a specified threshold.
Right to Buy Other Classes of
Certificates................ If Continental is in bankruptcy or certain
other specified events have occurred, the
Certificateholders may have the right to buy
certain other Classes of Certificates on the
following basis:
- If the Class A-1 or Class A-2
Certificateholders are then represented by
the Controlling Party, the
Certificateholders of such other Class
will have the right to purchase all of
such Class of Certificates represented by
the Controlling Party.
- The Class B Certificateholders will have
the right to purchase all of the Class A-1
and Class A-2 Certificates.
- The Class C Certificateholders will have
the right to purchase all of the Class
A-1, Class A-2 and Class B Certificates.
The purchase price in each case described
above will be the outstanding balance of the
applicable Class of Certificates plus accrued
and unpaid interest.
Liquidity Facilities.......... Under the Liquidity Facility for each Offered
Certificate Trust, the Offered Certificate
Liquidity Provider will, if necessary, make
advances in an aggregate amount sufficient to
pay interest on the applicable Certificates
on up to three successive semiannual Regular
Distribution Dates at the applicable interest
rate for such Certificates. Continental
expects that a Liquidity
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Facility will be provided for the Class C
Trust, under which the Class C Liquidity
Provider will, if necessary, make advances to
pay interest on the Class C Certificates at
the applicable rate for such Certificates,
subject to certain limitations. The Liquidity
Facilities cannot be used to pay any other
amount in respect of the Certificates and
will not cover interest payable on amounts
held in escrow as Deposits with the
Depositary.
Notwithstanding the subordination provisions
applicable to the Certificates, the holders
of the Certificates to be issued by each
Trust will be entitled to receive and retain
the proceeds of drawings under the Liquidity
Facility for such Trust.
Upon each drawing under any Liquidity
Facility to pay interest on the Certificates,
the Subordination Agent will reimburse the
applicable Liquidity Provider for the amount
of such drawing, subject to certain limits in
the case of the expected Class C Liquidity
Facility. Such reimbursement obligation and
all interest, fees and other amounts owing to
the Liquidity Provider under each Liquidity
Facility and certain other agreements will
rank equally with comparable obligations
relating to the other Liquidity Facilities
and, subject to certain limits in the case of
the expected Class C Liquidity Facility, will
rank senior to the Certificates in right of
payment.
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 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, variations in the
terms of each Aircraft financing or other
reasons. See "Description of the
Certificates--Obligation to Purchase
Equipment Notes". If any funds remain as
Deposits with respect to any 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
but without premium, to the
Certificateholders of such Trust after at
least 15 days' prior written notice. See
"Description of the Deposit
Agreements--Unused Deposits".
If the Class C Certificates have not been
issued by December 31, 2001, Continental will
cause to be distributed to the Class A-1
Certificateholders or Class B
Certificateholders
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(or both) by such date a portion of the
Deposits held for them, together with accrued
and unpaid interest thereon and a Deposit
Make-Whole Premium. Such distribution will be
in an amount sufficient to obtain written
confirmation from Moody's and Standard &
Poor's that, upon effectiveness of such
distribution, the ratings of the Class A-1,
A-2 and B Certificates will not be withdrawn,
suspended or downgraded due to failure to
issue Class C Certificates. See "Description
of the Certificates--Expected Issuance of
Class C Certificates".
Obligation to Purchase
Equipment Notes............... The Trustees will be obligated to purchase
the Equipment Notes issued with respect to
each Aircraft pursuant to the Note Purchase
Agreement. Continental may enter into a
leveraged lease financing or a secured debt
financing with respect to each Aircraft
pursuant to forms of financing agreements
attached to the Note Purchase Agreement.
However, the terms of the financing
agreements entered into may differ from the
forms of such agreements described in this
Prospectus Supplement. In the case of a
Leased Aircraft, this is because a third
party--the Owner Participant--will provide a
portion of the financing of the Aircraft and
may request changes. In addition, the
purchaser of Class C Certificates may request
changes to the forms of financing agreements
attached to the Note Purchase Agreement.
Although such changes are permitted, under
the Note Purchase Agreement, the terms of
such financing agreements must (a) contain
the Mandatory Document Terms set forth in the
Note Purchase Agreement and (b) not vary the
Mandatory Economic Terms for the Offered
Certificates set forth in the Note Purchase
Agreement. In addition, Continental must
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 Certificates.
It is a condition to the Trustees' obligation
to purchase Equipment Notes relating to any
Aircraft that either (x) the Class C
Certificates shall have been issued and
Series C Equipment Notes relating to such
Aircraft shall be concurrently purchased or
(y) a portion of the Deposits for the Class
A-1 Certificateholders or Class B
Certificateholders (or both) shall have been
distributed and a confirmation of the Rating
Agencies relating to the Offered Certificates
shall have been obtained. 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".
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Equipment Notes
(a) Issuer.................. Leased Aircraft. If Continental leases an
Aircraft, the related Equipment Notes will be
issued by a financial institution, acting as
Owner Trustee. The Owner Trustee will not be
individually liable for such Equipment Notes.
However, Continental's scheduled rental
obligations under the related Lease will be
in amounts sufficient to pay scheduled
payments on such Equipment Notes.
Owned Aircraft. If Continental purchases an
Aircraft, the related Equipment Notes will be
issued by Continental.
(b) Interest................ The Equipment Notes held in each 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 June 15 and December 15 of each
year, commencing on the first such date after
issuance of such Equipment Notes. Interest is
calculated on the basis of a 360-day year
consisting of twelve 30-day months.
(c) Principal............... Amortizing Notes. Principal payments on the
Series A-1 and Series B Equipment Notes are
scheduled on June 15 and December 15 in
certain years, commencing on .
Bullet Maturity Notes. The entire principal
amount of the Series A-2 Equipment Notes is
scheduled to be paid on June 15, 2011.
(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, but without
any premium.
Optional Redemption. The issuer of the
Equipment Notes with respect to an Aircraft
may elect to redeem them prior to maturity.
The redemption price in such case will be the
unpaid principal amount of such Equipment
Notes, together with accrued interest plus,
in the case of the Equipment Notes held in
the Offered Certificate Trusts, a Make-Whole
Premium. See "Description of the Equipment
Notes--Redemption".
Purchase by Owner. In the case of a Leased
Aircraft, if a Lease Event of Default is
continuing, the applicable Owner Trustee or
Owner Participant may elect to purchase all
of the Equipment Notes with respect to such
Aircraft, subject to the terms of the
applicable Leased Aircraft Indenture.
The purchase price in such case will be the
unpaid principal amount of such Equipment
Notes, together with accrued interest, but
without any premium (provided that, in the
case of the Equipment Notes held in the
Offered Certificate Trusts, a Make-Whole
Premium will be payable under certain
circumstances specified in the Leased
Aircraft Indenture). In
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the case of an Owned Aircraft, if an
Indenture Default exists Continental will
have no comparable right to purchase the
Equipment Notes.
(e) Security................ The Equipment Notes issued with respect to
each Aircraft will be secured by a security
interest in such Aircraft and, in the case of
each Leased Aircraft, in the related Owner
Trustee's rights under the Lease with respect
to such Aircraft (with certain limited
exceptions).
The Equipment Notes issued in respect of an
Aircraft will not be secured by any other
Aircraft or Leases. This means that any
excess proceeds from the sale of an Aircraft
or other exercise of remedies with respect to
such Aircraft will not be available to cover
any shortfall with respect to any other
Aircraft.
There will not be cross-default provisions in
the Indentures or in the Leases. This means
that if the Equipment Notes issued with
respect to one or more Aircraft are in
default and the Equipment Notes issued with
respect to the remaining Aircraft are not in
default, no remedies will be exercisable with
respect to the remaining Aircraft.
(f) Section 1110
Protection.............. Continental's outside counsel will provide
its opinion to the Trustees that the benefits
of Section 1110 of the U.S. Bankruptcy Code
will be available with respect to the
Equipment Notes.
Certain Federal Income Tax
Consequences................ Each Certificate Owner generally should
report on its federal income tax return its
pro rata share of income from the relevant
Deposits and income from the Equipment Notes
and other property held by the relevant
Trust. See "Certain U.S. Federal Income Tax
Consequences".
Certain ERISA
Considerations................ Each person who acquires a Certificate will
be deemed to have represented that either:
(a) no employee benefit plan assets have been
used to purchase such Certificate or (b) the
purchase and holding of such Certificate are
exempt from the prohibited transaction
restrictions of the Employee Retirement
Income Security Act of 1974 and the Internal
Revenue Code of 1986 pursuant to one or more
prohibited transaction statutory or
administrative exemptions. See "Certain ERISA
Considerations".
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 A-1.......................... Aa3 AA+
Class A-2.......................... Aa3 AA+
Class B............................ A2 AA-
A rating is not a recommendation to purchase,
hold or sell Certificates, since such rating
does not address market price or
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suitability for a particular investor. There
can be no assurance that such ratings will
not be lowered or withdrawn by a Rating
Agency.
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
Provider for the Offered Certificates... Short Term.......................... P-1 A-1+
Liquidity Provider Rating..... The Liquidity Provider for the Offered
Certificates meets the Threshold Rating
requirement.
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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, 2000, 1999 and 1998
are derived from the audited consolidated financial statements of Continental
including the notes thereto incorporated by reference in the Prospectus and
should be read in conjunction with those financial statements. The following
selected consolidated financial data for the years ended December 31, 1997 and
1996 are derived from the selected financial data contained in Continental's
Annual Report on Form 10-K for the year ended December 31, 2000, incorporated by
reference in the Prospectus, and the audited consolidated financial statements
of Continental for the years ended December 31, 1997 and 1996 and should be read
in conjunction therewith.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN MILLIONS OF DOLLARS, EXCEPT OPERATING DATA,
PER SHARE DATA AND RATIOS)
FINANCIAL DATA--OPERATIONS:
Operating Revenue........................... $9,899 $8,639 $7,927 $7,194 $6,347
Operating Expenses.......................... 9,215 8,039(1) 7,226(2) 6,478 5,822(3)
------ ------ ------ ------ ------
Operating Income............................ 684 600 701 716 525
Nonoperating Income (Expense), net.......... (113) 198(4) (53) (76) (97)
------ ------ ------ ------ ------
Income before Income Taxes, Minority
Interest, Extraordinary Charges and
Cumulative Effect of Change in Accounting
Principles................................ 571 798(5) 648 640 428
Net Income.................................. $ 342 $ 455 $ 383 $ 385 $ 319
====== ====== ====== ====== ======
Earnings per Common Share................... $ 5.62 $ 6.54(6) $ 6.34 $ 6.65 $ 5.75
====== ====== ====== ====== ======
Earnings per Common Share Assuming
Dilution.................................. $ 5.45 $ 6.20(7) $ 5.02 $ 4.99 $ 4.17
====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges(8)....... 1.51x 1.80x 1.94x 2.07x 1.81x
====== ====== ====== ====== ======
OPERATING DATA(9):
Revenue passenger miles (millions)(10)...... 64,161 60,022 53,910 47,906 41,914
Available seat miles (millions)(11)......... 86,100 81,946 74,727 67,576 61,515
Passenger load factor(12)................... 74.5% 73.2% 72.1% 70.9% 68.1%
Breakeven passenger load factor(13)(14)..... 66.3% 64.7% 61.6% 60.1% 60.7%
Passenger revenue per available seat mile
(cents)(15)............................... 9.84 9.12 9.23 9.29 9.01
Operating cost per available seat mile
(cents)(14)(16)........................... 9.76 8.99 8.89 9.04 8.75
Average yield per revenue passenger mile
(cents)(17)............................... 13.20 12.45 12.79 13.11 13.22
Average length of aircraft flight (miles)... 1,159 1,114 1,044 967 896
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DECEMBER 31,
----------------
2000 1999
------ ------
(IN MILLIONS OF
DOLLARS)
FINANCIAL DATA--BALANCE SHEET:
ASSETS:
Cash, Cash Equivalents and Short-Term Investments......... $1,395 $1,590
Other Current Assets...................................... 1,064 1,016
Total Property and Equipment, Net......................... 5,163 4,173
Routes, Gates and Slots, Net.............................. 1,081 1,131
Other Assets, Net......................................... 498 313
------ ------
Total Assets........................................... $9,201 $8,223
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities....................................... $2,980 $2,775
Long-Term Debt and Capital Leases......................... 3,374 3,055
Deferred Credits and Other Long-Term Liabilities.......... 995 800
Continental-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Convertible Subordinated Debentures(18)................ 242 --
Redeemable Common Stock(19)............................... 450 --
Common Stockholders' Equity............................... 1,160 1,593
------ ------
Total Liabilities and Stockholders' Equity............. $9,201 $8,223
====== ======
- ------------
(1) 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.
(2) Includes a $122 million fleet disposition/impairment loss resulting from
Continental's decision to accelerate the retirement of certain jet and
turboprop aircraft.
(3) Includes a $128 million fleet disposition loss associated primarily with
Continental's decision to accelerate the replacement of certain jet
aircraft.
(4) Includes a $297 million gain on the sale of the Company's interest in
AMADEUS Global Travel Distribution S.A.
(5) 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.
(6) Reflects earnings per common share after cumulative effect of changes in
accounting principles. See Note (5) for a description of the changes in
accounting principles. Earnings per common share for the year ended
December 31, 1999 was $7.02 before the cumulative effect of such changes in
accounting principles.
(7) Reflects earnings per common share assuming dilution after cumulative
effect of changes in accounting principles. See Note (5) for a description
of the changes in accounting principles. Earnings per common share assuming
dilution for the year ended December 31, 1999 was $6.64 before the
cumulative effect of such changes in accounting principles.
(8) For purposes of calculating this ratio, earnings consist of income before
income taxes, minority interest, 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.
(9) Includes operating data for CMI, but does not include operating data for
Express's regional jet operations or turboprop operations.
(10) The number of scheduled miles flown by revenue passengers.
(11) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(12) Revenue passenger miles divided by available seat miles.
(13) 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, nonoperating items and other special items.
(14) Excludes a $81 million fleet disposition/impairment loss in 1999, a $122
million fleet disposition/impairment loss in 1998 and a $128 million fleet
disposition loss in 1996. See Notes (1), (2) and (3) for description of the
charges.
(15) Passenger revenue divided by available seat miles.
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(16) Operating expenses divided by available seat miles.
(17) The average revenue received for each mile a revenue passenger is carried.
(18) 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.
(19) 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
RISK FACTORS RELATING TO THE COMPANY
HIGH LEVERAGE AND SIGNIFICANT FINANCING NEEDS
Continental has a higher proportion of debt compared to its equity capital
than some of its principal competitors. In addition, Continental has less cash
resources than some of its principal competitors. A majority of Continental's
property and equipment is subject to liens securing indebtedness. Accordingly,
Continental may be less able than some of its competitors to withstand a
prolonged recession in the airline industry or respond as flexibly to changing
economic and competitive conditions.
As of December 31, 2000, Continental had:
-- approximately $3.7 billion (including current maturities) of
long-term debt and capital lease obligations.
-- approximately $1.9 billion of Continental-obligated mandatorily
redeemable preferred securities of trust, redeemable common stock and
common stockholders' equity.
-- approximately $1.4 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, 2000, Continental had
agreed to acquire or lease a total of 86 Boeing jet aircraft through 2005.
Continental anticipates taking delivery of 35 Boeing jet aircraft in 2001.
Continental also has options for an additional 105 aircraft (exercisable subject
to certain conditions). The estimated aggregate cost of Continental's firm
commitments for Boeing aircraft is approximately $4 billion. We currently plan
to finance our new Boeing aircraft with a combination of enhanced pass through
trust certificates, lease equity and other third-party financing, subject to
availability and market conditions. As of December 31, 2000, Continental had
approximately $890 million in financing arranged for such Boeing deliveries.
Continental also has commitments or letters of intent for backstop financing for
approximately 23% of the anticipated remaining acquisition cost of future Boeing
deliveries. In addition, at December 31, 2000, Continental had firm commitments
to purchase 26 spare engines related to the new Boeing aircraft for
approximately $158 million, which will be deliverable through March 2005.
As of December 31, 2000, Express, Continental's subsidiary that operates
regional jet and turboprop aircraft, had firm commitments for 178 Embraer
regional jets with options for an additional 100 Embraer regional jets
exercisable through 2007. Express anticipates taking delivery of 41 regional
jets in 2001. As of December 31, 2000, the estimated cost of Continental's firm
commitments for Embraer regional jets was approximately $3 billion. Neither
Express nor Continental will have any obligation to take any such firm Embraer
aircraft that are not financed by a third party and leased to Continental.
For 2000, cash expenditures under operating leases relating to aircraft
approximated $864 million, compared to $758 million for 1999, and approximated
$353 million relating to facilities and other rentals compared to $328 million
in 1999. Continental expects that its operating lease expenses for 2001 will
increase over 2000 amounts.
Additional financing will be needed to satisfy Continental's capital
commitments. We cannot predict whether sufficient financing will be available
for capital expenditures not covered by firm financing commitments.
CONTINENTAL'S HISTORICAL OPERATING RESULTS
Continental has recorded positive net income in each of the last six years.
However, Continental experienced significant operating losses in the previous
eight years. Historically, the financial results of the U.S. airline industry
have been cyclical. We cannot predict whether current industry conditions will
continue.
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SIGNIFICANT COST OF AIRCRAFT FUEL
Fuel costs constitute a significant portion of Continental's operating
expenses. Fuel costs were approximately 15.6% of operating expenses for the year
ended December 31, 2000, and 9.7% for the year ended December 31, 1999
(excluding fleet disposition/impairment losses).
Fuel prices and supplies are influenced significantly by international
political and economic circumstances. We enter 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. Our fuel hedging strategy could result in
Continental not fully benefiting from certain fuel price declines. If a fuel
supply shortage were to arise from OPEC production curtailments, a disruption of
oil imports or otherwise, higher fuel prices or a reduction of scheduled airline
service could result. Significant changes in fuel costs or continuation of
current high jet fuel prices would materially affect Continental's operating
results.
LABOR COSTS
Labor costs constitute a significant percentage of Continental's total
operating costs, and Continental experiences competitive pressure to increase
wages and benefits. In July 2000, Continental completed a three-year program
bringing all employees to industry standard wages and also announced and began
to implement 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) Company matching contributions and additional past service
retirement credit for most senior employees.
RISK FACTORS RELATING TO THE AIRLINE INDUSTRY
COMPETITION AND INDUSTRY CONDITIONS
The airline industry is highly competitive and susceptible to price
discounting. Carriers have used discount fares to stimulate traffic during
periods of slack demand, to generate cash flow and to increase market share.
Some of Continental's competitors have substantially greater financial resources
or lower cost structures than Continental.
Airline profit levels are highly sensitive to changes in fuel costs, fare
levels and passenger demand. Passenger demand and fare levels have in the past
been influenced by, among other things, the general state of the economy (both
internationally and domestically), international events, airline capacity and
pricing actions taken by carriers. Domestically, from 1990 to 1993, the weak
U.S. economy, turbulent international events and extensive price discounting by
carriers contributed to unprecedented losses for U.S. airlines. In the last
several years, the U.S. economy has improved and excessive price discounting has
abated. We cannot predict the extent to which these industry conditions will
continue.
In recent years, the major U.S. airlines have sought to form marketing
alliances with other U.S. and foreign air carriers. Such alliances generally
provide for "code-sharing", frequent flyer reciprocity, coordinated scheduling
of flights of each alliance member to permit convenient connections and other
joint marketing activities. Such arrangements permit an airline to market
flights operated by other alliance members as its own. This increases the
destinations, connections and frequencies offered by the airline, which provide
an opportunity to increase traffic on such airline's segment of flights
connecting with alliance partners. The Northwest Alliance is an example of such
an arrangement, and Continental has existing alliances with numerous other air
carriers. Other major U.S. airlines have alliances or planned alliances more
extensive than Continental's. We cannot predict the extent to which Continental
will benefit from its alliances or be disadvantaged by competing alliances.
In recent years, and particularly since its deregulation in 1978, the U.S.
airline industry has also undergone substantial consolidation, and it may in the
future undergo additional consolidation. For example, in May 2000, United, the
nation's largest commercial airline, announced its agreement to acquire US
Airways, the nation's sixth largest commercial airline, subject to regulatory
approvals and other conditions. In addition, in January 2001, American announced
agreements to acquire the majority of Trans World Airlines, Inc.'s
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assets and some of US Airways' assets, subject to regulatory approvals and other
conditions. American's acquisition of the TWA assets was approved by the
bankruptcy court supervising TWA's bankruptcy case in March 2001. 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 anticipates it will
continue to have, discussions with third parties regarding strategic
alternatives. The impact on Continental of these pending transactions and any
additional consolidation within the U.S. airline industry cannot be predicted at
this time.
REGULATORY MATTERS
Airlines are subject to extensive regulatory and legal compliance
requirements that engender significant costs. In the last several years, the
Federal Aviation Administration ("FAA") has issued a number of directives and
other regulations relating to the maintenance and operation of aircraft that
have required significant expenditures. Such FAA requirements cover, among other
things, retirement of older aircraft, security measures, collision avoidance
systems, airborne windshear avoidance systems, noise abatement, commuter
aircraft safety and increased inspections and maintenance procedures to be
conducted on older aircraft. We expect to continue incurring expenses in
complying with the FAA's regulations.
Additional laws, regulations, taxes and airport rates and charges have been
proposed from time to time that could significantly increase the cost of airline
operations or reduce revenues. For instance, "passenger bill of rights"
legislation was introduced in Congress that would, among other things, require
the payment of compensation to passengers as a result of certain delays, and
limit the ability of carriers to prohibit or restrict usage of certain tickets
in manners currently prohibited or restricted.
The DOT has proposed rules that would significantly limit major carriers'
ability to compete with new entrant carriers. If adopted, these measures could
have the effect of raising ticket prices, reducing revenue and increasing costs.
Restrictions on the ownership and transfer of airline routes and takeoff and
landing slots have also been proposed. The ability of U.S. carriers to operate
international routes is subject to change because the applicable arrangements
between the United States and foreign governments may be amended from time to
time, or because appropriate slots or facilities are not made available. We
cannot provide assurance that laws or regulations enacted in the future will not
adversely affect us.
RISK FACTORS RELATING TO THE CERTIFICATES AND THE OFFERING
APPRAISALS AND REALIZABLE VALUE OF AIRCRAFT
Three independent appraisal and consulting firms have prepared appraisals
of the Aircraft. Letters summarizing such appraisals are annexed to this
Prospectus Supplement as Appendix II. Such appraisals are based on varying
assumptions and methodologies, which differ among the appraisers, and were
prepared without physical inspection of the Aircraft. Appraisals that are based
on other assumptions and methodologies may result in valuations that are
materially different from those contained in such appraisals. See "Description
of the Aircraft and the Appraisals--The Appraisals".
An appraisal is only an estimate of value. It does not indicate the price
at which an Aircraft may be purchased from the Aircraft manufacturer. Nor should
an appraisal be relied upon as a measure of realizable value. The proceeds
realized upon a sale of any Aircraft may be less than its appraised value. In
particular, the appraisals of the Aircraft are estimates of values as of future
delivery dates. The value of an Aircraft if remedies are exercised under the
applicable Indenture will depend on market and economic conditions, the supply
of similar aircraft, the availability of buyers, the condition of the Aircraft
and other factors. Accordingly, we 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.
PRIORITY OF DISTRIBUTIONS; SUBORDINATION
Certain Classes of Certificates are subordinated to other Classes in rights
to distributions. See "Description of the Certificates--Subordination".
Consequently, a payment default under any Equipment
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Note or a Triggering Event may cause the distribution to more senior Classes of
Certificates of payments received from payment on one or more junior series of
Equipment Notes. If this should occur, the interest accruing on the remaining
Equipment Notes would be less than the interest accruing on the remaining
Certificates. This is because the remaining Certificates of the junior Classes
accrue interest at a higher rate than the remaining Equipment Notes, which
include series applicable to the senior Classes bearing interest at a lower
rate. As a result of this possible interest shortfall, the holders of one or
more junior Classes of Certificates may not receive the full amount due to them
after a payment default under any Equipment Note even if all Equipment Notes are
eventually paid in full.
CONTROL OVER COLLATERAL; SALE OF COLLATERAL
If an Indenture Default is continuing, subject to certain conditions, the
Loan Trustee under such Indenture will be directed by the "Controlling Party" in
exercising remedies under such Indenture, including accelerating the applicable
Equipment Notes or foreclosing the lien on the Aircraft securing such Equipment
Notes. See "Description of the Certificates--Indenture Defaults and Certain
Rights Upon an Indenture Default".
The Controlling Party will be:
-- The Class A-1 Trustee or Class A-2 Trustee, whichever represents the
Class with the larger principal amount of Certificates outstanding at
the time that the Indenture Default occurs.
-- Upon payment of final distributions to the holders of such larger
Class, the other of the Class A-1 Trustee or Class A-2 Trustee.
-- Upon payment of final distributions to the holders of Class A-1 and
A-2 Certificates, the Class B Trustee.
-- Upon payment of final distributions to the holders of Class B
Certificates, the Class C Trustee.
-- Under certain circumstances, and notwithstanding the foregoing, the
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, any Owner Trustee, any Owner Participant
or any Trustee.
RATINGS OF THE OFFERED CERTIFICATES
It is a condition to the issuance of the Offered Certificates that the
Class A-1 and A-2 Certificates be rated not lower than Aa3 by Moody's and AA+ by
Standard & Poor's and the Class B Certificates be rated not lower than A2 by
Moody's and AA- by Standard & Poor's. A rating is not a recommendation to
purchase, hold or sell Certificates, since such rating does not address market
price or suitability for a particular investor. A rating may not remain for any
given period of time and may be lowered or withdrawn entirely by a Rating Agency
if in its judgment circumstances in the future (including the downgrading of
Continental, the Depositary or a Liquidity Provider) so warrant.
The rating of the Offered Certificates is based primarily on the default
risk of the Equipment Notes and the Depositary, the availability of the
Liquidity Facility for the benefit of holders of the Offered Certificates, the
collateral value provided by the Aircraft relating to the Equipment Notes and
the subordination provisions applicable to the Certificates. Standard & Poor's
has indicated that its rating applies to a unit consisting of Offered
Certificates representing the Trust Property and Escrow Receipts initially
representing undivided interests in certain rights to $708,475,000 of Deposits.
Amounts deposited under the Escrow Agreements are
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not property of Continental and are not 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.
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 but
without any premium, to the Certificateholders of such Trust. Since the maximum
principal amount of Equipment Notes may not be issued with respect to an
Aircraft and, in any such case, the Series B Equipment Notes are more likely not
to be issued in the maximum principal amount as compared to the Series A-1 and
A-2 Equipment Notes, it is more likely that a distribution of unused Deposits
will be made with respect to the Class B Certificates as compared to the other
Offered Certificates. See "Description of the Deposit Agreements--Unused
Deposits".
If the Class C Certificates have not been issued by December 31, 2001,
Continental will cause to be distributed to the Class A-1 Certificateholders or
Class B Certificateholders (or both) by such date a portion of the Deposits held
for them, together with accrued and unpaid interest thereon and a Deposit
Make-Whole Premium. Such distribution will be in an amount sufficient to obtain
written confirmation from Moody's and Standard & Poor's that, upon effectiveness
of such distribution, the ratings of the Class A-1, A-2 and B Certificates will
not be withdrawn, suspended or downgraded due to failure to issue Class C
Certificates. See "Description of the Certificates--Expected Issuance of Class C
Certificates" and "Description of the Deposit Agreements--Distribution if Class
C Certificates Not Issued".
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.
USE OF PROCEEDS
The proceeds from the sale of the Offered Certificates will be used to
purchase Equipment Notes during the Delivery Period issued, at Continental's
election, either (i) by each Owner Trustee to finance a portion of the purchase
price of the Leased Aircraft or (ii) by Continental to finance a portion of the
purchase price of the Owned Aircraft. Prior to being used to purchase Equipment
Notes, the proceeds from the sale of the Offered Certificates of each Trust will
be deposited with the Depositary on behalf of the applicable Escrow Agent for
the benefit of the Certificateholders of such Trust.
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THE COMPANY
Continental Airlines, Inc. ("Continental" or the "Company") is a major
United States air carrier engaged in the business of transporting passengers,
cargo and mail. Continental is the fifth largest United States airline (as
measured by revenue passenger miles in 2000) and, together with its wholly owned
subsidiaries, Continental Express, Inc. ("Express") and Continental Micronesia,
Inc. ("CMI"), serves 230 airports worldwide. As of January 19, 2001, Continental
flew to 136 domestic and 94 international destinations and offered additional
connecting service through alliances with domestic and foreign carriers.
Continental directly serves 16 European cities, 7 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.
DOMESTIC OPERATIONS
Continental operates its domestic route system primarily through its hubs
at Newark International Airport ("Newark"), George Bush Intercontinental Airport
("Bush Intercontinental") in Houston and Hopkins International Airport ("Hopkins
International") in Cleveland. The Company's hub system allows it to transport
passengers between a large number of destinations with substantially more
frequent service than if each route were served directly. The hub system also
allows Continental to add service to a new destination from a large number of
cities using only one or a limited number of aircraft. As of January 19, 2001,
Continental operated 55% of the average daily jet departures from Newark, 78% of
the average daily jet departures from Bush Intercontinental, and 50% of the
average daily jet departures from Hopkins International (in each case excluding
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.
CONTINENTAL EXPRESS
Continental's jet service at each of its domestic hub cities is coordinated
with Express, which operates new-generation regional jets and turboprop aircraft
under the name "Continental Express". The regional jets average two years of age
and seat either 37 or 50 passengers. The turboprop aircraft average
approximately nine years of age and seat 64 or fewer passengers.
As of January 19, 2001, Express served 40 destinations from Newark (35 by
regional jet), 62 destinations from Bush Intercontinental (46 by regional jet)
and 59 destinations from Hopkins International (40 by regional jet). In
addition, commuter feed traffic is currently provided by other code-sharing
partners.
Continental believes Express's regional jet and turboprop operations
complement Continental's jet operations by allowing more frequent service to
small cities than could be provided economically with conventional jet aircraft
and by carrying traffic that connects onto Continental's jets. In many cases,
Express (and Continental) compete for such connecting traffic with commuter
airlines owned by or affiliated with other major airlines operating out of the
same or other cities. Continental believes that Express's new regional jets
provide greater comfort and enjoy better customer acceptance than its turboprop
aircraft. The regional jets also allow Express to serve certain routes that
cannot be served by turboprop aircraft. Continental anticipates that Express's
fleet will be entirely comprised of regional jets by 2004.
DOMESTIC CARRIER ALLIANCES
Continental has entered into and continues to develop alliances with
domestic carriers. In 1998, the Company entered into a long-term global alliance
with Northwest Airlines, Inc. ("Northwest Airlines"). Contemporaneously with the
commencement of the Northwest Alliance, Northwest Airlines Corporation
("Northwest") purchased from a stockholder of the Company approximately 8.7
million shares of Class A common stock, par value $.01 per share ("Class A
common stock"), of the Company. On January 22, 2001, the Company repurchased
approximately 6.7 million of such shares for $450 million, and reclassified all
issued shares of Class A common stock into Class B common stock, par value $.01
per share ("Class B common
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stock"). At the same time, Continental and Northwest Airlines extended the term
of the Northwest Alliance through 2025, subject to earlier 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. Significant other joint
marketing activities are being undertaken, while preserving the separate
identities of the carriers. Northwest Airlines and Continental have also begun
to enter into joint contracts with major corporations and travel agents with the
objective of creating access to a broader product line encompassing the route
systems of both carriers. Continental has also entered into agreements to code
share with certain Northwest Airlines regional affiliates.
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. (doing business as CommutAir) and
American Eagle Airlines, Inc. Continental also 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 2000, approximately 38% of Continental's
jet operations, including CMI, were dedicated to international traffic. As of
January 19, 2001, the Company offered 152 weekly departures to 16 European
cities and marketed service to 31 other cities through code-sharing agreements.
Continental is one of the leading airlines providing service to Mexico and
Central America, serving more destinations there than any other United States
airline.
Continental's Newark hub is a significant international gateway. From
Newark, at January 19, 2001 Continental served 16 European cities, five Canadian
cities, six Mexican cities, four Central American cities, five South American
cities, ten Caribbean destinations, Tel Aviv and Tokyo. In addition, Continental
markets numerous other destinations through code-sharing arrangements with
foreign carriers. Continental recently inaugurated daily non-stop service
between Newark and Hong Kong, effective March 1, 2001 and announced that it will
begin daily non-stop service between Newark and London/ Stansted effective May
1, 2001 subject to governmental approval. In addition, Continental announced
that it would begin daily non-stop service between Newark and Buenos Aires,
Argentina effective December 1, 2001, subject to government approval.
The Company's Houston hub is the focus of its operations in Mexico and
Central America. As of January 19, 2001, 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. Express also serviced seven additional cities in Mexico by regional jets.
Continental flies to London, Montreal, Toronto, San Juan and Cancun from
its hub in Cleveland.
CONTINENTAL MICRONESIA
CMI is a United States-certificated international air carrier engaged in
the business of transporting passengers, cargo and mail in the western Pacific.
From its hub operations based on the island of Guam, CMI provides service to
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. Service to these Japanese cities and certain other
Pacific Rim destinations is subject to a variety of regulatory restrictions
limiting the ability of other carriers to service these markets.
CMI is the principal air carrier in the Micronesian Islands, where it
pioneered scheduled air service in 1968. CMI's route system is linked to the
United States market through 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.
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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.
Continental has implemented international code-sharing agreements with
Alitalia Linee Aeree Italiane, S.P.A. ("Alitalia"), Air China, Emirates (the
flag carrier of the United Arab Emirates), EVA Airways Corporation, an airline
based in Taiwan, Virgin Atlantic Airways ("Virgin"), Societe Air France ("Air
France"), and Compania Panamena de Aviacion, S.A., 49% of the common equity of
which is owned by Continental.
Certain of Continental's code-sharing agreements involve block-space
arrangements (pursuant to which the carriers agree to share capacity and bear
economic risk for blocks of seats on certain routes). 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 block-space arrangement with Alitalia was terminated effective
March 25, 2001. Continental and Air France are continuing to discuss terminating
certain portions of their alliance.
Most of Continental's larger U.S. competitors are members of global airline
groups involving multi-carrier marketing activities. Continental does not
currently have an agreement to join such a group, and it is likely that any
group formed by Continental in the future would be smaller than some of these
groups.
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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.
We are offering only the Class A-1, A-2 and B Certificates pursuant to this
Prospectus Supplement. We expect to privately place the Class C Certificates
described in this Prospectus Supplement at a later date, but only if we receive
written confirmation from Moody's and Standard & Poor's that the terms of the
Class C Certificates will not result in a withdrawal, suspension or downgrading
of the rating of the Class A-1, A-2 or B Certificates. You should consider all
references to Class C Certificates in this Prospectus Supplement to mean the
"Class C Certificates when issued" and all references to the Class C Trust to
mean the "Class C Trust when formed". Unless the Class C Certificates are
issued, no Series C Equipment Notes will be issued, and you should consider all
references to Series C Equipment Notes in this Prospectus Supplement to mean
"Series C Equipment Notes when issued".
