REGISTRATION NO. 333-109264
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4512 74-2099724
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
1600 SMITH STREET, DEPT. HQSEO
HOUSTON, TEXAS 77002
(713) 324-2950
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------
JENNIFER L. VOGEL, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
CONTINENTAL AIRLINES, INC.
1600 SMITH STREET, DEPT. HQSLG
HOUSTON, TEXAS 77002
(713) 324-2950
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF CORRESPONDENCE TO:
JOHN K. HOYNS, ESQ.
HUGHES HUBBARD & REED LLP
ONE BATTERY PARK PLAZA
NEW YORK, NEW YORK 10004-1482
(212) 837-6000
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
CALCULATION OF REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED TO BE REGISTERED PER UNIT OFFERING PRICE FEE(1)
---------------------------------------------------------------------------------------------------------------------------
Floating Rate Secured Subordinated
Notes Due 2007 $97,000,000 100% $97,000,000 $7,847.30(2)
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 457(f)(2), the registration fee has been calculated using
the book value of the securities being registered.
(2) The Commission has informed Continental Airlines, Inc. that it may set off
an amount in excess of the registration fee payable for this registration
statement due to a post-filing adjustment of the registration fee for the
Continental Airlines, Inc. registration statement on Form S-3 (File No.
333-71906), originally filed with the Commission on October 19, 2001.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities or accept offers to buy these
securities until the registration statement filed with the Securities and
Exchange Commission is effective. This preliminary prospectus is not an offer to
sell these securities and we are not soliciting offers to buy these securities
in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 21, 2003
PROSPECTUS
$97,000,000
CONTINENTAL AIRLINES, INC.
OFFER TO EXCHANGE
FLOATING RATE SECURED SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
FOR ANY AND ALL OUTSTANDING FLOATING RATE SECURED SUBORDINATED NOTES DUE 2007
We are offering to issue the new subordinated notes to satisfy our
obligations contained in the registration rights agreement entered into when the
old subordinated notes were sold in transactions exempt from, or not subject to,
registration under the Securities Act.
The terms of the new subordinated notes will be substantially identical to
the terms of the old subordinated notes, except that the new subordinated notes
will be registered under the Securities Act of 1933, the transfer restrictions,
registration rights and provisions for additional interest relating to the old
subordinated notes will not apply to the new subordinated notes, and the new
subordinated notes will be available only in book-entry form.
There is no existing market for the new subordinated notes. The new
subordinated notes will not be listed on any national securities exchange.
The exchange of old subordinated notes will not be a taxable event for U.S.
federal income tax purposes.
Old subordinated notes may be tendered only in integral multiples of
$1,000. You may withdraw a tender of old subordinated notes at any time prior to
the expiration of the exchange offer. All old subordinated notes that are
validly tendered and not validly withdrawn will be exchanged.
The exchange offer expires at 5:00 p.m., New York City time, on
, 2003, unless the exchange offer is extended.
---------------------
THE SUBORDINATED NOTES AND THE EXCHANGE OFFER INVOLVE RISKS. SEE "RISK
FACTORS" ON PAGE 18.
---------------------
PRINCIPAL INTEREST FINAL SCHEDULED
AMOUNT RATE PAYMENT DATE
----------- ------------------------- ----------------
$97,000,000 USD 3-Month LIBOR + 7.50% December 6, 2007
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 2003
TABLE OF CONTENTS
PAGE
----
PRESENTATION OF INFORMATION............ 3
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................ 4
PROSPECTUS SUMMARY..................... 6
The Exchange Offer................... 6
Summary of Terms of Notes............ 9
Collateral........................... 10
The Subordinated Notes............... 11
SUMMARY FINANCIAL AND OPERATING DATA... 14
RISK FACTORS........................... 18
Terrorist Attacks and International
Hostilities....................... 18
Risk Factors Relating to the
Company........................... 18
Risk Factors Relating to the Airline
Industry.......................... 21
Risk Factors Relating to the
Subordinated Notes and the
Exchange Offer.................... 23
USE OF PROCEEDS........................ 26
RATIO OF EARNINGS TO FIXED CHARGES..... 26
THE COMPANY............................ 27
Domestic Operations.................. 27
International Operations............. 28
Outlook.............................. 29
THE EXCHANGE OFFER..................... 32
Terms of the Exchange Offer.......... 32
Interest on the New Subordinated
Notes............................. 34
Procedures for Tendering............. 35
Acceptance of Old Subordinated Notes
for Exchange; Delivery of New
Subordinated Notes................ 36
Book-Entry Transfer.................. 37
Guaranteed Delivery Procedures....... 37
Withdrawal of Tenders................ 38
Conditions........................... 38
Exchange Agent....................... 39
Fees and Expenses.................... 39
DESCRIPTION OF THE SUBORDINATED
NOTES................................ 40
General.............................. 40
Payments of Principal and Interest... 40
Determination of LIBOR............... 41
Break Amount......................... 42
Redemption........................... 42
Collateral........................... 43
Event of Default..................... 48
PAGE
----
Remedies............................. 48
Controlling Party.................... 50
Priority of Distributions............ 52
Modifications and Waiver of the
Indenture and Certain Other
Agreements........................ 54
Merger, Consolidation and Transfer of
Assets............................ 56
Indemnification...................... 56
Governing Law........................ 57
The Trustee.......................... 57
Book Entry; Delivery and Form........ 57
Same Day Settlement and Payment...... 58
DESCRIPTION OF THE SENIOR NOTES........ 59
General.............................. 59
Payments of Principal and Interest... 59
Redemption........................... 60
Collateral........................... 60
DESCRIPTION OF THE LIQUIDITY FACILITY
FOR THE SENIOR NOTES................. 61
General.............................. 61
Drawings............................. 61
Reimbursement of Drawings............ 63
Liquidity Events of Default and
Termination....................... 64
Liquidity Provider................... 65
DESCRIPTION OF THE POLICY FOR THE
SENIOR NOTES......................... 66
The Policy........................... 66
General.............................. 68
Definitions.......................... 68
The Policy Provider Agreement........ 69
Policy Provider...................... 69
DESCRIPTION OF THE APPRAISAL........... 70
MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES......................... 72
Exchange of Old Subordinated Notes
for New Subordinated Notes........ 72
PLAN OF DISTRIBUTION................... 72
LEGAL MATTERS.......................... 73
EXPERTS................................ 73
FORWARD-LOOKING STATEMENTS............. 73
WHERE YOU CAN FIND MORE INFORMATION.... 73
INDEX OF TERMS.................. APPENDIX I
APPRAISAL LETTER................ APPENDIX II
2
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.
PRESENTATION OF INFORMATION
We have given certain capitalized terms specific meanings for purposes of
this Prospectus. The "Index of Terms" attached as Appendix I to this Prospectus
lists the page on which we have defined each such term.
At various places in this Prospectus, we refer you to other sections of
this document for additional information by indicating the caption heading of
such other sections. The page on which each principal caption included in this
Prospectus can be found is listed in the Table of Contents.
3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission (the "Commission") 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 Commission. 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.
This Prospectus includes by reference the documents listed below that we
previously have filed with the Commission and that are not delivered with this
document. They contain important information about our company and its financial
condition.
FILING DATE FILED
------ ----------
Amended Annual Report on Form 10-K/A-1 for the year ended
December 31, 2002......................................... April 22, 2003
Quarterly Report on Form 10-Q for the quarter ended March
31, 2003.................................................. April 16, 2003
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003...................................................... July 17, 2003
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003........................................ October 16, 2003
Current Report on Form 8-K.................................. January 3, 2003
Current Report on Form 8-K.................................. January 15, 2003
Current Report on Form 8-K.................................. February 4, 2003
Current Report on Form 8-K.................................. March 4, 2003
Amendment to Current Report on Form 8-K..................... March 4, 2003
Current Report on Form 8-K.................................. March 4, 2003
Current Report on Form 8-K.................................. March 19, 2003
Current Report on Form 8-K.................................. March 20, 2003
Current Report on Form 8-K.................................. April 2, 2003
Current Report on Form 8-K.................................. April 15, 2003
Current Report on Form 8-K.................................. May 2, 2003
Current Report on Form 8-K.................................. May 12, 2003
Current Report on Form 8-K.................................. May 14, 2003
Current Report on Form 8-K.................................. June 3, 2003
Current Report on Form 8-K.................................. June 5, 2003
Current Report on Form 8-K.................................. June 5, 2003
Current Report on Form 8-K.................................. June 12, 2003
Current Report on Form 8-K.................................. July 2, 2003
Current Report on Form 8-K.................................. August 4, 2003
Current Report on Form 8-K.................................. August 5, 2003
Current Report on Form 8-K.................................. September 3, 2003
Current Report on Form 8-K.................................. September 17, 2003
Current Report on Form 8-K.................................. October 2, 2003
Current Report on Form 8-K.................................. November 4, 2003
Current Report on Form 8-K.................................. November 10, 2003
Current Report on Form 8-K.................................. November 18, 2003
Our Commission file number is 1-10323.
We incorporate by reference additional documents that we may file with the
Commission between the date of this Prospectus and the termination of the
Exchange Offer. 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.
4
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 from our website
(www.continental.com) or 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
Telephone: (713) 324-2950
IN ORDER TO OBTAIN TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE
MADE BY [ ], 2003 (THE FIFTH BUSINESS DAY BEFORE THE SCHEDULED
EXPIRATION DATE OF THE EXCHANGE OFFER).
5
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. FOR MORE COMPLETE
INFORMATION ABOUT THE NOTES AND CONTINENTAL AIRLINES, INC., YOU SHOULD READ THIS
ENTIRE PROSPECTUS, AS WELL AS THE MATERIALS FILED WITH THE COMMISSION THAT ARE
CONSIDERED TO BE PART OF THIS PROSPECTUS. SEE "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE".
THE EXCHANGE OFFER
The Notes..................... On May 9, 2003, Continental issued an aggregate
of $100,000,000 Floating Rate Secured
Subordinated Notes due 2007 in transactions
exempt from or not subject to the registration
requirements of the Securities Act. Continental
subsequently acquired and surrendered for
cancellation $3,000,000 principal amount of
such notes.
When we use the term "Old Subordinated Notes"
in this Prospectus, we mean the Floating Rate
Secured Subordinated Notes due 2007 which were
issued on May 9, 2003 and which were not
registered with the Commission.
When we use the term "New Subordinated Notes"
in this Prospectus, we mean the Floating Rate
Secured Subordinated Notes due 2007 registered
with the Commission and offered hereby in
exchange for the Old Subordinated Notes.
When we use the term "Subordinated Notes" in
this Prospectus, the related discussion applies
both to the Old Subordinated Notes and the New
Subordinated Notes.
When we use the term "Senior Notes" in this
Prospectus, we mean the Floating Rate Secured
Notes due 2007, which were originally issued by
Continental on December 6, 2002, including
notes issued in exchange therefor pursuant to
Continental's exchange offer described in its
prospectus, dated June 25, 2003. The Exchange
Offer being made pursuant to this Prospectus
does not relate to the Senior Notes.
When we use the term "Notes" in this
Prospectus, the related discussion applies both
to the Subordinated Notes and the Senior Notes.
Registration Rights
Agreement................... On May 9, 2003, Continental entered into a
Registration Rights Agreement with Morgan
Stanley & Co. Incorporated (the "Initial
Purchaser") providing, among other things, for
the Exchange Offer being made pursuant to this
Prospectus.
The Exchange Offer............ Continental is offering New Subordinated Notes
in exchange for an equal principal amount of
Old Subordinated Notes. The New Subordinated
Notes will be issued to satisfy Continental's
obligations under the Registration Rights
Agreement. As of the date of this Prospectus,
$97,000,000 aggregate principal amount of Old
Subordinated Notes are outstanding. Old
Subordinated Notes may be tendered only in
integral multiples of $1,000.
Resale of New Subordinated
Notes....................... We believe that you can offer for resale,
resell or otherwise transfer the New
Subordinated Notes without complying with the
6
registration and prospectus delivery
requirements of the Securities Act if:
-- you acquire the New Subordinated Notes in
the ordinary course of your business;
-- you have no arrangement or understanding
with any person to participate in the
distribution of the New Subordinated
Notes; and
-- you are not an "affiliate", as defined in
the Rule 405 under the Securities Act, of
Continental or a broker-dealer who
acquired Old Subordinated Notes directly
from Continental for your own account.
If any of these conditions is not satisfied and
you transfer any New Subordinated Note without
delivering a proper prospectus or without
qualifying for a registration exemption, you
may incur liability under the Securities Act.
Continental does not assume or indemnify you
against such liability.
Each broker-dealer that receives New
Subordinated Notes in exchange for Old
Subordinated Notes held for its own account as
a result of market-making or other trading
activities must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Subordinated Notes. A
broker-dealer may use this prospectus for an
offer to resell, resale or other transfer of
such New Subordinated Notes issued to it in the
Exchange Offer.
Conditions to the Exchange
Offer....................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Subordinated
Notes being tendered for exchange. However, the
Exchange Offer is subject to certain customary
conditions, which may be waived by Continental.
Expiration Date of the
Exchange Offer.............. [ ], 2003, subject to Continental's
right to extend the Expiration Date.
Procedures for Tendering Old
Subordinated Notes.......... If you wish to accept the Exchange Offer, you
must deliver your Old Subordinated Notes to the
Exchange Agent for exchange no later than 5:00
p.m., New York City time, on the Expiration
Date.
You must also deliver a completed and signed
Letter of Transmittal together with the Old
Subordinated Notes. A Letter of Transmittal has
been sent to Subordinated Noteholders and a
form is attached as an exhibit to the
Registration Statement.
If you hold Old Subordinated Notes through DTC
and wish to accept the Exchange Offer, you may
do so through DTC's Automated Tender Offer
Program. By accepting the Exchange Offer
through such program, you will agree to be
bound by the Letter of Transmittal as though
you had signed the Letter of Transmittal and
delivered it to the Exchange Agent.
Guaranteed Delivery
Procedures.................. If you wish to tender your Old Subordinated
Notes and your Old Subordinated Notes are not
immediately available, you cannot deliver your
Old Subordinated Notes and a properly completed
Letter of Transmittal or any other document
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date
7
or you cannot complete the book-entry transfer
procedures prior to the Expiration Date, you
may tender your Old Subordinated Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer--Guaranteed
Delivery Procedures".
Withdrawal Rights............. You may withdraw a tender of Old Subordinated
Notes at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. To withdraw
a tender of Old Subordinated Notes, the
Exchange Agent must receive a written or
facsimile transmission notice requesting such
withdrawal at its address set forth under "The
Exchange Offer--Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration
Date.
Acceptance of Old Subordinated
Notes and Delivery of New
Subordinated Notes.......... Subject to certain conditions, any and all Old
Subordinated Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date will be
accepted for exchange. The New Subordinated
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date.
Registration, Clearance and
Settlement.................. The New Subordinated Notes will be represented
by one or more permanent global notes, which
will be registered in the name of the nominee
of DTC. The global notes will be deposited with
the Trustee as custodian for DTC.
Consequences of Failure to
Exchange Old Subordinated
Notes....................... Once the Exchange Offer has been completed, if
you do not exchange your Old Subordinated Notes
for New Subordinated Notes in the Exchange
Offer, you will no longer be entitled to
registration rights and will not be able to
offer or sell your Old Subordinated Notes,
unless (i) such Old Subordinated Notes are
subsequently registered under the Securities
Act (which, subject to certain limited
exceptions, Continental will have no obligation
to do) or (ii) your transaction is exempt from,
or otherwise not subject to, the Securities Act
and applicable state securities laws.
Certain Federal Income Tax
Consequences................ The exchange of Old Subordinated Notes for New
Subordinated Notes will not be a sale or
exchange or otherwise a taxable event for
federal income tax purposes.
Exchange Agent................ Wilmington Trust Company is serving as Exchange
Agent in connection with the Exchange Offer.
Fees and Expenses............. All expenses incident to Continental's
consummation of the Exchange Offer and
compliance with the Registration Rights
Agreement will be borne by Continental.
Use of Proceeds............... Continental will not receive any cash proceeds
from the exchange of the Old Subordinated Notes
for the New Subordinated Notes.
8
SUMMARY OF TERMS OF NOTES
Subordinated Notes Senior Notes(1)
--------------------------- ---------------------------
Original Principal Amount................. $100,000,000 $200,000,000
Outstanding Principal Amount(2)........... $97,000,000 $194,500,000
Loan to Collateral Value(3)............... 66.4% 42.4%
Maximum Loan to Collateral Value.......... 67.5% 45.0%
Interest Rate............................. USD 3-Month USD 3-Month
LIBOR + 7.50% LIBOR + .90%(4)
Interest Payment Dates.................... March 6, June 6, September March 6, June 6, September
6 and December 6 6 and December 6
Final Scheduled Payment Date.............. December 6, 2007 December 6, 2007
Final Legal Maturity Date................. Not applicable December 6, 2009
Minimum Denomination...................... $1,000 $1,000
Section 1110 Protection(5)................ Yes Yes
Liquidity Facility Coverage............... None 8 quarterly interest
payments(6)
Policy Provider Coverage.................. None Interest when due and
principal no later than the
Final Legal Maturity
Date(6)
---------------
(1) The Exchange Offer being made pursuant to this Prospectus does not relate to
the Senior Notes.
(2) The amounts listed are determined as of the date of this Prospectus and
reflect the purchase by Continental and subsequent cancellation by the
Trustee in September 2003 of $5,500,000 of Senior Notes and $3,000,000 of
Subordinated Notes.
(3) These percentages have been determined by dividing the outstanding principal
amount of the Senior Notes as of the date of this Prospectus plus, in the
case of the percentage applicable to the Subordinated Notes, the outstanding
principal amount of the Subordinated Notes as of the date of this
Prospectus, minus Cash Collateral, by the appraised value of the Collateral
determined as of June 25, 2003, the most recent appraisal obtained by
Continental. Continental is required to provide to the Policy Provider and
the Trustee a semiannual appraisal of the Collateral. If any such appraisal
indicates that the loan to Collateral value is greater than 45.0%, in the
case of the Senior Notes, or 67.5%, in the case of the Subordinated Notes,
Continental is required to provide additional collateral or to reduce the
principal amount of Senior Notes or Subordinated Notes outstanding so that
the loan to Collateral value is not greater than the applicable maximum
percentage. The appraised value of the Collateral determined as of June 25,
2003, indicated that such maximum percentages were exceeded. As a result,
Continental acquired and delivered to the Trustee for cancellation
$5,500,000 of Senior Notes and $3,000,000 of Subordinated Notes and
deposited Cash Collateral totalling $23,600,000. An appraised value is only
an estimate and reflects certain assumptions. See "Description of the
Appraisal".
(4) The interest rate applicable to the Senior Notes is subject to a maximum
rate of 12% per annum applicable only for periods as to which Continental
has failed to pay accrued interest when due and failed to cure such
nonpayment.
(5) Section 1110 of the U.S. Bankruptcy Code will be applicable to the spare
parts of the types initially subject to the lien securing the Notes, but
will not be applicable to Cash Collateral. In addition, in order to satisfy
the semiannual loan to collateral value requirement referred to in note (1)
above, Continental may add other collateral that may not be entitled to the
benefits of Section 1110, subject to certain limitations.
(6) The amounts available under the Liquidity Facility and the Policy for the
payment of accrued interest on the Senior Notes have been calculated
utilizing the Capped Interest Rate, which is the maximum interest rate on
the Senior Notes applicable only for periods as to which Continental has
failed to pay accrued interest when due and failed to cure such nonpayment.
9
COLLATERAL
The Subordinated Notes are secured by a lien on spare parts (including
appliances) first placed in service after October 22, 1994 and owned by
Continental that are appropriate for installation on or use in
-- one or more of the following aircraft models: Boeing model 737-700,
737-800, 737-900, 757-200, 757-300, 767-200, 767-400 or 777-200
aircraft,
-- any engine utilized on any such aircraft or
-- any other spare part included in the Collateral,
and not appropriate for installation on or use in any other model of aircraft
currently operated by Continental or engine utilized on any such other model of
aircraft. The Senior Notes are also secured by a lien on such Collateral. The
lien will not apply for as long as a spare part is installed on or being used in
any aircraft, engine or other spare part so installed or being used. In
addition, the lien will not apply to a spare part not located at one of the
designated locations specified pursuant to the security agreement applicable to
the spare parts.
The spare parts included in the Collateral fall into two categories,
"rotables" and "expendables". Rotables are parts that wear over time and can be
repeatedly restored to a serviceable condition over a period approximating the
life of the flight equipment to which they relate. Expendables consist of parts
that can be restored to a serviceable condition but have a life less than the
related flight equipment and parts that generally are used once and thereby
consumed or thereafter discarded. Spare engines are not included in the
Collateral. Set forth below is certain information about the spare parts
included in the Collateral as of June 25, 2003:
SPARE PARTS QUANTITY(1)
-------------------------------- APPRAISED
AIRCRAFT MODEL EXPENDABLES ROTABLES TOTAL VALUE(2)
-------------- ----------- -------- ------- ------------------
737-700............................... 675 36 711
737-700/800........................... 276,685 6,279 282,964
737-800............................... 3,964 199 4,163
737-900............................... 851 10 861
------- ------ -------
737-7/8/9 Subtotal.................... 282,175 6,524 288,699 $169,807,400
757-200............................... 175,886 3,364 179,250 72,852,100
757-300............................... 10,459 97 10,556 2,940,400
767-200............................... 25,387 208 25,595 8,907,900
767-400............................... 52,193 1,525 53,718 55,818,300
777-200............................... 106,538 2,555 109,093 93,148,300
------- ------ ------- ------------
Total................................. 652,638 14,273 666,911 $403,474,400
---------------
(1) This quantity of spare parts used in preparing the appraised value was
determined as of June 25, 2003. Since spare parts are regularly used,
refurbished, purchased, transferred and discarded in the ordinary course of
Continental's business, the quantity of spare parts included in the
Collateral and their appraised value will change over time. Continental is
required to provide to the Policy Provider and the Trustee a semiannual
appraisal of the Collateral.
(2) The appraised value reflects the opinion of Simat, Helliesen & Eichner,
Inc., an independent aviation appraisal and consulting firm, of the fair
market value of the spare parts. A letter summarizing such appraisal is
annexed to this Prospectus as Appendix II. The appraisal is subject to
number of assumptions and limitations and was prepared based on certain
specified methodologies. An appraisal is only an estimate of value and
should not be relied upon as a measure of realizable value.
10
THE SUBORDINATED NOTES
Issuer........................ Continental Airlines, Inc.
Notes Offered................. Floating Rate Secured Subordinated Notes due
2007.
Use of Proceeds............... The proceeds from the sale of the Old
Subordinated Notes were used for general
corporate purposes. Continental will not
receive any proceeds from the exchange of the
New Subordinated Notes for the Old Subordinated
Notes.
Trustee and Paying Agent...... Wilmington Trust Company.
Final Scheduled Payment
Date........................ The entire principal amount of the Subordinated
Notes is scheduled for payment on December 6,
2007.
Interest...................... The Subordinated Notes will accrue interest at
a variable rate per annum set forth on the
cover page of this Prospectus. Interest is
calculated on the basis of the actual number of
days elapsed over a 360-day year. LIBOR is
determined from time to time by the Reference
Agent as described in "Description of the
Subordinated Notes--Determination of LIBOR".
Interest Payment Dates........ March 6, June 6, September 6 and December 6,
commencing on June 6, 2003.
Subordination................. The Subordinated Notes rank junior to the
obligations relating to the Senior Notes
(including amounts owed to the Policy Provider
and Liquidity Provider) with respect to
payments received from Continental, proceeds
from liquidation of the Collateral and
otherwise. Unlike the Senior Notes, the
Subordinated Notes will not have the benefit of
a liquidity facility or an insurance policy.
Record Dates.................. The fifteenth day preceding the related
Interest Payment Date.
Optional Redemption........... The Subordinated Notes may not be redeemed by
Continental prior to May 9, 2004. Thereafter,
Continental may elect to redeem all or (so long
as no Payment Default has occurred and is
continuing) some of the Subordinated Notes at
any time prior to maturity. The redemption
price in such case will be the principal amount
of the Subordinated Notes, together with
accrued and unpaid interest, LIBOR break
amount, if any, and, if redeemed prior to the
fourth anniversary of the Issuance Date (except
in connection with a redemption to satisfy the
maximum Collateral Ratio or minimum Rotable
Ratio requirement), a Premium equal to the
following percentage of the principal amount
prepaid:
IF REDEEMED DURING THE YEAR
PRIOR TO THE ANNIVERSARY OF THE
ISSUANCE DATE INDICATED BELOW PREMIUM
------------------------------- -------
2nd 3.00%
3rd 2.00
4th 1.00
Notwithstanding the foregoing, so long as the
Policy Provider is the Controlling Party, no
such redemption may be made if an Event of
Default has occurred and is continuing or if
the maximum loan to Collateral value ratio and
minimum Rotables to loan ratio applicable to
the Senior Notes is not then satisfied, unless
the Policy Provider shall otherwise agree.