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 the four Continental
Airlines 2001-1 Pass Through Trusts (the "Class A-1 Trust", the "Class A-2
Trust", the "Class B Trust", and the "Class C Trust", and collectively, the
"Trusts", and the Class A-1 Trust, the Class A-2 Trust and the Class B Trust,
collectively, the "Offered 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
A-1 Trust, the Class A-2 Trust, the Class B Trust and the Class C Trust are
referred to herein as the "Class A-1 Certificates", the "Class A-2
Certificates", the "Class B Certificates" and the "Class C Certificates", and
the Class A-1 Certificates, the Class A-2 Certificates and the Class B
Certificates are referred to, collectively, as the "Offered Certificates".
Each Certificate will represent a fractional undivided interest in the
Trust created by the Basic Agreement and the applicable Trust Supplement
pursuant to which such Certificate is issued. (Section 2.01) The Trust Property
of each Trust (the "Trust Property") will consist of:
-- Subject to the Intercreditor Agreement, Equipment Notes acquired
under the Note Purchase Agreement and issued, at Continental's
election in connection with the financing of each Aircraft during the
Delivery Period, either (a) on a nonrecourse basis by an Owner
Trustee in each separate leveraged lease transaction with respect to
each Leased Aircraft to finance a portion of the purchase
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price of such Leased Aircraft by the Owner Trustee, in which case the
applicable Leased Aircraft will be leased to Continental, or (b) on a
recourse basis by Continental in connection with each separate secured
loan transaction with respect to each Owned Aircraft to finance a portion
of the purchase price of such Owned Aircraft by Continental.
-- The rights of such Trust to acquire Equipment Notes under the Note
Purchase Agreement.
-- In the case of the Offered Certificate Trusts, 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).
-- All monies receivable under the Liquidity Facility for such Trust.
-- Funds from time to time deposited with the Trustee in accounts
relating to such Trust.
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, any of the Loan Trustees or Owner
Trustees in their individual capacities, any Owner Participant or any affiliate
of any thereof.
Pursuant to the Escrow Agreement applicable to each 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 a Trust, except for the right to request withdrawals for
the purchase of Equipment Notes, will not constitute Trust Property of such
Trust.
EXPECTED ISSUANCE OF CLASS C CERTIFICATES
Continental expects to privately place Class C Certificates after issuance
of the Offered Certificates. If the expected private placement does not occur,
Continental intends to arrange for the sale of Class C Certificates in another
transaction. In such case, Continental has the option to cause a special purpose
subsidiary of Continental to purchase the Class C Certificates. The terms of the
Class C Certificates actually issued may vary from the expected terms described
in this Prospectus Supplement. The issuance of the Class C Certificates is
subject to receipt of written confirmation from the Rating Agencies that the
terms of the Class C Certificates will not result in a withdrawal, suspension or
downgrading of the ratings of any Class of Offered Certificates.
Continental expects to privately place up to $192,283,000 face amount of
Class C Certificates with a special purpose entity funded by an asset-backed
commercial paper conduit. Citibank, N.A. has committed, subject to certain terms
and conditions, to provide such entity with funding for such purchase, to the
extent the proposed asset-backed commercial paper conduit funding is not
available to such entity. If such proposed transaction occurs, the Class C
Certificates would have an average life of approximately seven years and a final
expected distribution date approximately ten years after the issuance thereof.
The Series C Equipment Notes issued to the Class C Trust in such proposed
transaction would bear interest at a floating rate that may change every three
months. Interest on the Series C Equipment Notes would be payable quarterly, on
each Regular Distribution Date and on each March 15 and September 15. Principal
on the Series C Equipment Notes
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would be payable on March 15, June 15, September 15 and December 15 in certain
years. Regular distribution dates for the Class C Certificates would be March
15, June 15, September 15 and December 15 of each year. The proposed transaction
would contain certain typical provisions for the funding of a financial
instrument similar to the Class C Certificates by an asset-backed commercial
paper conduit. These provisions include an agreement by certain stand-by banks
or financial institutions to fund the Class C Certificates in lieu of the
asset-backed commercial paper conduit under certain circumstances. The proposed
transaction also provides that under certain limited circumstances, which
Continental believes are unlikely to occur, Continental may be required to
provide additional collateral for the Class C Certificates. Such requirement to
post additional collateral, which could be met in its entirety by pledging
non-aircraft assets, would not benefit the Offered Certificates, since the
proceeds of such collateral would not be subject to the subordination provisions
of the Intercreditor Agreement. Continental believes the proposed transaction
provides significant savings versus alternative sources of financing.
The Series C Equipment Notes issued with respect to any Aircraft would be
redeemable, at the option of the issuer, at any time without the redemption of
the other Equipment Notes issued with respect to such Aircraft in connection
with a refinancing of the Series C Equipment Notes. Any such redemption would be
subject to Continental obtaining written confirmation from the Rating Agencies
that such redemption will not result in a withdrawal, suspension or downgrading
of the ratings of any Class of Offered Certificates.
The Class C Trust would be entitled to the benefit of a liquidity facility
similar to the Offered Certificate Liquidity Facilities (the "Series C Liquidity
Facility" and, together with the Offered Certificate Liquidity Facilities, the
"Liquidity Facilities"). See "Description of the Liquidity Facilities". Under
the Series C Liquidity Facility, the liquidity provider (the "Series C Liquidity
Provider" and, together with the Offered Certificate Liquidity Provider, the
"Liquidity Providers") would, if necessary, make advances in an aggregate amount
expected to be sufficient to pay interest on the Class C Certificates on up to
six quarterly distribution dates for the Class C Certificates. As with the other
Liquidity Facilities, upon each drawing under any Series C Liquidity Facility to
pay interest on the Class C Certificates, the Subordination Agent would
reimburse the Series C Liquidity Provider for the amount of such drawing, except
that the Series C Liquidity Provider may be required to limit its rights of
reimbursement to a specified amount or subordinate a portion of its claims for
reimbursement to the claims of the holders of the Offered Certificates under the
Intercreditor Agreement so as to obtain the Rating Agencies' confirmation
referred to above for the issuance of the Class C Certificates. Such
reimbursement obligation and all interest, fees and other amounts owing to the
Series C Liquidity Provider under the Series C Liquidity Facility and certain
other agreements would (unless the Series C Liquidity Provider is otherwise
required to agree) rank equally with comparable obligations relating to the
other Liquidity Facilities and would (unless the Series C Liquidity Provider is
otherwise required to agree) rank senior to the Certificates in right of
payment. Although the amount available to be drawn under the Series C Liquidity
Facility would not be fixed because of the floating rate of interest that would
be applicable to the Class C Certificates, the reimbursement for drawings by all
Liquidity Providers that ranks senior to the Certificates in right of payment
may not exceed 10% of the Assumed Aircraft Value 18 months after the first
unreimbursed drawing on the Liquidity Facilities.
If the Class C Certificates are not issued by December 31, 2001,
Continental will cause to be distributed to the Class A-1 Certificateholders or
Class B Certificateholders (or both) by such date a portion of the Deposits held
for them, together with accrued and unpaid interest and a Deposit Make-Whole
Premium. Such distribution will be in an amount sufficient to obtain written
confirmation from Moody's and Standard & Poor's that, upon effectiveness of such
distribution, the ratings of the Class A-1, A-2 and B Certificates will not be
withdrawn, suspended or downgraded due to the failure to issue Class C
Certificates. See "Description of the Deposit Agreements--Distribution if Class
C Certificates Not Issued". The Deposits held for the Certificateholders may not
be used to purchase any Equipment Notes unless either (x) the Class C
Certificates have been issued and concurrently with any purchase of Series A-1,
A-2 and B Equipment Notes there is a purchase of Series C Equipment Notes or (y)
a portion of the Deposits have been distributed and the confirmations of the
Rating Agencies described in this paragraph have been obtained. No assurance can
be given that the Class C Certificates will be issued or that the committed
funding described above will be available.
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SUBORDINATION
The subordination terms of the Certificates vary depending upon whether a
"Triggering Event" has occurred. "Triggering Event" means (x) the occurrence of
an Indenture Default under all Indentures resulting in a PTC Event of Default
with respect to the most senior Class of Certificates then outstanding, (y) the
acceleration of all of the outstanding Equipment Notes (provided that during the
Delivery Period the aggregate principal amount thereof exceeds $300 million) or
(z) certain bankruptcy or insolvency events involving Continental.
BEFORE A TRIGGERING EVENT
On each Regular Distribution Date or Special Distribution Date (each, a
"Distribution Date"), so long as no Triggering Event shall have occurred
(whether or not continuing), all payments received by the Subordination Agent in
respect of Equipment Notes and certain other payments under the related
Indenture will be distributed under the Intercreditor Agreement in the following
order:
-- To the Liquidity Providers to the extent required to pay the
Liquidity Expenses.
-- To the Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations.
-- To the Liquidity Providers to the extent required to pay or reimburse
the Liquidity Providers for certain Liquidity Obligations (other than
amounts payable pursuant to the two preceding clauses) and, if
applicable, to replenish each Cash Collateral Account up to the
Required Amount.
-- To the trustee for the Class A-1 Trust (the "Class A-1 Trustee") and
the trustee for the Class A-2 Trust (the "Class A-2 Trustee") to the
extent required to pay Expected Distributions on the Class A-1
Certificates and the Class A-2 Certificates. If available funds are
insufficient to pay an Expected Distribution to each such Class in
full, available funds will be distributed to each of the Class A-1
Trustee and Class A-2 Trustee in the same proportion as such
Trustee's proportionate share of the aggregate amount of such
Expected Distributions.
-- To the trustee for the Class B Trust (the "Class B Trustee") to the
extent required to pay Expected Distributions on the Class B
Certificates.
-- To the trustee for the Class C Trust (the "Class C Trustee") to the
extent required to pay Expected Distributions on the Class C
Certificates.
-- If Class D Certificates have been issued (see "--Possible Issuance of
Class D Certificates") to the trustee for the Class D Trust (the
"Class D Trustee") to the extent required to pay "Expected
Distributions" (to be defined in a manner equivalent to the
definition for other Classes of Certificates) on the Class D
Certificates.
-- To the Subordination Agent and each Trustee for the payment of
certain fees and expenses.
AFTER A TRIGGERING EVENT
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed under the Intercreditor Agreement
in the following order:
-- To the Subordination Agent, any Trustee, any Certificateholder and
any Liquidity Provider to the extent required to pay Administration
Expenses.
-- To the Liquidity Providers to the extent required to pay the
Liquidity Expenses.
-- To the Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations.
-- To the Liquidity Providers to the extent required to pay the
outstanding amount of all Liquidity Obligations and, if applicable,
with respect to any particular Liquidity Facility, unless (x) less
than 65% of the aggregate outstanding principal amount of all
Equipment Notes are Performing
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Equipment Notes and a Liquidity Event of Default shall have occurred
and is continuing under such Liquidity Facility or (y) a Final
Drawing shall have occurred under such Liquidity Facility, to
replenish the Cash Collateral Account with respect to such Liquidity
Facility up to the Required Amount for the related Class of
Certificates (less the amount of any repayments of Interest Drawings
under such Liquidity Facility while sub-clause (x) of this clause is
applicable).
-- To the Subordination Agent, any Trustee or any Certificateholder to
the extent required to pay certain fees, taxes, charges and other
amounts payable.
-- To the Class A-1 Trustee and the Class A-2 Trustee to the extent
required to pay Adjusted Expected Distributions on the Class A-1
Certificates and the Class A-2 Certificates. If available funds are
insufficient to pay an Adjusted Expected Distribution to each such
Class in full, available funds will be distributed to each of the
Class A-1 Trustee and Class A-2 Trustee in the same proportion as
such Trustee's proportionate share of the aggregate amount of such
Adjusted Expected Distributions.
-- To the Class B Trustee to the extent required to pay Adjusted
Expected Distributions on the Class B Certificates.
-- To the Class C Trustee to the extent required to pay Adjusted
Expected Distributions on the Class C Certificates.
-- If Class D Certificates have been issued, to the Class D Trustee to
the extent required to pay "Adjusted Expected Distributions" (to be
defined in a manner equivalent to the definition for other Classes of
Certificates) on the Class D Certificates.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
Payments in respect of the Deposits relating to a Trust and monies drawn
under a Liquidity Facility will not be subject to the subordination provisions
of the Intercreditor Agreement.
PAYMENTS AND DISTRIBUTIONS
Payments of interest on the Deposits with respect to each Offered
Certificate Trust and payments of principal, premium (if any) and interest on
the Equipment Notes or with respect to other Trust Property held in each Trust
will be distributed by the Paying Agent (in the case of the Deposits) or by the
Trustee (in the case of Trust Property of such Trust) to Certificateholders of
such Trust on the date receipt of such payment is confirmed, except in the case
of certain types of Special Payments.
The Deposits held with respect to each 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, payable on June
15 and December 15 of each year, commencing on December 15, 2001 (or, in the
case of Equipment Notes issued after such date, commencing with the first such
date to occur after initial issuance thereof). Such interest payments will be
distributed to Certificateholders of such Trust on each such date until the
final Distribution Date for such Trust, subject in the case of payments on the
Equipment Notes to the Intercreditor Agreement. Interest is calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Payments of interest applicable to the Offered Certificates to be issued by
each of the Offered Certificate Trusts will be supported by a separate Liquidity
Facility to be provided by the Offered Certificate Liquidity Provider for the
benefit of the holders of such Offered Certificates in an aggregate amount
sufficient to pay interest thereon at the Stated Interest Rate for such Trust on
up to three successive Regular Distribution Dates (without regard to any future
payments of principal on such Offered Certificates), except that the Liquidity
Facility with respect to such Trust will not cover interest payable by the
Depositary on the Deposits relating to such Trust. The Liquidity Facility for
any Class of Offered Certificates does not provide for
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drawings thereunder to pay for principal of or premium on the Certificates of
such Class, any interest on the Certificates of such Class in excess of the
Stated Interest Rates, or, notwithstanding the subordination provisions of the
Intercreditor Agreement, principal of or interest or premium on the Certificates
of any other Class. Therefore, only the holders of the Certificates to be issued
by a particular Trust will be entitled to receive and retain the proceeds of
drawings under the Liquidity Facility for such Trust. See "Description of the
Liquidity Facilities".
Payments of principal of the Series A-1 and B Equipment Notes are scheduled
to be received by the Trustee on June 15 and December 15 in certain years,
depending upon the terms of the Equipment Notes held in such Trust. The entire
principal amount of the Series A-2 Equipment Notes is scheduled for payment on
June 15, 2011.
Scheduled payments of interest on the Deposits and of interest or principal
on the Equipment Notes are herein referred to as "Scheduled Payments", and June
15 and December 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 A-1 Certificates is December
15, 2022, for the Class A-2 Certificates is December 15, 2012, and for the Class
B Certificates is June 15, 2017.
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, Trust
Indenture Estate under (and as defined in) any Leased Aircraft Indenture or
Collateral under (and as defined in) any Owned Aircraft Indenture other than a
Scheduled Payment (each, a "Special Payment") will be distributed on, in the
case of an early redemption or a purchase of any Equipment Note, the date of
such early redemption or purchase (which shall be a Business Day), and otherwise
on the Business Day specified for distribution of such Special Payment pursuant
to a notice delivered by each Trustee as soon as practicable after the Trustee
has received funds for such Special Payment (each a "Special Distribution
Date"). Any such distribution will be subject to the Intercreditor Agreement.
Any unused Deposits to be distributed after the Delivery Period Termination Date
or the occurrence of a Triggering Event, together with accrued and unpaid
interest thereon (each, also a "Special Payment"), will be distributed on a date
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
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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.
If any Distribution Date is a Saturday, Sunday or other day on which
commercial banks are authorized or required to close in New York, New York,
Houston, Texas, Wilmington, Delaware, or Salt Lake City, Utah (any other day
being a "Business Day"), distributions scheduled to be made on such Regular
Distribution Date or Special Distribution Date will be made on the next
succeeding Business Day without additional interest.
POOL FACTORS
The "Pool Balance" for each Offered Certificate Trust or for the Offered
Certificates issued by any Trust indicates, as of any date, the original
aggregate face amount of the Certificates of such Trust less the aggregate
amount of all payments made in respect of the Certificates of such Trust or in
respect of Deposits relating to such Trust other than payments made in respect
of interest or premium or reimbursement of any costs or expenses incurred in
connection therewith. The Pool Balance for each Offered Certificate Trust or for
the Offered Certificates issued by any Trust as of any Distribution Date shall
be computed after giving effect to any special distribution with respect to
unused Deposits, payment of principal of the Equipment Notes or payment with
respect to other Trust Property held in such Trust and the distribution thereof
to be made on that date. (Trust Supplements, Section 2.01)
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The "Pool Factor" for each Offered Certificate 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 Offered
Certificates of such Trust. The Pool Factor for each Offered Certificate Trust
or for the Offered Certificates issued by any Trust as of any Distribution Date
shall be computed after giving effect to any special distribution with respect
to unused Deposits, payment of principal of the Equipment Notes or payments with
respect to other Trust Property held in such Trust and the distribution thereof
to be made on that date. (Trust Supplements, Section 2.01) The Pool Factor for
each 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. 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 each Offered Certificate
Trust (the "Assumed Amortization Schedule") and resulting Pool Factors with
respect to such Trust. The actual aggregate principal amortization schedule
applicable to the Class A-1 or B Trust and the resulting Pool Factors with
respect to such Trust may differ from those set forth below, since the
amortization schedule for the Series A-1 or B Equipment Notes issued with
respect to an Aircraft may vary from such illustrative amortization schedule so
long as it complies with the Mandatory Economic Terms. In the case of the Class
A-2 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 in payment on such Equipment Notes occurred.
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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 A-1 CLASS A-2 CLASS B
------------------------- -------------------------- ------------------------
SCHEDULED EXPECTED SCHEDULED EXPECTED SCHEDULED EXPECTED
PRINCIPAL POOL PRINCIPAL POOL PRINCIPAL POOL
DATE PAYMENTS FACTOR PAYMENTS FACTOR PAYMENTS FACTOR
- ---------------------- -------------- -------- --------------- -------- ------------- --------
December 15, 2001..... $ 7,318,587.34 $ 0.00 $1,292,946.97
June 15, 2002......... 17,800,241.35 0.00 2,615,450.07
December 15, 2002..... 43,916,639.04 0.00 168,431.87
June 15, 2003......... 938,046.26 0.00 559,436.19
December 15, 2003..... 28,762,869.70 0.00 0.00
June 15, 2004......... 1,946,610.55 0.00 0.00
December 15, 2004..... 25,126,667.59 0.00 559,436.19
June 15, 2005......... 1,739,589.72 0.00 0.00
December 15, 2005..... 22,325,546.40 0.00 0.00
June 15, 2006......... 954,150.74 0.00 0.00
December 15, 2006..... 20,102,843.37 0.00 5,868,788.48
June 15, 2007......... 746,805.67 0.00 6,828,373.61
December 15, 2007..... 20,310,188.43 0.00 6,940,891.54
June 15, 2008......... 730,478.93 0.00 1,935,595.82
December 15, 2008..... 17,989,024.03 0.00 6,940,891.54
June 15, 2009......... 884,962.01 0.00 7,612,214.96
December 15, 2009..... 18,569,315.14 0.00 7,891,933.05
June 15, 2010......... 1,207,460.53 0.00 7,891,933.05
December 15, 2010..... 18,976,714.44 0.00 7,891,933.05
June 15, 2011......... 0.00 188,440,000.00 7,891,933.05
December 15, 2011..... 0.00 0.00 0.00
June 15, 2012......... 0.00 0.00 1,046,967.77
December 15, 2012..... 0.00 0.00 1,008,442.98
June 15, 2013......... 0.00 0.00 1,076,050.21
December 15, 2013..... 0.00 0.00 1,036,455.29
June 15, 2014......... 0.00 0.00 1,134,215.08
December 15, 2014..... 899,630.11 0.00 1,092,479.90
June 15, 2015......... 177,422.20 0.00 817,606.94
December 15, 2015..... 5,081,720.92 0.00 3,499,592.39
June 15, 2016......... 10,466,858.55 0.00 0.00
December 15, 2016..... 7,661,534.37 0.00 0.00
June 15, 2017......... 12,507,541.46 0.00 0.00
December 15, 2017..... 10,834,530.08 0.00 0.00
June 15, 2018......... 5,684,224.17 0.00 0.00
December 15, 2018..... 10,786,866.59 0.00 0.00
June 15, 2019......... 6,624,828.60 0.00 0.00
December 15, 2019..... 10,309,957.26 0.00 0.00
June 15, 2020......... 15,156,458.84 0.00 0.00
December 15, 2020..... 39,185,676.26 0.00 0.00
June 15, 2021......... 50,709,009.35 0.00 0.00
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, the
nonissuance of Class C Certificates or the occurrence of a Triggering Event, as
described in "Description of the Deposit Agreements".
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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 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) and (f) below):
(a) The aggregate amount of funds distributed on such Distribution
Date under the Pass Through Trust Agreement and under the Escrow Agreement,
indicating the amount allocable to each source.
(b) The amount of such distribution under the Pass Through Trust
Agreement allocable to principal and the amount allocable to premium, if
any.
(c) The amount of such distribution under the Pass Through Trust
Agreement allocable to interest.
(d) The amount of such distribution under the Escrow Agreement
allocable to interest.
(e) The amount of such distribution under the Escrow Agreement
allocable to unused Deposits, if any.
(f) The Pool Balance and the Pool Factor for such Trust. (Trust
Supplements, Section 3.02(a))
So long as the 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 3.02(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
3.02(b)) Such report and such other items shall be prepared on the basis of
information supplied to the applicable Trustee by the DTC Participants and shall
be delivered by such Trustee to such DTC Participants to be available for
forwarding by such DTC Participants to Certificate Owners in the manner
described above. (Trust Supplements, Section 3.02(b)) At such time, if any, as
the 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
An event of default under an Indenture (an "Indenture Default") will, with
respect to the Leased Aircraft Indentures, include an event of default under the
related Lease (a "Lease Event of Default"). See "Description of the Equipment
Notes--Indenture Defaults, Notice and Waiver". Since the Equipment Notes issued
under an Indenture will be held in more than one Trust, a continuing Indenture
Default under such Indenture would affect the Equipment Notes held by each such
Trust. There are no cross-default provisions in the Indentures or in the Leases
(unless otherwise agreed between an Owner Participant and Continental, which
Continental does not expect). Consequently, events resulting in an Indenture
Default under any particular Indenture may or may not result in an Indenture
Default under any other Indenture, and a Lease Event of Default under any
particular Lease may or may not constitute a Lease Event of Default under any
other Lease. If an Indenture Default occurs in fewer than all of the Indentures,
notwithstanding the treatment of Equipment Notes issued under any Indenture
under which an Indenture Default has occurred, payments of principal and
interest on all of the Equipment Notes will continue to be distributed to the
holders of the Certificates as originally scheduled, subject to the
Intercreditor Agreement. See "Description of the Intercreditor
Agreement--Priority of Distributions".
With respect to each Leased Aircraft, the applicable Owner Trustee and
Owner Participant will, under the related Leased Aircraft Indenture, have the
right under certain circumstances to cure Indenture Defaults that result from
the occurrence of a Lease Event of Default under the related Lease. If the Owner
Trustee or the Owner Participant exercises any such cure right, the Indenture
Default will be deemed to have been cured.
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential conflict of interest upon an
Indenture Default. In such event, each Trustee has indicated that it would
resign as Trustee of one or all such Trusts, and a successor trustee would be
appointed in accordance with the terms of the applicable Pass Through Trust
Agreement. Wilmington Trust Company will be the initial Trustee under each
Trust.
Upon the occurrence and continuation of an Indenture Default, the
Controlling Party will direct the Indenture Trustee under such Indenture in the
exercise of remedies thereunder and may accelerate and sell all (but not less
than all) of the Equipment Notes issued under such Indenture to any person,
subject to certain limitations. See "Description of the Intercreditor
Agreement--Intercreditor Rights--Sale of Equipment Notes or Aircraft". The
proceeds of such sale will be distributed pursuant to the provisions of the
Intercreditor Agreement. Any such proceeds so distributed to any Trustee upon
any such sale shall be deposited in the applicable Special Payments Account and
shall be distributed to the Certificateholders of the applicable Trust on a
Special Distribution Date. (Sections 4.01 and 4.02) The market for Equipment
Notes at the time of the existence of an Indenture Default may be very limited
and there can be no assurance as to the price at which they could be sold. If
any such Equipment Notes are sold for less than their outstanding principal
amount, certain Certificateholders will receive a smaller amount of principal
distributions than anticipated and will not have any claim for the shortfall
against Continental, any Liquidity Provider, any Owner Trustee, any Owner
Participant or any Trustee.
Any amount, other than Scheduled Payments received on a Regular
Distribution Date or within five days thereafter, distributed to the Trustee of
any Offered Certificate Trust by the Subordination Agent on account of any
Equipment Note, Trust Indenture Estate under (and as defined in) any Leased
Aircraft Indenture or Collateral under (and as defined in) any Owned Aircraft
Indenture held in such Trust following an Indenture Default will be deposited in
the Special Payments Account for such Trust and will be distributed to the
Certificateholders of such Trust on a Special Distribution Date. (Sections 4.01
and 4.02; Trust Supplements, Section 3.01) In addition, if, following an
Indenture Default under any Leased Aircraft Indenture, the applicable Owner
Participant or Owner Trustee exercises its option to redeem or purchase the
outstanding Equipment Notes issued under such Leased Aircraft Indenture, the
price paid by such Owner Participant or Owner Trustee for the Equipment Notes
issued under such Leased Aircraft Indenture and distributed to such Trust by the
Subordination Agent will be deposited in the Special Payments Account for such
Trust and will be distributed to the Certificateholders of such Trust on a
Special Distribution Date. (Sections 4.01 and 4.02)
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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, 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 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, if any, or interest with respect to any of the Equipment
Notes and (iii) a default in respect of any covenant or provision of the Pass
Through Trust Agreement that cannot be modified or amended without the consent
of each Certificateholder of such Trust affected thereby. (Section 6.05) Each
Indenture will provide that, with certain exceptions, the holders of the
majority in aggregate unpaid principal amount of the Equipment Notes issued
thereunder may on behalf of all such holders waive any past default or Indenture
Default thereunder. Notwithstanding such provisions of the Indentures, pursuant
to the Intercreditor Agreement only the Controlling Party will be entitled to
waive any such past default or Indenture Default.
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PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event, with
ten days' written notice to the Trustee and each Certificateholder of the same
Class:
-- If the Class A-1 or Class A-2 Certificateholders are then represented
by the Controlling Party, the Certificateholders of such other Class
will have the right to purchase all of such Class of Certificates
represented by the Controlling Party.
-- The Class B Certificateholders will have the right to purchase all of
the Class A-1 and Class A-2 Certificates.
-- The Class C Certificateholders will have the right to purchase all of
the Class A-1, Class A-2 and Class B Certificates.
-- If the Class D Certificates are issued, the Class D
Certificateholders will have the right to purchase all of the Class
A-1, Class A-2, Class B and Class C Certificates.
In each case the purchase price will be equal to the Pool Balance of the
relevant Class or Classes of Certificates plus accrued and unpaid interest
thereon to the date of purchase, without premium, but including any other
amounts then due and payable to the Certificateholders of such Class or Classes.
Such purchase right may be exercised by any Certificateholder of the Class or
Classes entitled to such right. In each case, if prior to the end of the ten-day
notice period, any other Certificateholder of the same Class notifies the
purchasing Certificateholder that the other Certificateholder wants to
participate in such purchase, then such other Certificateholder may join with
the purchasing Certificateholder to purchase the Certificates pro rata based on
the interest in the Trust held by each Certificateholder. (Trust Supplements,
Section 4.01)
PTC EVENT OF DEFAULT
A Pass Through Certificate Event of Default (a "PTC Event of Default")
under each Pass Through Trust Agreement means the failure to pay:
-- The outstanding Pool Balance of the applicable Class of Certificates
within ten Business Days of the Final Maturity Date for such Class.
-- Interest due on such Class of Certificates within ten Business Days
of any Distribution Date (unless the Subordination Agent shall have
made Interest Drawings, or withdrawals from the Cash Collateral
Account for such Class of Certificates, with respect thereto in an
aggregate amount sufficient to pay such interest and shall have
distributed such amount to the Trustee entitled thereto). (Section
1.01)
Any failure to make expected principal distributions with respect to any
Class of Certificates on any Regular Distribution Date (other than the Final
Maturity Date) will not constitute a PTC Event of Default with respect to such
Certificates. A PTC Event of Default with respect to the most senior outstanding
Class of Certificates resulting from an Indenture Default under all Indentures
will constitute a Triggering Event. See "Description of the Intercreditor
Agreement--Priority of Distributions" for a discussion of the consequences of
the occurrence of a Triggering Event.
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.
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-- The surviving successor or transferee corporation shall expressly
assume all of the obligations of Continental contained in the Basic
Agreement and any Trust Supplement, the Note Purchase Agreement, the
Indentures, the Participation Agreements and the Leases, and any
other operative documents.
-- Continental shall have delivered a certificate and an opinion or
opinions of counsel indicating that such transaction, in effect,
complies with such conditions.
In addition, after giving effect to such transaction, no Lease Event of
Default, in the case of a Leased Aircraft, or Indenture Default, in the case of
an Owned Aircraft, shall have occurred and be continuing. (Section 5.02; Leases,
Section 13.2; Owned Aircraft Indentures, Section 4.07)
The Basic Agreement, the Trust Supplements, the Note Purchase Agreement,
the Indentures, the Participation Agreements and the Leases will not contain any
covenants or provisions which may afford the applicable Trustee or
Certificateholders protection in the event of a highly leveraged transaction,
including transactions effected by management or affiliates, which may or may
not result in a change in control of Continental.
MODIFICATIONS OF THE PASS THROUGH TRUST AGREEMENTS AND CERTAIN OTHER AGREEMENTS
Each Pass Through Trust Agreement contains provisions permitting, at the
request of the Company, the execution of amendments or supplements to such Pass
Through Trust Agreement or, if applicable, to the Deposit Agreements, the Escrow
Agreements, the Intercreditor Agreement, the Note Purchase Agreement or the
Liquidity Facilities, without the consent of the holders of any of the
Certificates of such Trust:
-- To evidence the succession of another corporation to Continental and
the assumption by such corporation of Continental's obligations under
such Pass Through Trust Agreement or the Note Purchase Agreement.
-- To add to the covenants of Continental for the benefit of holders of
such Certificates or to surrender any right or power conferred upon
Continental in such Pass Through Trust Agreement, the Intercreditor
Agreement, the Note Purchase Agreement or the Liquidity Facilities.
-- To correct or supplement any provision of such Pass Through Trust
Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement or the Liquidity
Facilities which may be defective or inconsistent with any other
provision in such Pass Through Trust Agreement, the Intercreditor
Agreement, or the Liquidity Facilities, as applicable, or to cure any
ambiguity or to modify any other provision with respect to matters or
questions arising under such Pass Through Trust Agreement, the
Deposit Agreements, the Escrow Agreements, the Intercreditor
Agreement, the Note Purchase Agreement or the Liquidity Facilities,
provided that such action shall not materially adversely affect the
interests of the holders of such Certificates; to correct any mistake
in such Pass Through Trust Agreement, the Intercreditor Agreement or
the Liquidity Facilities; 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 or the Liquidity
Facilities to such extent as shall be necessary to continue the
qualification of such Pass Through Trust Agreement (including any
supplemental agreement) under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"), or any similar federal statute
enacted after the execution of such Pass Through Trust Agreement, and
to add to such Pass Through Trust Agreement, the Deposit Agreements,
the Escrow Agreements, the Intercreditor Agreement, the Note Purchase
Agreement or the Liquidity Facilities such other provisions as may be
expressly permitted by the Trust Indenture Act.
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-- To evidence and provide for the acceptance of appointment under such
Pass Through Trust Agreement, the Deposit Agreements, the Escrow
Agreements, the Intercreditor Agreement, the Note Purchase Agreement
or the Liquidity Facilities by a successor Trustee and to add to or
change any of the provisions of such Pass Through Trust Agreement,
the Deposit Agreements, the Escrow Agreements, the Intercreditor
Agreement, the Note Purchase Agreement or the Liquidity Facilities 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 the Class C Certificates, provided
that (i) the Rating Agencies have given written confirmation that the
terms of the Class C Certificates (including such amendments and
supplements) will not result in a withdrawal, suspension or
downgrading of the rating of any Class of Offered Certificates and
(ii) Continental certifies to the Trustees that any such amendment or
supplement does not materially and adversely affect the
Certificateholders. See "Description of the Certificates--Expected
Issuance of Class C 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 6.01)
Each Pass Through Trust Agreement also contains provisions permitting the
execution, with the consent of the holders of the Certificates of the related
Trust evidencing fractional undivided interests aggregating not less than a
majority in interest of such Trust, of amendments or supplements adding any
provisions to or changing or eliminating any of the provisions of such Pass
Through Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement or the Liquidity Facilities
to the extent applicable to such Certificateholders or of modifying the rights
and obligations of such Certificateholders under such Pass Through Trust
Agreement, the Deposit Agreements, the Escrow Agreements, the Intercreditor
Agreement, the Note Purchase Agreement or the Liquidity Facilities. No such
amendment or supplement may, without the consent of the holder of each
Certificate so affected thereby:
-- Reduce in any manner the amount of, or delay the timing of, any
receipt by the Trustee (or, with respect to the Deposits, the
Receiptholders) of payments with respect to the Equipment Notes held
in such Trust or distributions in respect of any Certificate related
to such Trust (or, with respect to the Deposits, payments upon the
Deposits), or change the date or place of any payment in respect of
any Certificate, or make distributions payable in coin or currency
other than that provided for in such Certificates, or impair the
right of any Certificateholder of such Trust to institute suit for
the enforcement of any such payment when due.
-- Permit the disposition of any Equipment Note held in such Trust,
except as provided in such Pass Through Trust Agreement, or otherwise
deprive such Certificateholder of the benefit of the ownership of the
applicable Equipment Notes.
-- Alter the priority of distributions specified in the Intercreditor
Agreement in a manner materially adverse to such Certificateholders.
-- Reduce the percentage of the aggregate fractional undivided interests
of the Trust provided for in such Pass Through Trust Agreement, the
consent of the holders of which is required for any such supplemental
trust agreement or for any waiver provided for in such Pass Through
Trust Agreement.
-- Modify any of the provisions relating to the rights of the
Certificateholders in respect of the waiver of events of default or
receipt of payment.
-- Adversely affect the status of any Trust as a grantor trust under
Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A of the
Code for U.S. federal income tax purposes. (Section 9.02; Trust
Supplements, Section 6.02)
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In the event that a Trustee, as holder (or beneficial owner through the
Subordination Agent) of any Equipment Note in trust for the benefit of the
Certificateholders of the relevant Trust or as Controlling Party under the
Intercreditor Agreement, receives (directly or indirectly through the
Subordination Agent) a request for a consent to any amendment, modification,
waiver or supplement under any Indenture, any Participation Agreement, any
Lease, any Equipment Note or any other related document, the Trustee shall
forthwith send a notice of such proposed amendment, modification, waiver or
supplement to each Certificateholder of the relevant Trust as of the date of
such notice. The Trustee shall request from the Certificateholders a direction
as to:
-- Whether or not to take or refrain from taking (or direct the
Subordination Agent to take or refrain from taking) any action which
a holder of such Equipment Note or the Controlling Party has the
option to direct.