11
If Continental gives notice of redemption but
fails to pay when due all amounts necessary to
effect such redemption, such redemption shall
be deemed revoked and no amount shall be due as
a result of notice of redemption having been
given.
Collateral.................... The Subordinated Notes are secured by a lien on
spare parts (including appliances) first placed
in service after October 22, 1994 and owned by
Continental that are appropriate for
installation on or use in
-- one or more of the following aircraft
models: Boeing model 737-700, 737-800,
737-900, 757-200, 757-300, 767-200,
767-400 or 777-200 aircraft,
-- any engine utilized on any such aircraft
or
-- any other spare part included in the
Collateral,
and not appropriate for installation on or use
in any other model of aircraft currently
operated by Continental or engine utilized on
any such other model of aircraft. The Senior
Notes are also secured by a lien on such
Collateral. The lien will not apply for as long
as a spare part is installed on or being used
in any aircraft, engine or other spare part so
installed or being used. In addition, the lien
will not apply to a spare part not located at
one of the designated locations specified
pursuant to the security agreement applicable
to the spare parts.
Maintenance of Collateral
Ratios...................... Continental is required to provide to the
Policy Provider and the Trustee a semiannual
appraisal of the Collateral. If any such
appraisal indicates that:
-- the ratio of the outstanding principal
amount of the Senior Notes to the
Collateral value is greater than 45.0%;
-- the ratio of the outstanding principal
amount of the Senior Notes and the
Subordinated Notes to Collateral value is
greater than 67.5%;
-- the ratio of the value of the Rotables
included in the Collateral to the
outstanding principal amount of the Senior
Notes is less than 150%; or
-- the ratio of the value of the Rotables
included in the Collateral to the
outstanding principal amount of the Senior
Notes and the Subordinated Notes is less
than 100%;
then Continental is required to provide
additional collateral or to reduce the
principal amount of Senior Notes or
Subordinated Notes outstanding so that such
ratios comply with the applicable maximum
Collateral value percentages and minimum
Rotable value percentages.
Section 1110 Protection....... Continental's outside counsel has provided its
opinion to the Trustee that the benefits of
Section 1110 of the U.S. Bankruptcy Code will
be available with respect to the lien on the
spare parts collateral.
Control of Trustee............ Whether before or after the occurrence of an
Event of Default, the "Controlling Party" will
direct the Trustee in taking action under the
Indenture and other agreements relating to the
Notes, including in amending such agreements
and granting waivers
12
thereunder. However, certain limited provisions
with respect to the Collateral as they relate
to the Subordinated Notes cannot be amended or
waived without the consent of the holders of a
majority of the outstanding principal amount of
the Subordinated Notes and certain other
limited provisions cannot be amended or waived
without the consent of each Noteholder affected
thereby. If an Event of Default is continuing,
the "Controlling Party" will direct the Trustee
in exercising remedies, such as accelerating
the Notes or foreclosing the lien on the
collateral securing the Notes.
The Controlling Party will be:
-- Except as provided below, MBIA Insurance
Corporation, the policy provider that has
provided an insurance policy to support
payments of principal and interest on the
Senior Notes.
-- If a Policy Provider Default is
continuing, the holders of more than 50%
in aggregate unpaid principal amount of
the Senior Notes then outstanding or, if
the Senior Notes have been paid in full,
of the Subordinated Notes then
outstanding.
-- If the Senior Notes, the Policy Expenses
and the Policy Provider Obligations have
been paid in full, the holders of more
than 50% in aggregate unpaid principal
amount of the Subordinated Notes then
outstanding.
-- Under certain circumstances, Morgan
Stanley Capital Services Inc., the
liquidity provider that is providing
support for certain payments of interest
on the Senior Notes.
The Subordinated Noteholders will have the
right to direct the Policy Provider in acting
as the Controlling Party during the continuance
of an Event of Default if the Subordinated
Noteholders shall have deposited with the
Policy Provider cash, U.S. government
securities or other investments acceptable to
the Policy Provider as collateral for amounts
owed to, and for certain amounts to become due
and payable to, the Policy Provider under the
Operative Documents and Support Documents. The
amount deposited must be sufficient without
reinvestment to pay certain amounts due and to
become due on the Senior Notes and to the
Policy Provider. No Subordinated Noteholder
will be required to contribute to a deposit.
The Subordinated Noteholders contributing their
proportionate share of such deposit will be
entitled to direct the Policy Provider in
taking action as the Controlling Party during
the continuance of such Event of Default by
vote of a majority of the principal amount of
the Subordinated Notes held by such
contributing Subordinated Noteholders. If the
Policy Provider draws on such deposit, after
the Policy Provider shall have paid in full all
amounts due to it under the Operative Documents
and Support Documents, amounts distributable to
the Policy Provider under the Indenture will be
distributed to such contributing Subordinated
Noteholders in the same proportion as their
respective contributions to the deposit until
their proportionate share of the deposit not
returned by the Policy Provider shall have been
repaid in full.
13
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, 2002, 2001 and 2000
are derived from the audited consolidated financial statements of Continental
including the notes thereto incorporated by reference in this Prospectus and
should be read in conjunction with those financial statements. The following
selected consolidated financial data for the years ended December 31, 1999 and
1998 are derived from the selected financial data contained in Continental's
Annual Report on Form 10-K/A-1 for the year ended December 31, 2002,
incorporated by reference in this Prospectus, and the audited consolidated
financial statements of Continental for the years ended December 31, 1999 and
1998 and should be read in conjunction therewith. The consolidated financial
data of Continental for the three and nine months ended September 30, 2003 and
2002 are derived from the unaudited consolidated financial statements of
Continental incorporated by reference in this Prospectus, which include all
adjustments (consisting solely of normal recurring accruals, except as disclosed
in the footnotes to the unaudited consolidated financial statements) that
Continental considers necessary for the fair presentation of the financial
position and results of operations for these periods. Operating results for the
three and nine months ended September 30, 2003 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------- --------------- ------------------------------------------
2003 2002 2003 2002 2002 2001 2000 1999 1998
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS OF DOLLARS, EXCEPT OPERATING DATA, PER SHARE DATA AND RATIOS)
FINANCIAL DATA -- OPERATIONS:(1)(2)
Operating Revenue.................. $2,365 $2,178 $6,622 $6,364 $8,402 $8,969 $9,899 $8,639 $7,927
Operating Expenses................. 2,191 2,132 6,434 6,619 8,714 8,825 9,170 8,024 7,226
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating Income (Loss)............ 174 46 188 (255) (312) 144 729 615 701
Non-operating Income (Expense),
net.............................. 87 (77) (82) (230) (319) (274) (169) 183 (79)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (Loss) before Income Taxes,
Minority Interest, and Cumulative
Effect of Changes in Accounting
Principles....................... 261 (31) 106 (485) (631) (130) 560 798 622
Net Income (Loss).................. $ 133 $ (37) $ (9) $ (342) $ (451) $ (95) $ 342 $ 455 $ 383
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings (Loss) per Share:
Basic............................ $ 2.04 $ (.58) $ (.14) $(5.36) $(7.02) $(1.72) $ 5.62 $ 6.54 $ 6.34
====== ====== ====== ====== ====== ====== ====== ====== ======
Diluted.......................... $ 1.83 $ (.58) $ (.14) $(5.36) $(7.02) $(1.72) $ 5.45 $ 6.20 $ 5.02
====== ====== ====== ====== ====== ====== ====== ====== ======
Shares used for Computation:
Basic............................ 65.4 64.3 65.4 63.9 64.2 55.5 60.7 69.5 60.3
Diluted.......................... 74.6 64.3 65.4 63.9 64.2 55.5 62.8 73.9 80.3
Ratio of Earnings to Fixed
Charges(3)....................... 1.83x -- 1.11x -- -- -- 1.51x 1.80x 1.87x
====== ====== ====== ====== ====== ====== ====== ====== ======
14
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ----------------- -----------------------------------------------
2003 2002 2003 2002 2002 2001 2000 1999 1998
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS OF DOLLARS, EXCEPT OPERATING DATA, PER SHARE DATA AND RATIOS)
OPERATING DATA:
MAINLINE JET STATISTICS:
Revenue passengers
(thousands)................ 10,613 10,581 29,978 31,365 41,016 44,238 46,896 45,540 43,625
Revenue passenger miles
(millions)(4).............. 16,436 15,923 44,383 45,441 59,349 61,140 64,161 60,022 53,910
Cargo ton miles (millions)... 221 232 679 664 908 917 1,096 1,000 856
Available seat miles
(millions)(5).............. 20,550 21,027 58,794 60,551 80,122 84,485 86,100 81,946 74,727
Passenger load factor(6)..... 80.0% 75.7% 75.5% 75.0% 74.1% 72.4% 74.5% 73.2% 72.1%
Passenger revenue per
available seat mile
(cents).................... 8.94 8.53 8.76 8.70 8.61 8.98 9.84 9.12 9.23
Total revenue per available
seat mile (cents).......... 9.79 9.19 9.64 9.34 9.27 9.58 10.52 9.75 9.85
Operating cost per available
seat mile (cents)(7)....... 9.01 8.90 9.30 9.61 9.53 9.22 9.68 9.07 9.03
Special items per available
seat mile (cents)(1)....... N/A N/A (0.16) 0.41 0.31 (0.36) N/A 0.09 0.14
Average yield per revenue
passenger mile
(cents)(8)................. 11.18 11.26 11.60 11.59 11.63 12.42 13.20 12.45 12.79
Average price per gallon of
fuel, excluding fuel taxes
(cents).................... 81.52 72.01 87.80 67.02 69.97 78.24 84.21 46.56 46.83
Average price per gallon of
fuel, including fuel taxes
(cents).................... 85.65 75.98 92.01 71.09 74.01 82.48 88.54 50.78 51.20
Fuel gallons consumed
(millions)................. 330 340 943 980 1,296 1,426 1,533 1,536 1,487
Average fare per revenue
passenger.................. $173.16 $169.48 $171.72 $167.98 $168.25 $171.59 $180.66 $164.11 $158.02
Average length of aircraft
flight (miles)............. 1,299 1,244 1,269 1,222 1,225 1,185 1,159 1,114 1,044
Average daily utilization of
each aircraft (hours)(9)... 9:38 9:37 9:20 9:35 9:28 10:20 10:36 10:26 10:09
Actual aircraft in fleet at
end of period(10).......... 352 366 352 366 366 352 371 363 363
REGIONAL JET AND TURBOPROP
STATISTICS:(11)
Revenue passenger miles
(millions)(4).............. 1,605 1,037 4,139 2,875 3,952 3,388 2,947 2,149 1,564
Available seat miles
(millions)(5).............. 2,269 1,599 6,109 4,555 6,219 5,437 4,735 3,431 2,641
Passenger load factor(6)..... 70.8% 64.9% 67.8% 63.1% 63.5% 62.3% 62.2% 62.6% 59.2%
CONSOLIDATED STATISTICS:
Consolidated passenger load
factor..................... 79.1% 75.0% 74.8% 74.2% 73.3% 71.8% 73.9% 72.8% 71.7%
Consolidated breakeven
passenger load
factor(12)................. 70.7% 71.9% 74.8% 83.6% 82.5% 73.5% 67.9% 64.0% 63.6%
15
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(IN MILLIONS OF DOLLARS)
FINANCIAL DATA -- BALANCE SHEET(2):
ASSETS:
Cash, Cash Equivalents and Short-Term Investments......... $ 1,613 $ 1,342
Other Current Assets(13).................................. 1,079 936
Total Property and Equipment, net......................... 6,670 6,968
Routes and Airport Operating Rights, net.................. 989 1,009
Other Assets(13).......................................... 527 493
------- -------
Total Assets.............................................. $10,878 $10,748
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities....................................... $ 3,029 $ 2,926
Long-Term Debt and Capital Leases(13)..................... 5,602 5,471
Deferred Credits and Other Long-Term Liabilities.......... 1,509 1,572
Minority Interest......................................... (26) 7
Redeemable Preferred Stock of Subsidiary(14).............. -- 5
Stockholders' Equity...................................... 764 767
------- -------
Total Liabilities and Stockholders' Equity.............. $10,878 $10,748
======= =======
---------------
(1) Includes the following special expense (income) items (in millions):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------- ------------- -------------------------------------
2003 2002 2003 2002 2002 2001 2000 1999 1998
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating expense (income):
Fleet impairment and restructuring
charges............................ $ -- $ -- $ 65 $ 242 $ 242 $ 61 $ -- $ 81 $ 122
Air Transportation Safety and System
Stabilization Act grant............ -- -- (176) 12 12 (417) -- -- --
Severance and other special
charges............................ -- -- 14 -- -- 63 -- -- --
Nonoperating expense (income):
Gain on sale of assets............... (173) -- (173) -- -- -- (9) (326) --
Impairment of investments............ -- -- -- -- -- 22 -- -- --
Cumulative effect of change in
accounting principle, net of taxes... -- -- -- -- -- -- -- 33 --
(2) Effective November 12, 2003, Continental no longer consolidates Holdings
and ExpressJet. Among the documents incorporated by reference into this
Prospectus is a Current Report on Form 8-K filed with the Commission on
November 18, 2003 which presents pro forma consolidated financial
statements of Continental reflecting (a) the results of operations of
Continental for the nine months ended September 30, 2003 and the year ended
December 31, 2002, as if the accounts of Holdings had been accounted for
using the equity method of accounting set forth in APB Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock", rather than
being consolidated, effective as of the beginning of each period, and (b)
the balance sheet as of September 30, 2003, adjusted to report Holdings
using the equity method of accounting as of that date.
(3) For purposes of calculating this ratio, earnings consist of income before
income taxes and cumulative effect of changes in accounting principles
adjusted for undistributed income of companies in which Continental has a
minority equity interest 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 expenses, the portion of rental expense representative of
interest expense, the amount amortized for debt discount, premium and
issuance expense and interest previously capitalized. For the three months
ended September 30, 2002, nine months ended September 30, 2002 and the
years ended December 31, 2002 and 2001, earnings were inadequate to cover
fixed charges and the coverage deficiency was $32 million, $492 million,
$640 million and $159 million, respectively.
(4) The number of scheduled miles flown by revenue passengers.
(5) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
16
(6) Revenue passenger miles divided by available seat miles.
(7) Includes applicable special items noted in (1).
(8) The average revenue received for each mile a revenue passenger is carried.
(9) The average number of hours per day that an aircraft flown in revenue
service is operated (from gate departure to gate arrival).
(10) Excludes aircraft that are either temporarily or permanently removed from
service.
(11) These statistics reflect operations of Continental Express (as operated by
ExpressJet). Pursuant to a capacity purchase agreement, Continental
currently purchases all of ExpressJet's available seat miles for a
negotiated price.
(12) The percentage of seats that must be occupied by revenue passengers for us
to break even on a net income basis. The special items noted in (1)
included in the consolidated breakeven passenger load factor account for
(5.9), --, (3.7), 4.4, 3.3, (3.0), (0.1), (2.3) and 1.6 percentage points
in each of the periods, respectively.
(13) Continental has a subsidiary trust that has Mandatorily Redeemable
Preferred Securities outstanding with a liquidation value of $248 million
($241 million net of issuance costs). These securities were issued in
November 2000 and were previously reported on Continental's balance sheet
as Mandatorily Redeemable Preferred Securities of Subsidiary Trust. Upon
the adoption of Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities", the subsidiary trust and the
Mandatorily Redeemable Preferred Securities issued by the trust are no
longer reported on Continental's balance sheet. Instead, Continental
reports the Convertible Junior Subordinated Debentures held by the
subsidiary trust, which had previously been eliminated in Continental's
consolidated financial statements, as long-term debt. The resulting
reclassifications and adjustments to remove the other assets and
liabilities of the trust have been reflected for all periods presented.
(14) In connection with an internal reorganization by Holdings, Continental's
former subsidiary, a subsidiary of Holdings issued non-voting preferred
stock which has a liquidation preference of $5 million, is mandatorily
redeemable in 2012, and is callable beginning in 2005. The preferred stock
was sold to a non-affiliated third party for a note in the original
principal amount of $5 million and was included on our balance sheet as
redeemable preferred stock of subsidiary through June 30, 2003. Effective
July 1, 2003, Continental adopted Statement of Financial Accounting
Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" and reclassified the
$5 million redeemable preferred stock to long-term debt. This
reclassification is prospective only.
17
RISK FACTORS
TERRORIST ATTACKS AND INTERNATIONAL HOSTILITIES
THE 2001 TERRORIST ATTACKS AND THE RECENT WAR IN IRAQ HAVE ADVERSELY AFFECTED,
AND ANY ADDITIONAL TERRORIST ATTACKS OR HOSTILITIES MAY FURTHER ADVERSELY
AFFECT, CONTINENTAL'S FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS
As described in greater detail below under "The Company--Outlook" and in
Continental's filings with the Commission, the terrorist attacks of September
11, 2001 involving commercial aircraft adversely affected Continental's
financial condition, results of operations and prospects, and the airline
industry generally. Those effects continue, although they have been mitigated
somewhat by increased traffic, money received by Continental under the Air
Transportation Safety and System Stabilization Act and the Emergency Wartime
Supplemental Appropriations Act, and by Continental's cost-cutting measures.
Moreover, additional terrorist attacks, even if not made directly on the airline
industry, or the fear of such attacks, could further negatively affect
Continental and the airline industry. The recent war in Iraq further decreased
demand for air travel, and additional hostilities could potentially have a
material adverse impact on Continental's financial condition, liquidity and
results of operations.
Among the effects Continental experienced from the September 11, 2001
terrorist attacks were significant flight disruption costs caused by the Federal
Aviation Administration ("FAA") imposed grounding of the U.S. airline industry's
fleet, significantly increased security, insurance and other costs,
significantly higher ticket refunds, significantly reduced load factors (defined
as revenue passenger miles divided by available seat miles), and significantly
reduced yields. Further terrorist attacks against commercial aircraft could
result in another grounding of Continental's fleet, and would likely result in
significant reductions in load factor and yields, along with increased ticket
refunds and security, insurance and other costs. In addition, terrorist attacks
not involving commercial aircraft, post-war unrest in Iraq or other world events
could result in decreased load factors and yields and could also result in
increased costs for Continental and the airline industry. For instance, fuel
costs rose significantly during late 2002 and the first quarter of 2003 and
remain at historically high levels. Premiums for aviation insurance have
increased substantially, and could escalate further, or certain aviation
insurance could become unavailable or available only for reduced amounts of
coverage that are insufficient to comply with the levels of insurance coverage
required by aircraft lenders and lessors or required by applicable government
regulations. Additionally, war-risk coverage or other insurance might cease to
be available to Continental's vendors, or might be available only at
significantly increased premiums or for reduced amounts of coverage, which could
adversely impact Continental's operations or costs.
Due in part to the lack of predictability of future traffic, business mix
and yields, Continental is currently unable to estimate the long-term impact on
it of the events of September 11, 2001 or the impact of any further terrorist
attacks or the recent war in Iraq. However, given the magnitude of the
unprecedented events of September 11, 2001 and their continuing aftermath, the
adverse impact to Continental's financial condition, results of operations,
liquidity and prospects may continue to be material, and Continental's financial
resources might not be sufficient to absorb it or that of any further terrorist
attacks or post-war unrest in Iraq.
RISK FACTORS RELATING TO THE COMPANY
CONTINENTAL CONTINUES TO EXPERIENCE SIGNIFICANT LOSSES
Since September 11, 2001, Continental has incurred significant losses.
Continental recorded net losses of $451 million in 2002 and $9 million for the
first nine months of 2003, and expects to incur significant losses for the
fourth quarter and the full year 2003. Passenger revenue per available seat mile
for Continental's mainline jet operations has declined since September 11, 2001.
Passenger revenue per available seat mile dropped 4.1% for the year ended
December 31, 2002 versus the same period in 2001 and overall passenger revenue
declined 7.0% during 2002 compared to 2001. During the first nine months of
2003, the revenue decline has moderated slightly, as passenger revenue per
available seat mile increased 0.7% and overall passenger revenue increased 1.9%
versus the same period in 2002. Business traffic, Continental's most profitable
source of revenue, and yields are down significantly from historical levels, and
carriers continue to offer reduced fares to attract
18
passengers, which lowers Continental's passenger revenue and yields and raises
Continental's break-even load factor. Continental cannot predict when business
traffic or yields will increase. Further, the long-term impact of any changes in
fare structures, most importantly in relation to business fares, booking
patterns, low-cost competitor growth, increased usage of regional jets,
competitor bankruptcies and other changes in industry structure and conduct,
cannot be predicted at this time, but could have a material adverse effect on
Continental's financial condition, liquidity and results of operations. See "The
Company--Outlook".
In addition, Continental's capacity purchase agreement with ExpressJet
provides that Continental purchase, in advance, all of ExpressJet's available
seat miles for a negotiated price, and Continental is at risk for reselling the
available seat miles at market prices. Continental previously announced its
intention to sell or otherwise dispose of its remaining interests in ExpressJet.
During the third quarter of 2003, Continental sold approximately 9.8 million
shares of Holdings common stock to Holdings, reducing Continental's ownership of
Holdings from 53.1% to 44.6%. Continental also contributed approximately 7.4
million shares of Holdings common stock to its defined benefit pension plan
further reducing its ownership of Holdings to 30.9% as of September 30, 2003.
The independent trustee for Continental's defined benefit pension plan
subsequently sold a portion of the shares of Holdings that Continental
contributed to the plan. As a result of such sales by the defined benefit
pension plan, the combined amount of Holdings common stock owned by Continental
and its defined benefit pension plan fell below 41% on November 12, 2003, the
point at which Continental will no longer consolidate Holdings and ExpressJet.
Accordingly, Continental has deconsolidated Holdings and ExpressJet as of
November 12, 2003. The primary effects of the deconsolidation of Holdings and
ExpressJet from Continental's financial statements is a decrease in current
assets, primarily due to the elimination of Holdings' cash, a decrease in total
assets, a decrease in long-term debt and a decrease in operating income as a
result of the exclusion of Holdings' operating income from Continental's
statement of operations. The decrease in operating income is offset by increases
in income from Continental's equity in Holdings' earnings. Among the documents
incorporated by reference into this Prospectus is a Current Report on Form 8-K
filed with the Commission on November 18, 2003, which presents pro forma
consolidated financial statements of Continental reflecting (1) the results of
operations of Continental for the nine months ended September 30, 2003 and the
year ended December 31, 2002, as if the accounts of Holdings had been accounted
for using the equity method of accounting set forth in APB Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock", rather than being
consolidated, effective as of the beginning of each period, and (2) the balance
sheet as of September 30, 2003, adjusted to report Holdings using the equity
method of accounting as of that date.
CONTINENTAL'S HIGH LEVERAGE MAY AFFECT ITS ABILITY TO SATISFY ITS SIGNIFICANT
FINANCING NEEDS OR MEET ITS OBLIGATIONS
As is the case with its principal competitors, Continental has a high
proportion of debt compared to its equity capital. Continental also has
significant operating lease and facility rental obligations, as well as
significant future funding requirements for a noncontributory defined benefit
plan. During 2002, the amount of Continental's long-term debt increased 24%. In
addition, Continental has fewer cash resources than some of its principal
competitors and substantially all 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 well to changing economic and competitive
conditions. Moreover, competitors emerging from bankruptcy will likely have
lower cost structures and greater operating flexibility after reorganizing their
companies in bankruptcy.
As of September 30, 2003, Continental had approximately:
-- $6.1 billion (including current maturities) of long-term debt and
capital lease obligations.
-- $764 million of stockholders' equity.
-- $1.6 billion in consolidated cash, cash equivalents and short-term
investments, of which $139 million is restricted cash and $171
million is cash held by Holdings to which Continental did not have
access. Effective November 12, 2003, Continental no longer
consolidates Holdings and ExpressJet.
Continental has substantial commitments for capital expenditures, including
for the acquisition of new aircraft. As of September 30, 2003, Continental had
firm purchase commitments for 67 aircraft from Boeing, with an estimated cost of
approximately $2.6 billion and options to purchase an additional 87 Boeing
aircraft. During the second quarter of 2003, Continental agreed to defer firm
deliveries of 36 Boeing 737 aircraft that
19
were originally scheduled for delivery in 2005, 2006 and 2007. These aircraft
will now be delivered in 2008 and beyond. Additionally, Continental reached an
agreement with Boeing regarding the terms of delivery of the 11 Boeing 757-300
aircraft that Continental had on order as of September 30, 2003. Continental now
expects to take delivery of five 757-300 aircraft in 2004. The final six 757-300
aircraft originally scheduled for delivery in late 2004 and the first half of
2005 have been substituted with six 737-800 aircraft expected to be delivered in
the second half of 2005. Furthermore, the 757-300 option count has been reduced
from 11 to zero. As a result, Continental expects to take delivery of a total of
four Boeing aircraft in the fourth quarter of 2003, 16 Boeing aircraft in 2004
(including the five 757-300 aircraft) and seven Boeing aircraft in 2005.