-- Whether or not to give or execute (or direct the Subordination Agent
to give or execute) any waivers, consents, amendments, modifications
or supplements as a holder of such Equipment Note or as Controlling
Party.
-- How to vote (or direct the Subordination Agent to vote) any Equipment
Note if a vote has been called for with respect thereto.
-- Provided such a request for Certificateholder direction shall have
been made, in directing any action or casting any vote or giving any
consent as the holder of any Equipment Note (or in directing the
Subordination Agent in any of the foregoing):
-- Other than as Controlling Party, the Trustee shall vote for or give
consent to any such action with respect to such Equipment Note in the
same proportion as that of (x) the aggregate face amount of all
Certificates actually voted in favor of or for giving consent to such
action by such direction of Certificateholders to (y) the aggregate
face amount of all outstanding Certificates of the relevant Trust.
-- As the Controlling Party, the Trustee shall vote as directed in such
Certificateholder direction by the Certificateholders evidencing
fractional undivided interests aggregating not less than a majority
in interest in the relevant Trust.
For purposes of the immediately preceding 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 or
Lease, any relevant Equipment Note or any other related document, if an
Indenture Default under any Indenture shall have occurred and be continuing, or
if such amendment, modification, waiver or supplement will not materially
adversely affect the interests of the Certificateholders. (Section 10.01)
OBLIGATION TO PURCHASE EQUIPMENT NOTES
The Trustees will be obligated to purchase the Equipment Notes issued with
respect to the Aircraft during the Delivery Period, subject to the terms and
conditions of a note purchase agreement (the "Note Purchase Agreement"). Under
the Note Purchase Agreement, Continental agrees to finance each Aircraft in the
manner provided therein. Continental will have the option of entering into a
leveraged lease financing or a secured debt financing with respect to each
Aircraft.
-- If Continental chooses to enter into a leveraged lease financing with
respect to an Aircraft (such Aircraft, a "Leased Aircraft"), the Note
Purchase Agreement provides for the relevant parties to enter into a
participation agreement (each, a "Participation Agreement"), a Lease
and an indenture (each, a "Leased Aircraft Indenture") relating to
the financing of such Leased Aircraft.
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-- If Continental chooses to enter into a secured debt financing with
respect to an Aircraft (such Aircraft, an "Owned Aircraft"), the Note
Purchase Agreement provides for the relevant parties to enter into a
participation agreement (each, a Participation Agreement) and an
indenture (each, an "Owned Aircraft Indenture", and together with the
other Owned Aircraft Indentures and the Leased Aircraft Indentures,
the "Indentures") relating to the financing of such Owned Aircraft.
The description of such 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 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 Trustee to purchase the Equipment Notes related to the
financing of an Aircraft that:
-- Either (x) the Class C Certificates shall have been issued and the
Series C Equipment Notes relating to such Aircraft shall have been
concurrently purchased or (y) if the Class C Certificates have not
been issued, a portion of the Deposits held for the Class A-1
Certificateholders or Class B Certificateholders (or both) shall have
been distributed to them and a written confirmation shall have been
obtained from the Rating Agencies that, upon effectiveness of such
distribution, the ratings of the Class A-1, A-2 and B Certificates
will not be withdrawn, suspended or downgraded due to the failure to
issue Class C Certificates.
-- No Triggering Event shall have occurred.
The Trustees will have no right or obligation to purchase Equipment Notes after
the Delivery Period Termination Date.
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The "Mandatory Economic Terms", as defined in the Note Purchase Agreement,
require, among other things, that:
-- The aggregate principal amount of all the Series A-1, A-2 and B
Equipment Notes issued with respect to an Aircraft shall not exceed
the amounts set forth in the following table:
MAXIMUM
PRINCIPAL
AMOUNT OF
SERIES A-1, A-2
MANUFACTURER'S AND B
AIRCRAFT TYPE(1) SERIAL NUMBER EQUIPMENT NOTES
---------------- -------------- ---------------
Boeing 737-824.............................................. 31588 $26,884,000
Boeing 737-824.............................................. 31632 26,884,000
Boeing 737-824.............................................. 31589 26,931,667
Boeing 737-824.............................................. 31590 26,931,667
Boeing 737-824.............................................. 31591 26,981,167
Boeing 737-824.............................................. 31592 27,120,500
Boeing 737-824.............................................. 31593 27,168,167
Boeing 737-824.............................................. 31594 27,168,167
Boeing 737-824.............................................. 31595 27,215,833
Boeing 737-824.............................................. 31596 27,417,500
Boeing 737-824.............................................. 31597 27,417,500
Boeing 737-824.............................................. 31598 27,417,500
Boeing 737-924.............................................. 30125 27,694,333
Boeing 737-924.............................................. 30126 27,743,833
Boeing 737-924.............................................. 30127 27,791,500
Boeing 737-924.............................................. 30128 27,907,000
Boeing 737-924.............................................. 30129 28,022,500
Boeing 737-924.............................................. 30130 28,143,500
Boeing 737-924.............................................. 30131 28,198,500
Boeing 767-424ER............................................ 29452 55,104,500
Boeing 767-424ER............................................ 29453 55,104,500
Boeing 767-424ER............................................ 29454 55,220,000
Boeing 767-424ER............................................ 29455 55,220,000
Boeing 767-424ER............................................ 29456 55,335,500
Boeing 767-424ER............................................ 29457 55,335,500
Boeing 767-424ER............................................ 29458 55,451,000
Boeing 767-424ER............................................ 29459 55,451,000
Boeing 767-424ER............................................ 29460 55,561,000
Boeing 767-424ER............................................ 29461 55,561,000
Boeing 777-224ER............................................ 31679 76,204,333
Boeing 777-224ER............................................ 31680 76,525,167
-------------------
(1) Includes all Boeing 737-824, 737-924, 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 A-1, A-2 and B 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 Aircraft set
forth in the applicable table in Appendix III to this Prospectus
Supplement.
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-- As of the Delivery Period Termination Date and each Regular
Distribution Date thereafter, the LTV for each Class of Offered
Certificates (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 percentages set forth in the following table for the applicable
date:
CLASS A-1 CLASS A-2 CLASS B
DATE(1) CERTIFICATES CERTIFICATES CERTIFICATES
------- ------------ ------------ ------------
June 15, 2002.....................................
December 15, 2002.................................
June 15, 2003.....................................
December 15, 2003.................................
June 15, 2004.....................................
December 15, 2004.................................
June 15, 2005.....................................
December 15, 2005.................................
June 15, 2006.....................................
December 15, 2006.................................
June 15, 2007.....................................
December 15, 2007.................................
June 15, 2008.....................................
December 15, 2008.................................
June 15, 2009.....................................
December 15, 2009.................................
June 15, 2010.....................................
December 15, 2010.................................
June 15, 2011.....................................
December 15, 2011.................................
June 15, 2012 and thereafter......................
-------------------
(1) If the Delivery Period Termination Date is not a Regular Distribution
Date, the LTV applicable to the Delivery Period Termination Date is
the LTV for the next preceding Regular Distribution Date, unless the
Delivery Period Termination Date is before June 15, 2002, in which
case the LTVs for June 15, 2002 shall apply.
-- The initial average life of the Series A-1 and B Equipment Notes for
any Aircraft shall not extend beyond 14.0 years and 11.3 years,
respectively, from the Issuance Date.
-- As of the Delivery Period Termination Date, the average life of the
Class A-1 Certificates and the Class B Certificates shall not be more
than 10.7 years and 8.5 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 maturity date of the Series A-2 Equipment Notes shall be
June 15, 2011, and there shall be no scheduled amortization of such
Equipment Notes.
-- The original aggregate principal amount of all of the Equipment Notes
of each Series shall not exceed the original aggregate face amount of
the Certificates issued by the corresponding Trust.
-- As of the Delivery Period Termination Date (assuming Equipment Notes
are acquired by the Trusts for all of the Aircraft), the aggregate
principal amount of the Series A-2 Equipment Notes shall equal the
original face amount of the Class A-2 Certificates.
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-- 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 A-1, A-2 and B Equipment Notes must
be June 15 and December 15, and basic rent under the Leases must be
payable on such dates.
-- Basic rent, stipulated loss values and termination values under the
Leases must be sufficient to pay amounts due with respect to the
related Equipment Notes.
-- The amounts payable under the all-risk aircraft hull insurance
maintained with respect to each Aircraft must be sufficient to pay
the applicable stipulated loss value, subject to certain rights of
self-insurance.
-- (a) The past due rate in the Indentures and the Leases, (b) the
Make-Whole Premium payable under the Indentures, (c) the provisions
relating to the redemption and purchase of Equipment Notes in the
Indentures, (d) the minimum liability insurance amount on Aircraft in
the Leases, (e) the interest rate payable with respect to stipulated
loss value in the Leases, and (f) the indemnification of the Loan
Trustees, Subordination Agent, Liquidity Providers, Trustees, Escrow
Agents and registered holders of the Equipment Notes (in such
capacity, the "Note Holders") with respect to certain taxes and
expenses, in each case shall be provided as set forth in the forms of
Participation Agreements, Lease and Indentures attached as exhibits
to the Note Purchase Agreement (collectively, the "Aircraft Operative
Agreements").
The "Mandatory Document Terms" prohibit modifications in any material
adverse respect to certain specified provisions of the Aircraft Operative
Agreements contemplated by the Note Purchase Agreement, as follows:
-- In the case of the Indentures, modifications are prohibited (i) to
the Granting Clause of the Indentures so as to deprive the Note
Holders of a first priority security interest in the Aircraft,
certain of Continental's rights under its purchase agreement with the
Aircraft manufacturer and, in the case of a Leased Aircraft, the
Lease or to eliminate the obligations intended to be secured thereby,
(ii) to certain provisions relating to the issuance, redemption,
purchase, payments, and ranking of the Equipment Notes (including the
obligation to pay the Make-Whole Premium in certain circumstances),
(iii) to certain provisions regarding Indenture Defaults, remedies
relating thereto and rights of the Owner Trustee and Owner
Participant in such circumstances, (iv) to certain provisions
relating to any replaced airframe or engines with respect to an
Aircraft and (v) to the provision that New York law will govern the
Indentures.
-- In the case of the Leases, modifications are prohibited to certain
provisions regarding the obligation of Continental (i) to pay basic
rent, stipulated loss value and termination value to the Leased
Aircraft Trustee, (ii) to record the Leased Aircraft Indenture with
the FAA and to maintain such Indenture as a first-priority perfected
mortgage on the related Aircraft, (iii) to furnish certain opinions
with respect to a replacement airframe and (iv) to consent to the
assignment of the Lease by the Owner Trustee as collateral under the
Leased Aircraft Indenture, as well as modifications which would
either alter the provision that New York law will govern the Lease or
would deprive the Loan Trustee of rights expressly granted to it
under the Leases.
-- In the case of the Participation 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
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Provider or the Loan Trustee in the definition of "Make-Whole
Premium". Notwithstanding the foregoing, any such Mandatory Document
Term may be modified to correct or supplement any such provision
which may be defective or to cure any ambiguity or correct any
mistake, provided that any such action shall not materially adversely
affect the interests of the Note Holders, the Subordination Agent,
the Liquidity Provider, the Mortgagee or the Certificateholders.
POSSIBLE ISSUANCE OF CLASS D CERTIFICATES
Continental may elect to issue Series D Equipment Notes in connection with
the financing of Aircraft, which will be funded from sources other than this
offering (the "Offering"). Continental may elect to fund the sale of the Series
D Equipment Notes through the sale of Pass Through Certificates (the "Class D
Certificates") issued by a Class D Continental Airlines 2001-1 Pass Through
Trust (the "Class D Trust"). Continental will not issue any Series D Equipment
Notes at any time prior to the consummation of this Offering. The Note Purchase
Agreement provides that Continental's ability to issue any Series D Equipment
Notes is contingent upon its obtaining written confirmation from each Rating
Agency that the issuance of such Series D Equipment Notes will not result in a
withdrawal or downgrading of the rating of any Class of Certificates. If the
Class D Certificates are issued, the Trustee with respect to such Certificates
will become a party to the Intercreditor Agreement. If Series D Equipment Notes
are issued to any one other than the Class D Trust, such Series D Equipment
Notes will nevertheless be subject to provisions of the Intercreditor Agreement
that allow the Controlling Party, during the continuance of an Indenture
Default, to direct the Loan Trustee in taking action under the applicable
Indenture. See "Description of the Intercreditor Agreement".
LIQUIDATION OF ORIGINAL TRUSTS
On the earlier of (i) the first Business Day after September 30, 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 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 and the applicable Trustees, Pass Through Trust
Agreements and similar terms shall apply to the Original Trusts until the
effectiveness of such transfer, assignment and assumption, and thereafter shall
be applicable with respect to the Successor Trusts. If for any reason such
transfer, assignment and assumption cannot be effected to any Successor Trust,
the related Original Trust will continue in existence until it is effected. The
Original Trusts may be treated as partnerships for U.S. federal income tax
purposes. The Successor Trusts will, in the opinion of Tax Counsel, be treated
as grantor trusts. See "Certain U.S. Federal Income Tax Consequences".
TERMINATION OF THE TRUSTS
The obligations of Continental and the applicable Trustee with respect to
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
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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.
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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 the Offering attributable to
Certificates of the applicable Trust will be deposited (each, a "Deposit") on
behalf of such Escrow Agent. Pursuant to the Deposit Agreement with respect to
each 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". Depending on the circumstances
of the financing of each Aircraft, the maximum aggregate principal amount of
Equipment Notes may not be issued.
If any funds remain as Deposits with respect to any 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
but without premium, to the Certificateholders of such Trust after at least 15
days' prior written notice. Since the maximum principal amount of Equipment
Notes may not be issued with respect to an Aircraft and, in any such case, the
Series B Equipment Notes are more likely not to be issued in the maximum
principal amount as compared to the Series A-1 and A-2 Equipment Notes, it is
more likely that a distribution of unused Deposits will be made with respect to
the Class B Certificates as compared to the other Offered Certificates.
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DISTRIBUTION IF CLASS C CERTIFICATES NOT ISSUED
If the Class C Certificates have not been issued by December 31, 2001,
Continental will cause to be distributed to the Class A-1 Certificateholders or
Class B Certificateholders (or both) by such date a portion of the Deposits held
for them, together with accrued and unpaid interest thereon and a Deposit
Make-Whole Premium. Such distribution will be in an amount sufficient to obtain
written confirmation from Moody's and Standard & Poor's that, upon effectiveness
of such distribution, the ratings of the Class A-1, A-2 and B Certificates will
not be withdrawn, suspended or downgraded due to failure to issue Class C
Certificates.
"Deposit Make-Whole Premium" means, with respect to the distribution to
holders of Class A-1 or B Certificates of a portion of the Deposits held for
them if Class C Certificates are not issued, 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 semiannual basis on each
Regular Distribution Date (assuming a 360-day year of twelve 30-day months)
using a discount rate equal to the Treasury Yield 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).
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.
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DESCRIPTION OF THE ESCROW AGREEMENTS
The following summary describes all material terms of the escrow and paying
agent agreements (the "Escrow Agreements"). The summary does not purport to be
complete and is qualified in its entirety by reference to all of the provisions
of the Escrow Agreements, each of which will be filed as an exhibit to a Current
Report on Form 8-K to be filed by Continental with the Commission. The
provisions of the Escrow Agreements are substantially identical except as
otherwise indicated.
First Security Bank, N.A., as escrow agent in respect of each 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 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.
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DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes all material terms of the Offered
Certificate Liquidity Facilities and certain provisions of the Intercreditor
Agreement relating to the Offered Certificate Liquidity Facilities. The summary
supplements (and, to the extent inconsistent therewith, replaces) the
description of the general terms and provisions relating to the Offered
Certificate 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 Offered Certificate
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 Offered Certificate Liquidity
Facilities are substantially identical except as otherwise indicated.
GENERAL
Landesbank Hessen-Thuringen Girozentrale (the "Offered Certificate
Liquidity Provider") will enter into a separate revolving credit agreement
(each, an "Offered Certificate Liquidity Facility") with the Subordination Agent
with respect to each Offered Certificate Trust. Under each Offered Certificate
Liquidity Facility, the Offered Certificate Liquidity Provider will, if
necessary, make one or more advances ("Interest Drawings") to the Subordination
Agent in an aggregate amount (the "Required Amount") sufficient to pay interest
on the related Offered Certificates on up to three consecutive semiannual
Regular Distribution Dates at the respective interest rates shown on the cover
page of this Prospectus Supplement for such Certificates (the "Stated Interest
Rates"). If interest payment defaults occur which exceed the amount covered by
or available under the Liquidity Facility for any Offered Certificate Trust, the
Certificateholders of such Trust will bear their allocable share of the
deficiencies to the extent that there are no other sources of funds. The initial
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 Liquidity Facility for each
Offered Certificate Trust at June 15, 2002, the first Regular Distribution Date
after the first 21 Aircraft available 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 June 15, 2002 is paid, will be as follows:
TRUST AVAILABLE AMOUNT
----- ----------------
Class A-1................................................. $
Class A-2.................................................
Class B...................................................
Except as otherwise provided below, the 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 to pay interest
then due and payable on the Certificates of such Trust at the Stated Interest
Rate for such Trust to the extent that the amount, if any, available to the
Subordination Agent on such Regular Distribution Date is not sufficient to pay
such interest; provided, however, that the maximum amount available to be drawn
under the Liquidity Facility with respect to any Offered Certificate Trust on
any Regular Distribution Date to fund any shortfall of interest on Certificates
of such Trust will not exceed the then Maximum Available Commitment under such
Liquidity Facility. The "Maximum Available Commitment" at any time under each
Offered Certificate Liquidity Facility is an amount equal to the then Required
Amount of such Liquidity Facility less the aggregate amount of each Interest
Drawing outstanding under such Liquidity Facility at such time, provided that
following a Downgrade Drawing, a Final Drawing or a Non-Extension Drawing under
an Offered Certificate Liquidity Facility, the Maximum Available Commitment
under such Liquidity Facility shall be zero.
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The Liquidity Facility for any Class of Offered Certificates does not
provide for drawings thereunder to pay for principal of or premium on the
Certificates of such Class or any interest on the Certificates of such Class in
excess of the Stated Interest Rate for such Class or more than three semiannual
installments of interest thereon or principal of or interest or premium on the
Certificates of any other Class. (Liquidity Facilities, Section 2.02;
Intercreditor Agreement, Section 3.6) In addition, the Liquidity Facility with
respect to each 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 an Offered Certificate Liquidity Provider reduces by the
same amount the Maximum Available Commitment under the related Offered
Certificate Liquidity Facility, subject to reinstatement as hereinafter
described. With respect to any Interest Drawings, upon reimbursement of the
applicable Offered Certificate Liquidity Provider in full for the amount of such
Interest Drawings plus interest thereon, the Maximum Available Commitment under
such Offered Certificate Liquidity Facility in respect of interest on the
Certificates of such Offered Certificate Trust will be reinstated to an amount
not to exceed the then Required Amount of the related Offered Certificate
Liquidity Facility. However, such Offered Certificate Liquidity Facility will
not be so reinstated at any time if (i) a Liquidity Event of Default shall have
occurred and be continuing and (ii) less than 65% of the then aggregate
outstanding principal amount of all Equipment Notes are Performing Equipment
Notes. With respect to any other drawings under such Offered Certificate
Liquidity Facility, amounts available to be drawn thereunder are not subject to
reinstatement. The Required Amount of the Liquidity Facility for any Offered
Certificate Trust will be automatically reduced from time to time to an amount
equal to the next three successive interest payments due on the Certificates of
such Trust (without regard to expected future payment of principal of such
Certificates) at the Stated Interest Rate for such Trust. (Offered Certificate
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 Offered
Certificate 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), and such Liquidity Facility is not
replaced with a Replacement Facility within ten days (or 45 days if Standard and
Poor's downgrades the Liquidity Provider's ratings from A-1+ to A-1) after
notice of such downgrading and as otherwise provided in the Intercreditor
Agreement, such Liquidity Facility will be drawn in full up to the then Maximum
Available Commitment under such 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 Liquidity Facility
would be used. (Offered Certificate 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 Liquidity Provider.
A "Replacement Facility" for any Offered Certificate Liquidity Facility
will mean an irrevocable liquidity facility (or liquidity facilities) in
substantially the form of the replaced Offered Certificate 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 Liquidity Provider), 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, and without regard to
expected
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future principal payments) on the three Regular Distribution Dates following the
date of replacement of such Liquidity Facility and issued by a person (or
persons) having unsecured short-term debt ratings issued by both Rating Agencies
which are equal to or higher than the Threshold Rating for the relevant Class.
(Intercreditor Agreement, Section 1.1) The provider of any Replacement Facility
will have the same rights (including, without limitation, priority distribution
rights and rights as "Controlling Party") under the Intercreditor Agreement as
the applicable initial Offered Certificate 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 Liquidity Facility for each Offered Certificate Trust provides that the
applicable 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).
-- The date on which the Subordination Agent delivers to such 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 Liquidity
Provider a certification that a Replacement Facility has been
substituted for such Liquidity Facility.
-- The fifth Business Day following receipt by the Subordination Agent
of a Termination Notice from such Liquidity Provider (see
"--Liquidity Events of Default").
-- The date on which no amount is or may (by reason of reinstatement)
become available for drawing under such Liquidity Facility.
Each Liquidity Facility provides that it may be extended for additional
364-day periods by mutual agreement of the relevant Liquidity Provider and the
Subordination Agent. Under certain circumstances the Offered Certificate
Liquidity Provider may extend its 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
Liquidity Facility for any Offered Certificate Trust if such Liquidity Facility
is scheduled to expire earlier than 15 days after the Final Maturity Date for
the Certificates of such Trust and such Liquidity Facility is not extended at
least 25 days prior to its then scheduled expiration date. If such Liquidity
Facility is not so extended or replaced by the 25th day prior to its then
scheduled expiration date, such Liquidity Facility will be drawn in full up to
the then Maximum Available Commitment under such 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 Liquidity Facility would be used. (Offered Certificate
Liquidity Facilities, Section 2.02(b); Intercreditor Agreement, Section 3.6(d))
Subject to certain limitations, Continental may, at its option, arrange for
a Replacement Facility at any time to replace the liquidity facility for any
Offered Certificate Trust (including without limitation any Replacement Facility
described in the following sentence). In addition, if any liquidity provider
shall determine not to extend any liquidity facility for an Offered Certificate
Trust, then such liquidity provider may, at its option, arrange for a
Replacement Facility to replace such 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 liquidity facility and (ii) at any time after such
scheduled expiration date. The Offered Certificate Liquidity Provider may also
arrange for a Replacement Facility to replace any of its liquidity facilities at
any time after it has extended such 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 liquidity
facility. If any Replacement Facility is provided at any time after a Downgrade
Drawing or a Non-Extension Drawing under any Offered Certificate Liquidity
Facility, the funds with respect to such liquidity facility on deposit in the
Cash Collateral Account for such Trust will be returned to the liquidity
provider being replaced. (Intercreditor Agreement, Section 3.6(e))
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Upon receipt by the Subordination Agent of a Termination Notice with
respect to any Offered Certificate Liquidity Facility from the relevant
Liquidity Provider, the Subordination Agent shall request a final drawing (a
"Final Drawing") under such Liquidity Facility in an amount equal to the then
Maximum Available Commitment thereunder. The Subordination Agent will hold the
proceeds of the Final Drawing in the Cash Collateral Account for the related
Trust as cash collateral to be used for the same purposes and under the same
circumstances, and subject to the same conditions, as cash payments of Interest
Drawings under such Liquidity Facility would be used. (Offered Certificate
Liquidity Facilities, Section 2.02(d); Intercreditor Agreement, Section 3.6(i))
Drawings under any Offered Certificate Liquidity Facility will be made by
delivery by the Subordination Agent of a certificate in the form required by
such Liquidity Facility. Upon receipt of such a certificate, the relevant
Liquidity Provider is obligated to make payment of the drawing requested thereby
in immediately available funds. Upon payment by the relevant Liquidity Provider
of the amount specified in any drawing under any Offered Certificate Liquidity
Facility, such Liquidity Provider will be fully discharged of its obligations
under such Liquidity Facility with respect to such drawing and will not
thereafter be obligated to make any further payments under such Liquidity
Facility in respect of such drawing to the Subordination Agent or any other
person.
REIMBURSEMENT OF DRAWINGS
The Subordination Agent must reimburse amounts drawn under any Offered
Certificate 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 an
Offered Certificate 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
Liquidity Provider's receipt of the notice of such Interest Drawing, interest
will accrue at the Base Rate plus 1.50% per annum (subject to an increase under
certain circumstances up to a maximum of 2% per annum). Thereafter, interest
will accrue at LIBOR for the applicable interest period plus 1.50% per annum
(subject to an increase under certain circumstances up to a maximum of 2% 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 (subject to an increase under certain circumstances up to a
maximum of 2% 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 Liquidity Provider from three
Federal funds brokers of recognized standing selected by it, plus (b)
one-quarter of one percent 1/4 of 1%).
"LIBOR" means, with respect to any interest period, (i) the rate per annum
appearing on display page 3750 (British Bankers Association--LIBOR) of the Dow
Jones Markets Service (or any successor or substitute therefor) at approximately
11:00 A.M. (London time) two business days before the first day of such interest
period, as the rate for dollar deposits with a maturity comparable to such
interest period, or (ii) if the rate calculated pursuant to clause (i) above is
not available, the average (rounded upwards, if necessary, to the next 1/16 of
1%) of the rates per annum at which deposits in dollars are offered for the
relevant interest period by three banks of recognized standing selected by the
applicable 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.
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DOWNGRADE DRAWINGS AND NON-EXTENSION DRAWINGS
The amount drawn under any Offered Certificate 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 Liquidity Provider to the extent that such amount exceeds
the Required Amount.
-- Any portion of such amount withdrawn from the Cash Collateral Account
for such Certificates to pay interest on such Certificates will be
treated in the same way as Interest Drawings.
-- The balance of such amount will be invested in certain specified
eligible investments.
Any Downgrade Drawing under any of the Offered Certificate 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 rate
equal to 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 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 (subject to an increase under certain circumstances up to a maximum of 2%
per annum).
Any Non-Extension Drawing under any of the Offered Certificate Liquidity
Facilities, other than any portion thereof applied to the payment of interest on
the Certificates, will bear interest (x) subject to clause (y) below, in an
amount equal to the investment earnings on amounts deposited in the Cash
Collateral Account attributable to such Liquidity Facility plus 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 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 (subject to an increase under certain circumstances up to a
maximum of 2% per annum).
LIQUIDITY EVENTS OF DEFAULT
Events of Default under each Offered Certificate Liquidity Facility (each,
an "Offered Certificate Liquidity Event of Default") will consist of:
-- The acceleration of all the Equipment Notes (provided, that if such
acceleration occurs during the Delivery Period, the aggregate
principal amount thereof exceeds $300 million).
-- Certain bankruptcy or similar events involving Continental. (Offered
Certificate Liquidity Facilities, Section 1.01)
If (i) any Offered Certificate Liquidity Event of Default under any Offered
Certificate 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 Liquidity Provider may, in its
discretion, give a notice of termination of such Liquidity Facility (a
"Termination Notice"). The Termination Notice will have the following
consequences:
-- The related Liquidity Facility will expire on the fifth Business Day
after the date on which such Termination Notice is received by the
Subordination Agent.
-- The Subordination Agent will promptly request, and the applicable
Liquidity Provider will make, a Final Drawing thereunder in an amount
equal to the then Maximum Available Commitment thereunder.
-- Any Drawing remaining unreimbursed as of the date of termination will
be automatically converted into a Final Drawing under such Liquidity
Facility.
-- All amounts owing to the applicable Liquidity Provider automatically
will be accelerated.
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Notwithstanding the foregoing, the Subordination Agent will be obligated to
pay amounts owing to the Offered Certificate 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". (Offered Certificate Liquidity
Facilities, Section 6.01) Upon the circumstances described below under
"Description of the Intercreditor Agreement--Intercreditor Rights", a liquidity
provider may become the Controlling Party with respect to the exercise of
remedies under the Indentures. (Intercreditor Agreement, Section 2.6(c))
OFFERED CERTIFICATE LIQUIDITY PROVIDER
The initial 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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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 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 thereunder or with respect to the Equipment Notes issued under such
Indenture, by the holders of at least a majority of the outstanding principal
amount of the Equipment Notes issued under such Indenture, so long as no
Indenture Default (which, with respect to Leased Aircraft, has not been cured by
the applicable Owner Trustee or Owner Participant) shall have occurred and be
continuing thereunder. For so long as the Subordination Agent is the registered
holder of the Equipment Notes, the Subordination Agent will act with respect to
the preceding sentence in accordance with the directions of the Trustees for
whom the Equipment Notes issued under such Indenture are held as Trust Property,
to the extent constituting, in the aggregate, directions with respect to the
required principal amount of Equipment Notes.
After the occurrence and during the continuance of an Indenture Default
under such Indenture (which, with respect to Leased Aircraft, has not been cured
by the applicable Owner Trustee or Owner Participant), each Loan Trustee will be
directed in taking, or refraining from taking, any action thereunder or with
respect to the Equipment Notes issued under the related Indenture, including
acceleration of such Equipment Notes or foreclosing the lien on the related
Aircraft, by the Controlling Party, subject to the limitations described below.
See "Description of the Certificates--Indenture Defaults and Certain Rights Upon
an Indenture Default" for a description of the rights of the Certificateholders
of each Trust to direct the respective Trustees.
The "Controlling Party" will be:
-- The Class A-1 Trustee or Class A-2 Trustee, whichever represents the
Class with the larger principal amount of Certificates outstanding at
the time that the Indenture Default occurs.
-- Upon payment of Final Distributions to the holders of such larger
Class, the other of the Class A-1 Trustee or Class A-2 Trustee.
-- Upon payment of Final Distributions to the holders of Class A-1 and
A-2 Certificates, the Class B Trustee.
-- Upon payment of Final Distributions to the holders of Class B
Certificates, the Class C Trustee.
-- Under certain circumstances, and notwithstanding the foregoing, the
liquidity provider with the largest amount owed to it, as discussed
in the next paragraph.
At any time after 18 months from the earlier to occur of (x) the date on
which the entire available amount under any Liquidity Facility shall have been
drawn (for any reason other than a Downgrade Drawing or a Non-Extension Drawing)
and remain unreimbursed, (y) the date on which the entire amount of any
Downgrade Drawing or Non-Extension Drawing shall have been withdrawn from the
relevant Cash Collateral Account to pay interest on the relevant Class of
Certificates and remain unreimbursed and (z) the date on which all Equipment
Notes shall have been accelerated (provided that if such acceleration occurs
prior to the Delivery Period Termination Date, the aggregate principal amount
thereof exceeds $300 million), the liquidity provider with the highest
outstanding amount of Liquidity Obligations shall have the right to become the
Controlling Party with respect to any Indenture.
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For purposes of giving effect to the rights of the Controlling Party, the
Trustees (other than the Controlling Party) shall irrevocably agree, and the
Certificateholders (other than the Certificateholders represented by the
Controlling Party) will be deemed to agree by virtue of their purchase of
Certificates, that the Subordination Agent, as record holder of the Equipment
Notes, shall exercise its voting rights in respect of the Equipment Notes as
directed by the Controlling Party. (Intercreditor Agreement, Section 2.6) For a
description of certain limitations on the Controlling Party's rights to exercise
remedies, see "Description of the Equipment Notes--Remedies".
"Final Distributions" means, with respect to the Certificates of any Trust
on any Distribution Date, the sum of (x) the aggregate amount of all accrued and
unpaid interest on such Certificates (excluding interest payable on the Deposits
relating to such Trust) and (y) the Pool Balance of such Certificates as of the
immediately preceding Distribution Date (less the amount of the Deposits for
such Class of Certificates as of such preceding Distribution Date other than any
portion of such Deposits thereafter used to acquire Equipment Notes pursuant to
the Note Purchase Agreement). For purposes of calculating Final Distributions
with respect to the Certificates of any Trust, any premium paid on the Equipment
Notes held in such Trust which has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
such Final Distributions.
SALE OF EQUIPMENT NOTES OR AIRCRAFT
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the immediately following sentence, sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person. So long
as any Certificates are outstanding, during nine months after the earlier of (x)
the acceleration of the Equipment Notes under any Indenture and (y) the
bankruptcy or insolvency of Continental, without the consent of each Trustee, no
Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold, if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes. In addition, with respect to
any Leased Aircraft, the amount and payment dates of rentals payable by
Continental under the related Lease may not be adjusted during this nine-month
period, if, as a result of such adjustment, the discounted present value of all
such rentals would be less than 75% of the discounted present value of the
rentals payable by Continental under such Lease before giving effect to such
adjustment.
"Minimum Sale Price" means, with respect to any Aircraft or the Equipment
Notes issued in respect of such Aircraft, at any time, the lesser of (1) 75% of
the Appraised Current Market Value of such Aircraft and (2) the aggregate
outstanding principal amount of such Equipment Notes, plus accrued and unpaid
interest thereon. The Minimum Sale Price for such Aircraft and the discounted
present value of all rentals shall be determined using the weighted average
interest rate of the Equipment Notes outstanding under such Indenture as the
discount rate.
PRIORITY OF DISTRIBUTIONS
BEFORE A TRIGGERING EVENT
So long as no Triggering Event shall have occurred (whether or not
continuing), all payments in respect of the Equipment Notes and certain other
payments received on any Distribution Date will be promptly distributed by the
Subordination Agent on such Distribution Date in the following order of
priority:
-- To the Liquidity Providers to the extent required to pay the
Liquidity Expenses.
-- To the Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations.
-- To the Liquidity Providers to the extent required to pay or reimburse
the Liquidity Providers for certain Liquidity Obligations (other than
amounts payable pursuant to the two preceding clauses) and/or, if
applicable, to replenish each Cash Collateral Account up to the
Required Amount.
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-- To the Class A-1 Trustee and the Class A-2 Trustee to the extent
required to pay Expected Distributions on the Class A-1 Certificates
and the Class A-2 Certificates. If available funds are insufficient
to pay an Expected Distribution to each such Class in full, available
funds will be distributed to each of the Class A-1 Trustee and Class
A-2 Trustee in the same proportion as such Trustee's proportionate
share of the aggregate amount of such Expected Distributions.
-- To the Class B Trustee to the extent required to pay Expected
Distributions on the Class B Certificates.
-- To the Class C Trustee to the extent required to pay Expected
Distributions on the Class C Certificates.
-- If Class D Certificates have been issued, to the Class D Trustee to
the extent required to pay "Expected Distributions" (to be defined in
a manner equivalent to the definition below for other Classes of
Certificates) on the Class D Certificates.
-- To the Subordination Agent and each Trustee for the payment of
certain fees and expenses.
"Liquidity Obligations" means the obligations to reimburse or to pay the
Liquidity Providers all principal, interest, fees and other amounts owing to
them under each Liquidity Facility or certain other agreements (or such lesser
amount as any Liquidity Provider may otherwise agree).
"Liquidity Expenses" means the Liquidity Obligations other than any
interest accrued thereon or the principal amount of any drawing under the
Liquidity Facilities.