Incorporating these changes to the Boeing order and excluding the one 737-800
aircraft delivered in October 2003, Continental has firm purchase commitments
for 66 Boeing aircraft with an estimated cost of approximately $2.5 billion and
options to purchase an additional 84 Boeing aircraft.
Continental currently has agreements in principle for the financing of the
three remaining 737-800 aircraft scheduled for delivery in the fourth quarter of
2003, six of the eleven 737-800 aircraft scheduled for delivery in 2004 and all
five of the 757-300 aircraft scheduled for delivery in 2004. Continental does
not have backstop financing or any other financing currently in place for the
remainder of the aircraft. In addition, at September 30, 2003, Continental had
firm commitments to purchase eight spare engines related to the new Boeing
aircraft for approximately $53 million. Continental has financing in place for
the first three of these spare engines, which are scheduled for delivery between
October and December 2003. Continental does not have any financing currently in
place for the remaining five spare engines, which are scheduled to be delivered
in 2004 and the first quarter of 2005. Further financing will be needed to
satisfy Continental's capital commitments for its firm aircraft. There can be no
assurance that sufficient financing will be available for the aircraft on order
or other related capital expenditures.
As of September 30, 2003, ExpressJet had firm commitments for an additional
56 regional jets from Empresa Brasileira de Aeronautica S.A. ("Embraer")
delivering through 2006, with an estimated aggregate cost of $1.1 billion.
ExpressJet does not have any obligation to take any of these firm aircraft that
are not financed by a third party and leased either to ExpressJet or
Continental. Under the capacity purchase agreement between Continental and
ExpressJet, Continental has agreed to lease as lessee and sublease to ExpressJet
the regional jets that are subject to ExpressJet's firm purchase commitments. In
addition, under the capacity purchase agreement with ExpressJet, Continental
generally is obligated to purchase all of the capacity provided by these new
aircraft as they deliver to ExpressJet. Continental cannot predict whether
passenger traffic levels will enable it to utilize fully regional jets
delivering to ExpressJet in the future.
Continental also has significant operating lease and facility rental
obligations, as well as significant future funding requirements for its
noncontributory defined benefit plan. For the year ended December 31, 2002,
annual aircraft and facility rental expense under operating leases approximated
$1.3 billion.
Additional financing will be needed to satisfy Continental's capital
commitments. Continental cannot predict whether sufficient financing will be
available. On several occasions subsequent to September 11, 2001, including in
March and April 2003, each of Moody's, Standard & Poor's and Fitch, Inc.
downgraded the credit ratings of a number of major airlines, including
Continental's credit ratings, and further downgrades are possible. Reductions in
Continental's credit ratings have increased the interest Continental pays on new
issuances of debt and may increase the cost of and reduce the financing
available to Continental in the future. Continental does not have debt
obligations that would be accelerated as a result of a credit rating downgrade.
SIGNIFICANT CHANGES OR EXTENDED PERIODS OF HIGH FUEL COSTS OR FUEL SUPPLY
DISRUPTIONS WOULD MATERIALLY AFFECT CONTINENTAL'S OPERATING RESULTS
Fuel costs, which are at historically high levels, constitute a significant
portion of Continental's operating expense. Fuel costs represented approximately
11.7% of Continental's operating expenses for the year ended December 31, 2002
and 13.9% of Continental's operating expenses for the year ended December 31,
2001. Fuel costs represented approximately 15.0% of Continental's operating
expenses for the nine months ended September 30, 2003, compared to 11.1% for the
same period in 2002. Fuel prices and supplies are influenced significantly by
international political and economic circumstances, such as the political crises
in Venezuela and Nigeria and post-war unrest in Iraq. From time to time
Continental enters into petroleum swap contracts, petroleum call option
contracts and/or jet fuel purchase commitments to provide some short-term
protection
20
(generally three to six months) against a sharp increase in jet fuel prices.
Depending upon the hedging method employed, Continental's strategy may limit its
ability to benefit from declines in fuel prices. Continental has hedged
approximately 60% of its fuel requirements for the remainder of the year with
petroleum call options. If a future fuel supply shortage were to arise from OPEC
production curtailments, a disruption of oil imports, post-war unrest in Iraq,
other conflicts in the Middle East, or otherwise, higher fuel prices or
reduction of scheduled airline service could result. Significant changes in fuel
costs would materially affect Continental's operating results.
LABOR COSTS IMPACT CONTINENTAL'S RESULTS OF OPERATIONS
Labor costs constitute a significant percentage of Continental's total
operating costs. Many of Continental's work groups are represented by unions and
others are seeking such representation. Continental's mechanics, represented by
the International Brotherhood of Teamsters, ratified a new four-year collective
bargaining agreement in December 2002. The mechanics agreement made an
adjustment to current pay and recognized current industry conditions by becoming
amendable with respect to wages, pension and health insurance provisions on
December 31, 2003. Work rules and other contract items are established through
2006. Collective bargaining agreements between Continental and its pilots and
between ExpressJet and its pilots (both of whom are represented by the Air Line
Pilots Association) became amendable in October 2002. After being deferred due
to the economic uncertainty following the September 11, 2001 terrorist attacks,
negotiations recommenced in September 2002 and are continuing. Although
Continental may incur increased labor costs in connection with the negotiation
of these collective bargaining agreements, the labor cost uncertainty associated
with recent major hub-and-spoke carrier bankruptcies makes predicting the
outcome of negotiations more difficult. US Airways Group, Inc. ("US Airways")
and United Air Lines, Inc. ("United") have significantly decreased their labor
costs during their bankruptcy cases. Earlier this year, American Airlines, Inc.
("American Airlines") agreed with its major labor groups on significant labor
cost reductions. Delta and Northwest Airlines have each announced that they are
seeking to decrease their labor costs significantly. Although Continental enjoys
generally good relations with its employees, there can be no assurance that
Continental will not experience labor disruptions in the future.
RISK FACTORS RELATING TO THE AIRLINE INDUSTRY
THE AIRLINE INDUSTRY IS HIGHLY COMPETITIVE
The airline industry is highly competitive and susceptible to price
discounting. Carriers use discount fares to stimulate traffic during periods of
slack demand, to generate cash flow and to increase market share. Some of
Continental's competitors have substantially greater financial resources or
lower cost structures than Continental, or both. In recent years, the market
share held by low cost carriers has increased significantly and is expected to
continue to increase.
Airline profit levels are highly sensitive to changes in fuel costs, fare
levels and passenger demand. Passenger demand and fare levels are influenced by,
among other things, the state of the global economy, domestic and international
events, airline capacity and pricing actions taken by carriers. The weak U.S.
economy, turbulent international events and extensive price discounting by
carriers contributed to unprecedented losses for U.S. airlines from 1990 to
1993. Since September 11, 2001, these same factors, together with the effects of
the terrorist attacks and the war in Iraq, have resulted in dramatic losses for
Continental and the airline industry generally. Continental cannot predict when
conditions will improve. US Airways, United and several small competitors have
filed for bankruptcy protection, although US Airways emerged from bankruptcy on
March 31, 2003. Other carriers could follow. These carriers could operate under
bankruptcy protection in a manner that would be adverse to Continental, and
could emerge from bankruptcy as more vigorous competitors with substantially
lower costs.
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 codesharing, 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
21
opportunity to increase traffic on its segment of flights connecting with its
alliance partners. Continental's alliance with Northwest Airlines and its new
alliance with Delta and Northwest Airlines are examples of such arrangements,
and Continental has existing alliances with numerous other air carriers. (See
"The Company--Domestic Operations".) Other major U.S. airlines have alliances or
planned alliances more extensive than Continental's, providing them with route
systems of relatively greater utility to customers than Continental's more
limited route system. Continental cannot predict the extent to which it will be
disadvantaged by competing alliances.
Since its deregulation in 1978, the U.S. airline industry has undergone
substantial consolidation, and it may in the future experience additional
consolidation. Continental routinely monitors changes in the competitive
landscape and engages in analysis and discussions regarding its strategic
position, including alliances and business combination transactions. Continental
has had, and expects to continue to have, discussions with third parties
regarding strategic alternatives. The impact of any consolidation within the
U.S. airline industry cannot be predicted at this time.
THE AVIATION SECURITY ACT WILL IMPOSE ADDITIONAL COSTS AND MAY CAUSE SEVERE
DISRUPTIONS
In November 2001, the President signed into law the Aviation and
Transportation Security Act (the "Aviation Security Act"). This law federalized
substantially all aspects of civil aviation security, creating a new
Transportation Security Administration under the Department of Transportation
(the "TSA"). Among other things, the law required that all checked baggage be
screened by explosive detection systems by December 31, 2002 (although during
the implementation phase, other permitted methods of screening are being
utilized and federal law permits individual airports to request extensions of
such deadline). At some airports, the TSA has provided for temporary security
measures. Implementation of the requirements of the Aviation Security Act has
resulted in increased costs for the airline industry and may result in
additional costs, delays and disruptions in air travel. However, pursuant to the
Emergency Wartime Supplemental Appropriations Act, some of these costs have been
reimbursed by the U.S. government. In May 2003, Continental received and
recognized in earnings $176 million in cash from the U.S. government pursuant to
the Emergency Wartime Supplemental Appropriations Act. This amount is
reimbursement for Continental's proportional share of passenger security and air
carrier security fees paid or collected by U.S. carriers as of the date of
enactment of the legislation, together with other items. See "The
Company--Outlook".
CONTINENTAL'S BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
As evidenced by the enactment of the Aviation Security Act, airlines are
subject to extensive regulatory and legal compliance requirements that result in
significant costs. 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 revenue. The FAA from time to time
issues directives and other regulations relating to the maintenance and
operation of aircraft that require significant expenditures. Some FAA
requirements cover, among other things, retirement of older aircraft, security
measures, collision avoidance systems, airborne windshear avoidance systems,
noise abatement and other environmental concerns, commuter aircraft safety and
increased inspections and maintenance procedures to be conducted on older
aircraft. Continental expects to continue incurring expenses to comply with the
FAA's regulations.
Additionally, because of significantly higher security and other costs
incurred by airports since September 11, 2001, and because reduced landing
weights since September 11, 2001 have reduced the fees airlines pay to airports,
many airports are significantly increasing their rates and charges to air
carriers, including to Continental. Restrictions on the ownership and transfer
of airline routes and takeoff and landing slots have also been proposed. The
ability of U.S. carriers to operate international routes is subject to change
because the applicable arrangements between the United States and foreign
governments may be amended from time to time, or because appropriate slots or
facilities are not made available. Continental cannot provide assurance that
current laws and regulations, or laws or regulations enacted in the future, will
not adversely affect it.
22
CONTINENTAL'S OPERATIONS ARE AFFECTED BY THE SEASONALITY ASSOCIATED WITH THE
AIRLINE INDUSTRY
Due to greater demand for air travel during the summer months, revenue in
the airline industry in the second and third quarters of the year is generally
stronger than revenue in the first and fourth quarters of the year for most U.S.
air carriers. Continental's results of operations generally reflect this
seasonality.
RISK FACTORS RELATING TO THE SUBORDINATED NOTES AND THE EXCHANGE OFFER
CONSEQUENCES OF FAILURE TO EXCHANGE
If you fail to deliver the proper documentation to the Exchange Agent in a
timely fashion, your tender of Old Subordinated Notes will be rejected. The New
Subordinated Notes will be issued in exchange for the Old Subordinated Notes
only after timely receipt by the Exchange Agent of the Old Subordinated Notes, a
properly completed and executed Letter of Transmittal (or an Agent's Message in
lieu thereof) and all other required documentation. If you wish to tender your
Old Subordinated Notes in exchange for New Subordinated Notes, you should allow
sufficient time to ensure timely delivery. None of the Exchange Agent, the
Trustee or Continental is under any duty to give holders of Old Subordinated
Notes notification of defects or irregularities with respect to tenders of Old
Subordinated Notes for exchange.
If you do not exchange your Old Subordinated Notes for New Subordinated
Notes pursuant to the Exchange Offer, or if your tender of Old Subordinated
Notes is not accepted, your Old Subordinated Notes will continue to be subject
to the restrictions on transfer of such Old Subordinated Notes as set forth in
the legend thereon. In general, you may not offer or sell Old Subordinated Notes
unless they are registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Continental does not currently anticipate that
it will register the Old Subordinated Notes under the Securities Act. To the
extent that Old Subordinated Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old
Subordinated Notes could be adversely affected.
APPRAISAL AND REALIZABLE VALUE OF COLLATERAL
Simat, Helliesen & Eichner, Inc., an independent aviation appraisal and
consulting firm ("SH&E"), has prepared an appraisal of the spare parts included
in the Collateral as of June 25, 2003. A letter, dated July 23, 2003 (as revised
November 13, 2003), summarizing such appraisal is annexed to this Prospectus as
Appendix II.
The appraisal is subject to a number of assumptions and limitations and was
prepared based on certain specified methodologies. In preparing its appraisal,
SH&E conducted only a limited physical inspection of certain locations at which
Continental maintains the spare parts. An appraisal that is subject to other
assumptions and limitations and based on other methodologies may result in
valuations that are materially different from those contained in SH&E's
appraisal. See "Description of the Appraisal".
Continental is required to provide to the Policy Provider and the Trustee a
semiannual appraisal of the Collateral. If any such appraisal indicates that the
ratio of the outstanding principal amount of the Senior Notes to the Collateral
value is greater than 45.0%, or that the ratio of the outstanding principal
amount of the Senior Notes and the Subordinated Notes to the Collateral value is
greater than 67.5%, Continental is required to provide additional collateral or
to reduce the principal amount of Senior Notes or Subordinated Notes outstanding
so that the loan to Collateral values are not greater than the applicable
maximum percentage. The appraised value of the Collateral determined as of June
25, 2003, indicated that such maximum percentages were exceeded. As a result,
Continental acquired and delivered to the Trustee for cancellation $5,500,000 of
Senior Notes and $3,000,000 of Subordinated Notes and deposited Cash Collateral
totalling $23,600,000. See "Description of the Subordinated Notes--Collateral".
An appraisal is only an estimate of value. An appraisal should not be
relied upon as a measure of realizable value. The proceeds realized upon a sale
of any Collateral may be less than its appraised value. The value of the
Collateral if remedies are exercised under the Indenture will depend on market
and economic conditions, the supply of similar spare parts, the availability of
buyers, the condition of the Collateral and other
23
factors. In addition, since spare parts are regularly used, refurbished,
purchased, transferred and discarded in the ordinary course of business, the
quantity of spare parts included in the Collateral and their appraised value
will change over time. Accordingly, Continental cannot assure you that the
proceeds realized upon any such exercise of remedies would be sufficient to
satisfy in full payments due on the Senior Notes and the Subordinated Notes. If
such proceeds are not sufficient to repay all such amounts due on the
Subordinated Notes, then holders of Subordinated Notes (to the extent not repaid
from the proceeds of the sale of Collateral) would have only unsecured claims
against Continental.
As discussed under "--Risk Factors Relating to the Airline Industry--The
Airline Industry is Highly Competitive", since September 11, 2001, the airline
industry has suffered substantial losses. Two major air carriers, US Airways and
United, have filed for bankruptcy protection, although US Airways emerged from
bankruptcy on March 31, 2003. Other airlines may file for bankruptcy protection
as well. Moreover, reports have suggested the possibility of liquidation by
United. In response to adverse market conditions, many air carriers have reduced
the number of aircraft in operation, and there may be further reductions,
particularly by air carriers in bankruptcy or liquidation. Any such reduction of
aircraft of the same models as the models of aircraft on which the spare parts
included in the Collateral may be installed or used could adversely affect the
value of the Collateral.
CONTROL OVER AMENDMENTS, WAIVERS AND SALE OF COLLATERAL
Whether before or after the occurrence of an Event of Default, the
"Controlling Party" will direct the Trustee in taking action under the Indenture
and other agreements relating to the Notes, including in amending such
agreements and granting waivers thereunder, except for certain limited
provisions with respect to the Collateral as it relates to the Subordinated
Notes that cannot be amended or waived without the consent of the holders of a
majority of the outstanding principal amount of the Subordinated Notes and
certain other limited provisions that cannot be amended or waived without the
consent of each Noteholder affected thereby. Except for those limited provisions
which are described in "Description of the Subordinated Notes--Modifications and
Waiver of the Indenture and Certain Other Agreements", the provisions of the
Indenture, the Security Agreement and the other Operative Documents may be
amended or waived by the Controlling Party (or, in the case of the Collateral
Maintenance Agreement, the Policy Provider) without the consent of the
Subordinated Noteholders. If an Event of Default is continuing, the "Controlling
Party" will direct the Trustee in exercising remedies under the Indenture and
the Collateral Agreements, including accelerating the Subordinated Notes or
foreclosing the lien on the Collateral securing the Subordinated Notes. See
"Description of the Subordinated Notes--Remedies".
The Controlling Party will be:
-- The Policy Provider (except as provided below).
-- If a Policy Provider Default is continuing, the holders of more than
50% in aggregate unpaid principal amount of the Senior Notes then
outstanding or, if the Senior Notes have been paid in full, of the
Subordinated Notes then outstanding.
-- If the Senior Notes, the Policy Expenses and the Policy Provider
Obligations have been paid in full, the holders of more than 50% in
aggregate unpaid principal amount of Subordinated Notes then
outstanding.
-- Under certain circumstances, the Liquidity Provider.
The Subordinated Noteholders will have the right to direct the Policy
Provider in acting as the Controlling Party during the continuance of an Event
of Default if the Subordinated Noteholders shall have deposited with the Policy
Provider cash, U.S. government securities or other investments acceptable to the
Policy Provider as collateral for amounts owed and to become due and payable to
the Policy Provider under the Operative Documents and Support Documents. The
Subordinated Noteholders contributing their proportionate share of such deposit
will be entitled to direct the Policy Provider in taking action as the
Controlling Party during the continuance of such Event of Default by vote of a
majority of the principal
24
amount of the Subordinated Notes held by such contributing Subordinated
Noteholders. See "Description of the Subordinated Notes--Controlling Party".
TERMS OF SUBORDINATION
The Subordinated Notes rank junior to the obligations relating to the
Senior Notes (including amounts owed to the Policy Provider and Liquidity
Provider) with respect to payments made by Continental, proceeds from
liquidation of the Collateral and otherwise. Accordingly, if cash available for
distribution under the Indenture is insufficient to cover all amounts then due,
the Senior Notes and sums due to the Policy Provider and the Liquidity Provider
will be paid in full before any amounts are paid with respect to the
Subordinated Notes. See "Description of the Subordinated Notes--Priority of
Distributions". In addition, if there is a payment default with respect to the
Subordinated Notes or any other default under the Indenture, Subordinated
Noteholders will not be entitled to accelerate the Subordinated Notes and cause
the Trustee to exercise remedies unless they are the Controlling Party or they
have the right to direct the Policy Provider in acting as the Controlling Party.
See "--Control over Amendments, Waivers and Sale of Collateral".
CERTAIN LIMITATIONS WITH RESPECT TO THE COLLATERAL
The Subordinated Notes are secured by a lien on the Pledged Spare Parts.
The Senior Notes are also secured by a lien on such collateral. See "Description
of the Subordinated Notes--Collateral". However, the lien will not apply to a
spare part for as long as it is installed on or being used in any aircraft,
engine or other spare part so installed or being used. In addition, since spare
parts are regularly used, refurbished, purchased, transferred and discarded in
the ordinary course of Continental's business, the quantity of spare parts
included in the Collateral and their appraised value will change over time.
Continental is required to keep the Pledged Spare Parts at certain
Designated Locations, subject to certain exceptions. See "Description of the
Subordinated Notes--Collateral--Designated Locations". The lien of the
Subordinated Notes will not apply to any spare part not located at a Designated
Location.
Continental is required to provide to the Policy Provider and the Trustee a
semiannual appraisal of the Collateral. If any such appraisal indicates that the
ratio of the outstanding principal amount of the Senior Notes to the Collateral
value is greater than 45.0%, or that the ratio of the outstanding principal
amount of the Senior Notes and Subordinated Notes to the Collateral value is
greater than 67.5%, Continental is required to provide additional collateral or
to reduce the principal amount of Senior Notes or Subordinated Notes outstanding
so that the loan to Collateral values are not greater than the applicable
maximum percentage. In order to satisfy this requirement, Continental may grant
a lien on additional Qualified Spare Parts, cash or certain investment
securities. In addition, Continental may grant a lien on other collateral,
provided that the Policy Provider agrees and each Rating Agency confirms that
the use of such additional collateral will not result in a reduction of the
rating of the Senior Notes or Subordinated Notes below the then current rating
for such Notes (determined in the case of the Senior Notes without regard to the
Policy) or a withdrawal or suspension of the rating of such Notes. See
"Description of the Subordinated Notes--Collateral". Section 1110 of the U.S.
Bankruptcy Code, which provides special rights to holders of liens with respect
to certain equipment (see "Description of the Subordinated Notes--Remedies"),
would apply to any such additional Qualified Spare Parts but would not apply to
any such cash or investment securities. In addition, Section 1110 may not apply
to such other collateral, depending on the circumstances.
LIMITED ABILITY TO RESELL THE SUBORDINATED NOTES
Prior to the Exchange Offer, there has been no public market for the
Subordinated Notes. Continental does not intend to apply for listing of the
Subordinated Notes on any national securities exchange or otherwise. The Initial
Purchaser has previously made a market in the Old Subordinated Notes and
Continental has been advised by the Initial Purchaser that it presently intends
to make a market in the New Subordinated Notes, as permitted by applicable laws
and regulations, after consummation of the Exchange Offer. The Initial Purchaser
is not obligated, however, to make a market in the Old Subordinated Notes or the
New Subordinated Notes, and any such market-making activity may be discontinued
at any time without notice at
25
the sole discretion of the Initial Purchaser. There can be no assurance as to
the liquidity of the public market for the Subordinated Notes or that any active
public market for the Subordinated Notes will develop or continue. If an active
public market does develop, it might not continue or it might not be
sufficiently liquid to allow you to resell any of your Subordinated Notes.
USE OF PROCEEDS
There will be no cash proceeds payable to Continental from the issuance of
the New Subordinated Notes pursuant to the Exchange Offer. The proceeds from the
sale of the Old Subordinated Notes were used by Continental for general
corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES
The ratios of our "earnings" to our "fixed charges" for each of the years
1998 through 2002 and for the nine months ended September 30, 2003 were:
NINE MONTHS
ENDED
SEPTEMBER 30,
2003 YEAR ENDED DECEMBER 31,
---------------- --------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
1.11 --(1) --(1) 1.51 1.80 1.87
---------------
(1) For the years ended December 31, 2002 and 2001, earnings were inadequate to
cover fixed charges and the coverage deficiency was $640 million and $159
million, respectively.
For purposes of the ratios, "earnings" means the sum of:
-- our pre-tax income (loss) adjusted for undistributed income of
companies in which we have a minority equity interest; 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 interest
expense.
26
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 the number of scheduled miles flown by revenue passengers, known as
revenue passenger miles, in 2002) and, together with ExpressJet Airlines, Inc.
(operating as Continental Express and referred to in this Prospectus as
"ExpressJet") and Continental's wholly owned subsidiary, Continental Micronesia,
Inc. ("CMI"), served 222 airports worldwide at September 30, 2003. Continental
indirectly owns a 30.9% equity interest in ExpressJet. As of September 30, 2003,
Continental flew to 125 domestic and 97 international destinations and offered
additional connecting service through alliances with domestic and foreign
carriers. Continental directly served 16 European cities, seven South American
cities, Tel Aviv, Hong Kong and Tokyo as of September 30, 2003, and is one of
the leading airlines providing service to Mexico and Central America, serving 29
cities, more destinations than any other United States airline. Through its Guam
hub, CMI provides extensive service in the western Pacific, including service to
more Japanese cities than any other United States carrier. The Company's
executive offices are located at 1600 Smith Street, Houston, Texas 77002. The
Company's telephone number is (713) 324-2950.
DOMESTIC OPERATIONS
Continental operates its domestic route system primarily through its hubs
in the New York metropolitan area at Newark Liberty International Airport
("Liberty International" or "Newark"), in Houston, Texas at George Bush
Intercontinental Airport ("Bush Intercontinental" or "Houston") and in
Cleveland, Ohio at Hopkins International Airport ("Hopkins International").