"Expected Distributions" means, with respect to the Certificates of any
Trust on any Distribution Date (the "Current Distribution Date"), the sum of (1)
accrued and unpaid interest on such Certificates (excluding interest, if any,
payable with respect to 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, the original aggregate face amount of the
Certificates of such Trust) and
(B) the Pool Balance of such Certificates as of the Current
Distribution Date calculated on the basis that (i) the principal of the
Equipment Notes held in such Trust has been paid when due (whether at
stated maturity, upon redemption, prepayment, purchase, acceleration or
otherwise) and such payments have been distributed to the holders of such
Certificates and (ii) the principal of any Equipment Notes formerly held in
such Trust that have been sold pursuant to the Intercreditor Agreement has
been paid in full and such payments have been distributed to the holders of
such Certificates, but without giving effect to any reduction in the Pool
Balance as a result of any distribution attributable to Deposits occurring
after the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, occurring after the
initial issuance of the Certificates of such Trust).
For purposes of determining the priority of distributions on account of the
redemption, purchase or prepayment of all of the Equipment Notes issued pursuant
to an Indenture, clause (1) of the definition of Expected Distributions shall be
deemed to read as follows: "(1) accrued, due and unpaid interest on such
Certificates together with (without duplication) accrued and unpaid interest on
a portion 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
excluding interest, if any, payable with respect to any Deposits relating to
such Trust".
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AFTER A TRIGGERING EVENT
Subject to the terms of the Intercreditor Agreement, upon the occurrence of
a Triggering Event and at all times thereafter, all funds received by the
Subordination Agent in respect of the Equipment Notes and certain other payments
will be promptly distributed by the Subordination Agent in the following order
of priority:
-- To the Subordination Agent, any Trustee, any Certificateholder and
any Liquidity Provider to the extent required to pay certain
out-of-pocket costs and expenses actually incurred by the
Subordination Agent or any Trustee or to reimburse any
Certificateholder or any Liquidity Provider in respect of payments
made to the Subordination Agent or any Trustee in connection with the
protection or realization of the value of the Equipment Notes, any
Trust Indenture Estate under (and as defined in any Leased Aircraft
Indenture) or Collateral under (and as defined in) any Owned Aircraft
Indenture (collectively, the "Administration Expenses").
-- To the Liquidity Providers to the extent required to pay the
Liquidity Expenses.
-- To the Liquidity Providers to the extent required to pay interest
accrued on the Liquidity Obligations.
-- To the Liquidity Providers to the extent required to pay the
outstanding amount of all Liquidity Obligations and/or, if
applicable, with respect to any particular Liquidity Facility, unless
(x) less than 65% of the aggregate outstanding principal amount of
all Equipment Notes are Performing Equipment Notes and a Liquidity
Event of Default shall have occurred and is continuing under such
Liquidity Facility or (y) a Final Drawing shall have occurred under
such Liquidity Facility, to replenish the Cash Collateral Account
with respect to such Liquidity Facility up to the Required Amount for
the related Class of Certificates (less the amount of any repayments
of Interest Drawings under such Liquidity Facility while sub-clause
(x) of this clause is applicable).
-- To the Subordination Agent, any Trustee or any Certificateholder to
the extent required to pay certain fees, taxes, charges and other
amounts payable.
-- To the Class A-1 Trustee and the Class A-2 Trustee to the extent
required to pay Adjusted Expected Distributions on the Class A-1
Certificates and the Class A-2 Certificates. If available funds are
insufficient to pay an Adjusted Expected Distribution to each such
Class in full, available funds will be distributed to each of the
Class A-1 Trustee and Class A-2 Trustee in the same proportion as
such Trustee's proportionate share of the aggregate amount of such
Adjusted Expected Distributions.
-- To the Class B Trustee to the extent required to pay Adjusted
Expected Distributions on the Class B Certificates.
-- To the Class C Trustee to the extent required to pay Adjusted
Expected Distributions on the Class C Certificates.
-- If Class D Certificates have been issued, to the Class D Trustee to
the extent required to pay "Adjusted Expected Distributions" (to be
defined in a manner equivalent to the definition below for other
Classes of Certificates) on the Class D Certificates.
"Adjusted Expected Distributions" means, with respect to the Certificates
of any Trust on any Current Distribution Date, the sum of (1) accrued and unpaid
interest on such Certificates (excluding interest, if any, payable with respect
to 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, the original aggregate
face amount of the Certificates of such Trust) and (y) the Pool Balance of
such Certificates as of the Current Distribution Date calculated on the
basis that (i) the principal of the Equipment Notes other than Performing
Equipment Notes (the "Non-Performing Equipment Notes") held in such Trust
has been paid in full and such payments have been distributed to the
holders of such Certificates, (ii) the principal of the Performing
Equipment Notes held in such Trust has been paid when due (but without
giving effect to any acceleration of Performing Equipment Notes) and such
payments have been distributed to the holders of such Certificates and
(iii) the principal of any Equipment Notes
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formerly held in such Trust that have been sold pursuant to the
Intercreditor Agreement has been paid in full and such payments have been
distributed to the holders of such Certificates, but without giving effect
to any reduction in the Pool Balance as a result of any distribution
attributable to Deposits occurring after the immediately preceding
Distribution Date (or, if the Current Distribution Date is the first
Distribution Date, occurring after the initial issuance of the Certificates
of such Trust), and
(B) the amount of the excess, if any, of (i) the Pool Balance of such
Class of Certificates as of the immediately preceding Distribution Date
(or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), less the
amount of 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 premium paid on
the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
"Aggregate LTV Collateral Amount" for any Class of Certificates for any
Distribution Date means the product of (A) (i) the sum of the applicable LTV
Collateral Amounts for each Aircraft, minus (ii) the Pool Balance for each Class
of Certificates, if any, senior to such Class, after giving effect to any
distribution of principal on such Distribution Date with respect to such senior
Class or Classes, multiplied by (B) (i) in the case of the Class A-1
Certificates or Class A-2 Certificates, a fraction the numerator of which equals
the Current Pool Balance for the Class A-1 Certificates or Class A-2
Certificates, as the case may be, and the denominator of which equals the
aggregate Current Pool Balance for the Class A-1 Certificates and Class A-2
Certificates, and (ii) in the case of the Class B Certificates or the Class C
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 Lease, in the case of a Leased
Aircraft, or relevant Indenture, in the case of an Owned Aircraft, the amount of
the insurance proceeds paid to the related Loan Trustee in respect thereof to
the extent then held by such Loan Trustee (and/or on deposit in the Special
Payments Account) or payable to such Loan Trustee in respect thereof) and (ii)
the outstanding principal amount of the Equipment Notes secured by such Aircraft
after giving effect to any principal payments of such Equipment Notes on or
before such Distribution Date.
"LTV Ratio" means for each Class of Offered Certificates as of any
Distribution Date, the percentages set forth in the following table:
CLASS A-1 CLASS A-2 CLASS B
CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------
% % %
The LTV Ratio for the Class C Certificates will be determined prior to the
issuance thereof.
"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
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the Aircraft shown in such LTV Appraisals, the Controlling Party shall have the
right to obtain or cause to be obtained substitute LTV Appraisals (including LTV
Appraisals based upon physical inspection of such Aircraft).
"LTV Appraisal" means a current fair market value appraisal (which may be a
"desk-top" appraisal) performed by any Appraiser or any other nationally
recognized appraiser on the basis of an arm's-length transaction between an
informed and willing purchaser under no compulsion to buy and an informed and
willing seller under no compulsion to sell and both having knowledge of all
relevant facts.
Interest Drawings under the Liquidity Facility and withdrawals from the
Cash Collateral Account, in each case in respect of interest on the Certificates
of any Trust, will be distributed to the Trustee for such Trust, notwithstanding
the priority of distributions set forth in the Intercreditor Agreement and
otherwise described herein. All amounts on deposit in the Cash Collateral
Account for any Trust that are in excess of the Required Amount will be paid to
the applicable Liquidity Provider.
VOTING OF EQUIPMENT NOTES
In the event that the Subordination Agent, as the registered holder of any
Equipment Note, receives a request for its consent to any amendment,
modification, consent or waiver under such Equipment Note or the related
Indenture (or, if applicable, the related Lease, the related Participation
Agreement or other related document), (i) if no Indenture Default shall have
occurred and be continuing with respect to such Indenture, the Subordination
Agent shall request instructions from the Trustee(s) and shall vote or consent
in accordance with the directions of such Trustee(s) and (ii) if any Indenture
Default (which, in the case of any Leased Aircraft Indenture, has not been cured
by the applicable Owner Trustee or Owner Participant) shall have occurred and be
continuing with respect to such Indenture, the Subordination Agent will exercise
its voting rights as directed by the Controlling Party, subject to certain
limitations; provided that no such amendment, modification, consent or waiver
shall, without the consent of the Liquidity Providers, reduce the amount of
rent, supplemental rent or stipulated loss values payable by Continental under
any Lease or reduce the amount of principal or interest payable by Continental
under any Equipment Note issued under any Owned Aircraft Indenture.
(Intercreditor Agreement, Section 9.1(b))
ADDITION OF TRUSTEE FOR CLASS D CERTIFICATES
If the Class D Certificates are issued, the Class D Trustee will become a
party to the Intercreditor Agreement.
THE SUBORDINATION AGENT
Wilmington Trust Company will be the Subordination Agent under the
Intercreditor Agreement. Continental and its affiliates may from time to time
enter into banking and trustee relationships with the Subordination Agent and
its affiliates. The Subordination Agent's address is Wilmington Trust Company,
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001,
Attention: Corporate Trust Administration.
The Subordination Agent may resign at any time, in which event a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. The Controlling Party may remove the Subordination Agent for cause as
provided in the Intercreditor Agreement. In such circumstances, a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. Any resignation or removal of the Subordination Agent and appointment
of a successor Subordination Agent does not become effective until acceptance of
the appointment by the successor Subordination Agent. (Intercreditor Agreement,
Section 8.1)
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DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft consist of nine Boeing 737-824 aircraft, five Boeing 737-924
aircraft, six Boeing 767-424ER aircraft and one 777-224ER aircraft
(collectively, the "Aircraft"), all of which will be newly delivered by the
manufacturer during the Delivery Period. The Aircraft have been designed to be
in compliance with Stage 3 noise level standards, which are the most restrictive
regulatory standards currently in effect in the United States for aircraft noise
abatement.
BOEING 737-824 AIRCRAFT
The Boeing 737-824 aircraft is a medium-range aircraft with a seating
capacity of approximately 150 passengers. The engine type utilized on
Continental's 737-824 aircraft is the CFM International, Inc. CFM56-7B26.
BOEING 737-924 AIRCRAFT
The Boeing 737-924 aircraft is a medium-range aircraft with a seating
capacity of approximately 167 passengers. The engine type utilized on
Continental's 737-924 aircraft is the CFM International, Inc. CFM56-7B26.
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.
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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 Aircraft
Information Services, Inc. ("AISI"), AVITAS, Inc. ("AVITAS") 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 nine of the twelve Boeing 737-824
aircraft listed below, five of the seven Boeing 737-924 aircraft listed below,
six of the ten Boeing 767-424ER aircraft listed below and one of the two
777-224ER aircraft listed below.
EXPECTED SCHEDULED APPRAISER'S VALUATIONS
REGISTRATION MANUFACTURER'S DELIVERY ------------------------------------------ APPRAISED
AIRCRAFT TYPE NUMBER SERIAL NUMBER MONTH(1) AISI AVITAS MBA VALUE(2)
- ---------------- ------------ -------------- ------------- ------------ ------------ ------------ ------------
Boeing 737-824 N76269 31588 October 2001 $ 51,520,000 $ 45,900,000 $ 49,220,000 $ 48,880,000
Boeing 737-824 N73270 31632 October 2001 51,520,000 45,900,000 49,220,000 48,880,000
Boeing 737-824 N35271 31589 November 2001 51,680,000 45,900,000 49,320,000 48,966,667
Boeing 737-824 N36272 31590 November 2001 51,680,000 45,900,000 49,320,000 48,966,667
Boeing 737-824 N37273 31591 December 2001 51,850,000 45,900,000 49,420,000 49,056,667
Boeing 737-824 N37274 31592 January 2002 52,010,000 46,400,000 49,520,000 49,310,000
Boeing 737-824 N73275 31593 February 2002 52,170,000 46,400,000 49,620,000 49,396,667
Boeing 737-824 N73276 31594 February 2002 52,170,000 46,400,000 49,620,000 49,396,667
Boeing 737-824 N37277 31595 March 2002 52,330,000 46,400,000 49,720,000 49,483,333
Boeing 737-824 N73278 31596 June 2002 52,830,000 46,700,000 50,020,000 49,850,000
Boeing 737-824 N79279 31597 June 2002 52,830,000 46,700,000 50,020,000 49,850,000
Boeing 737-824 N36280 31598 June 2002 52,830,000 46,700,000 50,020,000 49,850,000
Boeing 737-924 N37408 30125 October 2001 52,720,000 47,900,000 50,440,000 50,353,333
Boeing 737-924 N37409 30126 November 2001 52,890,000 47,900,000 50,540,000 50,443,333
Boeing 737-924 N75410 30127 December 2001 53,050,000 47,900,000 50,640,000 50,530,000
Boeing 737-924 N71411 30128 January 2002 53,210,000 48,400,000 50,740,000 50,740,000
Boeing 737-924 N31412 30129 March 2002 53,550,000 48,400,000 50,950,000 50,950,000
Boeing 737-924 N37413 30130 May 2002 53,880,000 48,800,000 51,170,000 51,170,000
Boeing 737-924 N30414 30131 June 2002 54,050,000 48,800,000 51,270,000 51,270,000
Boeing 767-424ER N66057 29452 January 2002 108,890,000 95,500,000 100,190,000 100,190,000
Boeing 767-424ER N67058 29453 January 2002 108,890,000 95,500,000 100,190,000 100,190,000
Boeing 767-424ER N69059 29454 February 2002 109,240,000 95,500,000 100,400,000 100,400,000
Boeing 767-424ER N78060 29455 February 2002 109,240,000 95,500,000 100,400,000 100,400,000
Boeing 767-424ER N68061 29456 March 2002 109,570,000 95,500,000 100,610,000 100,610,000
Boeing 767-424ER N76062 29457 March 2002 109,570,000 95,500,000 100,610,000 100,610,000
Boeing 767-424ER N69063 29458 April 2002 109,920,000 96,200,000 100,820,000 100,820,000
Boeing 767-424ER N76064 29459 April 2002 109,920,000 96,200,000 100,820,000 100,820,000
Boeing 767-424ER N76065 29460 May 2002 110,260,000 96,200,000 101,020,000 101,020,000
Boeing 767-424ER N77066 29461 May 2002 110,260,000 96,200,000 101,020,000 101,020,000
Boeing 777-224ER N78017 31679 March 2002 143,880,000 128,500,000 143,280,000 138,553,333
Boeing 777-224ER N37018 31680 April 2002 144,340,000 129,500,000 143,570,000 139,136,667
- ------------
(1) The actual delivery date for any 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, AISI, AVITAS and MBA each was asked to
provide its opinion as to the appraised value of each aircraft projected as of
the scheduled delivery month of each such aircraft. As part of this process, all
three Appraisers performed "desk-top" appraisals without any physical inspection
of the aircraft. The appraisals are based on various assumptions and
methodologies, which vary among the appraisals. The Appraisers have delivered
letters summarizing their respective appraisals, copies of which are annexed to
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this Prospectus Supplement as Appendix II. For a discussion of the assumptions
and methodologies used in each of the appraisals, reference is hereby made to
such summaries.
An appraisal is only an estimate of value. It is not indicative of the
price at which an aircraft may be purchased from the manufacturer. Nor should it
be relied upon as a measure of realizable value. The proceeds realized upon a
sale of any Aircraft may be less than its appraised value. The value of the
Aircraft in the event of the exercise of remedies under the applicable Indenture
will depend on market and economic conditions, the availability of buyers, the
condition of the Aircraft and other similar factors. Accordingly, there can be
no assurance that the proceeds realized upon any such exercise with respect to
the Equipment Notes and the Aircraft pursuant to the applicable Indenture would
equal the appraised value of such Aircraft or be sufficient to satisfy in full
payments due on such Equipment Notes or the Certificates.
DELIVERIES OF AIRCRAFT
The aircraft 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 October 2001 through June 2002. See the table under
"--The Appraisals" for the scheduled month of delivery of each such aircraft.
Under such purchase agreements, delivery of an aircraft may be delayed due to
"Excusable Delay", which is defined to include, among other things, acts of God,
governmental acts or failures to act, strikes or other labor troubles, inability
to procure materials, or any other cause beyond Boeing's control or not
occasioned by Boeing's fault or negligence.
The Note Purchase Agreement provides that the delivery period (the
"Delivery Period") will expire on September 30, 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) December 31, 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 September 30, 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 but without a premium. See "Description of
the Deposit Agreements--Unused Deposits".
SUBSTITUTE AIRCRAFT
If the delivery date for any Aircraft is delayed (i) more than 30 days
after the month scheduled for delivery or (ii) beyond September 30, 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 737-800, 737-900, 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 Leases, the Participation Agreements, the trust agreements
under which the Owner Trustees act on behalf of the Owner Participants (the
"Trust Agreements") and the Note Purchase Agreement set forth in the Prospectus.
The summaries make use of terms defined in and are qualified in their entirety
by reference to all of the provisions of the Equipment Notes, the Indentures,
the Leases, the Participation Agreements, the Trust Agreements and the Note
Purchase Agreement, each of which will be filed as an exhibit to a Current
Report on Form 8-K to be filed by Continental with the Commission. Except as
otherwise indicated, the following summaries relate to the Equipment Notes, the
Indenture, the Lease, the Participation Agreement and the Trust Agreement that
may be applicable to each Aircraft. Unless Class C Certificates are issued, no
Series C Equipment Notes will be issued and you should consider all references
to Series C Equipment Notes in this Prospectus Supplement to mean "Series C
Equipment Notes when issued".
Under the Note Purchase Agreement, Continental will have the option of
entering into a leveraged lease financing or a secured debt financing with
respect to each Aircraft.
-- If Continental chooses to enter into a leveraged lease financing with
respect to an Aircraft, the Note Purchase Agreement provides for the
relevant parties to enter into a Participation Agreement, a Lease and
a Leased Aircraft Indenture (among other documents) relating to the
financing of such Leased Aircraft.
-- If Continental chooses to enter into a secured debt financing with
respect to an Aircraft, the Note Purchase Agreement provides for the
relevant parties to enter into a Participation Agreement and an Owned
Aircraft Indenture relating to the financing of such Owned Aircraft.
The description of such 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. In the
case of a Leased Aircraft, this is because a third party--the owner participant
that will be the beneficial owner of the Leased Aircraft (the "Owner
Participant")--will provide a portion of the financing of such Aircraft and may
request changes. In addition, the purchaser of Class C Certificates may request
changes to the forms of financing agreements attached to the Note Purchase
Agreement. 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". Each Owner Participant will be required to satisfy certain
requirements, including having a minimum combined capital and surplus or net
worth.
GENERAL
Equipment Notes will be issued in up to four series with respect to each
Aircraft (the "Series A-1 Equipment Notes", the "Series A-2 Equipment Notes",
the "Series B Equipment Notes", the "Series C Equipment Notes", and,
collectively, the "Equipment Notes"). Continental may elect to issue a fifth
series of Equipment Notes with respect to an Aircraft (the "Series D Equipment
Notes"), which will be funded from sources other than this Offering. See
"Description of the Certificates--Possible Issuance of Class D Certificates".
The Equipment Notes with respect to each Leased Aircraft will be issued under a
separate Leased Aircraft Indenture between First Security Bank, National
Association, as owner trustee of a trust for the benefit of the Owner
Participant who will be the beneficial owner of such Aircraft (each, an "Owner
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Trustee"), and Wilmington Trust Company, as indenture trustee thereunder (each,
a "Leased Aircraft Trustee"). The Equipment Notes with respect to each Owned
Aircraft will be issued under a separate Owned Aircraft Indenture between
Continental and Wilmington Trust Company, as indenture trustee thereunder (each,
an "Owned Aircraft Trustee" and, together with the other Owned Aircraft Trustees
and the Leased Aircraft Trustees, the "Loan Trustees"). The Indentures will not
provide for defeasance, or discharge upon deposit of cash or certain obligations
of the United States, notwithstanding the description of defeasance in the
Prospectus.
The related Owner Trustee will lease each Leased Aircraft to Continental
pursuant to a separate Lease between such Owner Trustee and Continental with
respect to such Leased Aircraft. Under each Lease, Continental will be obligated
to make or cause to be made rental and other payments to the related Leased
Aircraft Trustee on behalf of the related Owner Trustee, which rental and other
payments will be at least sufficient to pay in full when due all payments
required to be made on the Equipment Notes issued with respect to such Leased
Aircraft. The Equipment Notes issued with respect to the Leased Aircraft are
not, however, direct obligations of, or guaranteed by, Continental.
Continental's rental obligations under each Lease and Continental's obligations
under the Equipment Notes issued with respect to each Owned Aircraft will be
general obligations of Continental.
Continental may, subject to some conditions, elect to convert a secured
debt financing to a leveraged lease financing within 120 days after such secured
debt financing by entering into a sale-leaseback transaction. Continental will
be permitted to convert an Owned Aircraft into a Leased Aircraft only if
Continental (1) furnishes to the relevant Owned Aircraft Trustee an opinion that
the Pass Through Trusts will not be subject to U.S. federal income tax as a
result of such transaction, (2) furnishes to the relevant Owned Aircraft Trustee
either (A) an opinion that the Certificateholders will not recognize gain or
loss for U.S. federal income tax purposes as a result of such transaction and
will be subject to U.S. federal income tax on the same amounts, in the same
manner and at the same time as would have been the case if such transaction had
not occurred or (B) both an opinion that the Certificateholders should not
recognize gain or loss for U.S. federal income tax purposes in connection with
such transaction and should be subject to U.S. federal income tax on the same
amount, in the same manner and at the same time as would have been the case if
such transaction had not occurred and an indemnity in favor of the
Certificateholders in form and substance reasonably satisfactory to the relevant
Owned Aircraft Trustee and (3) obtains written confirmation from each Rating
Agency that such transaction will not result in a withdrawal, suspension or
downgrading of the ratings of any Class of Certificates.
SUBORDINATION
The Indentures provide for the following subordination provisions
applicable to the Equipment Notes:
-- Series A-1 and Series A-2 Equipment Notes issued in respect of an
Aircraft will rank equally in right of payment and will rank senior
to other Equipment Notes issued in respect of such Aircraft.
-- Series B Equipment Notes issued in respect of an Aircraft will rank
junior in right of payment to the Series A-1 and Series A-2 Equipment
Notes issued in respect of such Aircraft and will rank senior to the
Series C Equipment Notes and, if applicable, Series D Equipment Notes
issued in respect of such Aircraft.
-- Series C Equipment Notes issued in respect of an Aircraft will rank
junior to the Series A-1, Series A-2 and Series B Equipment Notes
issued in respect of such Aircraft and, if Series D Equipment Notes
are issued in respect of such Aircraft, senior to such Series D
Equipment Notes.
-- If Continental elects to issue Series D Equipment Notes with respect
to an Aircraft, they will be subordinated in right of payment to the
Series A-1, A-2, B and C 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.
Interest will be payable on the unpaid principal amount of each Series A-1,
A-2 and B Equipment Note at the rate applicable to such Equipment Note on June
15 and December 15 of each year, commencing on the first such date to occur
after initial issuance thereof. Such interest will be computed on the basis of a
360-day year of twelve 30-day months.
Scheduled principal payments on the Series A-1 and Series B Equipment Notes
will be made on June 15 and December 15 in certain years. The entire principal
amount of the Series A-2 Equipment Notes is scheduled to be paid on June 15,
2011. See "Description of the Certificates--Pool Factors" for a discussion of
the scheduled payments of principal of the Equipment Notes and possible
revisions thereto.
If any date scheduled for a payment of principal, premium (if any) or
interest with respect to the Equipment Notes is not a Business Day, such payment
will be made on the next succeeding Business Day without any additional
interest.
REDEMPTION
If an Event of Loss occurs with respect to an Aircraft and such Aircraft is
not replaced by Continental under the related Lease (in the case of a Leased
Aircraft) or under the related Owned Aircraft Indenture (in the case of an Owned
Aircraft), the Equipment Notes issued with respect to such Aircraft will be
redeemed, in whole, in each case at a price equal to the aggregate unpaid
principal amount thereof, together with accrued interest thereon to, but not
including, the date of redemption, but without premium, on a Special
Distribution Date. (Leased Aircraft Indentures, Section 2.10(a); Owned Aircraft
Indentures, Section 2.10)
If Continental exercises its right to terminate a Lease under Section 9 of
such Lease, the Equipment Notes relating to the applicable Leased Aircraft will
be redeemed, in whole, on a Special Distribution Date at a price equal to the
aggregate unpaid principal amount thereof, together with accrued and unpaid
interest thereon to, but not including, the date of redemption, plus, in the
case of the Series A-1, A-2 and B Equipment Notes, a Make-Whole Premium. (Leased
Aircraft Indentures, Section 2.10(b)) See "--The Leases and Certain Provisions
of the Owned Aircraft Indentures--Lease Termination".
All of the Equipment Notes issued with respect to a Leased Aircraft may be
redeemed prior to maturity as part of a refunding or refinancing thereof under
Section 11 of the applicable Participation Agreement, and all of the Equipment
Notes issued with respect to the Owned Aircraft may be redeemed prior to
maturity at any time at the option of Continental, in each case at a price equal
to the aggregate unpaid principal thereof, together with accrued and unpaid
interest thereon to, but not including, the date of redemption, plus, in the
case of the Series A-1, A-2 and B Equipment Notes, a Make-Whole Premium.
(Indentures, Section 2.11) If notice of such a redemption shall have been given
in connection with a refinancing of Equipment Notes with respect to a Leased
Aircraft, such notice may be revoked not later than three days prior to the
proposed redemption date. (Leased Aircraft Indentures, Section 2.12)
If, with respect to a Leased Aircraft, (x) one or more Lease Events of
Default shall have occurred and been continuing, (y) in the event of a
bankruptcy proceeding involving Continental, (i) during the Section 1110 Period,
the trustee in such proceeding or Continental does not assume or agree to
perform its obligations under the related Lease or (ii) at any time after
assuming or agreeing to perform such obligations, such trustee or Continental
ceases to perform such obligations such that the stay period applicable under
the U.S. Bankruptcy Code comes to an end or (z) the Equipment Notes with respect
to such Aircraft have been accelerated or the Leased Aircraft Trustee with
respect to such Equipment Notes takes action or notifies the
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applicable Owner Trustee that it intends to take action to foreclose the lien of
the related Leased Aircraft Indenture or otherwise commence the exercise of any
significant remedy under such Indenture or the related Lease, then in each case
all, but not less than all, of the Equipment Notes issued with respect to such
Leased Aircraft may be purchased by the related Owner Trustee or Owner
Participant on the applicable purchase date at a price equal to the aggregate
unpaid principal thereof, together with accrued and unpaid interest thereon to,
but not including, the date of purchase, but without any premium (provided that
a Make-Whole Premium shall be payable with respect to the Series A-1, A-2 and B
Equipment Notes if such Equipment Notes are to be purchased pursuant to clause
(x) when a Lease Event of Default shall have occurred and been continuing for
less than 120 days). (Leased Aircraft Indentures, Section 2.13) Continental as
owner of the Owned Aircraft has no comparable right under the Owned Aircraft
Indentures to purchase the Equipment Notes under such circumstances.
"Make-Whole Premium" means, with respect to any Series A-1, A-2 or B
Equipment Note, an amount (as determined by an independent investment bank of
national standing) equal to the excess, if any, of (a) the present value of the
remaining scheduled payments of principal and interest to maturity of such
Equipment Note computed by discounting such payments on a semiannual basis on
each payment date under the applicable Indenture (assuming a 360-day year of
twelve 30-day months) using a discount rate equal to the Treasury Yield over (b)
the outstanding principal amount of such Equipment Note plus accrued interest to
the date of determination.
For purposes of determining the Make-Whole Premium, "Treasury Yield" means,
at the date of determination with respect to any Equipment Note, the interest
rate (expressed as a decimal and, in the case of United States Treasury bills,
converted to a bond equivalent yield) determined to be the per annum rate equal
to the semiannual yield to maturity for United States Treasury securities
maturing on the Average Life Date of such Equipment Note and trading in the
public securities markets either as determined by interpolation between the most
recent weekly average yield to maturity for two series of United States Treasury
securities trading in the public securities markets, (A) one maturing as close
as possible to, but earlier than, the Average Life Date of such Equipment Note
and (B) the other maturing as close as possible to, but later than, the Average
Life Date of such Equipment Note, in each case as published in the most recent
H.15(519) or, if a weekly average yield to maturity for United States Treasury
securities maturing on the Average Life Date of such Equipment Note is reported
in the most recent H.15(519), such weekly average yield to maturity as published
in such H.15(519). "H.15(519)" means the weekly statistical release designated
as such, or any successor publication, published by the Board of Governors of
the Federal Reserve System. The date of determination of a Make-Whole Premium
shall be the third Business Day prior to the applicable payment or redemption
date and the "most recent H.15(519)" means the H.15(519) published prior to the
close of business on the third Business Day prior to the applicable payment or
redemption date.
"Average Life Date" for any Equipment Note shall be the date which follows
the time of determination by a period equal to the Remaining Weighted Average
Life of such Equipment Note. "Remaining Weighted Average Life" on a given date
with respect to any Equipment Note shall be the number of days equal to the
quotient obtained by dividing (a) the sum of each of the products obtained by
multiplying (i) the amount of each then remaining scheduled payment of principal
of such Equipment Note by (ii) the number of days from and including such
determination date to but excluding the date on which such payment of principal
is scheduled to be made, by (b) the then outstanding principal amount of such
Equipment Note.
SECURITY
LEASED AIRCRAFT
The Equipment Notes issued with respect to each Leased Aircraft will be
secured by:
-- An assignment by the related Owner Trustee to the related Leased
Aircraft Trustee of such Owner Trustee's rights, except for certain
limited rights, under the Lease with respect to the related Aircraft,
including the right to receive payments of rent thereunder.
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-- A mortgage to such Leased Aircraft Trustee of such Aircraft, subject
to the rights of Continental under such Lease.
-- An assignment to such Leased Aircraft Trustee of certain of such
Owner Trustee's rights under the purchase agreement between
Continental and the Aircraft manufacturer.
Unless and until an Indenture Default with respect to a Leased Aircraft has
occurred and is continuing, the Leased Aircraft Trustee may not exercise the
rights of the Owner Trustee under the related Lease, except the Owner Trustee's
right to receive payments of rent due thereunder. The assignment by the Owner
Trustee to the Leased Aircraft Trustee of its rights under the related Lease
will exclude certain rights of such Owner Trustee and the related Owner
Participant, including the rights of the Owner Trustee and the Owner Participant
with respect to indemnification by Continental for certain matters, insurance
proceeds payable to such Owner Trustee in its individual capacity or to such
Owner Participant under public liability insurance maintained by Continental
under such Lease or by such Owner Trustee or such Owner Participant, insurance
proceeds payable to such Owner Trustee in its individual capacity or to such
Owner Participant under certain casualty insurance maintained by such Owner
Trustee or such Owner Participant under such Lease and certain reimbursement
payments made by Continental to such Owner Trustee. (Leased Aircraft Indentures,
Granting Clause) The Equipment Notes issued in respect of any one Aircraft will
not be secured by any of the other Aircraft or Leases (except in certain cases,
if any, where the related Owner Participant and Continental shall agree to
cross-collateralization). Accordingly, any excess proceeds from the exercise of
remedies with respect to the Equipment Notes relating to an Aircraft will not be
available to cover any shortfall with respect to any other Aircraft.
OWNED AIRCRAFT
The Equipment Notes issued with respect to each Owned Aircraft will be
secured by:
-- A mortgage to the Owned Aircraft Trustee of such Aircraft.
-- An assignment to the Owned Aircraft Trustee of certain of
Continental's rights under its purchase agreement with the Aircraft
manufacturer.
CASH
Cash, if any, held from time to time by the Loan Trustee with respect to
any Aircraft, including funds held as the result of an Event of Loss to such
Aircraft or, in the case of a Leased Aircraft, termination of the Lease, if any,
relating thereto, will be invested and reinvested by such Loan Trustee, at the
direction of the related Owner Trustee in the case of the Leased Aircraft or
Continental in the case of the Owned Aircraft, in investments described in the
related Indenture. (Leased Aircraft Indentures, Section 5.09; Owned Aircraft
Indentures, Section 6.06)
LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The following tables set forth illustrative loan to Aircraft value ratios
for the Equipment Notes issued in respect of Leased Aircraft and Owned Aircraft
as of December 15, 2001 and the December 15 Regular Distribution Dates
thereafter, assuming that the Equipment Notes (including Series C Equipment
Notes) in the maximum principal amount are issued in respect of each such
Aircraft. These examples were utilized by Continental in preparing the Assumed
Amortization Schedule, although the amortization schedule for the Series A-1,
Series B and Series C Equipment Notes issued with respect to an Aircraft may
vary from such assumed schedule so long as it complies with the Mandatory
Economic Terms. Accordingly, the schedules set forth below may not be applicable
in the case of any particular Aircraft. For example, in the event the final
maturity date of the Series A-1, Series B or Series C Equipment Notes for a
Boeing 737-824 aircraft were significantly earlier than that shown below, the
average life of the related Certificates may be correspondingly reduced, subject
to compliance with the Mandatory Economic Terms. See "Description of the
Certificates--Pool Factors". Although the following tables do not contain
illustrative loan to Aircraft value ratios for Equipment Notes issued in respect
of an owned Boeing 777-224ER Aircraft, Continental will have
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the option of entering into a secured debt financing with respect to each
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 fifteen years after the
year of delivery of such Aircraft and by approximately 4% of the initial
appraised value per year thereafter. Other rates or methods of depreciation
would result in materially different loan to Aircraft value ratios, and no
assurance can be given (i) that the depreciation rates and method assumed for
the purposes of the tables are the ones most likely to occur or (ii) as to the
actual future value of any Aircraft. Thus the tables should not be considered a
forecast or prediction of expected or likely loan to Aircraft value ratios, but
simply a mathematical calculation based on one set of assumptions.
BOEING 737-824
-------------------------------------------------------------------------------
LEASED AIRCRAFT OWNED AIRCRAFT
-------------------------------------- --------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT OUTSTANDING AIRCRAFT
BALANCE VALUE LOAN TO BALANCE VALUE LOAN TO
DATE (MILLIONS) (MILLIONS) VALUE RATIO (MILLIONS) (MILLIONS) VALUE RATIO
- ---- ----------- ---------- ----------- ----------- ---------- -----------
December 15, 2001....... $26.59 $48.88 54.4% $30.62 $48.97 62.5%
December 15, 2002....... 25.72 47.41 54.2 27.66 47.50 58.2
December 15, 2003....... 24.78 45.95 53.9 26.17 46.03 56.9
December 15, 2004....... 23.78 44.48 53.5 24.77 44.56 55.6
December 15, 2005....... 22.70 43.01 52.8 24.02 43.09 55.7
December 15, 2006....... 21.55 41.55 51.9 23.37 41.62 56.1
December 15, 2007....... 20.32 40.08 50.7 22.71 40.15 56.6
December 15, 2008....... 19.32 38.62 50.0 17.35 38.68 44.9
December 15, 2009....... 18.43 37.15 49.6 15.13 37.21 40.7
December 15, 2010....... 17.48 35.68 49.0 12.59 35.75 35.2
December 15, 2011....... 16.47 34.22 48.1 0.00 NA NA
December 15, 2012....... 15.46 32.75 47.2 0.00 NA NA
December 15, 2013....... 14.43 31.28 46.1 0.00 NA NA
December 15, 2014....... 13.33 29.82 44.7 0.00 NA NA
December 15, 2015....... 12.19 28.35 43.0 0.00 NA NA
December 15, 2016....... 11.06 26.88 41.2 0.00 NA NA
December 15, 2017....... 9.89 24.93 39.7 0.00 NA NA
December 15, 2018....... 8.66 22.97 37.7 0.00 NA NA
December 15, 2019....... 4.80 21.02 22.8 0.00 NA NA
December 15, 2020....... 2.37 19.06 12.4 0.00 NA NA
December 15, 2021....... 0.00 NA NA 0.00 NA NA
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BOEING 737-924
-------------------------------------------------------------------------------
LEASED AIRCRAFT OWNED AIRCRAFT
-------------------------------------- --------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT OUTSTANDING AIRCRAFT
BALANCE VALUE LOAN TO BALANCE VALUE LOAN TO
DATE (MILLIONS) (MILLIONS) VALUE RATIO (MILLIONS) (MILLIONS) VALUE RATIO
- ---- ----------- ---------- ----------- ----------- ---------- -----------
December 15, 2001....... $30.38 $50.35 60.3% $31.04 $50.44 61.5%
December 15, 2002....... 30.38 48.84 62.2 27.80 48.93 56.8
December 15, 2003....... 29.27 47.33 61.8 26.83 47.42 56.6
December 15, 2004....... 27.91 45.82 60.9 25.96 45.90 56.6
December 15, 2005....... 25.20 44.31 56.9 25.18 44.39 56.7
December 15, 2006....... 23.21 42.80 54.2 24.50 42.88 57.2
December 15, 2007....... 21.24 41.29 51.4 22.71 41.36 54.9
December 15, 2008....... 19.70 39.78 49.5 16.44 39.85 41.3
December 15, 2009....... 17.89 38.27 46.8 14.59 38.34 38.1
December 15, 2010....... 13.80 36.76 37.5 12.70 36.82 34.5
December 15, 2011....... 10.06 35.25 28.6 0.00 NA NA
December 15, 2012....... 10.06 33.74 29.8 0.00 NA NA
December 15, 2013....... 10.06 32.23 31.2 0.00 NA NA
December 15, 2014....... 10.06 30.72 32.8 0.00 NA NA
December 15, 2015....... 10.06 29.20 34.5 0.00 NA NA
December 15, 2016....... 9.13 27.69 33.0 0.00 NA NA
December 15, 2017....... 7.34 25.68 28.6 0.00 NA NA
December 15, 2018....... 7.34 23.67 31.0 0.00 NA NA
December 15, 2019....... 7.34 21.65 33.9 0.00 NA NA
December 15, 2020....... 4.06 19.64 20.7 0.00 NA NA
December 15, 2021....... 0.00 NA NA 0.00 NA NA
BOEING 767-424ER
-------------------------------------------------------------------------------
LEASED AIRCRAFT OWNED AIRCRAFT
-------------------------------------- --------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT OUTSTANDING AIRCRAFT
BALANCE VALUE LOAN TO BALANCE VALUE LOAN TO
DATE (MILLIONS) (MILLIONS) VALUE RATIO (MILLIONS) (MILLIONS) VALUE RATIO
- ---- ----------- ---------- ----------- ----------- ---------- -----------
December 15, 2001....... $63.25 $100.40 63.0% $63.38 $100.19 63.3%
December 15, 2002....... 60.59 97.39 62.2 52.43 97.18 53.9
December 15, 2003....... 54.55 94.38 57.8 50.43 94.18 53.6
December 15, 2004....... 50.07 91.36 54.8 48.64 91.17 53.4
December 15, 2005....... 48.26 88.35 54.6 47.05 88.17 53.4
December 15, 2006....... 46.66 85.34 54.7 44.68 85.16 52.5
December 15, 2007....... 45.07 82.33 54.7 41.07 82.16 50.0
December 15, 2008....... 43.66 79.32 55.1 38.50 79.15 48.6
December 15, 2009....... 42.21 76.30 55.3 35.01 76.14 46.0
December 15, 2010....... 34.41 73.29 46.9 25.91 73.14 35.4
December 15, 2011....... 27.48 70.28 39.1 0.00 NA NA
December 15, 2012....... 27.48 67.27 40.8 0.00 NA NA
December 15, 2013....... 27.48 64.26 42.8 0.00 NA NA
December 15, 2014....... 27.08 61.24 44.2 0.00 NA NA
December 15, 2015....... 25.04 58.23 43.0 0.00 NA NA
December 15, 2016....... 23.57 55.22 42.7 0.00 NA NA
December 15, 2017....... 21.07 51.20 41.1 0.00 NA NA
December 15, 2018....... 18.44 47.19 39.1 0.00 NA NA
December 15, 2019....... 15.75 43.17 36.5 0.00 NA NA
December 15, 2020....... 7.84 39.16 20.0 0.00 NA NA
December 15, 2021....... 0.00 NA NA 0.00 NA NA
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BOEING 777-224ER
--------------------------------------
LEASED AIRCRAFT
--------------------------------------
EQUIPMENT
NOTE ASSUMED
OUTSTANDING AIRCRAFT
BALANCE VALUE LOAN TO
DATE (MILLIONS) (MILLIONS) VALUE RATIO
- ---- ----------- ---------- -----------
December 15, 2001....... $ 86.49 $138.55 62.4%
December 15, 2002....... 82.54 134.40 61.4
December 15, 2003....... 74.35 130.24 57.1
December 15, 2004....... 68.55 126.08 54.4
December 15, 2005....... 66.07 121.93 54.2
December 15, 2006....... 63.89 117.77 54.3
December 15, 2007....... 61.72 113.61 54.3
December 15, 2008....... 59.79 109.46 54.6
December 15, 2009....... 57.81 105.30 54.9
December 15, 2010....... 47.05 101.14 46.5
December 15, 2011....... 37.65 96.99 38.8
December 15, 2012....... 37.65 92.83 40.6
December 15, 2013....... 37.65 88.67 42.5
December 15, 2014....... 37.48 84.52 44.3
December 15, 2015....... 34.56 80.36 43.0
December 15, 2016....... 32.20 76.20 42.3
December 15, 2017....... 28.78 70.66 40.7
December 15, 2018....... 25.19 65.12 38.7
December 15, 2019....... 21.52 59.58 36.1
December 15, 2020....... 10.64 54.04 19.7
December 15, 2021....... 0.00 NA NA
LIMITATION OF LIABILITY
The Equipment Notes issued with respect to the Leased Aircraft are not
direct obligations of, or guaranteed by, Continental, any Owner Participant or
the Leased Aircraft Trustees or the Owner Trustees in their individual
capacities. None of the Owner Trustees, the Owner Participants or the Leased
Aircraft Trustees, or any affiliates thereof, will be personally liable to any
holder of an Equipment Note or, in the case of the Owner Trustees and the Owner
Participants, to the Leased Aircraft Trustees for any amounts payable under the
Equipment Notes or, except as provided in each Leased Aircraft Indenture, for
any liability under such Leased Aircraft Indenture. All payments of principal
of, premium, if any, and interest on the Equipment Notes issued with respect to
any Leased Aircraft (other than payments made in connection with an optional
redemption or purchase of Equipment Notes issued with respect to a Leased
Aircraft by the related Owner Trustee or the related Owner Participant) will be
made only from the assets subject to the lien of the Indenture with respect to
such Leased Aircraft or the income and proceeds received by the related Leased
Aircraft Trustee therefrom (including rent payable by Continental under the
Lease with respect to such Leased Aircraft).
The Equipment Notes issued with respect to the Owned Aircraft will be
direct obligations of Continental.
Except as otherwise provided in the Indentures, each Owner Trustee and each
Loan Trustee, in its individual capacity, will not be answerable or accountable
under the Indentures or under the Equipment Notes under any circumstances
except, among other things, for its own willful misconduct or gross negligence.
None of the Owner Participants will have any duty or responsibility under any of
the Leased Aircraft Indentures or the Equipment Notes to the Leased Aircraft
Trustees or to any holder of any Equipment Note.
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INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture will include:
-- In the case of a Leased Aircraft Indenture, the occurrence of any
Lease Event of Default under the related Lease (other than the
failure to make certain indemnity payments and other payments to the
related Owner Trustee or Owner Participant unless a notice is given
by such Owner Trustee that such failure shall constitute an Indenture
Default).
-- The failure by the related Owner Trustee (other than as a result of a
Lease Default or Lease Event of Default), in the case of a Leased
Aircraft Indenture, or Continental, in the case of an Owned Aircraft
Indenture, to pay any interest or principal or premium, if any, when
due, under such Indenture or under any Equipment Note issued
thereunder that continues for more than ten Business Days, in the
case of principal, interest or Make-Whole Premium, and, in all other
cases, ten Business Days after the relevant Owner Trustee or Owner
Participant, in the case of a Leased Aircraft Indenture, or
Continental, in the case of an Owned Aircraft Indenture, receives
written demand from the related Loan Trustee or holder of an
Equipment Note.
-- The failure by the related Owner Participant or the related Owner
Trustee (in its individual capacity), in the case of a Leased
Aircraft Indenture, to discharge certain liens that continue after
notice and specified cure periods.
-- Any representation or warranty made by the related Owner Trustee or
Owner Participant, in the case of a Leased Aircraft Indenture, or
Continental, in the case of an Owned Aircraft Indenture, in such
Indenture, the related Participation Agreement or certain related
documents furnished to the Loan Trustee or any holder of an Equipment
Note pursuant thereto being false or incorrect in any material
respect when made that continues to be material and adverse to the
interests of the Loan Trustee or Note Holders and remains unremedied
after notice and specified cure periods.
-- Failure by Continental or the related Owner Trustee or Owner
Participant to perform or observe any covenant or obligation for the
benefit of the Loan Trustee or holders of Equipment Notes under such
Indenture or certain related documents that continues after notice
and specified cure periods.
-- The registration of the related Aircraft ceasing to be effective as a
result of the Owner Participant (in the case of a Leased Aircraft) or
Continental (in the case of an Owned Aircraft) not being a citizen of
the United States, as defined in the Transportation Code (subject to
a cure period).
-- With respect to the Owned Aircraft, the lapse or cancellation of
insurance required under the related Owned Aircraft Indenture.
-- The occurrence of certain events of bankruptcy, reorganization or
insolvency of the related Owner Trustee or Owner Participant (in the
case of a Leased Aircraft) or Continental (in the case of the Owned
Aircraft). (Leased Aircraft Indentures, Section 4.02; Owned Aircraft
Indentures, Section 5.01)
There will not be cross-default provisions in the Indentures or in the
Leases (unless otherwise agreed between an Owner Participant and Continental).
Consequently, events resulting in an Indenture Default under any particular
Indenture may or may not result in an Indenture Default occurring under any
other Indenture, and a Lease Event of Default under any particular Lease may or
may not constitute a Lease Event of Default under any other Lease.
If Continental fails to make any semiannual basic rental payment due under
any Lease, within a specified period after such failure the applicable Owner
Trustee may furnish to the Leased Aircraft Trustee the amount due on the
Equipment Notes issued with respect to the related Leased Aircraft, together
with any interest thereon on account of the delayed payment thereof, in which
event the Leased Aircraft Trustee and the holders of outstanding Equipment Notes
issued under such Indenture may not exercise any remedies otherwise available
under such Indenture or such Lease as the result of such failure to make such
rental payment, unless such Owner Trustee has previously cured three or more
immediately preceding semiannual
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basic rental payment defaults or, in total, six or more previous semiannual
basic rental payment defaults (or, in the case of certain Owner Participants,
four or more immediately preceding semiannual basic rental payment defaults or,
in total, eight or more previous semiannual basic rental payment defaults). The
number of basic rent cure rights is subject to proportionate adjustment if basic
rent is paid more frequently then semiannually. The applicable Owner Trustee
also may cure any other default by Continental in the performance of its
obligations under any Lease that can be cured with the payment of money. (Leased
Aircraft Indentures, Section 4.03)
The holders of a majority in principal amount of the outstanding Equipment
Notes issued with respect to any Aircraft, by notice to the Loan Trustee, may on
behalf of all the holders waive any existing default and its consequences under
the Indenture with respect to such Aircraft, except a default in the payment of
the principal of, or premium or interest on any such Equipment Notes or a
default in respect of any covenant or provision of such Indenture that cannot be
modified or amended without the consent of each holder of Equipment Notes.
(Leased Aircraft Indentures, Section 4.08; Owned Aircraft 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, subject to the applicable
Owner Participant's or Owner Trustee's right to cure, as discussed above,
declare the principal of all such Equipment Notes issued thereunder immediately
due and payable, together with all accrued but unpaid interest thereon, provided
that in the event of a reorganization proceeding involving Continental
instituted under Chapter 11 of the U.S. Bankruptcy Code, if no other Lease Event
of Default and no other Indenture Default (other than the failure to pay the
outstanding amount of the Equipment Notes which by such declaration shall have
become payable) exists at any time after the consummation of such proceeding,
such declaration will be automatically rescinded without any further action on
the part of any holder of Equipment Notes. The holders of a majority in
principal amount of Equipment Notes outstanding under an Indenture may rescind
any declaration of acceleration of such Equipment Notes at any time before the
judgment or decree for the payment of the money so due shall be entered if (i)
there has been paid to the related Loan Trustee an amount sufficient to pay all
principal, interest, and premium, if any, on any such Equipment Notes, to the
extent such amounts have become due otherwise than by such declaration of
acceleration and (ii) all other Indenture Defaults and incipient Indenture
Defaults with respect to any covenant or provision of such Indenture have been
cured. (Leased Aircraft Indentures, Section 4.04(b); Owned Aircraft 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,
including (if, in the case of a Leased Aircraft, the corresponding Lease has
been declared in default) one or more of the remedies under such Indenture or,
in the case of a Leased Aircraft, such Lease with respect to the Aircraft
subject to such Lease. If an Indenture Default arises solely by reason of one or
more events or circumstances which constitute a Lease Event of Default, the
related Leased Aircraft Trustee's right to exercise remedies under a Leased
Aircraft Indenture is subject, with certain exceptions, to its having proceeded
to exercise one or more of the dispossessory remedies under the Lease with
respect to such Leased Aircraft; provided that the requirement to exercise one
or more of such remedies under such Lease shall not apply in circumstances where
such exercise has been involuntarily stayed or prohibited by applicable law or
court order for a continuous period (a "Continuous Stay Period") in excess of 60
days subsequent to an entry of an order of relief pursuant to Chapter 11 of the
Bankruptcy Code (the "Sixty-Day Section 1110 Period"); provided, however, that
the requirement to exercise one or more of such remedies under such lease shall
nonetheless be applicable during a Continuous Stay Period subsequent to the
expiration of the Sixty-Day Section 1110 Period to the extent that the
continuation of such Continuous Stay Period subsequent to the expiration of the
Sixty-Day Section 1110 Period (A) results from an agreement by the trustee or
the debtor-in-possession in such proceeding during the Sixty-Day Section 1110
Period with the approval of the relevant court to perform such lease in
accordance with Section 1110(a)(2)(A) of the U.S. Bankruptcy Code and continues
to perform as required by Section 1110(a)(2) of the U.S. Bankruptcy Code
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and cures any default (other than a default of the kind specified in Section
365(b)(2) of the U.S. Bankruptcy Code) within the applicable time period
specified in Section 1110(a)(2)(B) of the U.S. Bankruptcy Code or (B) is an
extension of the Sixty-Day Section 1110 Period with the consent of such Loan
Trustee pursuant to Section 1110(b) of the U.S. Bankruptcy Code or (C) is the
consequence of such Loan Trustee's own failure to give any requisite notice or
demand to any person. See "--The Leases and Certain Provisions of the Owned
Aircraft Indentures--Events of Default under the Leases". Such remedies may be
exercised by the related Leased Aircraft Trustee to the exclusion of the related
Owner Trustee, subject to certain conditions specified in such Indenture and,
subject to the terms of such Lease. Any Aircraft sold in the exercise of such
remedies will be free and clear of any rights of those parties, including the
rights of Continental under the Lease with respect to such Aircraft; provided
that no exercise of any remedies by the related Leased Aircraft Trustee may
affect the rights of Continental under any Lease unless a Lease Event of Default
has occurred and is continuing. (Leased Aircraft Indentures, Section 4.04;
Leases, Section 15) The Owned Aircraft Indentures will not contain such
limitations on the Owned Aircraft Trustee's ability to exercise remedies upon an
Indenture Default under an Owned Aircraft Indenture.
If a bankruptcy proceeding involving Continental under the U.S. Bankruptcy
Code occurs, all of the rights of the Owner Trustee as lessor under a particular
Lease will be exercised by the Owner Trustee in accordance with the terms
thereof unless (i) during the Section 1110 Period the trustee in such proceeding
or Continental does not agree to perform its obligations under such Lease, (ii)
at any time after agreeing to perform such obligations, such trustee or
Continental ceases to perform such obligations with the result that the
Continuous Stay Period comes to an end or (iii) the related Loan Trustee takes
action, or notifies the Owner Trustee that such Loan Trustee intends to take
action, to foreclose the lien of the related Leased Aircraft Indenture or
otherwise commence the exercise of any significant remedy in accordance with the
Leased Aircraft Indenture. The Owner Trustee's exercise of such rights shall be
subject to certain limitations and, in no event, reduce the amount or change the
time of any payment in respect of the Equipment Notes or adversely affect the
validity or enforceability of the lien under the related Leased Aircraft
Indenture.
If the Equipment Notes issued in respect of one Aircraft are in default,
the Equipment Notes issued in respect of the other Aircraft may not be in
default, and, if not, no remedies will be exercisable under the applicable
Indentures with respect to such other Aircraft.
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 lessors, conditional vendors and holders of security interests
with respect to "equipment" (defined as described below). 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. 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 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 Trustee's obligation to purchase Equipment Notes
with respect to each Aircraft that outside counsel to Continental, which is
expected to be Hughes Hubbard & Reed LLP, provide its opinion to the Trustees
that (x) if such Aircraft is a Leased Aircraft, the Owner Trustee, as lessor
under the Lease for such Aircraft, and the Leased Aircraft Trustee, as assignee
of such Owner Trustee's rights under such Lease pursuant to the related Leased
Aircraft Indenture, will be entitled to the benefits of Section 1110
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with respect to the airframe and engines comprising such Aircraft or (y) if such
Aircraft is an Owned Aircraft, the Owned Aircraft Trustee will be entitled to
the benefits of Section 1110 with respect to the airframe and engines comprising
such Owned Aircraft, in each case 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 "--The Leases and Certain Provisions of the Owned Aircraft
Indentures--Events of Loss". The opinion of Hughes Hubbard & Reed LLP will also
not address the availability of Section 1110 with respect to any possible
sublessee of a Leased Aircraft subleased by Continental or to any possible
lessee of an Owned Aircraft if it is leased by Continental.
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the related Loan Trustee may be applied to reimburse
such Loan Trustee for any tax, expense or other loss incurred by it and to pay
any other amounts due to such Loan Trustee prior to any payments to holders of
the Equipment Notes issued under such Indenture. (Indentures, Section 3.03)
In the event of bankruptcy, insolvency, receivership or like proceedings
involving an Owner Participant, it is possible that, notwithstanding that the
applicable Leased Aircraft is owned by the related Owner Trustee in trust, such
Leased Aircraft and the related Lease and Equipment Notes might become part of
such proceeding. In such event, payments under such Lease or on such Equipment
Notes might be interrupted and the ability of the related Leased Aircraft
Trustee to exercise its remedies under the related Leased Aircraft Indenture
might be restricted, although such Leased Aircraft Trustee would retain its
status as a secured creditor in respect of the related Lease and the related
Leased Aircraft.
MODIFICATION OF INDENTURES AND LEASES
Without the consent of holders of a majority in principal amount of the
Equipment Notes outstanding under any Indenture, the provisions of such
Indenture and any related Lease, Participation Agreement or Trust Agreement may
not be amended or modified, except to the extent indicated below.
Subject to certain limitations, certain provisions of any Leased Aircraft
Indenture, and of the Lease, the Participation Agreement, and the Trust
Agreement related thereto, may be amended or modified by the parties thereto
without the consent of any holders of the Equipment Notes outstanding under such
Indenture. In the case of each Lease, such provisions include, among others,
provisions relating to (i) the return to the related Owner Trustee of the
related Leased Aircraft at the end of the term of such Lease (except to the
extent that such amendment would affect the rights or exercise of remedies under
the Lease) and (ii) the renewal of such Lease and the option of Continental at
the end of the term of such Lease to purchase the related Leased Aircraft so
long as the same would not adversely affect the Note Holders. (Leased Aircraft
Indentures, Section 9.01(a)) In addition, any Indenture may be amended without
the consent of the holders of Equipment Notes to, among other things, cure any
defect or inconsistency in such Indenture or the Equipment Notes issued
thereunder, provided that such change does not adversely affect the interests of
any such holder. (Leased Aircraft Indentures, Section 9.01(c); Owned Aircraft
Indentures, Section 10.01)
Without the consent of the 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 premium, if any, or interest payable on, any Equipment Notes
issued under such Indenture or change the date on which any principal, premium,
if any, or interest is due and payable, (b) permit the creation of any security
interest with respect to the property subject to the lien of such Indenture,
except as provided in such Indenture, or deprive any holder of an Equipment Note
issued under such Indenture of the benefit of the lien of such Indenture upon
the property subject thereto or (c) modify the
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percentage of holders of Equipment Notes issued under such Indenture required to
take or approve any action under such Indenture. (Leased Aircraft Indentures,
Section 9.01(b); Owned Aircraft Indentures, Section 10.01(a))
OWNER PARTICIPANT'S RIGHT TO RESTRUCTURE
Certain Owner Participants will have the right, subject to certain
conditions, to restructure the applicable leveraged lease transaction using a
"cross-border lease", a tax lease or head-lease/sublease structure and any other
type of transaction. In no event, however, shall any such restructuring (i)
change the terms and conditions of the rights and obligations of any holder of
Equipment Notes under the relevant Aircraft Operative Agreements or any holder
of Certificates or (ii) expose any such holder to any additional risks. As a
precondition to any such restructuring, the Owner Participant will be obligated
to deliver to the Leased Aircraft Trustee an appropriate officer's certificate
as to the satisfaction of the foregoing conditions and to obtain a written
confirmation from the Rating Agencies prior to the implementation of such
restructuring to the effect that such restructuring will not adversely affect
the ratings of the Certificates.
INDEMNIFICATION
Continental will be required to indemnify each Loan Trustee, each Owner
Participant, each Owner Trustee, each liquidity provider, the Subordination
Agent, the Escrow Agent and each Trustee, but not the holders of Certificates,
for certain losses, claims and other matters. Continental will be required under
certain circumstances to indemnify each Owner Participant against the loss of
depreciation deductions and certain other benefits allowable for certain income
tax purposes with respect to the related Leased Aircraft.
THE LEASES AND CERTAIN PROVISIONS OF THE OWNED AIRCRAFT INDENTURES
Each Leased Aircraft will be leased to Continental by the relevant Owner
Trustee under the relevant lease agreement (each, a "Lease"). Each Owned
Aircraft will be owned by Continental.
LEASE TERM RENTALS AND PAYMENTS
Each Leased Aircraft will be leased separately by the relevant Owner
Trustee to Continental for a term commencing on the date on which the Aircraft
is acquired by the Owner Trustee and expiring on a date not earlier than the
latest maturity date of the relevant Equipment Notes, unless terminated prior to
the originally scheduled expiration date as permitted by the applicable Lease.
The semiannual basic rent payment under each Lease is payable by Continental on
each related Lease Payment Date (or, if such day is not a Business Day, on the
next Business Day), and will be assigned by the Owner Trustee under the
corresponding Leased Aircraft Indenture to provide the funds necessary to make
scheduled payments of principal and interest due from the Owner Trustee on the
Equipment Notes issued under such Indenture. In certain cases, the semiannual
basic rent payments under the Leases may be adjusted, but each Lease provides
that under no circumstances will rent payments by Continental be less than the
scheduled payments on the related Equipment Notes. Any balance of each such
semiannual basic rent payment under each Lease, after payment of amounts due on
the Equipment Notes issued under the Indenture corresponding to such Lease, will
be paid over to the Owner Trustee. (Leases, Section 3; Leased Aircraft
Indentures, Section 3.01)
"Lease Payment Date" means, with respect to each Lease, June 15 or December
15 during the term of such Lease.
Payments of interest on the Series A-1, A-2 and B Equipment Notes issued by
Continental under an Owned Aircraft Indenture are payable on June 15 and
December 15 of each year, commencing on the first such date after issuance
thereof. Payments of principal of the Series A-1, A-2 and B Equipment Notes
issued by Continental under an Owned Aircraft Indenture will be payable on June
15 and December 15 in certain years or in full on final maturity.
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NET LEASE; MAINTENANCE
Under the terms of each Lease, Continental's obligations in respect of each
Leased Aircraft will be those of a lessee under a "net lease". Accordingly,
Continental is obligated under each Lease, among other things and at its
expense, to keep each Aircraft duly registered and insured, to pay all costs of
operating the Aircraft and to maintain, service, repair and overhaul the
Aircraft so as to keep it in as good an operating condition as when delivered to
Continental, ordinary wear and tear excepted, and in such condition as required
to maintain the airworthiness certificate for the Aircraft in good standing at
all times. (Leases, Sections 7.1, 8.1 and 11.1 and Annexes C and D) The Owned
Aircraft Indentures impose comparable maintenance, service and repair
obligations on Continental with respect to the Owned Aircraft. (Owned Aircraft
Indentures, Section 4.02)
POSSESSION, SUBLEASE AND TRANSFER
Each Aircraft may be operated by Continental or, subject to certain
restrictions, by certain other persons. Normal interchange and pooling
agreements customary in the commercial airline industry with respect to any
Airframe or Engine are permitted. Subleases, in the case of Leased Aircraft, and
leases, in the case of Owned Aircraft, are also permitted to U.S. air carriers
and foreign air carriers that have their principal executive office in certain
specified countries, subject to a reasonably satisfactory legal opinion that,
among other things, such country would recognize (in the case of the Leased
Aircraft) Owner Trustee's title to, and the Loan Trustee's security interest in
respect of, the applicable Aircraft. In addition, a sublessee or lessee may not
be subject to insolvency or similar proceedings at the commencement of such
sublease or lease. (Leases, Section 7, Owned Aircraft 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, except (in the case of a Leased Aircraft) if
the relevant Owner Trustee or the relevant Owner Participant fails to meet the
applicable citizenship requirements, and to record each Lease (in the case of a
Leased Aircraft) and Indenture and certain other documents under the
Transportation Code. (Leases, Section 7; Owned Aircraft 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 Lease Event of Default exists, Continental has the right to
register the Leased Aircraft subject to such Lease in a country other than the
United States at its own expense in connection with a permitted sublease of the
Aircraft to a permitted foreign air carrier, subject to certain conditions set
forth in the related Participation Agreement. These conditions include a
requirement that an opinion of counsel be provided that the lien of the
applicable Indenture will continue as a first priority security interest in the
applicable Aircraft. (Leases, Section 7.1.2; Participation Agreements, Section
7.6.11) The Owned Aircraft Indentures contain comparable provisions with respect
to registration of the Owned Aircraft in connection with a permitted lease of
the Owned Aircraft. (Owned Aircraft 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, Continental and, with respect to a Leased Aircraft, the Owner
Participant and Owner Trustee arising under the applicable Indenture, the Lease
(in the case of a
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Leased Aircraft) or the other operative documents related thereto, and other
than certain limited liens permitted under such documents, including but not
limited to (i) liens for taxes either not yet due or being contested in good
faith by appropriate proceedings; (ii) materialmen's, mechanics' and other
similar liens arising in the ordinary course of business and securing
obligations that either are not yet delinquent for more than 60 days or are
being contested in good faith by appropriate proceedings; (iii) judgment liens
so long as such judgment is discharged or vacated within 60 days or the
execution of such judgment is stayed pending appeal or discharged, vacated or
reversed within 60 days after expiration of such stay; and (iv) any other lien
as to which Continental has provided a bond or other security adequate in the
reasonable opinion of the Owner Trustee; provided that in the case of each of
the liens described in the foregoing clauses (i), (ii) and (iii), such liens and
proceedings do not involve any material risk of the sale, forfeiture or loss of
such Aircraft or the interest of any Participant therein or impair the lien of
the relevant Indenture. (Leases, Section 6; Owned Aircraft 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
sublessee has the right, at its own expense, to make such alterations,
modifications and additions with respect to each Aircraft as it deems desirable
in the proper conduct of its business and to remove parts which it deems to be
obsolete or no longer suitable or appropriate for use, so long as such
alteration, modification, addition or removal does not materially diminish the
fair market value, utility, condition or useful life of the related Aircraft or
Engine or invalidate the Aircraft's airworthiness certificate. (Leases, Section
8.1 and Annex C; Owned Aircraft Indentures, Section 4.04(d))
INSURANCE
Continental is required to maintain, at its expense (or at the expense of a
permitted lessee, in the case of the Owned Aircraft, or a permitted sublessee,
in the case of a Leased Aircraft), all-risk aircraft hull insurance covering
each Aircraft, at all times in an amount not less than, in the case of Leased
Aircraft, the stipulated loss value of such Aircraft (which will exceed the
aggregate outstanding principal amount of the Equipment Notes relating to such
Aircraft, together with accrued interest thereon) or, in the case of Owned
Aircraft, the aggregate outstanding principal amount of the Equipment Notes
relating to such Aircraft together with six months of interest accrued thereon
(the "Debt Balance"). However, after giving effect to self-insurance permitted
as described below, the amount payable under such insurance may be less than
such amounts payable with respect to the Equipment Notes. In the event of a loss
involving insurance proceeds in excess of $3,500,000 per occurrence in the case
of a Boeing 737-824 or 737-924 aircraft or $7,500,000 per occurrence in the case
of a Boeing 767-424ER or 777-224ER aircraft, such proceeds up to the stipulated
loss value or Debt Balance, as the case may be, of the relevant Aircraft will be
payable to the applicable Loan Trustee, for so long as the relevant Indenture
shall be in effect. In the event of a loss involving insurance proceeds of up to
$3,500,000 per occurrence in the case of a Boeing 737-824 or 737-924 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 an
Indenture Event of Default does not exist with respect to the Owned Aircraft
Indenture or (in the case of a Leased Aircraft) the Owner Trustee or Leased
Aircraft Trustee has not notified the insurance underwriters that a Lease Event
of Default exists. So long as the loss does not constitute an Event of Loss,
insurance proceeds will be applied to repair or replace the property. (Leases,
Sections 11 and Annex D; Owned Aircraft 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, in
the case of an Owned Aircraft, or a permitted sublessee, in the case of a Leased
Aircraft), including, without limitation, passenger liability, baggage
liability, cargo and mail liability, hangarkeeper's liability and contractual
liability insurance with respect to each Aircraft. Such liability insurance must
be underwritten by insurers of nationally or internationally recognized
responsibility. The amount of such liability insurance coverage per occurrence
may not be less than the amount of comprehensive
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airline liability insurance from time to time applicable to aircraft owned or
leased and operated by Continental of the same type and operating on similar
routes as such Aircraft. (Leases, Section 11.1 and Annex D, Owned Aircraft
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 sublessee or lessee) operates any
Aircraft, Airframe or Engine in any area of recognized hostilities or if
Continental (or any permitted sublessee or lessee) maintains such insurance with
respect to other aircraft operated on the same international routes or areas on
or in which the Aircraft is operated. (Leases, Annex D, Owned Aircraft
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 aircraft on which Continental carries insurance, whichever
is less, unless an insurance broker of national standing shall certify that the
standard among all other major U.S. airlines is a higher level of
self-insurance, in which case Continental may self-insure the Aircraft to such
higher level. In addition, Continental may self-insure to the extent of any
applicable deductible per Aircraft that does not exceed industry standards for
major U.S. airlines. (Leases, Section 11.1 and Annex D, Owned Aircraft
Indentures, Section 4.06 and Annex B)
In respect of each Aircraft, Continental is required to name as additional
insured parties the relevant Loan Trustee and holders of the Equipment Notes and
(in the case of the Leased Aircraft) the relevant Owner Participant and Owner
Trustee, in its individual capacity and as owner of such Aircraft, and the
Liquidity Providers under all liability, hull and property and war risk,
hijacking and allied perils insurance policies required with respect to such
Aircraft. In addition, the insurance policies will be required to provide that,
in respect of the interests of such additional insured persons, the insurance
shall not be invalidated or impaired by any act or omission of Continental, any
permitted sublessee or any other person. (Leases, Annex D, Owned Aircraft
Indentures, Section 4.06 and Annex B)
LEASE TERMINATION
Unless a Lease Event of Default shall have occurred and be continuing,
Continental may terminate any Lease on any Lease Payment Date occurring after
the fifth anniversary occurred of the date on which such Lease commenced, if it
makes a good faith determination that the Leased Aircraft subject to such Lease
is economically obsolete or surplus to its requirements. Continental is required
to give notice of its intention to exercise its right of termination described
in this paragraph at least 90 days prior to the proposed date of termination,
which notice may be withdrawn up to ten Business Days prior to such proposed
date; provided that Continental may give only five such termination notices. In
such a situation, unless the Owner Trustee elects to retain title to such
Aircraft, Continental is required to use commercially reasonable efforts to sell
such Aircraft as an agent for such Owner Trustee, and Owner Trustee will sell
such Aircraft on the date of termination to the highest cash bidder. If such
sale occurs, the Equipment Notes related thereto are required to be prepaid. If
the net proceeds to be received from such sale are less than the termination
value for such Aircraft (which is set forth in a schedule to each Lease),
Continental is required to pay to the applicable Owner Trustee an amount equal
to the excess, if any, of the applicable termination value for such Aircraft
over such net proceeds. Upon payment of termination value for such Aircraft and
an amount equal to the Make-Whole Premium, if any, payable on such date of
payment, together with certain additional amounts, the lien of the relevant
Indenture will be released, the relevant Lease will terminate, and the
obligation of Continental thereafter to make scheduled rent payments under such
Lease will cease. (Leases, Section 9; Leased Aircraft Indentures, Section
2.10(b))
The Owner Trustee has the option to retain title to the Leased Aircraft if
Continental has given a notice of termination under the Lease. In such event,
such Owner Trustee will pay to the applicable Loan Trustee an amount sufficient
to prepay the outstanding Equipment Notes issued with respect to such Aircraft
(including the Make-Whole Premiums), in which case the lien of the relevant
Indenture will be released, the relevant Lease will terminate and the obligation
of Continental thereafter to make scheduled rent payments under such Lease will
cease. (Leases, Section 9; Leased Aircraft Indentures, Sections 2.06 and
2.10(b))
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EVENTS OF LOSS
If an Event of Loss occurs with respect to the Airframe or the Airframe and
Engines of an Aircraft, Continental must elect within 45 days after such
occurrence either to make payment with respect to such Event of Loss or to
replace such Airframe and any such Engines. Not later than the first Business
Day following the earlier of (i) the 120th day following the date of occurrence
of such Event of Loss, and (ii) the fourth Business Day following the receipt of
the insurance proceeds in respect of such Event of Loss, Continental must either
(i) pay to the applicable Owner Trustee (in the case of a Leased Aircraft) or to
the Owned Aircraft Trustee (in the case of the Owned Aircraft) the stipulated
loss value of such Aircraft (in the case of a Leased Aircraft) or the
outstanding principal amount of the Equipment Notes (in the case of an Owned
Aircraft), together with certain additional amounts, but, in any case, without
any Make-Whole Premium or (ii) unless any Lease Event of Default or failure to
pay basic rent under the relevant Lease (in the case of a Leased Aircraft), an
Indenture Event of Default or failure to pay principal or interest under the
Owned Aircraft Indenture (in the case of the Owned Aircraft) or certain
bankruptcy defaults shall have occurred and is continuing, substitute an
airframe (or airframe and one or more engines, as the case may be) for the
Airframe, or Airframe and Engine(s), that suffered such Event of Loss. (Leases,
Sections 10.1.1 and 10.1.2; Leased Aircraft Indentures, Section 2.10(a); Owned
Aircraft 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, in the
case of a Leased Aircraft, convey to the related Owner Trustee title to an
airframe (or airframe and one or more engines, as the case may be) or, in the
case of an Owned Aircraft, subject such an airframe (or airframe and one or more
engines) to the lien of the Owned Aircraft Indenture, and such replacement
airframe or airframe and engines must be the same model as the Airframe or
Airframe and Engines to be replaced or an improved model, with a value, utility
and remaining useful life (without regard to hours or cycles remaining until the
next regular maintenance check) at least equal to the Airframe or Airframe and
Engines to be replaced, assuming that such Airframe and such Engines had been
maintained in accordance with the related Lease or Owned Aircraft Indenture, as
the case may be. Continental is also required to provide to the relevant Loan
Trustee and (in the case of a Leased Aircraft) the relevant Owner Trustee and
Owner Participant reasonably acceptable opinions of counsel to the effect, among
other things, that (i) certain specified documents have been duly filed under
the Transportation Code and (ii) such Owner Trustee and Leased Aircraft Trustee
(as assignee of lessor's rights and interests under the Lease), in the case of a
Leased Aircraft, or the Owned Aircraft Trustee, in the case of an Owned
Aircraft, will be entitled to receive the benefits of Section 1110 of the U.S.