Continental'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 September 30, 2003, Continental and ExpressJet
operated 65% of the average daily jet departures from Liberty International, 83%
of the average daily jet departures from Bush Intercontinental, and 65% of the
average daily jet departures from Hopkins International (in each case including
regional jets). Each of Continental's domestic hubs is located in a large
business and population center, contributing to a high volume of "origin and
destination" traffic.
EXPRESSJET
Continental's mainline jet service at each of its domestic hub cities is
coordinated with ExpressJet, which operates new-generation regional jets. In
April 2002, ExpressJet Holdings, Inc. ("Holdings"), Continental's then wholly
owned subsidiary and the sole stockholder of ExpressJet, sold 10 million shares
of its common stock in an initial public offering and used the net proceeds to
repay $147 million of ExpressJet's indebtedness to Continental. In addition,
Continental sold 20 million of its shares of Holdings common stock in the
offering for net proceeds of $300 million. At Continental's request, Holdings
filed a shelf registration statement with the Commission on May 1, 2003 relating
to the remaining shares of Holdings common stock held by Continental to enable
Continental to sell such common stock free of certain restrictions under the
Securities Act. During the quarter ended September 30, 2003, Holdings
repurchased approximately 9.8 million shares of its common stock from
Continental, reducing Continental's ownership of Holdings to 44.6%. On September
9, 2003, Continental contributed approximately 7.4 million shares of Holdings
common stock to its defined benefit pension plan, further reducing Continental's
ownership of Holdings to 30.9%. At November 12, 2003, the independent trustee of
the defined benefit pension plan sold a sufficient number of shares of Holdings
so that Continental no longer consolidates Holdings, effective as of that date.
Continental does not currently intend to remain a stockholder of Holdings over
the long term. Subject to market conditions, Continental expects to sell or
otherwise dispose of some or all of its shares of Holdings common stock in the
future.
Effective January 1, 2001, Continental entered into a capacity purchase
agreement with ExpressJet pursuant to which Continental currently purchases all
of ExpressJet's available seat miles for a negotiated price. Under the
agreement, ExpressJet has the right through December 31, 2006 to be
Continental's sole provider of regional jet service from Continental's hubs.
Continental is responsible for all scheduling, pricing and seat inventories of
ExpressJet's flights and is entitled to all revenue associated with those
flights. Continental pays ExpressJet based on scheduled block hours (the hours
from departure gate to arrival gate) in
27
accordance with a formula designed to provide ExpressJet with an operating
margin of approximately 10% before taking into account variations in some costs
and expenses that are generally controllable by ExpressJet. ExpressJet's overall
operating margin was 13.6% in 2002. Continental assumes the risk of revenue
volatility associated with fares and passenger traffic, price volatility for
specified expense items such as fuel and the cost of all distribution and
revenue-related costs. The capacity purchase agreement replaced Continental's
prior revenue-sharing arrangement.
As of September 30, 2003, ExpressJet served 102 destinations in the U.S.,
16 cities in Mexico and 5 cities in Canada. Since December 2002, ExpressJet's
fleet has been comprised entirely of regional jets. Continental believes
ExpressJet's regional jet service complements Continental's operations by
carrying traffic that connects onto Continental's mainline jets and allowing
more frequent flights to smaller cities than could be provided economically with
larger jet aircraft. Continental believes that ExpressJet's regional jets
provide greater comfort and enjoy better customer acceptance than turboprop
aircraft. The regional jets also allow ExpressJet to serve certain routes that
cannot be served by turboprop aircraft. Additional commuter feed traffic is
currently provided to Continental by other codesharing partners.
DOMESTIC CARRIER ALLIANCES
Continental has entered into alliance agreements, which are also referred
to as codeshare agreements or cooperative marketing agreements, with other
carriers. These relationships may include (a) codesharing (one carrier placing
its name and flight number, or "code", on flights operated by the other carrier)
and (b) reciprocal frequent flyer program participation, reciprocal airport
lounge access and other joint activities (such as seamless check-in at
airports). Some relationships may include other cooperative undertakings such as
joint purchasing, joint corporate sale contracts, airport handling, facilities
sharing or joint technology development.
Continental has a long-term global alliance with Northwest Airlines, Inc.
("Northwest Airlines") through 2025, subject to earlier termination by either
carrier in the event of certain changes in control of either Northwest Airlines
or Continental. The alliance with Northwest Airlines provides for each carrier
placing its code on a large number of the flights of the other, reciprocity of
frequent flyer programs and airport lounge access, and other joint marketing
activities. Northwest Airlines and Continental also have joint contracts with
major corporations and travel agents designed to create access to a broader
product line encompassing the route systems of both carriers.
In response to the dramatic changes occurring in the airline industry,
including a marketing alliance between United and US Airways, Continental signed
a marketing agreement with Northwest Airlines and Delta Air Lines, Inc.
("Delta") in August 2002 to permit it to compete more effectively with other
carriers and alliance groups. As with the alliance with Northwest Airlines, this
alliance involves codesharing, reciprocal frequent flyer benefits and reciprocal
airport lounge privileges. Implementation of this marketing alliance began in
June 2003.
Continental also has domestic codesharing agreements with Gulfstream
International Airlines, Inc., Mesaba Aviation, Inc., Hawaiian Airlines, Inc.,
Alaska Airlines, Inc., Horizon Airlines, Inc., Champlain Enterprises, Inc.
(CommutAir), Hyannis Air Service, Inc. (Cape Air), SkyWest Airlines, Inc. and
American Eagle Airlines, Inc. In 2002, Continental introduced the first
train-to-plane alliance in the United States with Amtrak.
INTERNATIONAL OPERATIONS
Continental directly serves destinations throughout Europe, Canada, Mexico,
Central and South America and the Caribbean as well as Tel Aviv, Hong Kong and
Tokyo. Continental also provides service to numerous other destinations through
codesharing arrangements with other carriers and has extensive operations in the
western Pacific conducted by CMI. As measured by 2002 available seat miles,
approximately 39% of Continental's mainline jet operations, including CMI, were
dedicated to international traffic.
Continental's New York/Newark hub is a significant international gateway.
From Liberty International, at September 30, 2003 Continental and ExpressJet
served 16 European cities, five Canadian cities, two
28
Mexican cities, six Central American cities, four South American cities, 13
Caribbean destinations, Tel Aviv, Hong Kong and Tokyo.
Continental's Houston hub is the focus of its operations in Mexico and
Central America. As of September 30, 2003, Continental and ExpressJet flew from
Bush Intercontinental to 21 cities in Mexico, every country in Central America,
six cities in South America, four cities in Canada, three cities in Europe,
three Caribbean destinations and Tokyo.
From Continental's Cleveland hub, Continental and ExpressJet flew to
Montreal, Toronto and London as of September 30, 2003.
CONTINENTAL MICRONESIA
From its hub operations based on the island of Guam, as of September 30,
2003, CMI provided service to eight cities in Japan, more than any other United
States carrier, as well as other Pacific Rim destinations, including Taiwan, the
Philippines, Hong Kong, Australia and Indonesia.
CMI is the principal air carrier in the Micronesian Islands, where it
pioneered scheduled air service in 1968. CMI's route system is linked to the
United States market through Hong Kong, Tokyo and Honolulu, each of which CMI
serves non-stop from Guam. CMI and Continental also maintain a codesharing
agreement and coordinate schedules on certain flights from the United States to
Honolulu, and from Honolulu to Guam, to facilitate travel from the United States
into CMI's route system.
FOREIGN CARRIER ALLIANCES
Continental seeks to develop international alliance relationships that
complement Continental's own route system 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, provide passengers connecting service from
Continental's international flights to other destinations beyond an alliance
partner's hub, and expand the product line that Continental may offer in a
foreign destination.
In October 2001, Continental announced that it had signed a cooperative
marketing agreement with KLM Royal Dutch Airlines ("KLM") that includes
extensive codesharing and reciprocal frequent flyer program participation and
airport lounge access. As of October 2003, Continental places its code on
selected flights operated by KLM and KLM Cityhopper from Amsterdam to more than
70 destinations in Europe, Africa and the Middle East, and KLM placed its code
on selected flights to U.S. destinations operated by Continental beyond its New
York and Houston hubs. In addition, members of each carrier's frequent flyer
program are able to earn mileage anywhere on the other's global route network,
as well as the global network of Northwest Airlines. The cooperative agreement
was extended in June 2003 and currently terminates in 2010.
Continental also currently has international codesharing agreements with
Air Europa, EVA Airways Corporation (an airline based in Taiwan), British
European, Virgin Atlantic Airways, Emirates (based in Dubai, U.A.E.) and
Compania Panamena de Aviacion, S.A. ("Copa"). Continental owns 49% of the common
equity of Copa. In February 2003, Continental launched an air/rail codeshare
agreement with the French high speed rail provider SNCF TGV. In May 2003,
Continental announced a new codesharing agreement with TAP Air Portugal, which
will begin in the first quarter of 2004, subject to government approval.
OUTLOOK
Despite recent improvements, the current U.S. domestic airline environment
continues to be one of the worst in Continental's history. Prior to September
2001, Continental was profitable, although many U.S. air carriers were losing
money and Continental's profitability was declining. The terrorist attacks of
September 11, 2001 and the war in Iraq dramatically worsened the difficult
financial environment and presented new and greater challenges for the airline
industry. Since the terrorist attacks, several airlines, including United and US
Airways, have filed for bankruptcy, although US Airways emerged from bankruptcy
on March 31, 2003. Other airlines may file for bankruptcy protection as well.
Although Continental has been able to raise capital, downsize its operations and
reduce its expenses significantly, Continental has reported significant losses
since the terrorist attacks, and current trends in the airline industry make it
likely that Continental will continue to
29
post significant losses for the foreseeable future. The revenue environment
continues to be weak in light of changing pricing models, excess capacity in the
market, reduced corporate travel spending and other issues. In addition, in late
2002 and early 2003, fuel prices significantly escalated due to the war in Iraq
and political tensions in Venezuela and Nigeria, and fuel prices remain at
historically high levels. Absent adverse factors outside Continental's control
such as those described herein, Continental believes that its liquidity and
access to cash will be sufficient to fund its current operations through 2004
(and beyond if Continental is successful in implementing its previously
announced revenue-generating and cost cutting measures). However, Continental
believes that the economic environment must improve for Continental to continue
to operate at its current size and expense level beyond that time. Continental
may find it necessary to further downsize its operations, ground additional
aircraft and further reduce its expenses. Continental anticipates that its
previously announced capacity and cost reductions, together with the capacity
reductions announced by other carriers and capacity reductions that could come
from restructurings within the industry, should result in a better financial
environment by the end of 2003, absent adverse factors outside Continental's
control such as a further economic recession, additional terrorist attacks,
post-war unrest in Iraq or conflicts elsewhere in the world, a significant
spread of Severe Acute Respiratory Syndrome, or "SARS", decreased consumer
demand or sustained high fuel prices. However, based on current information and
trends Continental expects to incur significant losses for the fourth quarter
and full year 2003.
Due in part to the lack of predictability of future traffic, business mix
and yields, Continental is currently unable to estimate the long-term effect on
it of the events of September 11, 2001, or the impact of any further terrorist
attacks or the recent war in Iraq. However, given the magnitude of the
unprecedented events of September 11, 2001 and their continuing aftermath, the
adverse impact to Continental's financial condition, results of operations,
liquidity and prospects may continue to be material, and Continental's financial
resources might not be sufficient to absorb it or that of any further terrorist
attacks or another military action elsewhere in the world.
Among the many factors that threaten Continental and the airline industry
generally are the following:
-- A weak global and domestic economy has significantly decreased
Continental's revenue. Business traffic, Continental's most
profitable source of revenue, and yields are down significantly, as
well as leisure traffic and yields. Several of Continental's
competitors are significantly changing all or a portion of their
pricing structures in a manner that is revenue dilutive to
Continental. Although Continental has been successful in decreasing
its unit cost as its unit revenue has declined, Continental expects
to incur significant losses for the fourth quarter and full year
2003. Continental currently expects its consolidated balance of cash,
cash equivalents and short-term investments at the end of the fourth
quarter of 2003 to be $1.4 billion, which excludes cash held by
Holdings.
-- Continental believes that reduced demand persists not only because of
the weak economy, but also because of some customers' concerns about
further terrorist attacks and reprisals. The war in Iraq
significantly reduced Continental's bookings and lowered passenger
traffic. In addition, the spread of SARS in China and elsewhere
caused a further decline in passenger traffic earlier this year,
particularly to Hong Kong and certain other cities in Asia that
Continental serves. Both of these events disproportionately affected
Continental's international passenger traffic. Continental responded
to the actual and anticipated reduction in demand by temporarily
reducing capacity on certain trans-Atlantic and trans-Pacific routes
and by reducing its summer schedule. Continental believes that demand
is further weakened by customer dissatisfaction with the hassles and
delays of heightened airport security and screening procedures.
-- Fuel costs rose significantly in late 2002 and early 2003 and remain
at historically high levels. Post-war unrest in Iraq, other conflicts
in the Middle East, political events in Venezuela or Nigeria, or
significant events in other oil-producing nations could cause fuel
prices to increase further and may impact the availability of fuel.
Based on gallons consumed in 2002 and anticipated consumption in
2003, for every one dollar increase in the price of crude oil,
Continental's annual fuel expense would be approximately $40 million
higher.
30
-- The terrorist attacks of 2001 have caused security costs to increase
significantly, many of which have been passed on to airlines.
Security costs are likely to continue rising for the foreseeable
future. In the current environment of lower consumer demand and
discounted pricing, these costs cannot effectively be passed on to
customers. Insurance costs have also risen sharply, in part due to
greater perceived risks and in part due to the reduced availability
of insurance coverage. Continental must absorb these additional
expenses in the current pricing environment. Under the Emergency
Wartime Supplemental Appropriations Act, Continental and other U.S.
carriers have been reimbursed for certain security fees paid or
collected by such carriers and for other security related costs.
Consequently, in May 2003 Continental and ExpressJet received a
reimbursement of $176 million for security fees paid or collected
since February 2002.
-- Although Continental reduced some of its costs during the last year
and continues to implement cost-cutting measures, its costs cannot be
decreased as quickly as its revenue has declined. In addition, as is
the case with many of its competitors, Continental is highly
leveraged, and has few assets that remain unpledged to support any
new debt. Combined with reduced access to the capital markets,
themselves already weakened by the state of the economy, there is the
potential for insufficient liquidity if current conditions continue
unabated for a sufficiently long period of time. As of September 30,
2003, Continental had $1.6 billion in consolidated cash, cash
equivalents and short-term investments. Cash and cash equivalents at
September 30, 2003 included $139 million of restricted cash and $171
million of cash held by Holdings (to which Continental does not have
access). The remaining 30.9% of Holdings common stock that
Continental continues to own is not pledged to creditors. Continental
intends to sell or otherwise dispose of some or all of its interest
in Holdings, subject to market conditions.
-- The nature of the airline industry is changing dramatically as
business travelers change their spending patterns and low-cost
carriers continue to gain market share. Continental has announced and
is implementing plans to modify its product for the large segment of
its customers who are not willing to pay for a premium product, to
reduce costs and to generate additional revenue. Other carriers have
announced similar plans to create lower-cost products, or to offer
separate low cost products (such as a low cost "airline within an
airline"). In addition, carriers emerging from bankruptcy will have
significantly reduced cost structures and operational flexibility
that will allow them to compete more effectively.
-- Current conditions may cause consolidation of the airline industry,
domestically and globally. The extremity of current conditions could
result in a reduction of some of the regulatory hurdles that
historically have limited consolidation. Depending on the nature of
the consolidation, Continental could benefit from it or be harmed by
it. Continental continues to monitor developments throughout the
industry and has entered into a marketing alliance with Northwest
Airlines and Delta to permit Continental to compete more effectively
with other carriers and alliance groups.
-- Continental has a noncontributory defined benefit plan covering
substantially all of Continental's employees. Continental contributed
to the plan $272 million in cash in 2003 and approximately 7.4
million shares of Holdings common stock valued at approximately $100
million on September 9, 2003. As a result, Continental has satisfied
all minimum required contributions to the plan during 2003. Although
Continental's 2004 minimum funding requirements are not expected to
be material, Continental currently expects to make significant
contributions to the plan in 2004 and thereafter.
-- Under the most restrictive provisions of a credit facility agreement
with an outstanding balance of $71 million at September 30, 2003,
Continental is required to maintain a minimum unrestricted cash
balance of $600 million. Also, under a separate credit facility
agreement with an outstanding balance of $25 million at September 30,
2003 Continental is required to maintain a 1 to 1 ratio of EBITDAR
(earnings before interest, income taxes, depreciation and aircraft
rentals) to fixed charges, which consist of interest expense,
aircraft rental expense, cash income taxes and cash dividends, for
the previous four quarters. Continental believes that it will be able
to meet both of these covenants for the remainder of 2003.
31
THE EXCHANGE OFFER
The following summary describes all material provisions of the Registration
Rights Agreement (the "Registration Rights Agreement") between Continental and
the Initial Purchaser with respect to the Subordinated Notes. The summary does
not purport to be complete. We urge you to read the Registration Rights
Agreement for additional detail and further information because it, and not this
description, defines your rights. The Registration Rights Agreement has been
filed as an exhibit to the Registration Statement and copies of the Registration
Rights Agreement are available as set forth under "Where You Can Find More
Information".
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the issuance of the Old Subordinated Notes, the Initial
Purchaser and its assignees became entitled to the benefits of the Registration
Rights Agreement.
Under the Registration Rights Agreement, Continental is obligated to use
its best efforts to:
-- file the Registration Statement of which this Prospectus is a part
for a registered exchange offer with respect to an issue of new notes
identical in all material respects to the Old Subordinated Notes
within 120 days after May 9, 2003, which is the date on which the Old
Subordinated Notes were issued (the "Issuance Date");
-- cause the Registration Statement to become effective under the
Securities Act within 180 days after the Issuance Date;
-- cause the Registration Statement to remain effective until the
closing of the Exchange Offer; and
-- consummate the Exchange Offer within 210 calendar days after the
Issuance Date.
Continental will keep the Exchange Offer open for a period of not less than
30 days. The Exchange Offer being made hereby, if commenced and consummated
within the time periods described in this paragraph, will satisfy those
requirements under the Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying letter of transmittal (the "Letter of Transmittal")
(which together constitute the Exchange Offer), all Old Subordinated Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date will be accepted for exchange. New Subordinated Notes will
be issued in exchange for an equal face amount of outstanding Old Subordinated
Notes accepted in the Exchange Offer. Old Subordinated Notes may be tendered
only in integral multiples of $1,000. This Prospectus, together with the Letter
of Transmittal, is being sent to all registered holders of Old Subordinated
Notes as of [ ], 2003. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Subordinated Notes being tendered for exchange.
However, the obligation to accept Old Subordinated Notes for exchange pursuant
to the Exchange Offer is subject to certain conditions, as set forth herein
under "--Conditions".
Old Subordinated Notes shall be deemed to have been accepted as validly
tendered when, as and if Continental has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Old Subordinated Notes for the purposes of receiving the New
Subordinated Notes and delivering New Subordinated Notes to such holders.
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, Continental believes that the New
Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old
Subordinated Notes may be offered for resale, resold or otherwise transferred by
holders thereof (other than (i) a broker-dealer who acquired such Old
Subordinated Notes directly from Continental for resale pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act or (ii) any holder that is an "affiliate" of Continental as defined in Rule
405 under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Subordinated Notes are acquired in the ordinary course of such holders' business
32
and such holders are not engaged in, and do not intend to engage in, a
distribution of such New Subordinated Notes and have no arrangement with any
person to participate in a distribution of such New Subordinated Notes.
By tendering the Old Subordinated Notes in exchange for New Subordinated
Notes, each holder, other than a broker-dealer, will represent to Continental
that:
-- it is not an affiliate of Continental (as defined in Rule 405 under
the Securities Act) nor a broker-dealer tendering Old Subordinated
Notes acquired directly from Continental for its own account;
-- any New Subordinated Notes to be received by it will be acquired in
the ordinary course of its business; and
-- it is not engaged in, and does not intend to engage in, a
distribution of such New Subordinated Notes and has no arrangement or
understanding to participate in a distribution of the New
Subordinated Notes.
If a holder of Old Subordinated Notes is engaged in or intends to engage in
a distribution of the New Subordinated Notes or has any arrangement or
understanding with respect to the distribution of the New Subordinated Notes to
be acquired pursuant to the Exchange Offer, such holder may not rely on the
applicable interpretations of the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each broker-dealer that
receives New Subordinated Notes for its own account pursuant to the Exchange
Offer (a "Participating Broker-Dealer") must acknowledge that it will deliver a
prospectus in connection with any resale of such New Subordinated Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Subordinated Notes
received in exchange for Old Subordinated Notes where such Old Subordinated
Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities. Continental has agreed
that, starting on the Expiration Date and ending on the close of business 180
days after the Expiration Date, it will make this Prospectus available to any
Participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution".
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit Continental to effect the Exchange
Offer, if the Registration Statement is not declared effective within 180
calendar days after the Issuance Date under certain circumstances or the
Exchange Offer is not consummated within 210 days after the Issuance Date under
certain other circumstances, at the request of a holder not eligible to
participate in the Exchange Offer or under certain other circumstances described
in the Registration Rights Agreement, Continental will, in lieu of effecting the
registration of the New Subordinated Notes pursuant to the Registration
Statement and at no cost to the holders of Old Subordinated Notes:
-- as promptly as practicable file with the Commission a shelf
registration statement (the "Shelf Registration Statement") covering
resales of the Old Subordinated Notes;
-- use its best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act by the 180th calendar day
after the Issuance Date; and
-- use its best efforts to keep effective the Shelf Registration
Statement for a period of two years after its effective date (or for
such shorter period as shall end when all of the Old Subordinated
Notes covered by the Shelf Registration Statement have been sold
pursuant thereto or may be freely sold pursuant to Rule 144 under the
Securities Act).
In the event that the declaration of the effectiveness by the Commission of
the Registration Statement or the Shelf Registration Statement (each, a
"Registration Event") does not occur on or prior to the 210th calendar day
following the Issuance Date, the interest rate per annum borne by the
Subordinated Notes shall be increased by 0.50% from and including such 210th day
to but excluding the earlier of (i) the date on which a Registration Event
occurs and (ii) the date on which all of the Subordinated Notes otherwise become
33
transferable by Subordinated Noteholders (other than affiliates or former
affiliates of Continental) without further registration under the Securities
Act. In the event that the Shelf Registration Statement ceases to be effective
at any time during the period specified by the Registration Rights Agreement for
more than 60 days, whether or not consecutive, during any 12-month period, the
interest rate per annum borne by the Subordinated Notes shall be increased by
0.50% from the 61st day of the applicable 12-month period such Shelf
Registration Statement ceases to be effective until such time as the Shelf
Registration Statement again becomes effective (or, if earlier, the end of such
period specified by the Registration Rights Agreement).
Upon consummation of the Exchange Offer, subject to certain exceptions,
holders of Old Subordinated Notes who do not exchange their Old Subordinated
Notes for New Subordinated Notes in the Exchange Offer will no longer be
entitled to registration rights and will not be able to offer or sell their Old
Subordinated Notes, unless such Old Subordinated Notes are subsequently
registered under the Securities Act (which, subject to certain limited
exceptions, the Company will have no obligation to do), except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors--Risk Factors Relating to
the Subordinated Notes and the Exchange Offer--Consequences of Failure to
Exchange".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean [ ], 2003 ([ ]
calendar days following the commencement of the Exchange Offer), unless the
Company, in its sole discretion, extends the Exchange Offer, in which case the
term "Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, Continental will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Subordinated Notes an announcement thereof, each prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time.
Continental reserves the right:
-- to extend the Exchange Offer or to terminate the Exchange Offer and
not permit acceptance of Old Subordinated Notes not previously
accepted if any of the conditions set forth herein under
"--Conditions" shall have occurred and shall not have been waived by
the Company, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent; and
-- to amend the terms of the Exchange Offer in any manner deemed by it
to be advantageous to the holders of the Old Subordinated Notes.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
Exchange Agent. If the Exchange Offer is amended in a manner determined by
Continental to constitute a material change, Continental will promptly disclose
such amendment in a manner reasonably calculated to inform the holders of the
Old Subordinated Notes of such amendment.
Without limiting the manner in which Continental may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, Continental shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE NEW SUBORDINATED NOTES
The New Subordinated Notes will bear interest at the Stated Interest Rate
from the most recent date to which interest has been paid on the Old
Subordinated Notes. Accordingly, registered holders of New Subordinated Notes on
the relevant record date for the first interest payment date following the
completion of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid.