Bankruptcy Code with respect to any such replacement airframe (unless, as a
result of a change in law or court interpretation, such benefits are not then
available). (Leases, Sections 10.1.3 and 10.3; Owned Aircraft 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 (in the case of an Owned
Aircraft) or the stipulated loss value for such Aircraft (in the case of a
Leased Aircraft), together with all additional amounts then due and unpaid with
respect to such Aircraft, which must be at least sufficient to pay in full as of
the date of payment thereof the aggregate unpaid principal amount under such
Equipment Notes together with accrued but unpaid interest thereon and all other
amounts due and owing in respect of such Equipment Notes, the lien of the
Indenture and (in the case of a Leased Aircraft) the Lease relating to such
Aircraft shall terminate with respect to such Aircraft, the obligation of
Continental thereafter to make the scheduled rent payments (in the case of a
Leased Aircraft) or interest and principal payments (in the case of an Owned
Aircraft) with respect thereto shall cease and (in the case of a Leased
Aircraft) the related Owner Trustee shall transfer all of its right, title and
interest in and to the related Aircraft to Continental. The stipulated loss
value and other payments made under the Leases or the Owned Aircraft Indenture,
as the case may be, by Continental shall be deposited with the applicable Loan
Trustee. Amounts in excess of the amounts due and owing under the Equipment
Notes issued with respect to such Aircraft will be distributed by such Loan
Trustee to the applicable Owner Trustee or to Continental, as the case may be.
(Leases, Section 10.1.2; Leased Aircraft Indentures, Sections 2.06 and 3.02;
Owned Aircraft Indentures, Sections 2.10, 3.02 and 4.05(a)(ii))
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If an Event of Loss occurs with respect to an Engine alone, Continental
will be required to replace such Engine within 60 days after the occurrence of
such Event of Loss with another engine, free and clear of all liens (other than
certain permitted liens). Such replacement engine shall be the same make and
model as the Engine to be replaced, or an improved model, suitable for
installation and use on the Airframe, and having a value, utility and remaining
useful life (without regard to hours or cycles remaining until overhaul) at
least equal to the Engine to be replaced, assuming that such Engine had been
maintained in accordance with the relevant Lease or Owned Aircraft Indenture, as
the case may be. (Leases, Section 10.2; Owned Aircraft 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 or an entity
of the country of registration of the relevant Aircraft) for a period
exceeding 180 consecutive days or, if earlier, at the end of the term
of such Lease (in the case of a Leased Aircraft).
-- In the case of any Leased Aircraft, any seizure, condemnation,
confiscation, taking or requisition of use of such property by any
U.S. government entity (or governmental entity of the country of
registration of the relevant Aircraft) that continues until the 30th
day after the last day of the term of the relevant Lease (unless the
Owner Trustee shall have elected not to treat such event as an Event
of Loss).
-- As a result of any law, rule, regulation, order or other action by
the FAA or any governmental entity, the use of such property in the
normal course of Continental's business of passenger air
transportation is prohibited for 180 consecutive days, unless
Continental, prior to the expiration of such 180-day period, shall
have undertaken and shall be diligently carrying forward steps which
are necessary or desirable to permit the normal use of such property
by Continental, but in any event if such use shall have been
prohibited for a period of two consecutive years, provided that no
Event of Loss shall be deemed to have occurred if such prohibition
has been applicable to Continental's entire U.S. registered fleet of
similar property and Continental, prior to the expiration of such
two-year period, shall have conformed at least one unit of such
property in its fleet to the requirements of any such law, rule,
regulation, order or other action and commenced regular commercial
use of the same and shall be diligently carrying forward, in a manner
which does not discriminate against applicable property in so
conforming such property, steps which are necessary or desirable to
permit the normal use of such property by Continental, but in any
event if such use shall have been prohibited for a period of three
years or, in the case of the Leased Aircraft, such use shall be
prohibited at the expiration of the term of the relevant Lease.
-- With respect to any Engine, any divestiture of title to such Engine
in connection with pooling or certain other arrangements shall be
treated as an Event of Loss. (Leases, Section 7.2.6 and Annex A;
Owned Aircraft Indentures, Annex A)
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RENEWAL AND PURCHASE OPTIONS
At the end of the term of each Lease after final maturity of the related
Equipment Notes and subject to certain conditions, Continental will have certain
options to renew such Lease for additional limited periods. In addition,
Continental will have the right at the end of the term of each Lease to purchase
the Aircraft subject thereto for an amount to be calculated in accordance with
the terms of such Lease. (Leases, Section 17)
In addition, Continental may have the right to purchase an Aircraft from
the applicable Owner Trustee and assume, as direct obligations of Continental,
the Equipment Notes issued with respect to such Aircraft. In such case, the
Leased Aircraft Indenture relating to such Equipment Notes will be amended and
restated to be substantially the same as an Owned Aircraft Indenture. See
"Certain U.S. Federal Income Tax Consequences--Taxation of Certificateholders
Generally--Trusts Classified as Grantor Trusts" for a discussion of certain tax
consequences of such purchase and assumption.
EVENTS OF DEFAULT UNDER THE LEASES
Lease Events of Default under each Lease include, among other things:
-- Failure by Continental to make any payment of basic rent, stipulated
loss value or termination value under such Lease within ten Business
Days after the same shall have become due, or failure by Continental
to pay any other amount due under such Lease or under any other
related operative document within ten Business Days from and after
the date of any written notice from the Owner Trustee or Loan Trustee
of the failure to make such payment when due.
-- Failure by Continental to make any excluded payment (as defined)
within ten Business Days after written notice that such failure
constitutes a Lease Event of Default is given by the relevant Owner
Participant to Continental and the relevant Loan Trustee.
-- Failure by Continental to carry and maintain insurance on and in
respect of the Aircraft, Airframe and Engines, in accordance with the
provisions of such Lease.
-- Failure by Continental to perform or observe in any material respect
any other covenant or agreement to be performed or observed by it
under such Lease or the related Participation Agreement or certain
other related operative documents (other than the related tax
indemnity agreement between Continental and the Owner Participant),
and such failure shall continue unremedied for a period of 30 days
after written notice of such failure by the applicable Owner Trustee
or Loan Trustee unless such failure is capable of being corrected and
Continental shall be diligently proceeding to correct such failure,
in which case there shall be no Lease Event of Default unless and
until such failure shall continue unremedied for a period of 270 days
after the receipt of such notice.
-- Any representation or warranty made by Continental in such Lease or
the related Participation Agreement or in certain other related
operative documents (other than in the related tax indemnity
agreement between Continental and the Owner Participant) shall prove
to have been untrue or inaccurate in any material respect at the time
made, such representation or warranty is material at the time in
question and the same shall remain uncured (to the extent of the
adverse impact thereof) for more than 30 days after the date of
written notice thereof to Continental.
-- The occurrence of certain voluntary events of bankruptcy,
reorganization or insolvency of Continental or the occurrence of
involuntary events of bankruptcy, reorganization or insolvency which
shall continue undismissed, unvacated or unstayed for a period of 90
days. (Leases, Section 14)
Indenture Events of Default under the Owned Aircraft Indentures are
discussed above under "--Indenture Defaults, Notice and Waiver".
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REMEDIES EXERCISABLE UPON EVENTS OF DEFAULT UNDER THE LEASE
If a Lease Event of Default has occurred and is continuing, the applicable
Owner Trustee may (or, so long as the Indenture shall be in effect, the
applicable Loan Trustee may, subject to the terms of the Indenture) exercise one
or more of the remedies provided in such Lease with respect to the related
Aircraft. These remedies include the right to repossess and use or operate such
Aircraft, to rescind or terminate such Lease, to sell or re-lease such Aircraft
free and clear of Continental's rights, except as set forth in the Lease, and
retain the proceeds, and to require Continental to pay, as liquidated damages
any due and unpaid basic rent plus an amount equal to, at such Owner Trustee's
(or, subject to the terms of the relevant Leased Aircraft Indenture, the Leased
Aircraft Trustee's) option, either (i) the excess of the present value of all
unpaid rent during the remainder of the term of such Lease over the present
value of the fair market rental value of such Aircraft for the remainder of the
term of such Lease or, (ii) the excess of the stipulated loss value of such
Aircraft over the fair market sales value of such Aircraft or, if such Aircraft
has been sold, the net sales proceeds from the sale of such Aircraft. (Leases,
Section 15; Leased Aircraft Indentures, Section 4.04) If the Loan Trustee has
validly terminated such Lease, the Loan Trustee may not sell or lease or
otherwise afford the use of such Aircraft to Continental or any of its
affiliates. (Leased Aircraft Indentures, Section 4.04(a))
Remedies under the Owned Aircraft Indentures are discussed above under
"--Remedies".
TRANSFER OF OWNER PARTICIPANT INTERESTS
Subject to certain restrictions, each Owner Participant may transfer all or
any part of its interest in the related Leased Aircraft. (Participation
Agreements, Section 10.1.1)
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary describes all material generally applicable U.S.
federal income tax consequences to Certificateholders of the purchase, ownership
and disposition of the 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, the Trust's
contractual rights and obligations under the Note Purchase Agreement, and any
other property held by the Trust. Accordingly, each U.S. Certificateholder's
share of interest paid on Equipment Notes will be taxable as ordinary income, as
it is paid or accrued, in accordance with such U.S. Certificateholder's method
of accounting for U.S. federal income tax purposes, and a U.S.
Certificateholder's share of premium, if any, paid on redemption of an Equipment
Note will be treated as capital gain. The Deposits will likely be subject to the
original issue discount and contingent payment rules, with the result that a
U.S. Certificateholder will be required to include interest income from a
Deposit using the accrual method of accounting regardless of its normal method
and with a possible slight deferral in the timing of income recognition as
compared to holding a single debt instrument with terms comparable to an Offered
Certificate. Any amounts received by an Offered Certificate Trust under a
Liquidity Facility in order to make interest payments will be treated for U.S.
federal income tax purposes as having the same characteristics as the payments
they replace.
An Owner Participant's conveyance of its interest in an owner trust should
not constitute a taxable event to U.S. Certificateholders. However, if
Continental assumes an owner trust's obligations under the related Equipment
Notes upon a purchase of a Leased Aircraft by Continental, such assumption would
be treated for federal income tax purposes as a taxable exchange by U.S.
Certificateholders of the Equipment Notes for "new" Equipment Notes resulting in
the recognition of taxable gain or loss equal to the difference between the U.S.
Certificateholder's adjusted basis in its interest in the Equipment Note and the
amount realized on such exchange (except to the extent attributable to accrued
interest, which would be taxable as interest income if not previously included
in income). For this purpose the amount realized (and the issue price of the
"new" Equipment Note) would be equal to the fair market value of the U.S.
Certificateholder's pro rata share of the respective Equipment Note at such time
if the Equipment Notes are "publicly traded" within the meaning of applicable
Treasury regulations and otherwise would be equal to their principal amount (or,
under certain circumstances, a lesser imputed principal amount).
In the case of a subsequent purchaser of 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
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premium may elect to amortize the premium as an offset to interest income on the
Deposit or Equipment Note under rules prescribed by the Code and Treasury
regulations promulgated under the Code.
Each U.S. Certificateholder will be entitled to deduct, consistent with its
method of accounting, its pro rata share of fees and expenses paid or incurred
by the corresponding Trust as provided in Section 162 or 212 of the Code.
Certain fees and expenses, including fees paid to the Trustee and the Liquidity
Provider, will be borne by parties other than the Certificateholders. It is
possible that such fees and expenses will be treated as constructively received
by the Trust, in which event a U.S. Certificateholder will be required to
include in income and will be entitled to deduct its pro rata share of such fees
and expenses. If a U.S. Certificateholder is an individual, estate or trust, the
deduction for such holder's share of such fees or expenses will be allowed only
to the extent that all of such holder's miscellaneous itemized deductions,
including such holder's share of such fees and expenses, exceed 2% of such
holder's adjusted gross income. In addition, in the case of U.S.
Certificateholders who are individuals, certain otherwise allowable itemized
deductions will be subject generally to additional limitations on itemized
deductions under applicable provisions of the Code.
ORIGINAL TRUSTS CLASSIFIED AS PARTNERSHIPS
If an Original Trust is classified as a partnership (and not as a publicly
traded partnership taxable as a corporation) for U.S. federal income tax
purposes, income or loss with respect to the assets held by the Trust will be
calculated at the Trust level but the Trust itself will not be subject to U.S.
federal income tax. A U.S. Certificateholder would be required to report its
share of the Trust's items of income and deduction on its tax return for its
taxable year within which the Trust's taxable year (which should be a calendar
year) ends as well as income from its interest in the relevant Deposits. A U.S.
Certificateholder's basis in its interest in the Trust would be equal to its
purchase price therefor (including its share of any funds withdrawn from the
Depositary and used to purchase Equipment Notes), plus its share of the Trust's
net income, minus its share of any net losses of the Trust, and minus the amount
of any distributions from the Trust. In the case of an original purchaser of 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 B 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 subordination of the Class B Trust
under the Intercreditor Agreement, the corresponding owners of beneficial
interests in the Class B Certificates 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 A-1 Certificateholders and Class A-2
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:
-- Class B Certificateholders incurring a shortfall would be required to
include as current income any interest or other income of the Class B
Trust that was a component of the shortfall, even though that amount
was in fact paid to the Class A-1 Certificateholders and Class A-2
Certificateholders;
-- a loss would only be allowed to Class B 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
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-- reimbursement of the shortfall before a claim of worthlessness would
not be taxable income to the Class B Certificateholders because the
amount reimbursed would have been previously included in income.
These results should not significantly affect the inclusion of income for
Class B Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Class B Certificateholders on the cash method
of accounting by, in effect, placing them on the accrual method.
Similar treatment would apply if the Class A-1 Trust or the Class A-2 Trust
receives less than the full amount of the receipts of interest, principal or
premium paid with respect to the Equipment Notes held by it because of the
provisions in the Intercreditor Agreement requiring that distributions be
allocated on a pro rata basis between Trusts of equal seniority.
DISSOLUTION OF ORIGINAL TRUSTS AND FORMATION OF NEW TRUSTS
Assuming that the Original Trusts are classified as grantor trusts, the
dissolution of an Original Trust and distribution of interests in the related
Successor Trust will not be a taxable event to U.S. Certificateholders, who will
continue to be treated as owning their shares of the property transferred from
the Original Trust to the Successor Trust. If the Original Trusts are classified
as partnerships, a U.S. Certificateholder will be deemed to receive its share of
the Equipment Notes and any other property transferred by the Original Trust to
the Successor Trust in liquidation of its interest in the Original Trust in a
non-taxable transaction. In such case, the U.S. Certificateholder's basis in the
property so received will be equal to its basis in its interest in the Original
Trust, allocated among the various assets received based upon their bases in the
hands of the Original Trust and any unrealized appreciation or depreciation in
value in such assets, and the U.S. Certificateholder's holding period for the
Equipment Notes and other property will include the Original Trust's holding
period.
SALE OR OTHER DISPOSITION OF THE CERTIFICATES
Upon the sale, exchange or other disposition of 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 an owner participant or 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 an owner participant or Continental;
and
-- certain certification requirements (including identification of the
beneficial owner of the Certificate) are complied with.
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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 of 31%
unless, in general, the Certificateholder fails to comply with certain reporting
procedures or otherwise fails to establish an exemption from such tax under
applicable provisions of the Code.
CERTAIN DELAWARE TAXES
The Trustee is a Delaware banking corporation with its corporate trust
office in Delaware. In the opinion of Richards, Layton & Finger, Wilmington,
Delaware, counsel to the Trustee, under currently applicable law, assuming that
the 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
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held by such Trust, unless it is established that equity participation in the
Trust by benefit plan investors (including but not limited to Plans and entities
whose underlying assets include Plan assets by reason of an employee benefit
plan's investment in the entity) is not "significant" within the meaning of the
Plan Asset Regulation. In this regard, the extent to which there is equity
participation in a particular Trust by, or on behalf of, employee benefit plans
will not be monitored. If the assets of a Trust are deemed to constitute the
assets of a Plan, transactions involving the assets of such Trust could be
subject to the prohibited transaction provisions of ERISA and Section 4975 of
the Code unless a statutory or administrative exemption is applicable to the
transaction.
The fiduciary of a Plan that proposes to purchase and hold any Certificates
should consider, among other things, whether such purchase and holding may
involve (i) the direct or indirect extension of credit to a party in interest or
a disqualified person, (ii) the sale or exchange of any property between a Plan
and a party in interest or a disqualified person, and (iii) the transfer to, or
use by or for the benefit of, a party in interest or a disqualified person, of
any Plan assets. Such parties in interest or disqualified persons could include,
without limitation, Continental and its affiliates, the Owner Participants, the
Underwriters, the Trustees, the Escrow Agent, the Depositary, the Owner Trustees
and the Liquidity Provider. In addition, whether or not the assets of a Trust
are deemed to be Plan assets under the Plan Asset Regulation, if Certificates
are purchased by a Plan and Certificates of a subordinate Class are held by a
party in interest or a disqualified person with respect to such Plan, the
exercise by the holder of the subordinate Class of Certificates of its right to
purchase the senior Classes of Certificates upon the occurrence and during the
continuation of a Triggering Event could be considered to constitute a
prohibited transaction unless a statutory or administrative exemption were
applicable. Depending on the identity of the Plan fiduciary making the decision
to acquire or hold Certificates on behalf of a Plan, Prohibited Transaction
Class Exemption ("PTCE") 91-38 (relating to investments by bank collective
investment funds), PTCE 84-14 (relating to transactions effected by a "qualified
professional asset manager"), PTCE 95-60 (relating to investments by an
insurance company general account), PTCE 96-23 (relating to transactions
directed by an in-house professional asset manager) or PTCE 90-1 (relating to
investments by insurance company pooled separate accounts) (collectively, the
"Class Exemptions") could provide an exemption from the prohibited transaction
provisions of ERISA and Section 4975 of the Code. However, there can be no
assurance that any of these Class Exemptions or any other exemption will be
available with respect to any particular transaction involving the Certificates.
Governmental plans and certain church plans, while not subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of ERISA and Section 4975 of the Code, may nevertheless be subject to
state or other federal laws that are substantially similar to the foregoing
provisions of ERISA and the Code. Fiduciaries of any such plans should consult
with their counsel before purchasing any Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase any
Certificates should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 of the Code to such an investment, and to confirm that such
purchase and holding will not constitute or result in a non-exempt prohibited
transaction or any other violation of an applicable requirement of ERISA.
In addition to the Class Exemptions referred to above, an individual
exemption may apply to the purchase, holding and secondary market sale of Class
A-1 Certificates and Class A-2 Certificates by Plans, provided that certain
specified conditions are met. In particular, the Department of Labor has issued
individual administrative exemptions to the Underwriters which are substantially
the same as the administrative exemptions issued to Morgan Stanley & Co.
Incorporated, Prohibited Transaction Exemption 90-24 (55 Fed. Reg. 20,548
(1990)), as amended, and Salomon Smith Barney Inc., Prohibited Transaction
Exemption 89-89 et al. (54 Fed. Reg. 42,589 (1989)), 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.
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The Underwriter Exemption sets forth a number of general and specific
conditions which must be satisfied for a transaction involving the initial
purchase, holding or secondary market sale of certificates representing a
beneficial ownership interest in a trust to be eligible for exemptive relief
thereunder. In particular, the Underwriter Exemption requires that the
acquisition of certificates by a Plan be on terms that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an unrelated
party; the rights and interests evidenced by the certificates not be
subordinated to the rights and interests evidenced by other certificates of the
same trust estate; the certificates at the time of acquisition by the Plan be
rated in one of the three highest generic rating categories by Moody's, Standard
& Poor's, Duff & Phelps Inc. or Fitch Investors Service, Inc.; and the investing
Plan be an accredited investor as defined in Rule 501(a) (1) of Regulation D of
the Commission under the Securities Act of 1933, as amended.
In addition, the trust corpus generally must be invested in qualifying
receivables, such as the Equipment Notes, but may not in general include a
pre-funding account (except for a limited amount of pre-funding which is
invested in qualifying receivables within a limited period of time following the
closing not to exceed three months).
With respect to the investment restrictions set forth in the Underwriter
Exemption, an investment in a Certificate will evidence both an interest in the
respective Original Trust as well as an interest in the Deposits held in escrow
by an Escrow Agent for the benefit of the Certificateholder. Under the terms of
the Escrow Agreements, the proceeds from the Offering of the Certificates of
each Class will be paid over by the Underwriters to the Depositary on behalf of
the Escrow Agent (for the benefit of such Certificateholders as the holders of
the Escrow Receipts) and will not constitute property of the Original Trusts.
Under the terms of each Escrow Agreement, the Escrow Agent will be irrevocably
instructed to enter into the Deposit Agreements with the Depositary and to
effect withdrawals upon the receipt of appropriate notice from the relevant
Trustee so as to enable such Trustee to purchase the identified Equipment Notes
on the terms and conditions set forth in the Note Purchase Agreement. Interest
on the Deposits relating to each Trust will be paid to the Certificateholders of
such Trust as Receiptholders through a Paying Agent appointed by the Escrow
Agent. Pending satisfaction of such conditions and withdrawal of such Deposits,
the Escrow Agent's rights with respect to the Deposits will remain plan assets
subject to the fiduciary responsibility and prohibited transaction provisions of
ERISA and Section 4975 of the Code.
There can be no assurance that the Department of Labor would determine that
the Underwriter Exemption would be applicable to Class A-1 Certificates and
Class A-2 Certificates in these circumstances. In particular, the Department of
Labor might assert that the escrow arrangement is tantamount to an impermissible
pre-funding rendering the Underwriter Exemption inapplicable. In addition, even
if all of the conditions of the Underwriter Exemption are satisfied with respect
to the Class A-1 Certificates and Class A-2 Certificates, no assurance can be
given that the Underwriter Exemption would apply with respect to all
transactions involving the Class A-1 Certificates or the Class A-2 Certificates
or the assets of the Class A-1 Trust or the Class A-2 Trust. In particular, it
appears that the Underwriter Exemption would not apply to the purchase by Class
B Certificateholders or Class C Certificateholders of Class A-1 Certificates or
Class A-2 Certificates in connection with the exercise of their rights upon the
occurrence and during the continuance of a Triggering Event. Therefore, the
fiduciary of a Plan considering the purchase of a Class A-1 Certificate or Class
A-2 Certificate should consider the availability of the exemptive relief
provided by the Underwriter Exemption, as well as the availability of any other
exemptions that may be applicable, such as the Class Exemptions.
The Underwriter Exemption does not apply to the Class B Certificates.
Therefore, the fiduciary of a Plan considering the purchase of a Class B
Certificate should consider the availability of other exemptions, such as the
Class Exemptions.
Each person who acquires or accepts a Certificate or an interest therein,
will be deemed by such acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been used to purchase such
Certificate or an interest therein or (ii) the purchase and holding of such
Certificate or an interest therein are exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
among Continental and the underwriters listed below (the "Underwriters")
relating to the Offered Certificates, Continental has agreed to cause each Trust
to sell to each of the Underwriters, and each of such Underwriters has severally
agreed to purchase, the respective aggregate amounts of Offered Certificates set
forth after their names below:
PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF CLASS A-1 OF CLASS A-2 OF CLASS B
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES
- ----------- ---------------- ---------------- ----------------
Morgan Stanley & Co. Incorporated................ $ $ $
Salomon Smith Barney Inc.........................
Credit Suisse First Boston Corporation...........
Chase Securities Inc. (JPMorgan).................
Credit Lyonnais Securities (USA) Inc.............
------------ ------------ ------------
Total....................................... $436,433,000 $188,440,000 $ 83,602,000
============ ============ ============
The underwriting agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the Offered Certificates if
any Offered Certificates are purchased. If an Underwriter defaults on its
purchase commitment, the purchase commitments of non-defaulting Underwriters may
be increased or the Offering of the Offered Certificates may be terminated.
Continental estimates that its out of pocket expenses associated with the
offer and sale of the Offered Certificates will be approximately $1,200,000.
The Underwriters propose initially to offer the Offered Certificates 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 public
offering prices and such concessions may be changed by the Underwriters.
PASS THROUGH TO SELLING GROUP DISCOUNT TO
CERTIFICATES DESIGNATION MEMBERS BROKER/DEALERS
------------------------ ---------------- --------------
2001-1A-1................................................... % %
2001-1A-2...................................................
2001-1B.....................................................
The Offered Certificates are new securities for which there currently is no
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. Accordingly, no assurance can be given as to the
liquidity of the trading market for the Offered Certificates.
The underwriting agreement provides that Continental will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and contribute to payments which the Underwriters may be
required to make in that respect.
Citibank, N.A., an affiliate of Salomon Smith Barney Inc., has committed to
provide funding (if required) in connection with the proposed placement of the
Class C Certificates, subject to certain terms and conditions. See "Description
of the Certificates--Expected Issuance of Class C Certificates".
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 Salomon Smith Barney Inc., Credit Suisse First Boston Corporation, Chase
Securities Inc. and Credit Lyonnais Securities (USA) Inc. are lenders to
Continental.
It is expected 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 business
S-95
96
day following the date of pricing of the Offered Certificates (this settlement
cycle being referred to as T+ ). 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 of pricing or the next succeeding business days
will be required, by virtue of the fact that the Offered Certificates initially
will settle in T+ , to specify an alternate settlement cycle at the time of
any trade to prevent a failed settlement. Purchasers of Offered Certificates who
wish to trade Offered Certificates on the date of pricing or the next
succeeding business days should consult their own advisor.
To facilitate the Offering of the Offered Certificates, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Offered Certificates. Specifically, the Underwriters may overallot
in connection with the Offering, creating a short position in the Offered
Certificates for their own account. In addition, to cover overallotments or to
stabilize the price of the Offered Certificates, the Underwriters may bid for,
and purchase, Offered Certificates in the open market. Finally, the Underwriters
may reclaim selling concessions allowed to an agent or a dealer for distributing
Offered Certificates in the offering, if the Underwriters repurchase previously
distributed Offered Certificates in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Offered Certificates above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
The validity of the 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. Milbank, Tweed, Hadley & McCloy LLP is acting as counsel to
Citibank, N.A. and a receivable securitization company administered by Citicorp
North America, Inc. in connection with the intended purchase of the Class C
Certificates.
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) for the year ended December 31, 2000 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.
The references to AISI, AVITAS and MBA, and to their respective appraisal
reports, dated as of March 28, 2001, March 20, 2001 and March 28, 2001,
respectively, are included herein in reliance upon the authority of each such
firm as an expert with respect to the matters contained in its appraisal report.
S-96
97
APPENDIX I--INDEX OF TERMS
PAGE
-----
Adjusted Expected Distributions........... S-62
Administration Expenses................... S-62
Aggregate LTV Collateral Amount........... S-63
Air France................................ S-27
Aircraft.................................. S-65
Aircraft Operative Agreements............. S-47
AISI...................................... S-66
Alitalia.................................. S-27
Appraised Current Market Value............ S-63
Appraisers................................ S-66
Assumed Aircraft Value.................... S-73
Assumed Amortization Schedule............. S-35
Assumed Appraised Value................... S-45
Average Life Date......................... S-71
AVITAS.................................... S-66
Base Rate................................. S-56
Basic Agreement........................... S-28
Boeing.................................... S-67
Bush Intercontinental..................... S-25
Business Day.............................. S-34
Cash Collateral Account................... S-54
Cede...................................... S-49
Certificate Account....................... S-34
Certificate Owner......................... S-49
Certificates.............................. S-28
Certificateholders........................ S-29
Class A common stock...................... S-25
Class A-1 Certificates.................... S-28
Class A-1 Trust........................... S-28
Class A-1 Trustee......................... S-31
Class A-2 Certificates.................... S-28
Class A-2 Trust........................... S-28
Class A-2 Trustee......................... S-31
Class B Certificates...................... S-28
Class B common stock...................... S-25
Class B Trust............................. S-28
Class B Trustee........................... S-31
Class C Certificates...................... S-28
Class C Trust............................. S-28
Class C Trustee........................... S-31
Class D Certificates...................... S-48
Class D Trust............................. S-48
Class D Trustee........................... S-31
Class Exemptions.......................... S-93
CMI....................................... S-25
Code...................................... S-42
Commission................................ S-28
Company................................... S-25
Continental............................... S-25
Continuous Stay Period.................... S-77
Controlling Party......................... S-59
Convention................................ S-81
Current Distribution Date................. S-61
Current Pool Balance...................... S-63
PAGE
-----
Debt Balance.............................. S-82
default................................... S-39
Delivery Period........................... S-67
Delivery Period Termination Date.......... S-50
Deposit................................... S-50
Deposit Agreement......................... S-50
Deposit Make-Whole Premium................ S-51
Depreciation Assumption................... S-73
disqualified persons...................... S-92
Distribution Date......................... S-31
Downgrade Drawing......................... S-54
DTC....................................... S-49
DTC Participants.......................... S-49
Equipment Notes........................... S-68
ERISA..................................... S-92
ERISA Plans............................... S-92
Escrow Agent.............................. S-52
Escrow Agreements......................... S-52
Escrow Receipts........................... S-52
event of default.......................... S-39
Event of Loss............................. S-85
Excusable Delay........................... S-67
Expected Distributions.................... S-61
Express................................... S-25
FAA....................................... S-22
Final Distributions....................... S-60
Final Drawing............................. S-56
Final Maturity Date....................... S-33
Gulfstream................................ S-26
H.15(519)................................. S-71
Hopkins International..................... S-25
Indenture Default......................... S-38
Indentures................................ S-44
Intercreditor Agreement................... S-59
Interest Drawings......................... S-53
IRS....................................... S-88
Issuance Date............................. S-55
Lease..................................... S-80
Lease Event of Default.................... S-38
Lease Payment Date........................ S-80
Leased Aircraft........................... S-43
Leased Aircraft Indenture................. S-43
Leased Aircraft Trustee................... S-69
LIBOR..................................... S-56
Liquidity Expenses........................ S-61
Liquidity Facilities...................... S-30
Liquidity Obligations..................... S-61
Liquidity Providers....................... S-30
Loan Trustees............................. S-69
LTV Appraisal............................. S-64
LTV Collateral Amount..................... S-63
LTV Ratio................................. S-63
LTVs...................................... S-7
Make-Whole Premium........................ S-71
I-1
98
APPENDIX I--INDEX OF TERMS--(CONTINUED)
PAGE
-----
Mandatory Document Terms.................. S-47
Mandatory Economic Terms.................. S-45
Maximum Available Commitment.............. S-53
MBA....................................... S-66
Minimum Sale Price........................ S-60
most recent H.15(519)..................... S-71
New Trustee............................... S-48
Newark.................................... S-25
Non-Extension Drawing..................... S-55
Non-Performing Equipment Notes............ S-62
Northwest................................. S-25
Northwest Airlines........................ S-25
Note Holders.............................. S-47
Note Purchase Agreement................... S-43
Offered Certificate Liquidity Event of
Default................................. S-57
Offered Certificate Liquidity Facility.... S-53
Offered Certificate Liquidity Provider.... S-53
Offered Certificate Trusts................ S-28
Offered Certificates...................... S-28
Offering.................................. S-48
Original Trustee.......................... S-48
Original Trusts........................... S-48
Owned Aircraft............................ S-44
Owned Aircraft Indenture.................. S-44
Owned Aircraft Trustee.................... S-69
Owner Participant......................... S-68
Owner Trustee............................. S-68
Participation Agreement................... S-43
parties in interest....................... S-92
Pass Through Trust Agreements............. S-28
Paying Agent.............................. S-52
Paying Agent Account...................... S-34
Performing Equipment Note................. S-54
Plan Asset Regulation..................... S-92
Plans..................................... S-92
Pool Balance.............................. S-34
Pool Factor............................... S-35
Prospectus................................ S-28
PTC Event of Default...................... S-40
PTCE...................................... S-93
PAGE
-----
Receiptholder............................. S-52
Regular Distribution Dates................ S-33
Remaining Weighted Average Life........... S-71
Replacement Facility...................... S-54
Required Amount........................... S-53
Scheduled Payments........................ S-33
Section 1110.............................. S-78
Series A-1 Equipment Notes................ S-68
Series A-2 Equipment Notes................ S-68
Series B Equipment Notes.................. S-68
Series C Equipment Notes.................. S-68
Series C Liquidity Facility............... S-30
Series C Liquidity Provider............... S-30
Series D Equipment Notes.................. S-68
Sixty-Day Section 1110 Period............. S-77
Special Distribution Date................. S-33
Special Payment........................... S-33
Special Payments Account.................. S-34
Stated Interest Rates..................... S-53
Subordination Agent....................... S-59
Substitute Aircraft....................... S-67
Successor Trust........................... S-48
Tax Counsel............................... S-88
Termination Notice........................ S-57
Threshold Rating.......................... S-55
Transfer Date............................. S-48
Transportation Code....................... S-40
Treasury Yield............................ S-71
Triggering Event.......................... S-31
Trust Agreements.......................... S-68
Trust Indenture Act....................... S-41
Trust Property............................ S-28
Trust Supplement.......................... S-28
Trusts.................................... S-28
Trustee................................... S-28
U.S. Certificateholders................... S-88
U.S. Persons.............................. S-88
Underwriter Exemption..................... S-93
Underwriters.............................. S-95
Virgin.................................... S-27
I-2
99
APPENDIX II--APPRAISAL LETTERS
II-1
100
[AIRCRAFT
INFORMATION
SERVICES, INC. LOGO]
28 March 2001
Continental Airlines
1600 Smith Street HQSFN
Houston, TX 77002
Subject: AISI Report No.: A1S015BVO
AISI Sight Unseen New Aircraft Base Value Appraisal, Twelve B737-800,
Seven B737-900, Ten B767-400ER and Two B777-200ER Aircraft.