34
Old Subordinated Notes accepted for exchange will cease to accrue interest from
and after the date of completion of the Exchange Offer. Holders of Old
Subordinated Notes whose Old Subordinated Notes are accepted for exchange will
not receive any payment for accrued interest on the Old Subordinated Notes
otherwise payable on any Interest Payment Date the record date for which occurs
on or after completion of the Exchange Offer and will be deemed to have waived
their rights to receive the accrued interest on the Old Subordinated Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof (or, if the Old Subordinated Notes
are tendered in accordance with the procedure for book-entry transfer described
below, an Agent's Message in lieu of the Letter of Transmittal), have the
signatures thereon guaranteed if required by the Letter of Transmittal and mail
or otherwise deliver such Letter of Transmittal or such facsimile or have the
Agent's Message delivered, together with any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
In addition, either
-- certificates for such Old Subordinated Notes must be received by the
Exchange Agent along with the Letter of Transmittal;
-- a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Subordinated Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust
Company ("DTC") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date; or
-- the holder must comply with the guaranteed delivery procedures
described below.
The method of delivery of Old Subordinated Notes, Letters of Transmittal
and all other required documents is at the election and risk of the holders. If
such delivery is by mail, it is recommended that registered mail, properly
insured, with return receipt requested, be used. In all cases, sufficient time
should be allowed to assure timely delivery. No Letters of Transmittal or Old
Subordinated Notes should be sent to Continental. Delivery of all documents must
be made to the Exchange Agent at one of the addresses as set forth below.
Holders may also request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect such tender for such holders.
The tender by a holder of Old Subordinated Notes will constitute an
agreement between such holder and Continental in accordance with the terms and
subject to the conditions set forth in the Prospectus and in the Letter of
Transmittal.
Only a holder of Old Subordinated Notes may tender such Old Subordinated
Notes in the Exchange Offer. The term "holder" with respect to the Exchange
Offer means any person in whose name Old Subordinated Notes are registered on
the books of Continental or any other person who has obtained a properly
completed bond power from the registered holder.
Any beneficial owner, whose Old Subordinated Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender, should contact such registered holder promptly and
instruct such registered holder to tender on such owner's behalf. If such
beneficial owner wishes to tender on such owner's behalf, such beneficial owner
must, prior to completing and executing the Letter of Transmittal and delivering
such owner's Old Subordinated Notes, either make appropriate arrangements to
register ownership of the Old Subordinated Notes in such owner's name or obtain
a properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (each, an
35
"Eligible Institution") unless the Old Subordinated Notes tendered pursuant
thereto are tendered (i) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (ii) for the account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Subordinated Notes listed therein, such Old
Subordinated Notes must be endorsed or accompanied by bond powers and a proxy
which authorizes such person to tender the Old Subordinated Notes on behalf of
the registered holder, in each case as the name of the registered holder or
holders appears on the Old Subordinated Notes.
If the Letter of Transmittal or any Old Subordinated Notes or bond powers
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
Continental, evidence satisfactory to Continental of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Subordinated Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Old Subordinated Notes not properly tendered or any Old Subordinated Notes the
acceptance of which would, in the opinion of counsel for Continental, be
unlawful. Continental also reserves the absolute right to waive any
irregularities or conditions of tender as to particular Old Subordinated Notes.
Continental's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Subordinated Notes must be cured within such time
as Continental shall determine. Neither Continental, the Exchange Agent nor any
other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Subordinated Notes, nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Subordinated Notes will not be deemed to have been made until such
irregularities have been cured or waived. Any Old Subordinated Notes received by
the Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent to the tendering holders of Old Subordinated
Notes (or, in the case of Old Subordinated Notes tendered by the book-entry
transfer procedures described below, such nonexchanged Old Subordinated Notes
will be credited to an account maintained with DTC), unless otherwise provided
in the Letter of Transmittal, promptly following the Expiration Date.
In addition, Continental reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any Old
Subordinated Notes that remain outstanding subsequent to the Expiration Date or,
as set forth under "--Conditions", to terminate the Exchange Offer in accordance
with the terms of the Registration Rights Agreement and (ii) to the extent
permitted by applicable law, purchase Old Subordinated Notes in the open market,
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
ACCEPTANCE OF OLD SUBORDINATED NOTES FOR EXCHANGE; DELIVERY OF NEW SUBORDINATED
NOTES
All Old Subordinated Notes properly tendered will be accepted, and the New
Subordinated Notes will be issued, promptly after the Expiration Date, subject
to satisfaction or waiver of all of the conditions to the Exchange Offer prior
to the Expiration Date. See "--Conditions" below. For purposes of the Exchange
Offer, Old Subordinated Notes shall be deemed to have been accepted for exchange
when, as and if Continental has given oral or written notice thereof to the
Exchange Agent.
In all cases, issuance of New Subordinated Notes for Old Subordinated Notes
that are accepted for exchange pursuant to the Exchange Offer will be made only
after timely receipt by the Exchange Agent of:
-- certificates for such Old Subordinated Notes or a timely Book-Entry
Confirmation of such Old Subordinated Notes into the Exchange Agent's
account at DTC;
36
-- a properly completed and duly executed Letter of Transmittal or an
Agent's Message in lieu thereof; and
-- all other required documents.
If any tendered Old Subordinated Notes are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Old Subordinated
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or nonexchanged Old Subordinated Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Subordinated Notes tendered by the book-entry transfer procedures described
below, such nonexchanged Old Subordinated Notes will be credited to an account
maintained with DTC), unless otherwise provided in the Letter of Transmittal,
promptly following the Expiration Date.
New Subordinated Notes will be initially issued only in the form of Global
Notes registered in the name of a nominee for DTC. Accordingly, interests in New
Subordinated Notes may only be held through DTC Participants or Indirect
Participants. See "Description of the Subordinated Notes--Book Entry; Delivery
and Form."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Subordinated Notes at DTC for purposes of the Exchange Offer within
two business days after the date of this Prospectus. The Exchange Agent has
confirmed that any financial institution that is a participant in DTC's systems
(a "DTC Participant") may use DTC's Automated Tender Offer program ("ATOP")
procedures to tender Old Subordinated Notes in the Exchange Offer. Any DTC
Participant may make book-entry delivery of Old Subordinated Notes by causing
DTC to transfer such Old Subordinated Notes into the Exchange Agent's account at
DTC in accordance with DTC's ATOP procedures for transfer. However, although
delivery of Old Subordinated Notes may be effected through book-entry transfer
into the Exchange Agent's account at DTC, the Letter of Transmittal (or
facsimile thereof) with any required signature guarantees, or an Agent's Message
in lieu of the Letter of Transmittal, and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "--Exchange Agent" on or prior to 5:00 p.m., New
York City time, on the Expiration Date or the guaranteed delivery procedures
described below must be complied with. The term "Agent's Message" means a
message, transmitted by DTC and received by the Exchange Agent and forming part
of a Book-Entry Confirmation, that states that DTC has received an express
acknowledgment from a DTC Participant tendering Old Subordinated Notes that are
the subject of such Book-Entry Confirmation that such DTC Participant has
received and agrees to be bound by the terms of the Letter of Transmittal, and
that Continental may enforce the Letter of Transmittal against such DTC
Participant.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of Old Subordinated Notes desires to tender such Old
Subordinated Notes, and (i) the Old Subordinated Notes are not immediately
available, or (ii) time will not permit such holder's Old Subordinated Notes,
the Letter of Transmittal or any other required documents to reach the Exchange
Agent before the Expiration Date, or (iii) the procedures for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if:
-- the tender is made through an Eligible Institution;
-- prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof or Agent's Message in lieu
thereof) and Notice of Guaranteed Delivery, substantially in the form
provided by Continental (by facsimile transmission, mail or hand
delivery), setting forth the name and address of the holder of Old
Subordinated Notes and the amount of Old Subordinated Notes tendered,
stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for
all physically tendered
37
Old Subordinated Notes in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof or Agent's
Message in lieu thereof) and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and
-- the certificates for all physically tendered Old Subordinated Notes
in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof or Agent's Message in lieu
thereof) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three New York
Stock Exchange trading days after the date of execution of the Notice
of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Subordinated Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date at one of the addresses set forth below under "--Exchange
Agent". Any such notice of withdrawal must specify the name of the person having
tendered the Old Subordinated Notes to be withdrawn, identify the Old
Subordinated Notes to be withdrawn (including the principal amount of such Old
Subordinated Notes) and (where certificates for Old Subordinated Notes have been
transmitted) specify the name in which such Old Subordinated Notes are
registered, if different from that of the withdrawing holder. If certificates
for Old Subordinated Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old
Subordinated Notes have been tendered pursuant to the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn Old Subordinated
Notes and otherwise comply with the procedures of such facility. All questions
as to the validity, form and eligibility (including time of receipt) of such
notices will be determined by Continental, whose determination shall be final
and binding on all parties. Any Old Subordinated Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Subordinated Notes which have been tendered for exchange
but which are not exchanged for any reason will be returned to the holder
thereof without cost to such holder (or, in the case of Old Subordinated Notes
tendered by book-entry transfer into the Exchange Agent's account at DTC
pursuant to the book-entry transfer procedures described above, such Old
Subordinated Notes will be credited to an account maintained with DTC for the
Old Subordinated Notes) as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Old Subordinated
Notes may be retendered by following one of the procedures described under
"--Procedures for Tendering" and "--Book-Entry Transfer" above at any time prior
to 5:00 p.m., New York City time, on the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Old Subordinated
Notes will not be required to be accepted for exchange, nor will New
Subordinated Notes be issued in exchange for, any Old Subordinated Notes, and
Continental may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Old Subordinated Notes, if because of any change in law,
or applicable interpretations thereof by the Commission, Continental determines
that it is not permitted to effect the Exchange Offer, and Continental has no
obligation to, and will not, knowingly, permit acceptance of tenders of Old
Subordinated Notes from affiliates of the Company (within the meaning of Rule
405 under the Securities Act) or from any other holder or holders who are not
eligible to participate in the Exchange Offer under applicable law or
interpretations thereof by the Commission, or if the New Subordinated Notes to
be received by such holder or holders of Old Subordinated Notes in the Exchange
Offer, upon receipt, will not be tradable by such holder without restriction
under the Securities Act and the Exchange Act and without material restrictions
under the "blue sky" or securities laws of substantially all of the states of
the United States.
38
EXCHANGE AGENT
Wilmington Trust Company has been appointed as exchange agent (the
"Exchange Agent") for the Exchange Offer. Questions and requests for assistance
and requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent addressed as follows:
BY MAIL: BY OVERNIGHT DELIVERY OR HAND:
Wilmington Trust Company Wilmington Trust Company
DC-1615 Reorg Services Corporate Trust Reorg Services
PO Box 8861 1100 North Market Street
Wilmington, Delaware 19899-8861 Wilmington, Delaware 19890-1615
FACSIMILE TRANSMISSION:
(302) 636-4145
CONFIRM BY TELEPHONE:
(302) 636-6472
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Continental. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telephone, telecopy, electronic mail or in person by officers and
regular employees of Continental.
Continental will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. Continental, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. Continental may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Subordinated Notes, and in handling or forwarding tenders for
exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by Continental, including fees and expenses of the Exchange Agent and the
Trustee and accounting, legal, printing and related fees and expenses.
Continental will pay all transfer taxes, if any, applicable to the exchange
of Old Subordinated Notes pursuant to the Exchange Offer. If, however,
certificates representing New Subordinated Notes or Old Subordinated Notes for
principal amounts not tendered or accepted for exchange are to be delivered to,
or are to be registered or issued in the name of, any person other than the
registered holder of the Old Subordinated Notes tendered, or if tendered Old
Subordinated Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Subordinated Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
39
DESCRIPTION OF THE SUBORDINATED NOTES
The following summary describes the material terms of the Subordinated
Notes. The summary does not purport to be complete. We urge you to read the
Subordinated Notes, the Indenture, the Security Agreement, the Collateral
Maintenance Agreement and the Reference Agency Agreement (collectively, the
"Operative Documents") for additional detail and further information because
they, and not this description, define your rights. Each of the Operative
Documents has been filed as an exhibit to the Registration Statement and is
available as set forth under "Where You Can Find More Information". The
references to Sections in parentheses in the following summary are to the
relevant Sections of the Indenture unless otherwise indicated.
GENERAL
The Old Subordinated Notes were issued by Continental under an Amended and
Restated Indenture (the "Indenture") among Continental, Wilmington Trust
Company, as trustee (the "Trustee"), the Policy Provider and the Liquidity
Provider. The New Subordinated Notes will also be issued by Continental under
the Indenture.
The forms and terms of the New Subordinated Notes are the same in all
material respects as the form and terms of the Old Subordinated Notes, except
that:
-- the New Subordinated Notes will be registered under the Securities
Act;
-- the New Subordinated Notes will not contain restrictions on transfer
or provisions relating to registration rights or interest rate
increases; and
-- the New Subordinated Notes will be available only in book-entry form.
The New Subordinated Notes will be issued only in fully registered form,
without coupons, and will be subject to the provisions described below under
"--Book-Entry; Delivery and Form". The New Subordinated Notes will be issued
only in minimum denominations of $1,000 or integral multiples thereof, except
that one Subordinated Note may be issued in a different denomination. (Section
2A.1(b))
The Subordinated Notes are secured by a lien on the Collateral. The
Subordinated Notes rank junior to the Senior Notes, as well as amounts owed to
the Policy Provider and the Liquidity Provider relating to the Senior Notes.
PAYMENTS OF PRINCIPAL AND INTEREST
Continental originally issued $100,000,000 in aggregate principal amount of
Old Subordinated Notes. As of the date of this Prospectus, $97,000,000 aggregate
principal amount of Old Subordinated Notes are outstanding. Subject to the
provisions of the Indenture, the entire principal amount of the Subordinated
Notes is scheduled to be paid to the Subordinated Noteholders on December 6,
2007 (the "Final Scheduled Payment Date").
Interest accrues on the unpaid principal amount of each Subordinated Note
at the variable rate per annum set forth on the cover page of this Prospectus
(plus, if applicable, 0.50% during the periods specified in the Registration
Rights Agreement) (the "Stated Interest Rate"). Accrued interest will be payable
on March 6, June 6, September 6 and December 6 of each year (each, a "Scheduled
Interest Payment Date") or, if not a Business Day, the next succeeding Business
Day (each date on which interest is due, an "Interest Payment Date"), commencing
on June 6, 2003. Such accrued interest will be paid to holders of record on the
15th day preceding the applicable Scheduled Interest Payment Date. Interest on
the Subordinated Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the Issuance Date. Interest
on the Subordinated Notes is calculated on the basis of the actual number of
days elapsed over a 360-day year and shall accrue with respect to the first but
not the last day of each Interest Period. If any date scheduled for a payment of
principal, interest, Premium, if any, or Break Amount, if any, is not a Business
Day, such payment will be made on the next succeeding Business Day, and interest
shall be added for such additional period. (Section 2A.7)
40
Payments of interest and principal on the Notes will be distributed by the
Trustee on the date scheduled for such payment under the Indenture or, if the
money for purposes of such payment has not been deposited, in whole or in part,
with the Trustee by Continental, the Liquidity Provider or the Policy Provider
on such date, on the next Business Day on which some or all of the money has
been deposited with the Trustee (a "Distribution Date"). However, if some or all
of the money has not been deposited with the Trustee for purposes of making an
interest payment on the Subordinated Notes within five days after the Interest
Payment Date for such payment, Continental is required to fix a special payment
date and special record date for such payment and to give written notice to the
Subordinated Noteholders of such special dates and the amount of defaulted
interest to be paid.
DETERMINATION OF LIBOR
LIBOR ("LIBOR") for the period commencing on and including the Issuance
Date and ending on but excluding the first Interest Payment Date (the "Initial
Interest Period" and an "Interest Period") was determined on the second Business
Day preceding the Issuance Date as the rate for deposits in U.S. dollars for a
period of three months that appeared on the display designated as page "3750" on
the Telerate Monitor.
For the purpose of calculating LIBOR for the periods from and including an
Interest Payment Date to but excluding the next succeeding Interest Payment Date
(each, also an "Interest Period"), Continental and the Trustee have entered into
a Reference Agency Agreement (as amended, the "Reference Agency Agreement") with
Wilmington Trust Company, as reference agent (the "Reference Agent"). The
Reference Agent will determine LIBOR for each Interest Period following the
Initial Interest Period, on a date (the "Reference Date") that is two London
banking days (meaning days on which commercial banks are open for general
business in London, England) before the Interest Payment Date on which such
Interest Period commences.
On each Reference Date, the Reference Agent will determine LIBOR as the
rate for deposits in U.S. dollars for a period of three months that appears on
the display designated as page "3750" on the Telerate Monitor (or such other
page or service as may replace it) as of 11:00 a.m., London time.
If the rate determined as described in the foregoing paragraph does not
appear on the Telerate Page 3750, the Reference Agent will determine LIBOR on
the basis of the rates at which deposits in U.S. Dollars are offered by certain
reference banks as described in the Reference Agency Agreement at approximately
11:00 a.m., London time, on the Reference Date for such Interest Period to prime
banks in the London interbank market for a period of three months commencing on
the first day of such Interest Period and in an amount that is representative
for a single transaction in the London interbank market at the relevant time.
The Reference Agent will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that Interest Period will be the
arithmetic mean of the quotations. If fewer than two quotations are provided,
the interest rate for the next Interest Period shall be the arithmetic mean of
the rates quoted by major banks in New York City, selected by the Reference
Agent in good faith and in a commercially reasonable manner, at approximately
11:00 a.m., New York City time, on the first day of such Interest Period for
loans in U.S. Dollars to leading European banks for a period of three months
commencing on the first day of such Interest Period and in an amount that is
representative for a single transaction in the New York market at the relevant
time, except that, if the banks so selected by the Reference Agent are not
quoting as mentioned above, LIBOR shall be the floating rate of interest in
effect for the last preceding Interest Period.
The Reference Agent's determination of LIBOR (in the absence of negligence,
willful default, bad faith or manifest error) will be conclusive and binding
upon all parties.
As promptly as is practicable after the determination thereof, the
Reference Agent will give notice of its determination of LIBOR for the relevant
Interest Period to Continental and the Trustee. Holders of the Subordinated
Notes (the "Subordinated Noteholders" and, together with the Senior Noteholders,
the "Noteholders") may obtain such information from the Trustee.
41
Continental reserves the right to terminate the appointment of the
Reference Agent at any time on 30 days' notice and to appoint a replacement
reference agent in its place. Notice of any such termination will be given to
the Noteholders. The Reference Agent may not be removed or resign its duties
without a successor having been appointed.
BREAK AMOUNT
"Break Amount" means, as of any date of payment, redemption or acceleration
of any Note (the "Applicable Date"), an amount determined by the Reference Agent
on the date that is two Business Days prior to the Applicable Date pursuant to
the formula set forth below.
The Break Amount with respect to any Note will be calculated as follows:
Break Amount = Z - Y
Where:
X = with respect to any applicable Interest Period, the sum of (i) the
amount of the outstanding principal amount of such Note as of the
first day of the then applicable Interest Period plus (ii) interest
payable thereon during such entire Interest Period at then effective
LIBOR.
Y = X, discounted to present value from the last day of the then
applicable Interest Period to the Applicable Date, using then
effective LIBOR as the discount rate.
Z = X, discounted to present value from the last day of the then
applicable Interest Period to the Applicable Date, using a rate
equal to the applicable London interbank offered rate for a period
commencing on the Applicable Date and ending on the last day of the
then applicable Interest Period, determined by the Reference Agent
as of two Business Days prior to the Applicable Date as the discount
rate.
No Break Amount will be payable (x) if the Break Amount, as calculated
pursuant to the formula set forth above, is equal to or less than zero or (y) on
or in respect of any Applicable Date that is an Interest Payment Date.
REDEMPTION
The Subordinated Notes may not be redeemed by the Company prior to May 9,
2004. The Subordinated Notes may be redeemed at any time on or after May 9,
2004, in whole or (so long as no Payment Default has occurred and is continuing)
in part (in any integral multiple of $1,000) by the Company at its sole option
at a redemption price equal to the sum of 100% of the principal amount of,
accrued and unpaid interest on, and Break Amount, if any, with respect to, the
redeemed Subordinated Notes to and including the date of redemption. In
addition, if a Subordinated Note is redeemed before the fourth anniversary of
the Issuance Date (except in connection with a redemption to satisfy the maximum
Collateral Ratio or minimum Rotable Ratio requirements discussed under
"--Collateral--Appraisals and Maintenance of Ratios"), such redemption price
will include a premium (the "Premium") equal to the following percentage of the
principal amount of such Subordinated Note: (i) if redeemed before the second
anniversary of the Issuance Date, 3.00%; (ii) if redeemed on or after such
second anniversary and before the third anniversary of the Issuance Date, 2.00%;
and (iii) if redeemed on or after such third anniversary and before the fourth
anniversary of the Issuance Date, 1.00%. Notwithstanding the foregoing, so long
as the Policy Provider is the Controlling Party, no such redemption may be made
if an Event of Default has occurred and is continuing or if the Senior
Collateral Ratio or Senior Rotable Ratio is not then satisfied (after giving
effect to any concurrent redemption of the Senior Notes), unless the Policy
Provider shall otherwise agree. (Section 4.1)
At least 15 days but not more than 60 days before any redemption date, the
Trustee will send a notice of redemption to each Subordinated Noteholder whose
Subordinated Notes are to be redeemed, identifying the Subordinated Notes and
the principal amount thereof to be redeemed. If less than all of the
Subordinated Notes are to be redeemed, the Trustee will select the Subordinated
Notes to be redeemed on either a pro rata basis or by lot or by any other
equitable manner determined by the Trustee in its sole discretion. On the
42
redemption date, interest will cease to accrue on the Subordinated Notes or
portions thereof called for redemption, unless Continental fails to make the
redemption payment for such Subordinated Notes. (Sections 4.3, 4.4 and 4.5)
If the Trustee gives notice of redemption but Continental fails to pay when
due all amounts necessary to effect such redemption, such redemption shall be
deemed revoked and no amount shall be due as a result of notice of redemption
having been given.
COLLATERAL
The Subordinated Notes are secured by a lien on spare parts (including
appliances) first placed in service after October 22, 1994, and owned by
Continental that are appropriate for installation on or use in
-- one or more of the following aircraft models: Boeing model 737-700,
737-800, 737-900, 757-200, 757-300, 767-200, 767-400 or 777-200
aircraft,
-- any engine utilized on any such aircraft or
-- any other Qualified Spare Part,
and not appropriate for installation on or use in any other model of aircraft
currently operated by Continental or engine utilized on any such other model of
aircraft ("Qualified Spare Parts"), together with certain records relating to
such spare parts, certain rights of Continental with respect to such spare parts
and certain proceeds of the foregoing (collectively, the "Collateral"). The
Senior Notes are also secured by a lien on the Collateral. The lien will not
apply for as long as a spare part is installed on or being used in any aircraft,
engine or other spare part so installed or being used. In addition, the lien
will not apply if a spare part is not located at a Designated Location.
(Security Agreement, Section 2.01) Spare engines are not included in the
Collateral.
On the Senior Notes Issuance Date, Continental entered into a Security
Agreement (as amended, the "Security Agreement" and, together with any other
agreement under which Continental may grant a lien for the benefit of the
Noteholders, the "Collateral Agreements") with the Trustee, acting as security
agent (the "Security Agent" and, together with any collateral agent under any
other Collateral Agreement, the "Collateral Agents"), providing for the grant of
the lien on the Collateral. In addition, on the Senior Notes Issuance Date,
Continental entered into a Collateral Maintenance Agreement (as amended, the
"Collateral Maintenance Agreement") with the Policy Provider, providing for
appraisal reports and certain other requirements with respect to the Collateral.
The following summarizes certain provisions of the Security Agreement and
Collateral Maintenance Agreement, as such agreements were amended on the
Issuance Date in connection with the issuance of the Subordinated Notes,
relating to the spare parts included in the Collateral (the "Pledged Spare
Parts").
APPRAISALS AND MAINTENANCE OF RATIOS
Continental is required to furnish to the Policy Provider and the Trustee
by the fifth Business Day of February and the fifth Business Day of August in
each year, commencing in August 2003, so long as the Notes of any series are
outstanding, a certificate of an independent appraiser. Such certificates are
required to state such appraiser's opinion of the fair market value of the
Collateral and of the Rotables included in the Collateral, determined on the
basis of a hypothetical sale negotiated in an arm's length free market
transaction between a willing and able seller and a willing and able buyer,
neither of whom is under undue pressure to complete the transaction, under then
current market conditions (the "Fair Market Value"). This appraisal will not
apply to any cash or permitted investment securities (the "Cash Collateral")
then held as collateral for the Notes, and such securities will be valued by the
Trustee in accordance with customary financial market practices. Such valuations
will then be used to calculate the following:
-- the "Senior Collateral Ratio" applicable to the Senior Notes, which
shall mean a percentage determined by dividing (i) the aggregate
principal amount of the outstanding Senior Notes minus the sum of the
Cash Collateral held by the Collateral Agent by (ii) the Fair Market
Value of all Collateral (excluding any Cash Collateral) as set forth
in such independent appraiser's certificate;
43
-- the "Subordinated Collateral Ratio" applicable to the Subordinated
Notes, which shall mean a percentage determined by dividing (i) the
aggregate principal amount of the outstanding Senior Notes and
Subordinated Notes minus the sum of the Cash Collateral held by the
Collateral Agent by (ii) the Fair Market Value of all Collateral
(excluding any Cash Collateral) as set forth in such independent
appraiser's certificate;
-- the "Senior Rotable Ratio" applicable to the Senior Notes, which
shall mean a percentage determined by dividing (i) the Fair Market
Value of the Rotables as set forth in such independent appraiser's
certificate by (ii) the aggregate principal amount of all outstanding
Senior Notes minus the sum of the Cash Collateral held by the
Collateral Agent; and
-- the "Subordinated Rotable Ratio" applicable to the Subordinated
Notes, which shall mean a percentage determined by dividing (i) the
Fair Market Value of the Rotables as set forth in such independent
appraiser's certificate by (ii) the aggregate principal amount of all
outstanding Senior Notes and Subordinated Notes minus the sum of the
Cash Collateral held by the Collateral Agent.
The calculation of the Senior Collateral Ratio, the Subordinated Collateral
Ratio (together, the "Collateral Ratios"), the Senior Rotable Ratio and the
Subordinated Rotable Ratio (together, the "Rotable Ratios") will be set forth in
a certificate of Continental. (Collateral Maintenance Agreement, Article 2)
If the Senior Collateral Ratio as so determined is greater than 45.0% or
the Subordinated Collateral Ratio as so determined is greater than 67.5%,
Continental will be required, within 90 days after the date of Continental's
certificate calculating such Collateral Ratios, to:
-- subject additional Qualified Spare Parts to the lien of the Security
Agreement;
-- grant a security interest in other property to secure the Notes for
the benefit of the Noteholders (which thereafter will be included as
"Collateral" for purposes of the Notes), but only if the Policy
Provider agrees and Continental shall have received written
confirmation from each nationally recognized rating agency then
rating the Senior Notes or the Subordinated Notes at Continental's
request (a "Rating Agency") that the use of such additional
collateral and the related agreements to reduce the Collateral Ratios
will not result in a reduction of the rating for the Senior Notes or
the Subordinated Notes below the then current rating for such Notes
(such rating in the case of the Senior Notes determined without
regard to the Policy) or a withdrawal or suspension of the rating of
such Notes;
-- provide additional Cash Collateral to the Security Agent under the
Security Agreement (provided that if Continental's cash, cash
equivalents and certain other marketable securities as of the
applicable determination date was less than $600,000,000, then the
total amount of Cash Collateral may not exceed $20,000,000);
-- deliver Notes to the Trustee for cancellation;
-- redeem some or all of the Notes; or
-- any combination of the foregoing;
such that the Senior Collateral Ratio and the Subordinated Collateral Ratio, as
recalculated giving effect to such action (but otherwise using the information
most recently used to determine such Collateral Ratios), would not be greater
than 45.0% and 67.5%, respectively. (Collateral Maintenance Agreement, Section
3.1(a))
If the Senior Rotable Ratio as so determined is less than 150% or the
Subordinated Rotable Ratio as so determined is less than 100%, Continental will
be required, within 90 days after the date of Continental's certificate
calculating such Rotable Ratios, to:
-- subject additional Rotables to the lien of the Security Agreement;
-- provide additional Cash Collateral to the Security Agent under the
Security Agreement (provided that if Continental's cash, cash
equivalents and certain other marketable securities as of the
applicable
44
determination date was less than $600,000,000, then the total amount of Cash
Collateral may not exceed $20,000,000);
-- deliver Notes to the Trustee for cancellation;
-- redeem some or all of the Notes; or
-- any combination of the foregoing;
such that the Senior Rotable Ratio and the Subordinated Rotable Ratio, as
recalculated giving effect to such action (but otherwise using the information
most recently used to determine such Rotable Ratios), would not be less than
150% and 100%, respectively. (Collateral Maintenance Agreement, Section 3.1(b))
If Continental provides additional Cash Collateral to comply with any such
maximum Collateral Ratio or minimum Rotable Ratio requirement, it must, within
90 days after providing such Cash Collateral, take additional action (other than
providing Cash Collateral) to cause the Collateral Ratios and the Rotable Ratios
(in each case calculated to exclude such Cash Collateral) to comply with the
applicable maximum or minimum percentage. (Collateral Maintenance Agreement,
Section 3.1(e)) If the Senior Collateral Ratio and Subordinated Collateral Ratio
are less than the applicable maximum percentage and the Senior Rotable Ratio and
the Subordinated Rotable Ratio are greater than the applicable minimum
percentage, in each case as most recently determined as described above, and the
Security Agent held Cash Collateral as of the relevant determination date,
Continental may withdraw Cash Collateral in excess of the amount necessary to
comply with such ratios. (Security Agreement, Section 7.03(b))
The appraised value of the Collateral determined as of June 25, 2003, which
is the most recent appraisal obtained by Continental, indicated that the
Collateral Ratios exceeded the applicable maximum percentages. As a result,
Continental acquired and delivered to the Trustee for cancellation $5,500,000 of
Senior Notes and $3,000,000 of Subordinated Notes and deposited Cash Collateral
totalling $23,600,000.
Continental is required to furnish to the Policy Provider and the Trustee,
within ten Business Days after each May 1 and November 1, commencing with May 1,
2003, a report providing certain information regarding the quantity of Pledged
Spare Parts included in the Collateral and compliance with certain requirements
of the Collateral Maintenance Agreement.
FLEET REDUCTION
The Collateral Maintenance Agreement requires that the outstanding
principal amount of Senior Notes and Subordinated Notes be reduced if the total
number of aircraft of any of the four aircraft model groups listed below in
Continental's in-service fleet during any period of 60 consecutive days is less
than the minimum specified below for such group (other than due to restrictions
on operating such aircraft imposed by the FAA or any other U.S. Government
agency):
AIRCRAFT MODEL MINIMUM
-------------- -----------
-- Boeing 737-700, Boeing 737-800 and Boeing 737-900 Aircraft...... 63 Aircraft
-- Boeing 757-200 and Boeing 757-300 Aircraft...................... 23 Aircraft
-- Boeing 767-200 and Boeing 767-400 Aircraft...................... 13 Aircraft
-- Boeing 777-200 Aircraft......................................... 9 Aircraft
If any of the foregoing specified minimums is not so satisfied with respect to
any aircraft model group, then within 90 days after such occurrence, Continental
must redeem Senior Notes or deliver Senior Notes to the Trustee for cancellation
(or a combination thereof) in a percentage of the outstanding principal amount
of Senior Notes determined by dividing the appraised value of the Pledged Spare
Parts that are appropriate for installation on, or use in, only the aircraft of
such model group, or the engines utilized only on such aircraft, by
45
the appraised value of the Collateral. In addition, Continental must redeem
Subordinated Notes or deliver Subordinated Notes to the Trustee for cancellation
(or a combination thereof) in the same percentage of the outstanding principal
amount of Subordinated Notes. (Collateral Maintenance Agreement, Section 3.3)
LIENS
Continental is required to maintain the Pledged Spare Parts free of any
liens, other than the rights of the Trustee, the Noteholders and Continental
arising under the Indenture or the other Operative Documents related thereto,
and other than certain limited liens permitted under such documents, including
but not limited to (i) liens for taxes either not yet due or being contested in
good faith by appropriate proceedings; (ii) materialmen's, mechanics' and other
similar liens arising in the ordinary course of business 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
Security Agent; 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 the Pledged Spare Parts or
the interest of the Security Agent therein or impair the lien of the Security
Agreement. (Collateral Maintenance Agreement, Section 3.4)
MAINTENANCE
Continental is required to maintain the Pledged Spare Parts in good working
order and condition, excluding (i) Pledged Spare Parts that have become worn out
or unfit for use and not reasonably repairable or obsolete, (ii) Pledged Spare
Parts that are not required for Continental's normal operations and (iii)
expendable parts that have been consumed or used in Continental's operations. In
addition, Continental must maintain all records, logs and other materials
required by the FAA or under the Federal Aviation Act to be maintained in
respect of the Pledged Spare Parts. (Collateral Maintenance Agreement, Section
3.5)
USE AND POSSESSION
Continental has the right to deal with the Pledged Spare Parts in any
manner consistent with its ordinary course of business. This includes the right
to install on, or use in, any aircraft, engine or Qualified Spare Part leased to
or owned by Continental any Pledged Spare Part, free from the lien of the
Security Agreement. (Security Agreement Section 4.02(a))
Continental may not sell, lease, transfer or relinquish possession of any
Pledged Spare Part without the prior written consent of the Policy Provider,
except as permitted by the Security Agreement or the Collateral Maintenance
Agreement. So long as no Event of Default has occurred and is continuing,
Continental may sell, transfer or dispose of Pledged Spare Parts free from the
Lien of the Security Agreement. (Security Agreement, Section 4.03(a)) However,
as of any date during the period between the dates of independent appraiser's
certificates delivered pursuant to the Collateral Maintenance Agreement, the
aggregate appraised value of all Pledged Spare Parts (x) previously during such
period sold, transferred or disposed of (with certain exceptions) may not exceed
2% of the appraised value of the Collateral, (y) then subject to leases or loans
may not exceed 2% of the appraised value of the Collateral or (z) previously
during such period moved from a Designated Location to a location that is not a
Designated Location (with certain exceptions) may not exceed 2% of the appraised
value of the Collateral. Such restrictions may be waived by the Policy Provider,
so long as after giving effect to a transaction permitted as a result of such
waiver the Subordinated Collateral Ratio (using the information most recently
used to determine such ratio) would not be greater than 67.5%. (Collateral
Maintenance Agreement, Section 3.2)
Continental may, in the ordinary course of business, transfer possession of
any Pledged Spare Part to the manufacturer thereof or any other organization for
testing, overhaul, repairs, maintenance, alterations or modifications or to any
person for the purpose of transport to any of the foregoing. In addition,
Continental may dismantle any Pledged Spare Part that has become worn out or
obsolete or unfit for use and may sell or
46
dispose of any such Pledged Spare Part or any salvage resulting from such
dismantling, free from the lien of the Security Agreement. Continental also may
subject any Pledged Spare Part to a pooling, exchange, borrowing or maintenance
servicing agreement arrangement customary in the airline industry and entered
into in the ordinary course of business; provided, however, that if
Continental's title to any such Pledged Spare Part shall be divested under any
such agreement or arrangement, such divestiture shall be deemed to be a sale
with respect to such Pledged Spare Part. (Collateral Maintenance Agreement,
Section 3.6(a))
So long as no Event of Default shall have occurred and be continuing,
Continental may enter into a lease with respect to any Pledged Spare Part to any
U.S. air carrier that is not then subject to any bankruptcy, insolvency,
liquidation, reorganization, dissolution or similar proceeding and shall not
have substantially all of its property in the possession of any liquidator,
trustee, receiver or similar person. In the case of any such lease, Continental
will include in such lease appropriate provisions which (i) make such lease
expressly subject and subordinate to all of the terms of the Security Agreement,
including the rights of the Security Agent to avoid such lease in the exercise
of its rights to repossession of the Pledged Spare Parts thereunder; (ii)
require the lessee to comply with the insurance requirements of the Collateral
Maintenance Agreement; and (iii) require that the Pledged Spare Parts subject
thereto be used in accordance with the limitations applicable to Continental's
use, possession and location of such Pledged Spare Parts provided in the
Collateral Maintenance Agreement and the Security Agreement (including, without
limitation, that such Pledged Spare Parts be kept at one or more Designated
Locations). (Collateral Maintenance Agreement, Section 3.6(b))
DESIGNATED LOCATIONS
Continental is required to keep the Pledged Spare Parts at one or more of
the designated locations specified in the Security Agreement or added from time
to time by Continental in accordance with the Security Agreement (the
"Designated Locations"), except as otherwise permitted under the Security
Agreement and Collateral Maintenance Agreement. (Security Agreement, Section
4.02(b)) Continental is entitled to hold Qualified Spare Parts at locations
other than Designated Locations. The lien of the Security Agreement does not
apply to any spare part not located at a Designated Location.
INSURANCE
Continental is required to maintain insurance covering physical damage to
the Pledged Spare Parts. Such insurance must provide for the reimbursement of
Continental's expenditure in repairing or replacing any damaged or destroyed
Pledged Spare Part. If any such Pledged Spare Part is not repaired or replaced,
such insurance must provide for the payment of the amount it would cost to
repair or replace such Pledged Spare Part, on the date of loss, with proper
deduction for obsolescence and physical depreciation. However, after giving
effect to self-insurance permitted as described below, the amounts payable under
such insurance may be less.
All insurance proceeds paid under such policies as a result of the
occurrence of an "Event of Loss" with respect to any Pledged Spare Parts
involving proceeds in excess of $2 million, up to 110% of the outstanding
principal amount of the Notes (the "Debt Balance"), will be paid to the Security
Agent. The entire amount of any insurance proceeds not involving an "Event of
Loss" with respect to any Pledged Spare Parts or involving proceeds of $2
million or less, and the amount of insurance proceeds in excess of the Debt
Balance, will be paid to Continental so long as no Payment Default, Event of
Default or Continental Bankruptcy Event shall be continuing. For these purposes,
"Event of Loss" means, with respect to any Pledge Spare Part, its destruction,
damage beyond repair, damage that results in the receipt of insurance proceeds
on the same basis as destruction or loss of possession by Continental for 90
consecutive days as a result of theft or disappearance. Any such proceeds held
by the Security Agent will be disbursed to Continental to reimburse it for the
purchase of additional Qualified Spare Parts after the occurrence of such Event
of Loss. In addition, such proceeds will be disbursed to Continental to the
extent it would not cause the Collateral Ratios, as subsequently determined, to
exceed the applicable maximum percentages.
Continental is also required to maintain third party liability insurance
with respect to the Pledged Spare Parts, in an amount and scope as it
customarily maintains for equipment similar to the Pledged Spare Parts.
47
Continental may self-insure the risks required to be insured against as
described above in such amounts as shall be consistent with normal industry
practice.
EVENT OF DEFAULT
Each of the following constitutes an "Event of Default" with respect to the
Notes:
-- Failure by Continental to pay (i) principal of, interest on, or
Premium, if any, or Break Amount, if any, with respect to, any Note
when due, and such failure shall remain unremedied for more than ten
Business Days (it being understood that any amount distributed to the
Senior Noteholders in respect of the foregoing from funds provided by
the Policy Provider, the Liquidity Provider or the Cash Collateral
Account shall not be deemed to cure such Default) or (ii) any other
amount payable by it to the Noteholders under the Indenture or any
other Operative Document when due, and such failure shall continue
for more than ten Business Days after Continental has received
written notice from the Trustee of the failure to make such payment
when due (without giving effect to any such notice or grace period, a
"Payment Default").
-- Failure by Continental to observe or perform (or cause to be observed
and performed) in any material respect any other covenant, agreement
or obligation set forth in the Indenture or in any other Operative
Document, and such failure shall continue after notice and specified
cure periods.
-- Any representation or warranty made by Continental in the Indenture
or any Operative Document (a) shall prove to have been untrue or
inaccurate in any material respect as of the date made, (b) such
untrue or inaccurate representation or warranty is material at the
time in question and (c) the same shall remain uncured (to the extent
of the adverse impact of such incorrectness on the Trustee) for more
than 30 days after the date of written notice from the Trustee to
Continental.
-- The occurrence of certain events of bankruptcy, reorganization or
insolvency of Continental (each, a "Continental Bankruptcy Event").
(Section 7.1)
If an event occurs and is continuing which is, or after notice or passage
of time, or both, would be an Event of Default (a "Default") and if such Default
is known to the Trustee, the Trustee shall mail to each Noteholder, the
Liquidity Provider and the Policy Provider a notice of the Default within 90
days after the occurrence thereof except as otherwise permitted by the Trust
Indenture Act of 1939, as amended (the "TIA"). Except in the case of a Default
in payment of principal of, or interest on, or Premium, if any, or Break Amount,
if any, with respect to, any Note, the Trustee may withhold the notice if and so
long as it, in good faith, determines that withholding the notice is in the
interests of the Noteholders. (Section 8.5)
REMEDIES
If an Event of Default (other than a Continental Bankruptcy Event) occurs
and is continuing, the Controlling Party may, by notice to Continental and the
Trustee, and the Trustee shall, upon the request of the Controlling Party,
declare all unpaid principal of, accrued but unpaid interest on, and Premium, if
any, and Break Amount, if any, with respect to, the outstanding Notes and other
amounts otherwise payable under the Indenture, if any, to be due and payable
immediately. If a Continental Bankruptcy Event occurs, such amounts shall be due
and payable without any declaration or other act on the part of the Trustee, the
Controlling Party or any Noteholder. (Section 7.2)
The Controlling Party by notice to the Trustee may rescind an acceleration
and its consequences if (a) all existing Events of Default, other than the
non-payment as to the Notes of the principal, interest, Premium, if any, and
Break Amount, if any, with respect thereto and other amounts otherwise payable
under the Indenture, if any, which have become due solely by such declaration of
acceleration, have been cured or waived, (b) to the extent the payment of such
interest is permitted by law, interest on overdue installments of interest and
on overdue principal which has become due otherwise than by such declaration of
acceleration, has been paid, (c) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction, and (d) all payments
due to the Trustee and any predecessor Trustee have been made. No such
rescission shall affect any subsequent default or impair any right arising from
any subsequent default. (Section 7.2)
48
If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy by proceeding at law or in equity to collect the payment of
principal of, interest on, or Premium, if any, or Break Amount, if any, with
respect to, the Notes or other amounts otherwise payable under the Indenture, if
any, or to enforce the performance of any provision of the Notes or the
Indenture, including instituting proceedings and exercising and enforcing, or
directing exercise and enforcement of, all rights and remedies of the Trustee
and the Collateral Agent under the Operative Documents and directing the
Collateral Agent to deposit with the Trustee all cash or investment securities
held by the Collateral Agent. The Trustee may maintain a proceeding even if it
does not possess any of the Notes or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Noteholder in exercising
any right or remedy accruing upon an Event of Default shall not impair the right
or remedy or constitute a waiver of or acquiescence in the Event of Default. No
remedy is exclusive of any other remedy. All available remedies are cumulative.
(Section 7.3)
The Controlling Party by notice to the Trustee may authorize the Trustee to
waive an existing Default or Event of Default and its consequences, except a
Default or Event of Default (i) in the payment of principal of, interest on, or
Premium, if any, or Break Amount, if any, with respect to, any Note that has not
been paid to the Noteholder from funds provided by the Policy Provider, the
Liquidity Provider or the Cash Collateral Account or (ii) in respect of a
covenant or provision of the Indenture which cannot be modified or amended
without the consent of the Liquidity Provider, the Policy Provider and the
holder of each Note affected. When a Default or Event of Default is waived, it
is cured and ceases, and the Company, the Liquidity Provider, the Policy
Provider, the Noteholders and the Trustee shall be restored to their former
positions and rights hereunder respectively; but no such waiver shall extend to
any subsequent or other Default or Event of Default or impair any right
consequent thereon. (Section 7.4)
No holder of a Note may institute any remedy with respect to the Indenture
or the Notes unless such holder has previously given to the Trustee written
notice of a continuing Event of Default, the holders of 25% or more of the
principal amount of a series of Notes then outstanding have requested that the
Trustee pursue the remedy, such holder has offered the Trustee indemnity against
loss, liability and expense satisfactory to the Trustee, the Trustee has failed
so to act for 60 days after receipt of the same, during such 60-day period the
Controlling Party has not given the Trustee a direction inconsistent with the
request and, in the case of a Subordinated Noteholder, the principal of,
interest on, and Senior Notes Premium, if any, Break Amount, if any, and all
other amounts payable under the Indenture with respect to the Senior Notes have
been paid in full. (Section 7.6) Notwithstanding the foregoing, the right of any
Noteholder to receive payment when due of principal, interest, Premium, if any,
and Break Amount, if any, or to bring suit for the enforcement of any such
payment, shall not be impaired or affected without the consent of such holder.
(Section 7.7)
The Controlling Party may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee (as Trustee or Collateral
Agent, subject, in the case of any actions based on the status of the Trustee as
Collateral Agent, to any limitations otherwise expressly provided for in the
Operative Documents) or exercising any trust or power conferred on it; provided
that the Trustee may take any other action deemed proper by the Trustee which is
not inconsistent with such direction. The Trustee may refuse to follow any
direction or authorization that conflicts with law or the Indenture or that the
Trustee determines may subject the Trustee to personal liability. In addition,
at any time after a Policy Provider Default or after the Senior Notes, the
Policy Expenses and the Policy Provider Obligations have been paid in full, the
Trustee may refuse to follow any direction or authorization that the Trustee
determines may be unduly prejudicial to the rights of another Noteholder.
However, the Trustee shall have no liability for any actions or omissions to act
which are in accordance with any such direction or authorization. (Section 7.5)
The Controlling Party shall not direct the Trustee or any Collateral Agent
to sell or otherwise dispose of any Collateral unless all unpaid principal of,
accrued but unpaid interest on, and Premium, if any, and Break Amount, if any,
with respect to, the outstanding Notes and other amounts otherwise payable under
the Indenture, if any, shall be declared or otherwise become due and payable
immediately. (Section 7.5)
In the case of Chapter 11 bankruptcy proceedings, Section 1110 of the U.S.
Bankruptcy Code ("Section 1110") provides special rights to holders of security
interests with respect to "equipment" (defined as described below). Under
Section 1110, the right of such holders to take possession of such equipment in
49
compliance with the provisions of a security agreement is not affected by any
provision of the U.S. Bankruptcy Code or any power of the bankruptcy court. Such
right to take possession may not be exercised for 60 days following the date of
commencement of the reorganization proceedings. Thereafter, such right to take
possession may be exercised during such proceedings unless, within the 60-day
period or any longer period consented to by the relevant parties (the "Section
1110 Period"), 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.
On the Issuance Date, Hughes Hubbard & Reed LLP, outside counsel to
Continental, provided its opinion to the Trustee and the Policy Provider that
the Security Agent will be entitled to the benefits of Section 1110 with respect
to the Pledged Spare Parts, assuming that, at the time of the issuance,
Continental held 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.
If Continental is the debtor in a Chapter 11 bankruptcy proceeding and:
-- the Section 1110 Period shall expire without Continental having
entered into an agreement to perform its obligations under the
Indenture and the other Operative Documents in accordance with
Section 1110(a),
-- Continental shall have entered into such an agreement in accordance
with Section 1110(a) but thereafter Continental defaults such that
the Security Agent is entitled to take possession of the Pledged
Spare Parts pursuant to the Security Agreement or
-- Continental shall not reinstate its obligations under the Operative
Documents in its confirmed plan of reorganization,
then the Policy Provider, if then the Controlling Party, will not permit (and
will not permit the Trustee or any Collateral Agent to permit) the sale or lease
of any Collateral to Continental or any of its affiliates for any amount less
than the then current fair market value for such transaction. The Policy
Provider, if then the Controlling Party, will give the Subordinated Noteholders
at least 30 days' prior written notice of its intention to sell or lease any of
the Collateral. These restrictions are not applicable to any Controlling Party
other than the Policy Provider.
CONTROLLING PARTY
Whether before or after the occurrence of an Event of Default, the Trustee
and the Security Agent will be directed by the Controlling Party in taking
action under the Indenture and other agreements relating to the Notes, including
in amending such agreements and granting waivers thereunder. However, certain
limited provisions with respect to the Collateral as they relate to the
Subordinated Notes cannot be amended or waived without the consent of the
holders of a majority of the outstanding principal amount of the Subordinated
Notes and certain other limited provisions cannot be amended or waived without
the consent of each Noteholder affected thereby. Except for those limited
provisions which are described in "--Modifications and Waiver of the Indenture
and Certain Other Agreements", the provisions of the Indenture, the Security
Agreement and the other Operative Documents may be amended or waived by the
Controlling Party (or, in the case of the Collateral Maintenance Agreement, the
Policy Provider) without the consent of the Noteholders. If an Event of Default
has occurred and is continuing, the Controlling Party will direct the Trustee
and the Security Agent in exercising remedies under the Indenture and under the
Security Agreement, subject to the limitations described below. (Section 3.8(a))
50
The "Controlling Party" will be:
-- The Policy Provider (except as provided below).