Reference: (a) Morgan Stanley Fax and Email messages 09/14 March 2001
Dear Gentlemen:
Aircraft Information Services, Inc. (AISI) is pleased to offer Continental
Airlines our opinion of the sight unseen base value of various new aircraft
scheduled to be delivered from the manufacturer to Continental Airlines between
October 2001 and June 2002 as listed and defined in Table I and referenced (a)
data above.
1. METHODOLOGY AND DEFINITIONS
The standard terms of reference for commercial aircraft value are 'base value'
and `current market value' of an 'average' aircraft. Base value is a theoretical
value that assumes a balanced market while current market value is the value in
the real market; both assume a hypothetical average aircraft condition. All
other values are derived from these values. AISI value definitions are
consistent with the current definitions of the International Society of
Transport Aircraft Trading (ISTAT), those of 01 January 1994. AISI is a member
of that organization and employs an ISTAT Certified and Senior Certified
Appraiser.
AISI defines a 'base value' as that of a transaction between an equally willing
and informed buyer and seller, neither under compulsion to buy or sell, for a
single unit cash transaction with no hidden value or liability, with supply and
demand of the sale item roughly in balance and with no event which would cause a
short term change in the market. Base values are typically given for aircraft in
'new' condition, 'average half-life' condition, or 'adjusted' for an aircraft in
a specifically described condition at a specific time.
Headquarters, 26072 Merit Circle, Suite 123. Laguna Hills, CA 92653
TEL: 949-582-8888 FAX: 949-582-8887 E-MAIL: AISINews@aol.com
101
[LOGO]
28 March 2001
AISI File No. A1S015BVO
Page - 2 -
An 'average' aircraft is an operable airworthy aircraft in average physical
condition and with average accumulated flight hours and cycles, with clear title
and standard unrestricted certificate of airworthiness, and registered in an
authority which does not represent a penalty to aircraft value or liquidity,
with no damage history and with inventory configuration and level of
modification which is normal for its intended use and age. AISI assumes average
condition unless otherwise specified in this report. AISI also assumes that
airframe, engine and component maintenance and essential records are sufficient
to permit normal commercial operation under a strict airworthiness regulatory
authority.
'Half-life' condition assumes that every component or maintenance service which
has a prescribed interval that determines its service life, overhaul interval or
interval between maintenance services, is at a condition which is one-half of
the total interval.
An 'adjusted' appraisal reflects an adjustment from half life condition for the
actual condition, utilization, life remaining or time remaining of an airframe,
engine or component.
It should be noted that AISI and ISTAT value definitions apply to a transaction
involving a single aircraft, and that transactions involving more than one
aircraft are often executed at considerable and highly variable discounts to a
single aircraft price, for a variety of reasons relating to an individual buyer
or seller.
AISI defines a 'current market value', which is synonymous with the older term
`fair market value' as that value which reflects the real market conditions
including short term events, whether at, above or below the base value
conditions. Assumption of a single unit sale and definitions of aircraft
condition, buyer/seller qualifications and type of transaction remain unchanged
from that of base value. Current market value takes into consideration the
status of the economy in which the aircraft is used, the status of supply and
demand for the particular aircraft type, the value of recent transactions and
the opinions of informed buyers and sellers. Current market value assumes that
there is no short term time constraint to buy or sell.
AISI encourages the use of base values to consider historical trends, to
establish a consistent baseline for long term value comparisons and future value
considerations, or to consider how actual market values vary from theoretical
base values. Base values are less volatile than current market values and tend
to diminish regularly with time. Base values are normally inappropriate to
determine near term values. AISI encourages the use of current market values to
consider the probable near term value of an aircraft.
102
[LOGO]
28 March 2001
AISI File No. A1S015BVO
Page - 3 -
If more than one aircraft is contained in this report than it should be noted
that the values given are not directly additive, that is, the total of the given
values is not the value of the fleet but rather the sum of the values of the
individual aircraft if sold individually over time so as not to exceed demand.
2. VALUATION
The aircraft are valued predicated upon the reference (a) data which describes
the aircraft MTOW and any engine upgrades. Following is AISI's opinion of the
base value for the subject aircraft on their respective scheduled delivery dates
in current US Dollars. Valuations are presented in Table I subject to the
assumptions, definitions and disclaimers herein.
TABLE I
- -----------------------------------------------------------------------------------------
Scheduled Expected
Manufacturer's Aircraft Serial Registration New Delivery Base Value -
Delivery Date Number Number Current USDollars
- -----------------------------------------------------------------------------------------
B737-800, CFM56-7B26 ENGINES, 174,200LB MTOW
Oct-01 31588 N76269 $51,520,000
Oct-01 31632 N73270 $51,520,000
Nov-01 31589 N35271 $51,680,000
Nov-01 31590 N36272 $51,680,000
Dec-01 31591 N37273 $51,850,000
Jan-02 31592 N37274 $52,010,000
Feb-02 31593 N73275 $52,170,000
Feb-02 31594 N73276 $52,170,000
Mar-02 31595 N37277 $52,330,000
Jun-02 31596 N73278 $52,830,000
Jun-02 31597 N79279 $52,830,000
Jun-02 31598 N36280 $52,830,000
103
[AISI LOGO]
28 March 2001
AISI File No. A1S015BVO
Page - 4 -
B737-900, CFM56-7B26 ENGINES, 174,200LB MTOW
Oct-01 30125 N37408 $52,720,000
Nov-01 30126 N37409 $52,890,000
Dec-01 30127 N75410 $53,050,000
Jan-02 30128 N71411 $53,210,000
Mar-02 30129 N31412 $53,550,000
May-02 30130 N37413 $53,880,000
Jun-02 30131 N30414 $54,050,000
B767-400ER, CF6-80C2B8F ENGINES, 450,000LB MTOW
Jan-02 29452 N66057 $108,890,000
Jan-02 29453 N67058 $108,890,000
Feb-02 29454 N69059 $109,240,000
Feb-02 29455 N78060 $109,240,000
Mar-02 29456 N68061 $109,570,000
Mar-02 29457 N76062 $109,570,000
Apr-02 29458 N69063 $109,920,000
Apr-02 29459 N76064 $109,920,000
May-02 29460 N76065 $110,260,000
May-02 29461 N77066 $110,260,000
B777-200ER, GE90-90B ENGINES, 648,000LB MTOW
Mar-02 31679 N78017 $143,880,000
Apr-02 31680 N37018 $144,340,000
104
[AISI LOGO]
28 March 2001
AISI File No. A1S015BVO
Page - 5 -
Unless otherwise agreed by Aircraft Information Services, Inc. (AISI) in
writing, this report shall be for the sole use of the client/addressee. This
report is offered as a fair and unbiased assessment of the subject aircraft.
AISI has no past, present, or anticipated future interest in the subject
aircraft. The conclusions and opinions expressed in this report are based on
published information, information provided by others, reasonable
interpretations and calculations thereof and are given in good faith. Such
conclusions and opinions are judgments that reflect conditions and values which
are current at the time of this report. The values and conditions reported upon
are subject to any subsequent change. AISI shall not be liable to any party for
damages arising out of reliance or alleged reliance on this report, or for any
parties action or failure to act as a result of reliance or alleged reliance on
this report.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
/s/ John D. McNicol
John D. McNicol
Vice President
Appraisals & Forecasts
105
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106
CONTINENTAL AIRLINES MARCH 20, 2001
- --------------------------------------------------------------------------------
INTRODUCTION
AVITAS, Inc. has been retained by Continental Airlines (the "Client") to provide
its opinion as to the Base Value for thirty-one (31) jet aircraft. The subject
aircraft are identified and their values are set forth in Figure 1 in this
report.
The values presented in this report assume that this 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,set forth in full in the appendix at the end of this
report, conform to those of the International Society of Transport Aircraft
Trading ("ISTAT") adopted in January 1994, and are summarized as follows:
- - BASE VALUE is the appraiser's opinion of the underlying economic value of
an aircraft in an open, unrestricted, stable market environment with a
reasonable balance of supply and demand, and assumes full consideration of
its "highest and best use." An aircraft's Base Value is founded in the
historical trend of values and in the projection of value trends and
presumes an arm's-length, cash transaction between willing 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 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).
AIRCRAFT VALUE
AVITAS's opinion as to the value of the subject aircraft is presented below in
millions of U.S. dollars.
- --------------------------------------------------------------------------------
[PICTURE GLOBAL WORLD]
WORLD HEADQUARTERS: 14520 Avion Pkwy, Chantilly, VA 20151 USA
- - Telephone: (703) 476-2300 Fax: (703) 860-5855 Email: avitas@dnv.com
AVITAS EUROPE: Palace House, 3 Cathedral St. London SE1 9DE
- - Telephone: 0171-716-6621 Fax: 0717-357-6873 Email: avitas@dnv.com
AVITAS ENGINEERING: 5040 N.W. 7th Street, #900 Miami, FL 33126
- - Telephone: (305) 476-9650 Fax: (305) 476-9915 Email: avitas@dnv.com
A DET NORSKE VERITAS COMPANY
- --------------------------------------------------------------------------------
107
CONTINENTAL AIRLINES MARCH 20, 2001
- --------------------------------------------------------------------------------
FIGURE 1
CONTINENTAL AIRLINES
AIRCRAFT SUMMARY & AIRCRAFT VALUES IN US$ MILLIONS
- --------------------------------------------------------------------------------------------------------------
NO. TYPE ENGINES S/N DEL. DATE MTOW (LBS) BV
- --------------------------------------------------------------------------------------------------------------
1 737-800 CFM56-7B26 31588 2001-10 174,200 $ 45.9
2 737-800 CFM56-7B26 31632 2001-10 174,200 45.9
3 737-800 CFM56-7B26 31589 2001-11 174,200 45.9
4 737-800 CFM56-7B26 31590 2001-11 174,200 45.9
5 737-800 CFM56-7B26 31591 2001-12 174,200 45.9
6 737-800 CFM56-7B26 31592 2002-01 174,200 46.4
7 737-800 CFM56-7B26 31593 2002-02 174,200 46.4
8 737-800 CFM56-7B26 31594 2002-02 174,200 46.4
9 737-800 CFM56-7B26 31595 2002-03 174,200 46.4
10 737-800 CFM56-7B26 31596 2002-06 174,200 46.7
11 737-800 CFM56-7B26 31597 2002-06 174,200 46.7
12 737-800 CFM56-7B26 31598 2002-06 174,200 46.7
13 737-900 CFM56-7B26 30125 2001-10 174,200 47.9
14 737-900 CFM56-7B26 30126 2001-11 174,200 47.9
15 737-900 CFM56-7B26 30127 2001-12 174,200 47.9
16 737-900 CFM56-7B26 30128 2002-01 174,200 48.4
17 737-900 CFM56-7B26 30129 2002-03 174,200 48.4
18 737-900 CFM56-7B26 30130 2002-05 174,200 48.8
19 737-900 CFM56-7B26 30131 2002-06 174,200 48.8
20 767-400ER CF6-80C2B8F 29452 2002-01 450,000 95.5
21 767-400ER CF6-80C2B8F 29453 2002-01 450,000 95.5
22 767-400ER CF6-80C2B8F 29454 2002-02 450,000 95.5
23 767-400ER CF6-80C2B8F 29455 2002-02 450,000 95.5
24 767-400ER CF6-80C2B8F 29456 2002-03 450,000 95.5
25 767-400ER CF6-80C2B8F 29457 2002-03 450,000 95.5
26 767-400ER CF6-80C2B8F 29458 2002-04 450,000 96.2
27 767-400ER CF6-80C2B8F 29459 2002-04 450,000 96.2
28 767-400ER CF6-80C2B8F 29460 2002-05 450,000 96.2
29 767-400ER CF6-80C2B8F 29461 2002-05 450,000 96.2
30 777-200ER GE90-90B 31679 2002-03 648,000 128.5
31 777-200ER GE90-90B 31680 2002-04 648,000 129.5
- ---------------------------------------------------------------------------------------------------------------
GRAND TOTAL $ 2,108.6
- ---------------------------------------------------------------------------------------------------------------
2
108
CONTINENTAL AIRLINES MARCH 20, 2001
- --------------------------------------------------------------------------------
GENERAL MARKET OVERVIEW
INTRODUCTION
Many key indicators suggested that the expected cyclical downturn would commence
in 2000, but the continuation of the economic boom through the year took most
observers by surprise. Although the availability of some types remained
significant - especially for younger, narrowbody aircraft - 2000 was marked by a
robust U.S. economy, healthy traffic growth worldwide and total net orders for
more than 1,200 new jet aircraft. However, during 2001, in the U.S. economy
especially, the slowdown is likely to become much more apparent and the rate of
growth in air traffic both in North America and elsewhere is forecast to
decrease significantly. Europe remains on a very firm footing economically,
especially in the euro-zone countries, and recovery in Asia has now gained
considerable ground, although Japan is expected to take longer than its
neighbours to catch up.
AVITAS predicts that growth in international air traffic worldwide will average
between 4.0% and 7.0% over the next five years, with 2000 being the last year of
the most recent upswing in the cycle. In 2001, global traffic is forecast to
increase by 2.7%, which compares to growth of more than 6.0% in the previous
year, but this rate of increase is expected to accelerate in the years
immediately afterward.
Net orders for new jet aircraft of all types are forecast to be less than 900
units in both 2001 and 2002, following four consecutive years in which sales
exceeded 1,200 units annually. Much of the decline in orders will be accounted
for by fewer sales of narrowbody aircraft. Commercial jet deliveries, for all
types, totalled more than 1,100 units in 2000, with deliveries in 2001 expected
to decline only slightly. Over the next three years, this total is forecast to
decrease steadily, to less than 900 units in 2004.
The debate over the timing and depth of a fresh round of more restrictive noise
regulations, commonly referred to as Stage 4, will intensify as the year
progresses. If these new rules are sufficiently stringent, they will have a
far-reaching impact on some currently popular aircraft types. Given that
widespread international agreement must first be secured, it is unlikely that
such rules can be enforced in the next several years. Beyond then, concerns over
the potential effects on aircraft trading conditions are very real. The
Committee on Aviation Environmental Protection (CAEP) of the International Civil
Aviation Organization (ICAO) recommended in January 2001 that a new noise
standard, ten decibels lower than Stage 3, be enforced on a cumulative basis for
new aircraft designs with effect from 2006, with appropriate procedures
introduced for the certification of existing fleets. A consensus on precisely
how new standards can be applied has yet to be reached, however, and the dispute
between the U.S. and the E.U. over hushkitted aircraft still flying remains.
During 2001, moves toward the finalization of the proposed Unidroit Convention
should also be made, although formal ratification may be some years from now.
The convention intends to provide a single international regime covering
operator bankruptcy and aircraft registration issues.
While the finances of most of the major U.S. carriers remain basically sound,
2000 proved to be a very difficult year for operations in many respects. Weather
delays and airport congestion all made their
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- --------------------------------------------------------------------------------
impact felt, while higher fuel prices continued to affect profitability and
consumer dissatisfaction and labor disputes became much more prominent issues.
Consolidation within the industry tightened as United Airlines announced plans
to acquire US Airways while American Airlines moved to take over TWA, and
several smaller or niche carriers ceased trading. At many of the main airlines,
labor and contract related issues have still to be resolved while scope clauses,
which limit the introduction of regional jets into mainstream airline
operations, are still in place at many carriers.
AVITAS believes that fuel prices will stabilize in the medium to long term as
known world reserves remain plentiful, although OPEC's supply policies and
worries over potential conflict in the Middle East remain factors to be
considered.
Substantial discounting between the two major airframe manufacturers continues
to place downward pressure on new aircraft prices. Airbus Industrie is also
moving toward the adoption of a conventional corporate structure.
The formal launch by Airbus of both passenger and freighter versions of the A380
ultra-high capacity long-haul transport marks the consortium's bid to outpace
Boeing at the upper end of the aircraft market. With service entry slated for
2006, deliveries of the new type should commence just as the next upturn in the
economic cycle is underway. Airbus can be expected to secure more firm orders
for the A380 as time goes on and Boeing's only response, to date, has been to
offer an enhanced variant of its 747-400. If the A380 orderbook grows, 747-400
values can be expected to be negatively affected (the type is already twelve
years old) although long-range versions of the 777 should continue to sell well
and support widebody market share for the U.S. manufacturer.
NARROWBODIES
Trends in orders, deliveries and backlog for narrowbody aircraft are shown in
the following Figure. 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 last year, declines are forecast
once more for 2001 and 2002.
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FIGURE 2
NARROWBODY ORDERS, DELIVERIES, AND BACKLOG
(PASSENGER AND FREIGHTER)
[BAR GRAPH]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Deliveries 452 569 520 331 277 220 225 351 546 655 598
Net Orders 652 88 136 29 92 303 688 669 897 588 829
Backlog 2311 1830 1446 1144 959 1042 1505 1823 2174 2107 2338
Source: BACK Information Services
WIDEBODIES
Trends in the market for widebody aircraft are shown in the following Figure.
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 the end of the decade, and 2000 and 2001 are
predicted to be the poorest years for sales, with around 130 widebody units
ordered in each year. The success of the Airbus A380 program will almost
entirely depend on commitments to it from carriers based in Asia, 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.
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FIGURE 3
WIDEBODY ORDERS, DELIVERIES, AND BACKLOG
(PASSENGER AND FREIGHTER)
[BAR GRAPH]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Deliveries 170 201 211 211 156 161 172 208 249 252 196
Net Orders 382 213 92 47 30 146 281 274 216 149 254
Backlog 1029 1041 922 758 632 617 726 792 759 656 714
Source: BACK Information Services
AIRCRAFT AVAILABILITY
Over the last three years, the number of aircraft available for either sale or
lease has grown substantially, although many of these are types that have
suffered because of the passing of the Stage 3 noise gate at the end of 1999.
What is of most concern, however, is the increase in the number of available
younger aircraft, particularly narrowbodies. The recession in Asia in the late
1990s is still being felt to some extent in the overall demand for widebody
aircraft, for which the region is a crucial market.
The following Figure shows the trend in aircraft availability since 1990, the
last peak in the market cycle.
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FIGURE 4
COMMERCIAL JET AIRCRAFT AVAILABLE FOR SALE OR LEASE
(AVERAGE END OF MONTH)
[BAR GRAPH]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
WIDEBODY 91 156 153 232 234 181 131 138 159 188 209
NARROWBODY 454 571 508 473 434 308 188 197 242 313 331
Source: BACK Information Services and The Airline Monitor.
RETIREMENTS
While a range of factors influence the rate of aircraft retirements, the
continuing impact of the 1999 Stage 2 noise gate and higher fuel prices are
currently the most significant. AVITAS forecasts that an average of 180 aircraft
per year will be permanently withdrawn from use between 2001 and 2005, but this
rate will accelerate in years to come. Some older widebody aircraft, it should
be noted, have also reached the end of their useful economic lives somewhat
prematurely. Aircraft affected include 747-100/-200Bs, older A300s and DC-10s. A
strong market for aircraft parts and spare engines will also help to support
more retirements of older types.
The following Figure displays the trend in retirements for both widebody and
narrowbody aircraft (in passenger and freighter configuration) since 1990.
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FIGURE 5
COMMERCIAL JET RETIREMENTS
(PASSENGER AND FREIGHTER)
[BAR GRAPH]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
WIDEBODY 1 1 4 9 21 19 26 38 55 47 51
NARROWBODY 25 42 100 91 74 56 50 90 124 120 120
Source: BACK Information Services
WORLD DISTRIBUTION
The following Figures show the global distribution of narrowbody and widebody
aircraft by type and region. Almost half of the total fleet of narrowbodies is
based in North America while Europe is home to around a quarter. Asia/Pacific
accounts for just under 11% of the total. However, for widebody types, almost
one third of the world fleet is in the Asia/Pacific region. Another third is
based in North America while a quarter is in Europe.
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FIGURE 6
NARROWBODY AIRCRAFT ACTIVE FLEET BY REGION AS OF JANUARY 2001
[BAR GRAPH]
- ------------------------------------------------------------------------------------------------------------------------------------
737- 737- 737- A319/A
707 727 200/200 300/400/ 600/700/ 757- 320/A32 DC-8 DC-9 MD- 717 F100
A 500 800 200/300 1 80/90
- ------------------------------------------------------------------------------------------------------------------------------------
AFRICA/M.E. 97 115 124 76 77 22 88 15 5 44 7
ASIA/PACIFIC 10 23 90 421 81 66 201 1 12 115 7 18
EUROPE 50 83 78 581 200 205 544 10 46 334 5 65
L.AM./CARIB. 25 126 190 87 35 24 67 10 98 76 62
N. AMERICA 87 767 349 783 328 618 458 159 491 681 31 122
- -----------------------------------------------------------------------------------------------------------------------------------
Source: BACK Information Services
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FIGURE 7
WIDEBODY AIRCRAFT ACTIVE FLEET BY REGION AS OF JANUARY 2001
[BAR GRAPH]
No. of Aircraft in Active Service
A300-
A300 600 A310 A330 A340 B747 B767 B777 DC10 MD11 L1011
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
AFRICA/M.E. 31 46 65 20 29 111 39 40 7 7 5
ASIA/PACIFIC 42 91 62 72 47 443 204 119 29 41 2
EUROPE 42 26 51 58 90 254 138 58 34 62 14
L.AM./CARIB. 8 6 5 7 7 44 3 16 4
N. AMERICA 26 78 54 17 12 199 382 98 249 62 60
Source: BACK Information Services
BACKGROUND - BOEING 737
Design of the Boeing short range 737 was announced in early 1965 with Lufthansa
as the launch customer. As evidenced by the fleet statistics shown below, the
737 is an extremely popular aircraft family.
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- --------------------------------------------------------------------------------
FIGURE 8
- ---------------------------------------------------------------------------------------------------
BOEING 737 FAMILY STATISTICS
AS OF JANUARY 2001
- ---------------------------------------------------------------------------------------------------
MODEL AIRCRAFT IN SERVICE AIRLINE OPERATORS FIRM ORDERS
- ---------------------------------------------------------------------------------------------------
737-100 2 1 --
737-200 43 12 --
737-200A 816 125 --
737-300 1,100 103 --
737-400 482 68 --
737-500 386 35 --
737-600 38 3 29
737-700 318 33 487
737-800 393 42 407
737-900 2 -- 40
- ---------------------------------------------------------------------------------------------------
GRAND TOTAL 3,580 273 963
- ---------------------------------------------------------------------------------------------------
Source: BACK Information Services
The first version in this series was the 737-100, which accommodates as many as
100 passengers. Only 30 were produced. The 737-200 is a stretched version, which
accommodates up to 130 passengers and is equipped with standard JT8D-9
powerplants. A 6-foot-4-inch plug was installed to increase capacity. The
737-200 Advanced model replaced the standard 737-200 in 1971. This aircraft
incorporated many aerodynamic improvements and a high lift system, which greatly
improved short field performance. Perhaps most significant of the upgrades was
the availability of the higher thrust JT8D-15 engines which allowed the maximum
takeoff weight to be increased to 115,000 pounds when the engine was introduced
and ultimately to 128,100 pounds.
The Boeing 737-300, first delivered in late 1984, features a fuselage lengthened
by about ten feet, fuel efficient CFM International CFM56-3 high bypass engines
and various structural, aerodynamic and systems modifications. The CFM engines
also make the -300 and subsequent models Stage 3/Chapter 3 noise compliant.
Though the maximum seating capacity is 149 passengers in a single-class
arrangement, the 737-300 typically seats 128 in a two-class configuration.
The 737-400 offers the same technology found in the -300 with the fuselage
lengthened by an additional ten feet and strengthened outer wings and landing
gear to allow for higher landing weights. The first production model was rolled
out of the factory in January 1988 and the first delivery was made to Piedmont
Airlines that September.
The Boeing 737-500 is the successor to the 737-200 in terms of its size and
passenger loads but utilizes the later technology CFM56 engines and
EFIS-equipped cockpit. The 737-500 was first flown in June 1989. Typical seating
is 108 passengers in a two-class configuration, though the aircraft can seat up
to 132 passengers.
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The rather wide acceptance of the A320 in the early 1990s prompted Boeing to
launch a new range of aircraft to replace the 737 family and compete with the
A320's seat-mile economics. In response to customers' needs, the 737-600,
737-700 and 737-800 programs were launched. The goal was to improve economic
performance and capability and to retain commonality with the existing 737
family. A new wing, new powerplant and other design enhancements were
incorporated to boost the range to 2,925 nautical miles (U.S. transcontinental),
and still retain as many parts as possible so that existing 737 operators would
be able to economize on maintenance costs. To improve what was already highly
regarded dispatch reliability, many of the modifications were designed to
simplify maintenance tasks. Overall, the new aircraft have 8% lower fuel burn
and estimated 15% lower maintenance charges than their predecessors.
The new supercritical wing has an increased chord and span providing a 15%
improvement in lift to drag ratio over the old design. A high hull weight was
needed to increase fuel capacity by 35%. To reduce the number of parts and
man-hours needed for overhaul, newly designed slats and flaps were fitted to the
wing.
The CFM56-7 powerplant is an improved version of the -5A series, and provides
thrust rated between 18,000 pounds and 26,400 pounds which allows for a typical
cruise speed of 0.82 Mach. In addition to an improved core, the -7 has a 61-inch
diameter fan with wider chord fan blades which allow it to operate at lower
turbine temperatures, thus slowing turbine deterioration. There is a fuel burn
performance improvement over the -5A which powers the A320 and A319. The
reliability of the CFM56-7 will certainly contribute to the reduction of
maintenance costs.
The Next Generation 737 maintains flight-deck commonality with the current 737
family. This allows pilots with a current 737 type rating to gain a rating for
the Next Generation 737s very quickly (possibly in as little as one day of
training), and reduces costly simulator training. The Next Generation 737's
instrumentation can be modified to display either 777 or 737-300/-400/-500
instrumentation. This reduces the amount of time it will take for pilots to get
new ratings. These systems were introduced as a lower cost means of competing
with the cross-crew qualification utilized by Airbus. Boeing elected not to
introduce a fly-by-wire system, but instead designed the flight controls to
minimize cross-training requirements.
On March 14, 1995, SAS became the launch customer for the 737-600, successor to
the -500, with a firm order for 35 aircraft and options for 35 more. Deliveries
commenced in the second half of 1998. Nine inches longer than the -500 and with
the same passenger capacity, the aircraft has CFM56-7 engines and a new wing.
The 737-600 has an increased takeoff weight of 124,000 pounds to 143,500 pounds
compared to the 115,500 pounds to 133,500 pounds of the -500. Standard fuel
capacity has been increased from 5,311 U.S. gallons to 7,150 U.S. gallons. As a
result, the -600 has a range with 108 passengers of 3,200 nautical miles, 800
miles more than the -500.
In December 1993, Southwest Airlines gave Boeing the launch order for the Boeing
737-700 with 63 firm orders plus options. Deliveries of the 737-700 began in
1997. It shares many of the same qualities as its very successful predecessor,
the 737-300. The 737-700 has the same seating capacity as the 737-300 (128
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in a two-class configuration), but has an increase in range. The range increase
is due to the greater fuel capacity and higher takeoff weight, which is 133,000
pounds to 153,000 pounds.
The Boeing 737-800 is a stretched version of the 737-400 capable of transporting
up to 162 passengers in two-class configuration or 189 in a single class. The
extra seating gives the -800 a reduction in seat-mile charges over the -400 for
the same trip cost. The differences between the 737-800 and the A320 are far
less pronounced than the other variants, thus tightening the competition. The
seating of the 737-800 is greater than that of the A320 (189 vs 164 in a single
class); however, it has a little less range. The aircraft, delivered to launch
customer Hapag-Lloyd in April 1998, has a design range of approximately 2,900
nautical miles, making it most desirable in the European markets. The -800 has
takeoff weight offerings from 155,500 pounds to 174,200 pounds. Boeing is
offering winglets as an option and will make them available as a retrofit for
present operators. South African Airways is the first customer who has ordered a
737-800 with winglets. First delivery is scheduled for 2001. A 737-800 equipped
with the new winglets will be able to fly farther, burn 3% to 5% less fuel, or
carry up to 6,000 pounds more payload according to the manufacturer.
In late 1997, Alaska Airlines launched the Boeing 737-900, which is a 737-800
stretched by nearly nine feet, with ten firm orders. The aircraft will have 18%
more cargo volume and 9% more passenger cabin area than the 737-800. Deliveries
are scheduled to begin in April 2001.
The Figure below summarizes the performance capabilities of the 737 series
(excluding the -100, -200 and -200A).
FIGURE 9
SEATING CAPACITY MTOW (LBS) RANGE (NM)
AIRCRAFT -------------------- ---------------------- ----------------------
MODEL BASIC MAX BASIC MAX BASIC MAX
- ------------------------------------------------------------------------------------------------------
737-300 128 149 124,500 138,500 1,625 2,270
737-400 146 172 138,500 150,000 1,960 2,090
737-500 108 132 115,500 133,500 1,520 2,420
737-600 108 132 124,000 143,500 1,530 3,230
737-700 128 149 133,000 153,000 1,620 3,245
737-800 162 189 155,500 174,200 1,905 2,925
737-900 177 189 166,000 174,200 1,925 2,728
- ------------------------------------------------------------------------------------------------------
All CFM-powered 737s meet the noise abatement requirements outlined in U.S. FAR
Part 36, Stage 3, and ICAO Annex 16, Chapter 3. Earlier models of the Boeing 737
series do not meet these noise standards without modification.
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CURRENT MARKET - BOEING 737-800
CURRENT MARKET
AVITAS is of the opinion that the current market for the Boeing 737-800 aircraft
is firm. There are presently 393 aircraft in service worldwide among more than
40 airline operators and a backlog of 407 firm orders and 95 options. The first
737-800 was delivered to launch customer Hapag Lloyd in April 1998. The 737-800
is a stretched version of the 737-400 that features additional capacity of
approximately 16 seats, increased range and cruising altitude. It competes with
the Airbus A320-200, which has been very successful in capturing large strategic
orders.
RECENT FLEET DEVELOPMENTS
In September 2000, Continental Airlines ordered five 737-800s with deliveries
scheduled to take place in late 2002. The purchase brought the carrier's
orderbook for the variant up to 55 aircraft.
In August 2000, American Airlines placed a firm order for three 737-800s. The
purchase is part of an exercised option from a 1996 contract.
In June 2000, ILFC announced its order for 50 additional 737NG aircraft. The
model types are not known at this time.
In May 2000, American Trans Air ordered 37 737-800 Enhanced Performance aircraft
(winglets and CFM56-7B27 engines).
In March 2000, Ryanair announced plans to acquire ten 737-800s after it raises
GBP 77 million through a new share placing to support its route expansion plans.
In February 2000, South African Airways said it will acquire 21 737-800 aircraft
to support its regional and domestic route networks. The aircraft will come
equipped with the optional winglets that provide up to 5% better fuel efficiency
and increased performance.
AVAILABILITY
As of January 2001, AVITAS is aware of three Boeing 737-800 aircraft being
advertised as available for either sale or lease by China Airlines, GECAS and
Sterling European Airlines. The aircraft offered by China Airlines is built in
1998 and has an asking price of $37 million.
RECENT TRANSACTIONS AND OPERATING LEASE RATES
The 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.
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In August 1999, it was reported that Transavia's average monthly lease rate for
its 737-800s is $300,000. Lease terms are between five and seven years. AVITAS
believes that monthly operating lease rates range from the upper $200s to low
$300s depending on lease term, airline credit and size of order.
CURRENT OPERATOR BASE AND BACKLOG
As shown in the Figure below, as of January 2001, there were 393 737-800
aircraft in service among 42 operators and another 407 on firm order and 95
options for the type. Ten aircraft are listed as being in service with the
manufacturer.
FIGURE 10
- ------------------------------------------------------------------------------------------------
BOEING 737-800 CURRENT FLEET & BACKLOG
AS OF JANUARY 2001
- ------------------------------------------------------------------------------------------------
OPERATOR IN SERVICE FIRM ORDERS OPTIONS TOTAL
- ------------------------------------------------------------------------------------------------
DELTA AIR LINES 40 91 131
AMERICAN AIRLINES 51 64 115
CONTINENTAL AIRLINES 58 24 10 92
GECAS 46 22 68
TURK HAVA YOLLARI 22 4 23 49
RYANAIR 12 15 17 44
ILFC 35 35
HAPAG-LLOYD 22 7 29
AIR BERLIN 16 6 22
AMERICAN TRANS AIR 20 20
TRANSAVIA AIRLINES 6 4 9 19
ISTANBUL AIRLINES 12 6 18
KLM ROYAL DUTCH AIRLINES 13 4 17
SCANDINAVIAN AIRLINES SYSTEM 13 2 15
GATX FLIGHTLEASE AIRCRAFT CO. 14 14
JET AIRWAYS 8 6 14
CHINA AIRLINES 9 4 13
KOREAN AIR 8 3 2 13
SOUTH AFRICAN AIRWAYS 8 5 13
AIR EUROPA 10 10
BOEING 10 10
VARIG 10 10
AIR ALGERIE 6 2 8
GATX LEASING CORP. 8 8
AIR CHINA 7 7
CIT AEROSPACE CORP. 7 7
HAINAN AIRLINES 7 7
ROYAL AIR MAROC 5 2 7
BWIA WEST INDIES AIRWAYS 6 6
FUTURA INTERNATIONAL AIRWAYS 6 6
STERLING EUROPEAN AIRLINES 5 5
All Others 45 16 2 63
- ------------------------------------------------------------------------------------------------
GRAND TOTAL 393 407 95 895
- ------------------------------------------------------------------------------------------------
Source: BACK Information Services
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The Figure below shows the geographic distribution of the 737-800. North America
has the greatest concentration of any region, accounting for about 56% of the
aircraft in service and on firm order. Europe follows with approximately 31% of
the 737-800 aircraft in service and on firm order. However, in terms of number
of operators and orderholders, Europe has the majority with 24.
FIGURE 11
737-800 GEOGRAPHIC DISTRIBUTION
AS OF JANUARY 2001
[BAR GRAPH]
AFRICA/M.E. ASIA/PACIFIC EUROPE L.AM./CARIB. N. AMERICA
- - In Service 24 50 150 6 163
- - Firm Orders 9 12 74 10 302
- - Options 6 57 32
Source: BACK Information Services
OUTLOOK AND FUTURE ASSET RISK ANALYSIS
With regard to the 737-800's competition, the A320-200, which has been in
service since 1988, has 888 aircraft in service and 504 firm orders. The A320
offers a maximum takeoff weight of 162,000 to 169,000 pounds versus the
737-800's 155,500 to 174,200 pounds and similar range capability; but the
737-800 can have as many as 12 more seats than the A320, depending on interior
configuration. Although Airbus has had a great degree of recent success with the
A320-200 and the aircraft remains a tough competitor to the 737-800, to meet
specific operating needs, the 737-800 can be ordered with higher
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specifications than the A320. AVITAS believes the values for the 737-800 should
remain firm despite intense competition in the foreseeable future.