-- If a Policy Provider Default is continuing, the holders of more than
50% in aggregate unpaid principal amount of the Senior Notes then
outstanding or, if the Senior Notes have been paid in full, of the
Subordinated Notes then outstanding.
-- If the Senior Notes, the Policy Expenses and the Policy Provider
Obligations have been paid in full, the holders of more than 50% in
aggregate unpaid principal amount of the Subordinated Notes then
outstanding.
-- Under the circumstances described in the next paragraph, the
Liquidity Provider.
At any time after the Liquidity Provider Reimbursement Date, if a Policy
Provider Default attributable to a failure to make a drawing to pay the
Liquidity Provider, as described under "Description of the Policy for the Senior
Notes--The Policy--Liquidity Provider Drawing", is continuing, the Liquidity
Provider (so long as the Liquidity Provider has not defaulted in its obligation
to make any advance under the Liquidity Facility) shall have the right to become
the Controlling Party, provided that if the Policy Provider subsequently pays to
the Liquidity Provider all outstanding drawings, together with accrued interest
thereon owing under the Liquidity Facility, and no other Policy Provider Default
has occurred and is continuing, then the Policy Provider shall be the
Controlling Party so long as no Policy Provider Default occurs after the date of
such payment. (Section 3.8(c))
The Subordinated Noteholders will have the right to direct the Policy
Provider in acting as the Controlling Party during the continuance of an Event
of Default if the Subordinated Noteholders shall have deposited with the Policy
Provider cash, U.S. government securities or other investments acceptable to the
Policy Provider as collateral for amounts owed to and to become due and payable
to the Policy Provider under the Operative Documents and Support Documents. The
payments of principal and interest when due and without reinvestment on any such
deposited U.S. government securities or other investments plus any deposited
money without investment must, in the opinion of a nationally recognized firm of
independent certified public accountants acceptable to the Policy Provider,
provide cash sufficient to pay: (i) all accrued and unpaid Policy Expenses and
Policy Provider Obligations, (ii) the then outstanding principal amount of the
Senior Notes, (iii) interest accruing and payable on the Senior Notes to the
Final Legal Maturity Date (or, alternatively, the interest calculated at the
rate of interest of 12% per annum for a period of 24 months (or, if shorter, the
period from the date of such deposit to the Final Legal Maturity Date)) and (iv)
the Policy premium payable for a period of 24 months (or, if shorter, the period
from the date of such deposit to the Final Legal Maturity Date). In order to
participate in such deposit, a Subordinated Noteholder must contribute its
proportionate share of the deposit, which will be the proportion that the
principal amount of its Subordinated Notes bears to the principal amount of the
Subordinated Notes of all Subordinated Noteholders participating in such
deposit. A Subordinated Noteholder will not be required to contribute to a
deposit. The Subordinated Noteholders contributing their proportionate shares of
such deposit will be entitled to direct the Policy Provider in taking action as
the Controlling Party during the continuance of such Event of Default by vote of
a majority of the principal amount of the Subordinated Notes held by such
contributing Subordinated Noteholders. If the Policy Provider draws on such
deposit, after the Policy Provider shall have been paid in full all amounts due
to it under the Operative Documents and Support Documents, amounts otherwise
distributable to the Policy Provider under the Indenture will be distributed to
such contributing Subordinated Noteholders in the same proportion as their
respective contributions to the deposit until their proportionate share of the
deposit not returned by the Policy Provider shall have been repaid in full. If
Continental or any of its affiliates is a Subordinated Noteholder, it will not
be entitled to participate in making the foregoing deposit or directing the
Controlling Party. (Section 3.11)
"Policy Provider Default" means the occurrence of any of the following
events: (a) the Policy Provider fails to make a payment required under the
Policy in accordance with its terms and such failure remains unremedied for two
Business Days following the delivery of written notice of such failure to the
Policy Provider or (b) the Policy Provider (i) files any petition or commences
any case or proceeding under any
51
provisions of any federal or state law relating to insolvency, bankruptcy,
rehabilitation, liquidation or reorganization, (ii) makes a general assignment
for the benefit of its creditors or (iii) has an order for relief entered
against it under any federal or state law relating to insolvency, bankruptcy,
rehabilitation, liquidation or reorganization that is final and nonappealable,
or (c) a court of competent jurisdiction, the New York Department of Insurance
or another competent regulatory authority enters a final and nonappealable
order, judgment or decree (i) appointing a custodian, trustee, agent or receiver
for the Policy Provider or for all or any material portion of its property or
(ii) authorizing the taking of possession by a custodian, trustee, agent or
receiver of the Policy Provider (or taking of possession of all or any material
portion of the Policy Provider's property).
PRIORITY OF DISTRIBUTIONS
On each Distribution Date, all payments received by the Trustee in respect
of the Notes will be promptly distributed in the following order:
-- If an Event of Default shall have occurred and be continuing on such
Distribution Date, to the Trustee, the Policy Provider, the Liquidity
Provider and any Senior Noteholder to the extent required to pay
certain out-of-pocket costs and expenses actually incurred by the
Trustee or the Policy Provider or to reimburse the Policy Provider,
the Liquidity Provider or any Senior Noteholder in respect of
payments made to the Trustee in connection with the protection or
realization of the value of the Collateral.
-- To the Liquidity Provider to the extent required to pay the Liquidity
Expenses and to the Policy Provider to pay the Policy Expenses.
-- To the Liquidity Provider to the extent required to pay interest
accrued on the Liquidity Obligations (as determined after giving
effect to certain payments by the Policy Provider to the Liquidity
Provider), to the Policy Provider to the extent required to pay
interest accrued on certain Policy Provider Obligations and, if the
Policy Provider has paid to the Liquidity Provider all outstanding
drawings and interest thereon owing to the Liquidity Provider, to the
Policy Provider to the extent required to reimburse the Policy
Provider for the amount of such payment made to the Liquidity
Provider attributable to interest accrued on such drawings.
-- To (i) the Liquidity Provider to the extent required to pay the
outstanding amount of all Liquidity Obligations (as determined after
giving effect to certain payments by the Policy Provider to the
Liquidity Provider), (ii) if applicable, unless (x) on such
Distribution Date the Senior Notes are Non-Performing and a Liquidity
Event of Default shall have occurred and be continuing or (y) the
Final Drawing shall have occurred, to replenish the Cash Collateral
Account up to the Required Amount (less the amount of any repayments
of Interest Drawings under the Liquidity Facility while sub-clause
(x) of this clause is applicable) and (iii) if the Policy Provider
has paid to the Liquidity Provider all outstanding drawings and
interest thereon owing to the Liquidity Provider, to the Policy
Provider to the extent required to reimburse the Policy Provider for
the amount of such payment made to the Liquidity Provider in respect
of principal of drawings under the Liquidity Facility.
-- If an Event of Default shall have occurred and be continuing on such
Distribution Date and at all times thereafter, to the Trustee or any
Senior Noteholder, to the extent required to pay certain fees, taxes,
charges and other amounts payable.
-- To the Senior Noteholders to the extent required to pay in full
amounts due on such Distribution Date.
-- To the Policy Provider to the extent required to pay Policy Provider
Obligations (other than amounts payable pursuant to the first four
clauses above).
-- To the Subordinated Noteholders to the extent required to pay in full
amounts due on such Distribution Date.
52
-- To the Trustee for the payment of certain fees and expenses (other
than amounts payable pursuant to the first and fifth clauses above).
-- To the Company (unless on such Distribution Date (i) an Event of
Default has occurred and is continuing or (ii) any amount due to the
Liquidity Provider or the Policy Provider from the Company has not
been paid). (Section 3.2)
"Liquidity Obligations" means the obligations to reimburse or to pay the
Liquidity Provider all principal, interest, fees and other amounts owing to it
under the Liquidity Facility or certain other agreements.
"Liquidity Expenses" means the Liquidity Obligations other than any
interest accrued thereon or the principal amount of any drawing under the
Liquidity Facility.
"Non-Performing" means, with respect to any Senior Note, a Payment Default
existing thereunder (without giving effect to any acceleration); provided, that,
in the event of a bankruptcy proceeding under the U.S. Bankruptcy Code in which
the Company is a debtor, any Payment Default existing at the commencement of
such bankruptcy proceeding or 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.
"Policy Provider Obligations" means all reimbursement and other amounts,
including fees and indemnities (to the extent not included in Policy Expenses)
due to the Policy Provider under the Policy Provider Agreement and, if the
Liquidity Provider has failed to honor any Interest Drawing, interest on any
Policy Drawing made to cover the shortfall attributable to such failure by the
Liquidity Provider in an amount equal to the amount of interest that would have
accrued on such Interest Drawing if such Interest Drawing had been made at the
interest rate applicable to such Interest Drawing until such Policy Drawing has
been repaid in full. Except as provided in the definition of Policy Provider
Obligations, no interest will accrue on any Policy Drawing.
"Policy Expenses" means all amounts (including amounts in respect of
premiums, fees, expenses or indemnities) owing to the Policy Provider under the
Policy Provider Agreement other than (i) any Policy Drawing, (ii) any interest
accrued on any Policy Provider Obligation and (iii) reimbursement of and
interest on the Liquidity Obligations in respect of the Liquidity Facility paid
by the Policy Provider to the Liquidity Provider, provided that if, at the time
of determination, a Policy Provider Default exists, Policy Expenses will not
include any indemnity payments owed to the Policy Provider.
"Policy Drawing" means any payment of a claim under the Policy.
Interest Drawings under the Liquidity Facility, withdrawals from the Cash
Collateral Account and drawings under the Policy will be distributed to the
Trustee for distribution to the Senior Noteholders, notwithstanding the priority
of distributions set forth in the Indenture and otherwise described herein. All
amounts on deposit in the Cash Collateral Account that are in excess of the
Required Amount will be paid to the Liquidity Provider.
If any Distribution Date is a Saturday, Sunday or other day on which
commercial banks are authorized or required to close in New York, New York,
Houston, Texas, or Wilmington, Delaware, or, which is not a day for trading by
and between banks in the London interbank Eurodollar market (any other day being
a "Business Day"), distributions scheduled to be made on such Distribution Date
will be made on the next succeeding Business Day, and interest shall be added
for such additional period.
53
MODIFICATIONS AND WAIVER OF THE INDENTURE AND CERTAIN OTHER AGREEMENTS
The Company, the Trustee and the Collateral Agent may amend or supplement
the Indenture, the Notes, the other Operative Documents and, upon request of
Continental, the Trustee shall amend or supplement the Support Documents, in
each case without the consent of the Noteholders:
-- To provide for uncertificated Notes of any series in addition to or
in place of certificated Notes of such series.
-- To provide for the assumption of the Company's obligations under the
Operative Documents and the Notes in the case of a merger,
consolidation or conveyance, transfer or lease of all or
substantially all of the assets of the Company.
-- To comply with any requirements of the Commission in connection with
the qualification of the Indenture under the TIA.
-- To provide for a replacement Liquidity Provider.
-- To provide for the effectiveness of any additional Collateral
Agreement.
-- To comply with the requirements of DTC, Euroclear Bank or Clearstream
Banking or the Trustee with respect to the provisions of the
Indenture or the Notes of any series relating to transfers and
exchanges of the Notes of any series or beneficial interests therein.
-- To provide for any successor Trustee or Collateral Agent with respect
to the Notes of one or more series and to add to or change any of the
provisions of the Indenture as shall be necessary or advisable to
provide for or facilitate the administration of the trusts under the
Indenture by more than one Trustee.
-- To cure any ambiguity, defect or inconsistency.
-- To make any other change not inconsistent with the Indenture provided
that such action does not materially adversely affect the interests
of any Noteholder. (Section 10.1)
The Company, the Trustee and the Collateral Agent may otherwise amend or
supplement the Indenture, the Notes and the other Operative Documents (other
than the Collateral Maintenance Agreement), and, upon consent of the Company,
the Trustee shall amend or supplement the Support Documents, in each case only
with the written consent of the Controlling Party, subject to certain limited
exceptions. Except for those limited provisions described in this section under
the caption "--Modifications and Waiver of the Indenture and Certain Other
Agreements", the provisions of the Indenture, the Security Agreement and the
Operative Documents may be amended or waived by the Controlling Party (or, in
the case of the Collateral Maintenance Agreement, the Policy Provider) without
the consent of the Noteholders. Whether before or after the occurrence of an
Event of Default, the Controlling Party may authorize the Trustee to, and the
Trustee upon such authorization shall, waive compliance by the Company with any
provision of the Indenture, the Notes or the other Operative Documents (other
than the Collateral Maintenance Agreement). However, no such amendment,
supplement or waiver may, without the consent of the Liquidity Provider, the
Policy Provider and each Senior Noteholder affected:
-- Reduce the amount of Senior Notes whose holders must consent to an
amendment, supplement or waiver.
-- Reduce the rate or extend the time for payment of interest on any
Senior Note.
-- Reduce the amount or extend the time for payment of principal of, or
Premium, if any, or Break Amount, if any, with respect to (in each
case, whether on redemption or otherwise), any Senior Note.
-- Change the place of payment where, or the coin or currency in which,
any Senior Note (or the redemption price thereof), interest thereon,
or Premium, if any, or Break Amount, if any, with respect thereto, is
payable.
-- Change the priority of distributions and application of payments
specified in the Indenture.
54
-- Waive a default in the payment of the principal of, interest on, or
Premium, if any, or Break Amount, if any, with respect to, any Senior
Note.
-- Make any changes to provisions in the Indenture that involve the
waiver of defaults, the right of Senior Noteholders to receive
payment of principal of, interest on, and Premium, if any, and Break
Amount, if any, with respect to, any Senior Note on or after the
respective due dates.
-- Impair the right of any Senior Noteholder to institute suit for the
enforcement of any amount payable on any Senior Note when due.
(Section 10.2)
In addition, no such amendment, supplement or waiver may, without the
consent of each Subordinated Noteholder affected:
-- Reduce the amount of Subordinated Notes whose holders must consent to
an amendment, supplement or waiver.
-- Reduce the rate or extend the time for payment of interest on any
Subordinated Note.
-- Reduce the amount or extend the time for payment of principal of, or
Premium, if any, or Break Amount, if any, with respect to (in each
case, whether on redemption or otherwise), any Subordinated Note.
-- Change the definitions of "Maximum Subordinated Collateral Ratio" or
"Subordinated Collateral Ratio".
-- Increase the principal amount of, or the rate of interest on, the
Senior Notes.
-- Change the place of payment where, or the coin or currency in which,
any Senior Note or Subordinated Note (or the redemption price
thereof), interest thereon, or Premium, if any, or Break Amount, if
any, with respect thereto, is payable.
-- Change the priority of distributions and application of payments
specified in the Indenture.
-- Waive a default in the payment of the principal of, interest on, or
Premium, if any, or Break Amount, if any, with respect to, any
Subordinated Note.
-- Make any changes to provisions in the Indenture that involve the
waiver of defaults, the right of Noteholders to receive payment of
principal of, interest on, and Premium, if any, and Break Amount, if
any, with respect to, any Subordinated Note on or after the
respective due dates.
-- Impair the right of any Subordinated Noteholder to institute suit for
the enforcement of any amount payable on any Subordinated Note when
due. (Section 10.2)
The provisions of the Indenture for determining who will be the Controlling
Party, the definition of "Event of Default" and the covenant described in the
last paragraph under "--Remedies" cannot be amended without the consent of the
holders of a majority in principal amount of the Subordinated Notes. In
addition, an amendment of any defined term used in the definitions of "Maximum
Subordinated Collateral Ratio" or "Subordinated Collateral Ratio" or in any such
defined term will not be effective for purposes of such definitions unless
consented to by the holders of a majority in principal amount of the
Subordinated Notes. The requirement that the Subordinated Noteholders consent to
an amendment to the definition of "Event of Default" does not affect the right
of the Controlling Party to waive an Event of Default. See "--Remedies".
The Company and the Policy Provider can amend, modify or waive compliance
with any provision of the Collateral Maintenance Agreement (including the
provisions described under "--Collateral--Appraisals and Maintenance of Ratios",
"--Collateral--Fleet Reduction", "--Collateral--Liens",
"--Collateral--Maintenance", "--Collateral--Insurance" and "--Collateral--Use
and Possession") without the consent of the Trustee, the Collateral Agent or any
Noteholders, except for certain limited provisions. However, the Company and the
Trustee, with the consent of the holders of a majority in principal amount of
55
the Subordinated Notes and without the consent of the Policy Provider, can
amend, modify or waive compliance with the following requirements of the
Collateral Maintenance Agreement:
-- that appraisals of the Collateral be obtained for purposes of
determining the maximum Subordinated Collateral Ratio by the fifth
Business Day of February and the fifth Business Day of August in each
year, commencing in August 2003 (see "--Collateral--Appraisals and
Maintenance of Ratios");
-- that the maximum Subordinated Collateral Ratio be complied with in
connection with such appraisals (see "--Collateral--Appraisals and
Maintenance of Ratios");
-- that the outstanding principal amount of the Subordinated Notes be
reduced if there is a fleet reduction (see "--Collateral--Fleet
Reduction"); or
-- that the maximum Subordinated Collateral Ratio be complied with upon
effecting a transaction permitted as a result of the waiver by the
Policy Provider of certain restrictions on selling, leasing and
moving Pledged Spare Parts (see "--Collateral--Use and Possession").
However, the methods for determining the Fair Market Value of the Collateral,
the qualifications of the appraiser, the limitations on Cash Collateral and
other provisions of the Collateral Maintenance Agreement applicable to both the
Senior Notes and the Subordinated Notes may be amended or modified by agreement
of the Company and the Policy Provider without the consent of Subordinated
Noteholders.
In determining whether the holders of the required principal amount of
Senior Notes or Subordinated Notes have consented to an amendment, modification
or waiver, any such Senior Notes or Subordinated Notes owned by Continental or
any of its affiliates will be disregarded and deemed not outstanding. (Section
2.13)
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Continental is prohibited from consolidating with, merging into, or
conveying, transferring or leasing substantially all of its assets to any person
unless:
-- The resulting, surviving, transferee or lessee person shall be
organized under the laws of the United States, any state thereof or
the District of Columbia and shall be a U.S. air carrier.
-- The resulting, surviving, transferee or lessee person shall expressly
assume all of the obligations of Continental contained in the
Indenture, the Notes and any other Operative Documents.
-- Continental shall have delivered a certificate and an opinion of
counsel stating that (i) such transaction, in effect, complies with
such conditions and (ii) the Indenture, the Notes and the other
Operative Documents constitute the valid and legally binding
obligations of the resulting, surviving, transferee or lessee person.
-- Immediately after giving effect to such transaction, no Event of
Default shall have occurred and be continuing. (Section 5.4)
The Indenture, the Notes and the other Operative Documents do not contain
any covenants or provisions which may afford the Trustee or Noteholders
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.
INDEMNIFICATION
Continental is required to indemnify the Liquidity Provider, the Policy
Provider, the Trustee and the Collateral Agent, but not the Noteholders, for
certain losses, claims and other matters. (Section 6.1)
56
GOVERNING LAW
The Indenture and the Notes are governed by the laws of the State of New
York. (Section 12.8)
THE TRUSTEE
The Trustee is Wilmington Trust Company. Except as otherwise provided in
the Indenture, the Trustee, in its individual capacity, will not be answerable
or accountable under the Indenture or under the Notes under any circumstances
except, among other things, for its own willful misconduct or gross negligence.
Continental and its affiliates may from time to time enter into banking and
trustee relationships with the Trustee and its affiliates. The Trustee's 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
GENERAL
The New Subordinated Notes will be represented by one or more global Notes,
in definitive, fully registered form without interest coupons (the "Global
Notes"). Each Global Note will be deposited with the Trustee, as custodian for
DTC, and registered in the name of Cede & Co. ("Cede"), as nominee for DTC.
DTC has advised Continental as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for DTC Participants and facilitate the clearance and settlement of
securities transactions between DTC Participants through electronic book-entry
changes in accounts of DTC Participants, thereby eliminating the need for
physical movement of certificates. DTC Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations. DTC is owned by a number of DTC Participants and by the New York
Stock Exchange, Inc., the American Stock Exchange LLC, and the National
Association of Securities Dealers, Inc. 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 DTC Participant,
either directly or indirectly ("Indirect Participants").
Ownership of beneficial interests in Global Notes is limited to persons who
have accounts with DTC Participants or persons who hold interests through DTC
Participants. Ownership of beneficial interests in the Global Notes is shown on,
and the transfer of that ownership is effected only through, records maintained
by DTC or its nominee (with respect to interests of DTC Participants) and the
records of DTC Participants (with respect to interests of persons other than DTC
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities. Such limits and such laws
may limit the market for beneficial interests in the Global Notes.
So long as DTC or its nominee is the registered owner or holder of the
Global Notes, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the Subordinated Notes represented by such Global
Notes for all purposes under the Indenture. No beneficial owners of an interest
in the Global Notes will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture.
Beneficial interests in the Global Notes will be exchangeable or
transferable, as the case may be, for Subordinated Notes in definitive, fully
registered form ("Definitive Notes") only if (i) DTC notifies the Trustee that
DTC is unwilling or unable to continue as depositary for such Subordinated Notes
and successor depositary is not appointed by the Trustee within 90 days of such
notice or (ii) after the occurrence and during the continuance of an Event of
Default, owners of beneficial interests in the Global Notes (the "Note Owners")
with a principal amount aggregating not less than a majority of the outstanding
principal amount of the Global Notes advise the Trustee, Continental and DTC
through Direct Participants in writing that the continuation of a book-entry
system through DTC (or a successor thereto) is no longer in their best
interests.
57
(Section 2A.5(b)) Upon the occurrence of any event described in clauses (i) or
(ii) of the immediately preceding sentence, the Trustee will be required to
notify all Direct Participants having a beneficial interest in the Global Notes
of the availability of Definitive Notes. Upon surrender by DTC of the Global
Notes and receipt of instructions for re-registration, the Trustee will reissue
the Subordinated Notes as Definitive Notes to Note Owners. (Section 2A.5(d))
Payments of the principal of, interest on, Premium, if any, and Break
Amount, if any, with respect to, the Global Notes will be made to DTC or its
nominee, as the case may be, as the registered owner thereof. Neither
Continental, the Trustee, nor any paying agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Continental expects that DTC or its nominee, upon receipt of any payment of
principal of, interest on, Premium, if any, and Break Amount, if any, with
respect to, a Global Note, will credit the accounts of DTC Participants with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Note, as shown on the records of DTC or its
nominee. Continental also expects that payments by DTC Participants to owners of
beneficial interests in such Global Note held through such DTC Participants will
be governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
DTC Participants.
Distributions of principal of, interest on, and Premium, if any, and Break
Amount, if any, with respect to, Definitive Notes will be made by the Trustee
directly in accordance with the procedures set forth in the Indenture, to
holders in whose names the Definitive Notes were registered at the close of
business on the applicable record date. Such distributions will be made by check
mailed to the address of such holder as it appears on the register maintained by
the Trustee. The final payment on any Subordinated Note, however, will be made
only upon presentation and surrender of such Subordinated Note at the office or
agency specified in the notice of final distribution to Subordinated
Noteholders.
Neither Continental nor the Trustee has any responsibility for the
performance by DTC, DTC Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
SAME-DAY SETTLEMENT AND PAYMENT
As long as the Subordinated Notes are registered in the name of DTC or its
nominee, Continental will make all payments to the Trustee under the Indenture
in immediately available funds. The Trustee will pass through to DTC in
immediately available funds all payments received from Continental, including
the final distribution of principal with respect to the Subordinated Notes.
Any Subordinated Notes 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 Subordinated Notes to settle in
immediately available funds. Continental cannot give any assurance as to the
effect, if any, of settlement in same-day funds on trading activity in the
Subordinated Notes.
58
DESCRIPTION OF THE SENIOR NOTES
The following summary describes terms of the Senior Notes that are material
to a holder of Subordinated Notes. The summary does not purport to be complete.
We urge you to read the Senior Notes and the Operative Documents for additional
detail and further information because they, and not this description, define
your rights. Each of the Operative Documents has been filed as an exhibit to the
Registration Statement and is available as set forth under "Where You Can Find
More Information". The references to Sections in parentheses in the following
summary are to the relevant Sections of the Indenture.
GENERAL
On December 6, 2002 (the "Senior Notes Issuance Date"), Continental issued
the Senior Notes under the Indenture. The Senior Notes are secured by a lien on
the Collateral. The Senior Notes, as well as amounts owed to the Policy Provider
and the Liquidity Provider relating to the Senior Notes, rank senior to the
Subordinated Notes.