CURRENT MARKET - BOEING 737-900
CURRENT MARKET
AVITAS is of the opinion that the current market for the Boeing 737-900, the
newest B737NG jet aircraft, is stable. There is presently a backlog of 44 firm
orders and 13 options. Alaska Airlines launched the aircraft in November 1997,
with an order for 10 aircraft. Continental Airlines, KLM and Korean Airlines
followed with orders for the type. The first aircraft is scheduled for delivery
to Alaska Airlines in April of 2001.
RECENT TRANSACTIONS AND OPERATING LEASE RATES
Since the aircraft has yet to be delivered, there are no transaction data
available. The Boeing list price for the Boeing 737-900 is $60.0 - $68.5
million, which is $3 - $4 million higher than the list price for the 737-800.
The 737-900 should command similar or slightly higher lease rates than the
737-800, whose lease rates have been reported at upper $200s to low $300s per
month.
COMPETITIVE PROFILE
FIGURE 12
- -----------------------------------------------------------------------------------------------------------------------
AIRBUS A321 COMPETITIVE PROFILE
AS OF JANUARY 2001
- -----------------------------------------------------------------------------------------------------------------------
AIRCRAFT EIS SEAT CAPACITY RANGE (NM) MTOW (LBS) IN SERVICE FIRM ORDERS OPTIONS
- -----------------------------------------------------------------------------------------------------------------------
A321-100 1994 185-220 2,350 w/185 pax 187,400 88 75 --
A321-200 1997 185-220 3,000 w/185 pax 205,000 98 118 33
737-800 1998 162-189 2,940 w/162 pax 174,200 393 407 95
737-900 2001 177-189 2,728 w/177 pax 174,200 2 44 13
757-200 1982 194-239 3,900 w/194 pax 220,000 927 68 5
- -----------------------------------------------------------------------------------------------------------------------
Source: BACK Information Services, Airbus, Boeing
CURRENT OPERATOR BASE AND BACKLOG
As shown in the Figure below, as of January 2001, there were 57 737-800 aircraft
on backlog among four orderholders.
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- --------------------------------------------------------------------------------
FIGURE 13
- -------------------------------------------------------------------------------------
BOEING 737-900 BACKLOG
AS OF JANUARY 2001
- -------------------------------------------------------------------------------------
OPERATOR FIRM ORDERS OPTIONS TOTAL
- -------------------------------------------------------------------------------------
ALASKA AIRLINES 9 10 19
KOREAN AIR 16 3 19
CONTINENTAL AIRLINES 15 -- 15
KLM 4 -- --
GRAND TOTAL 44 13 57
Source: BACK Information Services
OUTLOOK AND FUTURE ASSET RISK ANALYSIS
The competing aircraft types are the nine feet smaller 737-800, which was
introduced into service in 1997, and the A321-100/-200 aircraft, which was
introduced into service in 1993. Both these aircraft have significant backlogs
with 407 firm orders for the 737-800 and 193 for the A321s. It seems unlikely
that the -900 will capture as many orders as the successful -700 and -800, which
both have significant fleets in service and large backlogs among a broad range
of operators.
Another indirect competitor is the larger 757-200 which seats 194 passengers in
a two-class configuration and has been in airline service since 1982. The type
is still in production holds a backlog of 68 firm orders and 5 options.
Unless the backlog for the 737-900 increases considerably, the aircraft may
become a niche aircraft like the 737-600.
BACKGROUND - BOEING 767
In July 1978, Boeing announced its intention to launch the development of an
advanced technology, short to medium-range, twin-aisle airliner. The new
widebody was equipped with a two (optional three) crew cockpit and twin high
bypass engines and was soon after designated the 767. A 216-seat mixed class
passenger version with a range of 3,160 nautical miles, the 767-200 was selected
as the basic model. The 767-200, powered by two Pratt & Whitney JT9D-7R4D
engines, made its maiden flight in September 1981. The fifth production
aircraft, with General Electric CF6-80A engines, first flew in February 1982.
Delivery of the first 767-200 with Pratt & Whitney engines was to United
Airlines in August 1982, and the first General Electric powered aircraft to
Delta Air Lines in December of the same year.
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An extended-range version, the Boeing 767-200ER, was first delivered in June
1984 to Ethiopian Airlines. The ER version features higher gross weights and
increased fuel capacity and consequently greater range and utility. This version
is capable of carrying 224 passengers in a standard two-class configuration or
181 passengers in a standard three-class configuration. The aircraft in a
three-class configuration has a range of 6,655 nautical miles.
The -200EM variant applies to 767-200 non-ER aircraft, which have been ETOPS
modified and usually upgraded with a maximum takeoff weight increase. The -200EM
aircraft have no center wing fuel tanks.
The extent to which any -200 can be modified depends on the specific aircraft's
build specification and date of manufacture. The installation of the ETOPS
equipment and some weight increases are possible with all 767-200s without major
structural changes. However, increasing an aircraft's maximum takeoff weight may
require replacement of the landing gear and structural changes at a cost of
almost $3.0 million.
The 767-200 and -200ER aircraft characteristics are summarized in the Figure
below.
FIGURE 14
- --------------------------------------------------------------------------------------------------------------------
BOEING 767-200/-200ER CHARACTERISTICS
- --------------------------------------------------------------------------------------------------------------------
767-200 767-200ER
-------------------- ------------------------------------
UNIT BASIC OPTION BASIC OPTIONS
- --------------------------------------------------------------------------------------------------------------------
Maximum Takeoff Weight lb 300,000 335,000 345,000 387,000 395,000
Maximum Landing Weight lb 270,000 278,000 278,000 285,000 285,000
Maximum Zero Fuel Weight lb 248,000 253,000 253,000 260,000 260,000
Fuel Capacity U.S. gal 16,700 20,450 24,140 24,140
Range (216 pax & bags) nm 3,200* 5,200*
- --------------------------------------------------------------------------------------------------------------------
Source: Boeing
* Range calculated at 300,000 lbs MTOW for 767-200 and 351,000 lbs for
767-200ER.
The 767-300 aircraft features a fuselage stretch of about 21 feet, various
structural modifications and a maximum seating capacity of 325 passengers. In a
more typical two-class configuration, this aircraft can carry 261 passengers up
to 4,260 nautical miles.
The 767-300ER is an extended range variant of the basic 767-300 with higher
gross weights. Development of the aircraft began in early 1985. This version
embodies further structural modifications to allow maximum gross takeoff weights
up to 412,000 pounds and a fuel capacity of 24,140 U.S. gallons. It was first
delivered in February 1988. This variant is approved for ETOPS operations and
carries 269 passengers in a standard two-class configuration or 218 passengers
in a standard three-class configuration.
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The aircraft in a three-class configuration has a range of 6,150 nautical miles.
The 767-300ER has established the greatest operator base and market penetration
of the 767 family.
The 767-300F was launched as a specialized package freighter in January 1993 by
United Parcel Service. UPS ordered 30 (plus 30 options) package freighters and
Asiana ordered two freighters in November 1993. One was delivered in August
1996, and the delivery of the second one was canceled.
The modifications to the aircraft as freighter aircraft include a reinforced
landing gear and internal wing structure. The main deck floor has been
strengthened to accommodate 24 containers. The aircraft has no passenger windows
and a (8 ft 9 in x 11 ft 1 3/4 in) forward freight door. Pilot type rating and
many components are common to those of the Boeing 757 freighter. Although
Rolls-Royce, Pratt & Whitney and General Electric offer engines for the 767-300F
freighter aircraft, customers to date have chosen the General Electric
CF6-80C2B7F engine to power their aircraft. The 767-300 is available in two
freighter configurations, the package freighter and the freighter; both are
based on the 767-300ER airframe. The main difference between the two
configurations is found in the cargo handling system. The freighter has an
environmental control system, which allows perishable goods and live animals to
be transported, and powered handling systems on both the main and lower decks.
The main deck features a ball-mat maneuvering area near the cargo door and
rollers through the entire length of the cabin.
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
AVITAS believes that the Boeing 767-400ER market is stable. The aircraft was
launched by Delta Airlines in 1997 and the first entered service in August 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
432 aircraft in service and 39 firm orders and 10 options.
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RECENT FLEET DEVELOPMENTS
In October 2000, Continental Airlines converted two of its 767-400ER orders into
777-200ER orders. 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 rate 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.
CURRENT OPERATOR BASE AND BACKLOG
As of January 2001, there are 30 firm orders and 24 options among three airlines
and one leasing company. 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 15
BOEING 767-400ER CURRENT FLEET & BACKLOG
AS OF JANUARY 2001
IN FIRM
OPERATOR/ORDERHOLDER SERVICE ORDERS OPTIONS TOTAL
- -------------------- ------- ------ ------- -----
DELTA AIR LINES 12 6 24 42
CONTINENTAL AIRLINES 4 20 24
BOEING 3 3
KENYA AIRWAYS 3 3
GE CAPITAL AVIATION SERVICES INC. 1 1
-- -- -- --
GRAND TOTAL 19 30 24 73
== == == ==
Source: Back Information Services
COMPETITIVE PROFILE
Displayed below are the competing aircraft types for the Boeing 767-400ER.
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FIGURE 16
BOEING 767-400ER COMPETITIVE PROFILE
AS OF JANUARY 2001
AIRCRAFT EIS SEAT CAPACITY RANGE (NM) MTOW (LBS) IN SERVICE FIRM ORDERS
- -------- --- ------------- ---------- ---------- ---------- -----------
A300-600R 1988 230-361 4,100 w/266 pax 378,535 207 23
A330-200 1998 253-380 6,400 w/253 pax 507,000 84 104
A330-300 1994 295-400 5,600 w/335 pax 507,000 100 21
767-300 1986 218-325 4,300 w/261 pax 351,000 136 3
767-300ER 1988 218-325 6,150 w/218 pax 412,000 432 39
767-400ER 2000 245-375 5,635 w/245 pax 450,000 19 30
Source: BACK Information Services, Airbus, Boeing
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. In a search for a 200-seater, Airbus is
considering a further shrink of the A330, tentatively designated the A330-100.
The aircraft would have the same range capability but a lower MTOW than the
A330-200.
The -400ER is an incremental product to the 767-300ER, which has been a
successful product with airlines and leasing companies. It was designed to
replace older L1011s, DC-10-30s and A300s.
The future values and market outlook for the 767-400ER will most likely suffer.
Boeing has launched the 767-400ERX, which has a better range capability with
6,150 nautical miles with 245 passengers. So far, Kenya Airways and American
Airlines have showed interest in the new type. However, we believe that both the
- -ER and the -ERX aircraft have a questionable future with a lackluster orderbook
and intense competition from the Airbus products.
BACKGROUND - BOEING 777
Sized to fill the range/capacity gap in Boeing's product line between the
767-300 and the 747-400, the internal go-ahead for the 777 program came in late
1990, and major assembly began in early 1993. The first Boeing 777 was rolled
out of the Everett production facility in April 1994 and flight testing began in
June of the same year. Certification of the 777-200A model occurred in early
1995 with first delivery to United Airlines in May 1995.
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
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service. In February 2000, Boeing and GE launched two new derivatives of the
777, which are designated as the 777-200LR and the 777-300ER. Japan Airlines is
the manufacturer's launch customer for the longer range 777-300ER. Both of the
new aircraft variants will be powered by GE90-115B engines.
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 777-200 is the initial model designed for domestic and regional routes and
offers a maximum range of about 5,000 nautical miles. Direct competitors for the
domestic/regional 777-200 include the DC-10-10, L1011-1 and the A330-300.
Maximum gross takeoff weights of 506,000 pounds to 545,000 pounds are offered
with a fuel load of 31,000 U.S. gallons. The Pratt & Whitney PW4000, General
Electric GE90 and Rolls-Royce Trent 800 engines are all offered. With a 545,000
pound takeoff weight with 375 passengers, the 777-200 has a range of about 5,620
nautical miles, which is sufficient to service routes such as New York-Athens,
London-Dallas/Fort Worth, Tokyo-Sydney and Tokyo-Los Angeles.
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.
Boeing launched the 777-300 with orders (some were actually swapped from other
777 variants) from six airlines, Cathay Pacific, Thai Airways International,
Korean Air, All Nippon Airways, Malaysia Airlines and Japan Airlines. The -300
incorporates a fuselage stretch to accommodate up to 479 passengers in a
two-class configuration on routes up to 5,700 nautical miles.
FIGURE 17
BOEING 777 SERIES PERFORMANCE SUMMARY
-------------------------------------
MTOW (LBS) SEATING CAPACITY
AIRCRAFT MAX -------------------- --------------------
MODEL RANGE (NM) BASIC MAX BASIC MAX
----- ---------- ----- --- ----- ---
777-200 5,140 506,000 545,000 305 440
777-200ER 7,770 580,000 656,000 305 440
777-300 5,960 580,000 660,000 368 550
The 777-300 can be compared to the 747-100/-200 models in terms of passenger
capacity and range capability. However, the 777-300 burns one third less fuel
and has 40% lower maintenance costs. Engine options are the same as those
offered for the 777-200 but available in higher takeoff thrusts needed to
accommodate the increased takeoff weights of 580,000 pounds to 660,000 pounds.
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CURRENT MARKET - BOEING 777
CURRENT MARKET
The 777 fits 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. Because of its very long range, the 777-200ER has become the most
popular model. Due to a strong backlog and low availability for the 777-200ER
type, we believe the current market is balanced; however, for the 777-300 we
believe that prices may come under pressure as operators have cancelled or
deferred orders for the type. Also, the recent launch of the 777-300ER may also
negatively affect value performance of the -300 while the 777-200LR will be more
of a complement to the Series 200ER.
HISTORIC MARKET DEVELOPMENT
In the 300-seat long-range class, the Boeing 777 competes with the Airbus A330,
A340 and MD-11. Although these competitors enjoyed a significant head start in
market penetration and earlier availability, for this size aircraft, the Boeing
777 has won the majority of new aircraft competitions over the past three years.
Aside from the aircraft's superior economics, AVITAS is of the belief that an
aggressive competition between engine manufacturers is causing attractive
pricing for the type. Displayed below are the past and future deliveries (firm
orders and options) by year for the Boeing 777.
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FIGURE 18
BOEING 777 DELIVERIES AS OF JANUARY 2001
[BAR GRAPH]
- --------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
- --------------------------------------------------------------------------------------------------------------------------------
777-200 13 32 11 10 3 9 7 9 7 3 2
777-200ER 48 50 63 42 66 58 48 35 24 12 14 11 6
777-200LR 2 1 2 2
777-300 14 17 4 7 4 3 2 1
777-300ER 5 11 16 20 19 5 2
- --------------------------------------------------------------------------------------------------------------------------------
Source: BACK Information Services
AVAILABILITY
As of January 2001, AVITAS was aware of two 777s currently being publicly
offered for lease. GECAS is advertising two GE90-powered Series 200ER aircraft
as available from 2003. Over the last 12 months, the number of 777s being
offered for either sale or lease has never been more than two.
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 August 1999, Thai Airways got the approval to seek a $550 million loan from
the U.S. Export-Import Bank to finance the purchase of four Boeing 777-300 and
one 747-400 aircraft. Three of the aircraft have
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been in service since 1999 and two are scheduled to be delivered in October and
November 2000. Emirates Airlines reportedly signed a $117.3 million bank
financing package for a 777-200ER that was scheduled to be delivered in November
1998. The carrier reportedly also paid $138 million in 1997 for a 777-200ER in a
German leveraged lease deal.
RECENT FLEET DEVELOPMENTS
In January 2001, Japan Airlines announced that it was switching its engine
choice on eight 777-200ER aircraft held on order. The carrier will change from
Pratt & Whitney to General Electric GE90 engines. Additional orders are held for
777-300ERs, for which GE is the exclusive engine supplier.
In November 2000 Vietnam Airlines signed a letter of intent to order three
777-200ER aircraft. Also in November 2000, Japan Airlines stated it ordered
eight 777-200ER and two 767-300ER aircraft. As part of the transaction, Boeing
will take ten Japan Airlines MD-11 aircraft in trade between 2002 and 2004. Also
in November 2000, Alitalia announced it ordered six 777-200ER aircraft and
placed options for six 777-300ER aircraft, in lieu of its previously announced
plan to order 747-400 aircraft.
In October 2000, Air France announced an order for ten more 777-300ER aircraft
from Boeing. Options were reserved on a further ten models. The new aircraft
will all be powered by GE90-115B engines. Air France already flies eleven
777-200ERs and holds outstanding orders for twelve more. The newly-ordered
aircraft are slated for delivery from October 2003 onwards.
In September 2000, All Nippon Airways (ANA) changed four existing orders for
777-200ERs to Series 300ERs.
In early August 2000, American Airlines ordered six Boeing 777-200ER aircraft.
In July, ILFC placed an order for 25 777-200ER and eight of the recently
launched 777-200LR aircraft. In the same month, All Nippon Airways announced its
order for six of the new 777-300ER aircraft, converting four earlier options and
adding two more. Emirates Airlines who already operates three -200s and seven
- -200ERs, signed a letter of intent (LOI) in July 2000, to purchase six 777-300
and says it plans to firm up the order by the end of October.
GECAS announced at the Farnborough Air show in July 2000, its intention to order
10 of the new longer-range 777 aircraft and options for five. The order also
includes five -200ERs with options for two.
In June 2000, EVA Airways of Taiwan placed an order with Boeing for seven
longer-range 777s. The purchase covers three -200LR and four -300ER aircraft.
The 777s will be GE90-powered and will be deployed on trans-Pacific services.
EVA also reserved seven options for the type.
In March 2000, Japan Air Lines announced it is the launch customer for the long
range derivative of the Boeing 777-300. The airline ordered eight of the
aircraft and placed options for two more. Deliveries are scheduled to occur from
June 2004 through 2008. The aircraft will be configured for 300 seats and will
be used to replace 747-200 and 747-300 aircraft, which the airline will retire
during the 2004 through
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2008 period. Also in March 2000, EgyptAir announced it ordered two 777 aircraft,
and will return one 767-300ER aircraft to Boeing as part of the deal. The exact
model of 777 aircraft ordered was not disclosed, though the airline currently
operates three 777-200ER aircraft.
In October 1999, El Al ordered three 777-200ERs that will replace the carrier's
five 757-200s. In September 1999, Delta Air Lines and its pilot union reached a
tentative agreement on pay rates for the Boeing 777. The deal means that the two
aircraft delivered to the carrier last spring can resume in service and a
rescheduling of the deferred aircraft can be made. In April 1999, Delta Air
Lines announced a deferral of four 777-200s due to unresolved pilot negotiations
and ordered four 767-300ER aircraft in their place.
In August 1999, China Airlines signed a $3.8 billion deal for 13 Boeing
747-400Fs, five 737-800s and options to buy four 747-400Fs and two 747-400
passenger aircraft. The carrier reversed earlier plans to purchase the Boeing
777 for which it placed an option in 1995, in favor of the Airbus A340.
In February 2000, Boeing launched the 777-200LR and -300ER, which will have
longer range, higher MTOW and will be direct competitors to the recently
launched A340-500 and -600. Boeing plans for the first delivery of the 777-300ER
in September 2003 and the -200LR by January 2004. In July 1999, Boeing announced
it selected a GE90 engine as the sole powerplant for the 777-200LR and
777-300ER.
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. Also presented are the current operators of the subject aircraft
type.
FIGURE 19
BOEING 777 CURRENT FLEET & BACKLOG
AS OF JANUARY 2001
------------------
MODEL IN SERVICE FIRM ORDERS OPTIONS TOTAL
----- ---------- ----------- ------- -----
777-200 77 12 16 105
777-200ER 208 169 100 477
777-200LR -- 3 4 7
777-300 35 13 4 52
777-300ER -- 46 32 78
--- --- --- ---
GRAND TOTAL 320 243 156 719
=== === === ===
Source: BACK Information Services
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FIGURE 20
BOEING 777 CURRENT OPERATORS
AS OF JANUARY 2001
OPERATOR 777-200 777-200ER 777-300 TOTAL
-------- ------- --------- ------- -----
UNITED AIRLINES 22 26 -- 48
BRITISH AIRWAYS 5 35 -- 40
AMERICAN AIRLINES -- 27 -- 27
ALL NIPPON AIRWAYS 12 4 5 21
SAUDI ARABIAN AIRLINES -- 21 -- 21
SINGAPORE AIRLINES -- 13 5 18
CONTINENTAL AIRLINES -- 16 -- 16
THAI AIRWAYS INTERNATIONAL 8 -- 6 14
AIR FRANCE -- 14 -- 14
CATHAY PACIFIC AIRWAYS 5 -- 7 12
EMIRATES AIRLINES 3 6 3 12
MALAYSIA AIRLINES -- 11 -- 11
JAPAN AIRLINES 5 -- 5 10
CHINA SOUTHERN AIRLINES 4 5 -- 9
KOREAN AIR -- 5 4 9
AIR CHINA 7 -- -- 7
DELTA AIR LINES -- 7 -- 7
JAPAN AIR SYSTEM 6 -- -- 6
BOEING -- 5 -- 5
EGYPTAIR -- 3 -- 3
AEROFLOT RUSSIAN INT'L AIRLINES -- 2 -- 2
AIR EUROPE S.P.A -- 2 -- 2
KUWAIT AIRWAYS -- 2 -- 2
LAUDA AIR -- 2 -- 2
MID EAST JET -- 1 -- 1
SAUDI OGER LTD -- 1 -- 1
--- --- --- ---
GRAND TOTAL 77 208 35 320
=== === === ===
Source: BACK Information Services
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As presented below, among airline orderholders, Asian carriers hold the majority
of the 777-300s on order.
FIGURE 21
BOEING 777 FIRM ORDERS
AS OF JANUARY 2001
ORDERHOLDER 777-200 777-200ER 777-200LR 777-300 777-300ER TOTAL
----------- ------- --------- --------- ------- --------- -----
INTERNATIONAL LEASE FINANCE CORP -- 44 -- 7 8 59
SINGAPORE AIRLINES -- 29 -- 2 -- 31
JAPAN AIRLINES 5 8 -- -- 8 21
GENERAL ELECTRIC CAPITAL CORP -- 10 -- -- 10 20
AMERICAN AIRLINES -- 19 -- -- -- 19
AIR FRANCE -- 5 -- -- 10 15
UNITED AIRLINES -- 11 -- -- -- 11
ALL NIPPON AIRWAYS 4 -- -- -- 6 10
DELTA AIR LINES -- 7 -- -- -- 7
EVA AIRWAYS -- -- 3 -- 4 7
ALITALIA -- 6 -- -- -- 6
ASIANA AIRLINES -- 5 -- 1 -- 6
BRITISH AIRWAYS -- 5 -- -- -- 5
MALAYSIA AIRLINES -- 3 -- 1 -- 4
SINGAPORE AIRCRAFT LEASING ENTERPRISE -- 4 -- -- -- 4
VARIG -- 4 -- -- -- 4
AIR CHINA 3 -- -- -- -- 3
KOREAN AIR -- 1 -- 2 -- 3
CONTINENTAL AIRLINES -- 2 -- -- -- 2
EL AL -- 2 -- -- -- 2
LAUDA AIR -- 2 -- -- -- 2
SAUDI ARABIAN AIRLINES -- 2 -- -- -- 2
-- --- -- -- -- ---
GRAND TOTAL 12 169 3 13 46 243
== === == == == ===
Source: BACK Information Services
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ENGINE CHOICES
Depicted below are the numbers of aircraft currently in service by engine type.
AVITAS does not believe there is a value difference between the three
airframe/engine combinations.
FIGURE 22
BOEING 777 BY ENGINE TYPE
AS OF JANUARY 2001
ENGINE TYPE 777-200 777-200ER 777-300 TOTAL
- ----------- ------- --------- ------- -----
GE90 9 89 -- 98
PW4000 52 42 14 108
Trent 800 16 77 21 114
-- -- -- ---
GRAND TOTAL 77 208 35 320
== === == ===
Source: BACK Information Services
OUTLOOK AND FUTURE ASSET RISK ANALYSIS
The Boeing 777 will eventually replace older widebodies such as the Boeing
747-100/-200 and older tri-jets such as the DC-10, of which there are 189 and
194 passenger aircraft in service respectively and which have an average age of
over 20 years. The prospects for replacing three and four engine widebody
aircraft with the 777 is being further 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. An 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 firm 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 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 the all the 777s.
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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
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APPENDIX A - AVITAS VALUE DEFINITIONS
- - BASE VALUE is the appraiser's opinion of the underlying economic value of an
aircraft in an open, unrestricted, stable market environment with a
reasonable balance of supply and demand and assumes full consideration of
its "highest and best use." An aircraft's Base Value is founded in the
historical trend of values and in the projection of value trends and
presumes an arm's-length, cash transaction between willing 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 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.
- - FUTURE BASE VALUE is the appraiser's forecast of future aircraft value(s)
setting forth Base Value(s) as defined above.
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APPENDIX A - AVITAS Value Definitions
- - 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.
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APPENDIX B - 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 questions should cost to
position it competitively.
34
140
APPENDIX B - 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.
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142
MORTEN BEYER & AGNEW
AVIATION CONSULTING FIRM
Current Base Value Appraisal of
31 Aircraft
(2001-1)
PREPARED FOR:
Continental Airlines, Inc.
MARCH 28, 2001
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
143
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144
I. INTRODUCTION AND EXECUTIVE SUMMARY
MORTEN BEYER & AGNEW (MBA) has been retained by Continental Airlines (the
"Client") to determine the Current Base Value of 31 aircraft delivered
throughout 2001 and into the second quarter of 2002. The aircraft are further
identified in Section III of this report.
MBA utilized the technical data of these aircraft provided by the Client, but
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.
145
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. CURRENT MARKET CONDITIONS
[AIRPLANE (737) PHOTO] Boeing 737-800/900
New Generation
Boeing began replacing the trio of B-737-300/-400/-500s with upgraded new
generation versions beginning with the B-737-700 in 1997. Southwest Airlines'
order for 63 of the series officially launched the program in late 1993, and new
orders increased rapidly. Boeing ramped-up production to 279 last year for the
New Generation aircraft.
The fuselage of the new aircraft mirror that of the old (which were out-growths
of the original -100s and -200s). Upgraded avionics, a new wing design, and
other improvements combine to increase range, efficiency, and performance in
general. The CFM56-7 is the exclusive engine for the 3rd generation. However,
Boeing is losing market share to the more comfortable, wider A320 family.
Prospects for the 3rd generation B-737 jets were thought to be considerably
enhanced by the discontinuation of the MD-80/-90 series. The MD-95 has been
adopted by Boeing as its 100-seat competitor under the aegis of B-717, competing
with its own B-737-600. Airbus is becoming more aggressive with its
A318/319/320/321 high-tech series and winning an increasing share of orders.
During 2000 Airbus had 388 narrowbody orders, while Boeing had 443.
As the industry passes the peak of the current cycle, the prospects for a
downturn increase, together with deferrals and cancellations of orders for both
manufacturers.
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[AIRPLANE (767) PHOTO] Boeing 767-400ER
Boeing tried to interest Delta in buying more B-777s, but the aircraft was just
too much for the Atlanta airline who was already suffering indigestion on its
MD-11s. Delta is a big B-767 operator with 94 in service and 24 on order. Boeing
obligingly agreed to stretch the B-767-300ER to the -400ER configuration,
increasing gross weight from 412,000 pounds to 450,000 and seating up to 375,
only 65 below the B-777 and about the same as its 40-odd remaining L-1011s which
it is retiring. Delta and Continental are the only airlines with B-767-400ER so
far, totaling 47. There are eight additional orders from lessors.
MBA estimates the initial offering price to be $105.09 million with initial
engines to be the GE CF6-80C2B7F's. P&W or Rolls engines can also be ordered if
the customer desires.
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[AIRPLANE (777) PHOTO] Boeing 777-200ER
The 777 family of widebody twin-engine aircraft was designed to fill the gap in
Boeing's product line between the 767 and 747. The 777-200 twinjet seats from
305 to 328 passengers in a typical three-class configuration. The initial
777-200, which was first delivered in May 1995, has a range of up to 5,925
miles.
The 777-200ER (extended range) was first delivered in February 1997. This model
is capable of flying the same number of passengers up to 8,861 miles. The -200
models can accommodate up to 32 LD-3 containers plus 600 cubic feet of bulk
cargo underfloor.
The latest 777 derivative is the 777-300, a stretched version that provides
seating for 328 to 394 passengers in a typical three-class configuration. The
first airplane was delivered in May 1998. The -300 can accommodate up to 44 LD-3
containers plus bulk cargo underfloor.
Boeing recently launched 777-200 and -300 Longer-Range derivatives. The 777-200
derivative is expected be the longest-range airplane in the world, while Boeing
hopes the 777-300 derivative becomes a popular replacement for early 747s.
Proposed first delivery will be late 2003 (first model), with the second model
following four to six months later.
The 777's systems are among the most modern of any aircraft, with triple
redundant fly-by-wire flight controls, five-tube EFIS/EICAS displays, and
computerized controls and monitors for all critical systems.
The 777 family of aircraft has excellent operating economics, with trip costs
relative to its number of seats among the lowest among widebody twins. The
aircraft has been approved for 180-minute ETOPS operations, and all requirements
for ETOPS are incorporated in the basic model design.
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Through March 2001, 325 Boeing 777 aircraft have been delivered to more than 25
airline customers and several lessors. Of these, 290 were -200 and -200ER
models, and 35 were -300 models. As of March 2001, Boeing had a backlog of 105
unfilled 777 orders.
The 777 aircraft remains to be the superstar in Boeing's widebody product line.
As airlines are directing their efforts to more point to point services and are
cutting down capacities, the 777 is fitting in the long-haul markets once served
by the larger 747s.
STAGE 3 -
The subject aircraft complies with the currently effective Stage III / Chapter
III aircraft noise limitations. However, the FAA and the ICAO are currently
planning the adoption of more stringent Stage IV noise regulations. Neither the
severity of the proposed new regulations, nor the schedule of their
implementation has not been determined, but when enacted and effective may limit
the continued utilization of the subject aircraft in most areas of the world.
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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.
SCHEDULED
MANUFACTURER'S AIRCRAFT SERIAL CONTINENTAL ADJ. BASE VALUE
DELIVERY DATE NUMBER TAIL NUMBER ($000,000)
- -------------- --------------- ----------- ---------------
B737-900, CFM56-7B26 Engines, 174,200 (lb) MTOW
Oct-01 31588 N76269 49.22
Oct-01 31632 N73270 49.22
Nov-01 31589 N35271 49.32
Nov-01 31590 N36272 49.32
Dec-01 31591 N37273 49.42
Jan-02 31592 N37274 49.52
Feb-02 31593 N73275 49.62
Feb-02 31594 N73276 49.62
Mar-02 31595 N37277 49.72
Jun-02 31596 N73278 50.02
Jun-02 31597 N79279 50.02
Jun-02 31598 N36280 50.02
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SCHEDULED
MANUFACTURER'S AIRCRAFT SERIAL CONTINENTAL ADJ. BASE VALUE
DELIVERY DATE NUMBER TAIL NUMBER ($000,000)
- ------------- ------ ----------- ----------
B737-900, CFM56-7B26 Engines, 174,200 (lb) MTOW
Oct-01 30125 N37408 50.44
Nov-01 30126 N37409 50.54
Dec-01 30127 N75410 50.64
Jan-02 30128 N71411 50.74
Mar-02 30129 N31412 50.95
May-02 30130 N37413 51.17
Jun-02 30131 N30414 51.27
SCHEDULED
MANUFACTURER'S AIRCRAFT SERIAL CONTINENTAL ADJ. BASE VALUE
DELIVERY DATE NUMBER TAIL NUMBER ($000,000)
- ------------- ------ ----------- ----------
B767-400ER, CF6-80C2B8F, 450,000(lb) MTOW
Jan-02 29452 N66057 100.19
Jan-02 29453 N67058 100.19
Feb-02 29454 N69059 100.40
Feb-02 29455 N78060 100.40
Mar-02 29456 N68061 100.61
Mar-02 29457 N76062 100.61
Apr-02 29458 N69063 100.82
Apr-02 29459 N76064 100.82
May-02 29460 N76065 101.02
May-02 29461 N77066 101.02
SCHEDULED
MANUFACTURER'S AIRCRAFT SERIAL CONTINENTAL ADJ. BASE VALUE
DELIVERY DATE NUMBER TAIL NUMBER ($000,000)
- ------------- ------ ----------- ----------
B777-200ER, GE90-90B, 648,000(lb) MTOW
Mar-02 31679 N78017 143.28
Apr-02 31680 N37018 143.57
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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
Director of Operations
Reviewed by:
March 28, 2001 /s/ Morten S. Beyer
Morten S. Beyer, Appraiser Fellow
Chairman & CEO
ISTAT Certified Senior Appraiser
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APPENDIX III--MANDATORY ECONOMIC TERMS--MAXIMUM LTV
FOR SERIES A-1, A-2 AND B EQUIPMENT NOTES
The following tables set forth the maximum LTV for each Aircraft
(identified in the applicable table by its expected U.S. registration number) as
required under the second bullet point listed under "Mandatory Economic Terms"
under "Description of Certificates--Obligation to Purchase Equipment Notes" in
the attached Prospectus Supplement:
III-1
156
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 date of this prospectus is March 23, 2001.
157
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.................. 3
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......................... 13
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............................ 17
Modifications of the Basic
Agreement......................... 17
Modification of Indenture and Related
Agreements........................ 18
Cross-Subordination Issues........... 18
Termination of the Pass Through
Trusts............................ 19
Delayed Purchase of Equipment
Notes............................. 19
Liquidity Facility................... 19
The Pass Through Trustee............. 19
PAGE
----
DESCRIPTION OF THE EQUIPMENT NOTES..... 21
General.............................. 21
Principal and Interest Payments...... 21
Redemption........................... 21
Security............................. 21
Ranking of Equipment Notes........... 23
Payments and Limitation of
Liability......................... 23
Defeasance of the Indentures and the
Equipment Notes in Certain
Circumstances..................... 24
Assumption of Obligations by
Continental....................... 24
Liquidity Facility................... 24
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
158
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, Suite 1400
Washington, D.C. 20549 New York, New York 10048 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
159
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,
2000...................................................... February 6, 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
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
160
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.
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.
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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.
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.
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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.
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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, Continental Express, Inc. and Continental Micronesia, Inc.,
serve 230 airports worldwide. As of January 19, 2001, we flew to 136 domestic
and 94 international destinations and offered additional connecting service
through alliances with domestic and foreign air carriers. We directly serve 16
European cities, 7 South American cities, Tel Aviv and Tokyo 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, Hopkins
International Airport in Cleveland, and a Pacific hub on the island of Guam. We
are the primary carrier at each of these hubs, accounting for 55%, 78%, 50% and
68% of average daily jet departures, respectively, as of January 19, 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. 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".
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RATIO OF EARNINGS TO FIXED CHARGES
The ratios of our "earnings" to our "fixed charges" for each of the years
1996 through 2000 were:
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
1.81 2.07 1.94 1.80 1.51
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.
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
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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 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.
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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;
- 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;
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- 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, 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
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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 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
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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.
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.
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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.
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
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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.
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.
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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.
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
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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 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
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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.
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;
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- 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.
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
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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.
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
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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 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.
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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.
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
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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 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
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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.
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
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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 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.
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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".
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
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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 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%.
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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.
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.
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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 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.
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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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