On the Senior Notes Issuance Date, the Trustee, for the benefit of the
Senior Noteholders, entered into the Liquidity Facility, the fee letter with
respect thereto, the Policy and the Policy Provider Agreement (collectively, the
"Support Documents"). (Section 3.10)
PAYMENTS OF PRINCIPAL AND INTEREST
Continental originally issued $200,000,000 in aggregate principal amount of
Senior Notes. As of the date of this Prospectus, $194,500,000 aggregate
principal amount of Senior Notes are outstanding. Subject to the provisions of
the Indenture, the entire principal amount of the Senior Notes is scheduled to
be paid to the Senior Noteholders on the Final Scheduled Payment Date. The
"Final Legal Maturity Date" applicable to the Senior Notes is December 6, 2009.
Interest accrues on the unpaid principal amount of each Senior Note at
LIBOR plus 0.90% (plus, if applicable, 0.50% during the periods specified in the
registration rights agreement applicable to the Senior Notes), subject to a
maximum equal to the Capped Interest Rate applicable only for periods as to
which Continental has failed to pay accrued interest when due and failed to cure
such nonpayment (the "Senior Notes Stated Interest Rate"). For all other
periods, the interest rate on the Senior Notes will not be capped. Accrued
interest on the Senior Notes is payable on March 6, June 6, September 6 and
December 6 of each year or, if not a Business Day, the next succeeding Business
Day, commencing on March 6, 2003. Such accrued interest will be paid to holders
of record on the 15th day preceding the applicable Scheduled Interest Payment
Date. Interest on the Senior Notes accrues from the most recent date to which
interest has been paid or, if no interest has been paid, from the Senior Notes
Issuance Date. Interest on the Senior Notes is calculated on the basis of the
actual number of days elapsed over a 360-day year and shall accrue with respect
to the first but not the last day of each Interest Period. If any date scheduled
for a payment of principal, interest, Senior Notes Premium, if any, or Break
Amount, if any, is not a Business Day, such payment will be made on the next
succeeding Business Day, and interest shall be added for such additional period.
(Section 2.7)
Payments of interest on the Senior Notes are supported by a Liquidity
Facility provided by the Liquidity Provider for the benefit of the holders of
the Senior Notes. The Liquidity Facility will provide an amount sufficient to
pay interest on the Senior Notes at the Senior Notes Stated Interest Rate on up
to eight successive Interest Payment Dates. The Liquidity Facility does not
provide for drawings or payments thereunder to pay for principal of, or Senior
Notes Premium, if any, or Break Amount, if any, with respect to, the Senior
Notes or for any amounts with respect to the Subordinated Notes. See
"Description of the Liquidity Facility for the Senior Notes".
Except in specified circumstances, after use of any available funds under
the Liquidity Facility and the Cash Collateral Account, the payment of interest
on the Senior Notes at the Senior Notes Stated Interest Rate will be supported
by the Policy provided by the Policy Provider. Payment of principal of the
Senior Notes no later than the Final Legal Maturity Date will also be supported
by the Policy. Amounts payable with
59
respect to the Subordinated Notes are not supported by the Policy. See
"Description of the Policy for the Senior Notes--The Policy".
REDEMPTION
The Senior Notes may be redeemed at any time in whole or (so long as no
Payment Default has occurred and is continuing) in part (in any integral
multiple of $1,000) by Continental at its sole option at a redemption price
equal to the sum of 100% of the principal amount of, accrued and unpaid interest
on, and Break Amount, if any, with respect to, the redeemed Senior Notes to and
including the date of redemption. In addition, if a Senior Note is redeemed
before the third anniversary of the Senior Notes Issuance Date (except in
connection with a redemption to satisfy the maximum Collateral Ratio or minimum
Rotable Ratio requirements discussed under "Description of the Subordinated
Notes--Collateral--Appraisals and Maintenance of Ratios"), such redemption price
will include a premium (the "Senior Notes Premium") equal to the following
percentage of the principal amount of such Senior Note: (i) if redeemed before
the first anniversary of the Senior Notes Issuance Date, 1.5%; (ii) if redeemed
on or after such first anniversary and before the second anniversary of the
Senior Notes Issuance Date, 1.0%; and (iii) if redeemed on or after such second
anniversary and before the third anniversary of the Senior Notes Issuance Date,
0.5%. (Section 4.1)
If Continental gives notice of redemption but fails to pay when due all
amounts necessary to effect such redemption, such redemption shall be deemed
revoked and no amount shall be due as a result of notice of redemption having
been given.
COLLATERAL
The Senior Notes are secured by a lien on the Collateral. See "Description
of the Subordinated Notes--Collateral".
60
DESCRIPTION OF THE LIQUIDITY FACILITY FOR THE SENIOR NOTES
The following summary describes terms of the Liquidity Facility for the
Senior Notes and certain provisions of the Indenture relating to the Liquidity
Facility that are material to a holder of Subordinated Notes. The summary does
not purport to be complete. We urge you to read the Liquidity Facility and the
Indenture for additional detail and further information because they, and not
this description, define your rights. Each of the Liquidity Facility and the
Indenture has been filed as an exhibit to the Registration Statement and is
available as set forth under "Where You Can Find More Information".
GENERAL
The Subordinated Notes do not have the benefit of a Liquidity Facility,
unlike the Senior Notes. With respect to the Senior Notes, Morgan Stanley
Capital Services Inc. (the "Liquidity Provider") has entered into a revolving
credit agreement (the "Liquidity Facility") with the Trustee. The Indenture and
the Liquidity Facility provide that certain payments to the Liquidity Provider
be made prior to payments to the holders of Subordinated Notes. See "Description
of the Subordinated Notes--Priority of Distributions".
On any Distribution Date, if, after giving effect to the subordination
provisions of the Indenture, the Trustee does not have sufficient funds for the
payment of interest on the Senior Notes, the Liquidity Provider is required to
make an advance (an "Interest Drawing") in the amount needed to fund the
interest shortfall (calculated assuming that Continental will not cure the
nonpayment of interest) up to the Maximum Available Commitment.
The maximum amount of Interest Drawings available under the Liquidity
Facility will be sufficient to pay interest on the Senior Notes on up to eight
consecutive quarterly Interest Payment Dates at the Senior Notes Stated Interest
Rate (calculated assuming that Continental will not cure any nonpayment of
interest). If interest payment defaults occur which exceed the amount covered by
and available under the Liquidity Facility, the holders of the Senior Notes (the
"Senior Noteholders") will bear their allocable share of the deficiencies to the
extent that there are no other sources of funds. The initial Liquidity Provider
may be replaced by one or more other entities under certain circumstances.
DRAWINGS
Except as otherwise provided below, the Liquidity Facility enables the
Trustee to make Interest Drawings thereunder promptly on or after any
Distribution Date if, after giving effect to the subordination provisions of the
Indenture, there are insufficient funds available to the Trustee to pay interest
then due and payable on the Senior Notes at the Senior Notes Stated Interest
Rate (calculated assuming that Continental will not cure any nonpayment of
interest); provided, however, that the maximum amount available to be drawn
under the Liquidity Facility on any Distribution Date to fund any shortfall of
interest on the Senior Notes will not exceed the then Maximum Available
Commitment.
The "Maximum Available Commitment" at any time is an amount equal to the
then Required Amount of the Liquidity Facility less the aggregate amount of each
Interest Drawing outstanding thereunder at such time, provided that, following a
Non-Extension Drawing, a Downgrade Drawing or a Final Drawing, the Maximum
Available Commitment shall be zero.
The "Required Amount" will be equal, on any day, to the sum of the
aggregate amount of interest, calculated at the Capped Interest Rate, that would
be payable on the Senior Notes on each of the eight consecutive quarterly
Interest Payment Dates immediately following such day or, if such day is an
Interest Payment Date, on such day and the succeeding seven quarterly Interest
Payment Dates, in each case calculated on the outstanding aggregate principal
amount of the Senior Notes on such day and without regard to expected future
payments of principal.
The "Capped Interest Rate" is 12% per annum.
The Liquidity Facility does not provide for drawings thereunder to pay for
principal of, or Senior Notes Premium, if any, or Break Amount, if any, with
respect to, the Senior Notes, any interest thereon in excess of
61
an amount equal to eight full quarterly installments of interest calculated at
the Capped Interest Rate thereon or any amount with respect to the Subordinated
Notes. (Liquidity Facility, Section 2.02; Indenture, Section 3.5)
Each payment by the Liquidity Provider reduces by the same amount the
Maximum Available Commitment, subject to reinstatement as hereinafter described.
With respect to any Interest Drawings, upon reimbursement of the Liquidity
Provider in full or in part for the amount of such Interest Drawings plus
interest thereon, the Maximum Available Commitment will be reinstated to an
amount not to exceed the then Required Amount. However, the Liquidity Facility
will not be so reinstated at any time if (i) the Senior Notes are Non-Performing
and a Liquidity Event of Default shall have occurred and be continuing or (ii)
the Liquidity Provider Reimbursement Date has occurred. Any amounts paid by the
Policy Provider to the Liquidity Provider as described in "Description of the
Subordinated Notes--Controlling Party" or "Description of the Policy for the
Senior Notes--Liquidity Provider Drawing" will not reinstate the Liquidity
Facility but any reimbursement of such amounts received by the Policy Provider
under the distribution provisions of the Indenture will reinstate the Liquidity
Facility to the extent of such reimbursement unless (i) the Senior Notes are
Non-Performing and a Liquidity Event of Default shall have occurred and be
continuing or (ii) the Liquidity Provider Reimbursement Date has occurred. With
respect to any other drawings under the Liquidity Facility, amounts available to
be drawn thereunder are not subject to reinstatement. The Required Amount will
be automatically reduced from time to time to an amount equal to the next eight
successive quarterly interest payments due on the Senior Notes (without regard
to expected future payments of principal) at the Capped Interest Rate.
(Liquidity Facility, Section 2.04(a); Indenture, Section 3.5(j)) Upon the
occurrence of the Liquidity Provider Reimbursement Date, no further drawings
under the Liquidity Facility will be permitted.
If at any time the short-term unsecured debt rating of the Liquidity
Provider Guarantor then issued by either Moody's or Standard & Poor's is lower
than the Threshold Rating or the Liquidity Provider Guarantor's guarantee ceases
to be in full force and effect or becomes invalid or unenforceable or the
Liquidity Provider Guarantor denies its liability thereunder, and the Liquidity
Facility is not replaced with a replacement Liquidity Facility within ten days
after notice of such downgrading or such event and as otherwise provided in the
Indenture, the Liquidity Facility will be drawn in full up to the then Maximum
Available Commitment (the "Downgrade Drawing"). The proceeds of a Downgrade
Drawing will be deposited into a cash collateral account (the "Cash Collateral
Account") and used for the same purposes and under the same circumstances and
subject to the same conditions as cash payments of Interest Drawings under the
Liquidity Facility would be used. (Liquidity Facility, Section 2.02(c);
Indenture, Section 3.5(c)) If a qualified replacement Liquidity Facility is
subsequently provided, the balance of the Cash Collateral Account will be repaid
to the replaced Liquidity Provider.
"Threshold Rating" means the short-term unsecured debt rating of P-1 by
Moody's Investors Service, Inc. ("Moody's") and A-1 by Standard & Poor's Ratings
Services, a division of The McGraw Hill Companies, Inc. ("Standard & Poor's").
The Liquidity Facility provides that the Liquidity Provider's obligations
thereunder will expire on the earliest of:
-- 364 days after the Senior Notes Issuance Date (counting from, and
including, the Senior Notes Issuance Date).
-- The date on which the Trustee delivers to the Liquidity Provider a
certification that all of the Senior Notes have been paid in full.
-- The date on which the Trustee delivers to the Liquidity Provider a
certification that a replacement Liquidity Facility has been
substituted for such Liquidity Facility.
-- The fifth Business Day following receipt by the Trustee of a
Termination Notice from the Liquidity Provider (see "--Liquidity
Events of Default and Termination").
62
-- The date on which no amount is or may (by reason of reinstatement)
become available for drawing under the Liquidity Facility.
-- The occurrence of the Liquidity Provider Reimbursement Date.
The Liquidity Facility provides that it will be automatically extended for
additional 364-day periods unless the Liquidity Provider notifies the Trustee
that it does not agree to such extension.
The Indenture provides for the replacement of the Liquidity Facility if
such Liquidity Facility is scheduled to expire earlier than 15 days after the
Final Legal Maturity Date and the Liquidity Facility is not extended at least 25
days prior to its then scheduled expiration date. If the Liquidity Facility is
not so extended or replaced by the 25th day prior to its then scheduled
expiration date, the Liquidity Facility will be drawn in full up to the then
Maximum Available Commitment (the "Non-Extension Drawing"). The proceeds of the
Non-Extension Drawing will be deposited in the Cash Collateral Account 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
the Liquidity Facility would be used. (Liquidity Facility, Section 2.02(b);
Indenture, Section 3.5(d))
Upon receipt by the Trustee of a Termination Notice from the Liquidity
Provider, the Trustee shall request a final drawing (a "Final Drawing") under
the Liquidity Facility in an amount equal to the then Maximum Available
Commitment thereunder. The Trustee will hold the proceeds of the Final Drawing
in the Cash Collateral Account 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 the Liquidity Facility would be
used. (Liquidity Facility, Section 2.02(d); Indenture, Section 3.5(i))
REIMBURSEMENT OF DRAWINGS
The Trustee must reimburse amounts drawn under the 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 Trustee has funds
available therefor.
INTEREST DRAWINGS AND FINAL DRAWINGS
Amounts drawn by reason of an Interest Drawing or Final Drawing under the
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 Liquidity Provider's receipt of the notice
of such Interest Drawing, interest will accrue at the Base Rate plus 2.00% per
annum. Thereafter, interest will accrue at Liquidity Facility LIBOR for the
applicable interest period plus 2.00% per annum. In the case of the Final
Drawing, however, the Trustee may convert the Final Drawing into a drawing
bearing interest at the Base Rate plus 2.00% per annum on the last day of an
interest period for such Drawing.
"Base Rate" means a fluctuating interest rate per annum in effect from time
to time, which rate per annum shall at all times be equal to (a) the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or, if such day is not a business day, for the next preceding business day)
by the Federal Reserve Bank of New York, or if such rate is not so published for
any day that is a business day, the average of the quotations for such day for
such transactions received by the Liquidity Provider from three Federal funds
brokers of recognized standing selected by it, plus (b) one-quarter of one
percent (1/4 of 1%).
"Liquidity Facility LIBOR" means, with respect to any interest period, (i)
the rate per annum appearing on display page 3750 (British Bankers
Association--LIBOR) of the Dow Jones Markets Service (or any successor or
substitute therefor) at approximately 11:00 a.m. (London time) two business days
before the first day of such interest period, as the rate for dollar deposits
with a maturity comparable to such interest period, or (ii) if the rate
calculated pursuant to clause (i) above is not available, the average (rounded
upwards, if necessary, to the next 1/16 of 1%) of the rates per annum at which
deposits in dollars are offered for the relevant interest period by three banks
of recognized standing selected by the Liquidity Provider in the London
interbank market at approximately 11:00 a.m. (London time) two business days
before the first day of such
63
interest period in an amount approximately equal to the principal amount of the
LIBOR Advance to which such interest period is to apply and for a period
comparable to such interest period.
DOWNGRADE DRAWINGS AND NON-EXTENSION DRAWINGS
The amount drawn under the Liquidity Facility by reason of a Downgrade
Drawing or a Non-Extension Drawing will be treated as follows:
-- Such amount will be released on any Distribution Date to the
Liquidity Provider to the extent that such amount exceeds the
Required Amount.
-- Any portion of such amount withdrawn from the Cash Collateral Account
to pay interest on the Senior Notes 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, other than any portion thereof applied to the
payment of interest on the Senior Notes, will bear interest (x) subject to
clause (y) below, at a rate equal to Liquidity Facility LIBOR for the applicable
interest period plus a specified margin on the outstanding amount from time to
time of such Downgrade Drawing and (y) from and after the date, if any, on which
it is converted into a Final Drawing as described below under "--Liquidity
Events of Default and Termination", at a rate equal to Liquidity Facility LIBOR
for the applicable interest period (or, as described in the first paragraph
under "--Interest Drawings and Final Drawings", the Base Rate) plus 2.00% per
annum.
Any Non-Extension Drawing, other than any portion thereof applied to the
payment of interest on the Senior Notes, 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 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 and Termination", at a rate
equal to Liquidity Facility LIBOR for the applicable interest period (or, as
described in the first paragraph under "--Interest Drawings and Final Drawings",
the Base Rate) plus 2.00% per annum.
LIQUIDITY EVENTS OF DEFAULT AND TERMINATION
Events of default under the Liquidity Facility (each, a "Liquidity Event of
Default") consist of:
-- The acceleration of the Senior Notes.
-- Certain bankruptcy or similar events involving Continental.
(Liquidity Facility, Section 1.01)
If any Liquidity Event of Default has occurred and is continuing and the
Senior Notes are Non-Performing, the Liquidity Provider may, in its discretion,
give a notice of termination of the Liquidity Facility (a "Termination Notice").
The Termination Notice will have the following consequences:
-- The Liquidity Facility will expire on the fifth Business Day after
the date on which such Termination Notice is received by the Trustee.
-- The Trustee will promptly request, and the Liquidity Provider will
make, a Final Drawing in an amount equal to the then Maximum
Available Commitment.
-- Any drawing remaining unreimbursed as of the date of termination will
be automatically converted into a Final Drawing.
-- All amounts owing to the Liquidity Provider automatically will be
accelerated.
Notwithstanding the foregoing, the Trustee will be obligated to pay amounts
owing to the Liquidity Provider only to the extent of funds available therefor
after giving effect to the payments in accordance with the provisions set forth
under "Description of the Subordinated Notes--Priority of Distributions".
(Liquidity Facility, Section 6.01) Upon the circumstances described above under
"Description of the Subordinated
64
Notes--Remedies", the Liquidity Provider may become the Controlling Party with
respect to the exercise of remedies under the Indenture. (Indenture, Section
3.8(c))
Upon the occurrence of the Liquidity Provider Reimbursement Date, the
Liquidity Facility will automatically expire, any drawing remaining unreimbursed
as of such date will be automatically converted into a Final Drawing and all
amounts owing to the Liquidity Provider automatically will be accelerated. On
and after such date, no drawings under the Liquidity Facility will be permitted.
LIQUIDITY PROVIDER
The initial Liquidity Provider for the Senior Notes is Morgan Stanley
Capital Services Inc. The obligations of Morgan Stanley Capital Services Inc.
have been guaranteed by Morgan Stanley, its parent company (the "Liquidity
Provider Guarantor"). Morgan Stanley has short-term unsecured debt ratings of
P-1 from Moody's and A-1 from Standard & Poor's.
65
DESCRIPTION OF THE POLICY FOR THE SENIOR NOTES
The following summary describes terms of the Policy for the Senior Notes
and certain provisions of the Policy Provider Agreement that are material to a
holder of Subordinated Notes. The summary does not purport to be complete. We
urge you to read the Policy for additional detail and further information
because it, and not this description, defines your rights. The Policy has been
filed as an exhibit to the Registration Statement and is available as set forth
under "Where You Can Find More Information".
THE POLICY
The Subordinated Notes do not have the benefit of a Policy, unlike the
Senior Notes. MBIA Insurance Corporation (the "Policy Provider" ) has issued a
certificate guarantee insurance policy (the "Policy") in favor of the Trustee
for the benefit of the Senior Noteholders and the Liquidity Provider. The
Indenture, the Policy and the Policy Provider Agreement provide that certain
payments to the Policy Provider be made prior to payments to the holders of
Subordinated Notes. See "Description of the Subordinated Notes--Priority of
Distributions".
Drawings under the Policy may be made under the following six
circumstances:
INTEREST DRAWINGS
If on any Distribution Date (other than the date on which a Policy Drawing
is made as described in "--Proceeds Deficiency Drawing", "--Non-Performance
Drawing" or "--Final Policy Drawing") after giving effect to the subordination
provisions of the Indenture and to the application of any drawing paid under the
Liquidity Facility in respect of interest due on the Senior Notes on such
Distribution Date and any withdrawal of funds from the Cash Collateral Account
in respect of such interest (collectively, "Prior Funds"), the Trustee does not
then have sufficient funds available for the payment of all amounts due and
owing in respect of accrued interest on the Senior Notes at the Senior Notes
Stated Interest Rate (without giving effect to any acceleration and calculated
assuming that Continental will not cure the nonpayment of interest), the Trustee
is to request a Policy Drawing under the Policy in an amount sufficient to
enable the Trustee to pay such accrued interest.
PROCEEDS DEFICIENCY DRAWING
If on any Distribution Date (other than the date on which a Policy Drawing
is made as described in "--Non-Performance Drawing" or "--Final Policy Drawing")
established by the Trustee by reason of its receipt of a payment constituting
the proceeds from the sale of Pledged Spare Parts comprising all of the Pledged
Spare Parts subject to the lien of the Security Agreement at the time of such
sale, after giving effect to the subordination provisions of the Indenture and
to the application of Prior Funds, the Trustee does not then have sufficient
funds available for the payment in full of the then outstanding principal amount
of the Senior Notes together with accrued and unpaid interest thereon at the
Senior Notes Stated Interest Rate (calculated assuming that Continental will not
cure the nonpayment of interest and excluding any accrued and unpaid Senior
Notes Premium or Break Amount) (collectively, the "Outstanding Amount"), the
Trustee is to request a Policy Drawing under the Policy in an amount sufficient
to enable the Trustee to pay the Outstanding Amount.
NON-PERFORMANCE DRAWING
If a Payment Default exists under the Senior Notes (without giving effect
to any acceleration or any payments by the Liquidity Provider or the Policy
Provider) for eight consecutive Interest Periods (such period, the
"Non-Performing Period") (regardless of whether any proceeds from the sale of
any Collateral are distributed by the Trustee during such period) and continues
to exist on the Interest Payment Date on which such eighth Interest Period ends
(or, if such Interest Payment Date falls within the applicable period specified
in the proviso to the definition of "Non-Performing", continues to exist on the
Business Day immediately following such period (the "Relevant Date")), and on
the 25th day following such Interest Payment Date or, if applicable, the
Relevant Date (or, if such 25th day is not a Business Day, the next Business
Day) (the
66
"Non-Performance Payment Date") after giving effect to the subordination
provisions of the Indenture and to the application of Prior Funds, the Trustee
does not then have sufficient funds available for the payment in full of the
Outstanding Amount as of the Non-Performance Payment Date, unless the Policy
Provider shall have paid on any day prior thereto the Outstanding Amount as of
such day pursuant to a Policy Drawing as described in "--Proceeds Deficiency
Drawing" or "--Final Policy Drawing", the Trustee is to request a Policy Drawing
under the Policy in an amount sufficient to enable the Trustee to pay such
Outstanding Amount. If the Non-Performance Payment Date is established, the
Trustee shall send to the Senior Noteholders written notice thereof promptly,
but no later than three Business Days, after the occurrence of the Interest
Payment Date on which the Non-Performing Period ends or, if applicable, the
Relevant Date.
Notwithstanding the foregoing, if the Non-Performance Payment Date is
scheduled to occur prior to the Final Scheduled Payment Date, instead of paying
such amount on the Non-Performance Payment Date, the Policy Provider may, so
long as no Policy Provider Default is continuing, elect (the "Policy Provider
Election"), by giving notice to the Trustee at least 10 days prior to the
Non-Performance Payment Date, to pay:
-- Any shortfall on the Non-Performance Payment Date in funds required
to pay accrued interest on the Senior Notes.
-- Thereafter, on each Distribution Date, an amount equal to the
scheduled principal (on the Final Scheduled Payment Date) and
interest (without regard to any acceleration thereof) payable on the
Senior Notes on such Distribution Date.
Notwithstanding the Policy Provider Election, the Policy Provider may, on
any Business Day (which shall be a Distribution Date) elected by the Policy
Provider upon 20 days' notice, cause the Trustee to make a drawing under the
Policy for an amount equal to the Outstanding Amount as of such day. Further,
notwithstanding the Policy Provider Election, upon the occurrence of a Policy
Provider Default, the Trustee shall, on any Business Day elected by the Trustee
upon 20 days' notice to the Policy Provider, make a drawing under the Policy for
an amount equal to the Outstanding Amount as of such day.
FINAL POLICY DRAWING
If on the Final Legal Maturity Date, after giving effect to the
subordination provisions of the Indenture and to the application of any Prior
Funds, unless the Policy Provider shall have paid on any day prior thereto the
Outstanding Amount as of such day as described in "--Proceeds Deficiency
Drawing" or "--Non-Performance Drawing", the Trustee does not then have
sufficient funds available for the payment in full of the Outstanding Amount as
of such date, the Trustee is to request a Policy Drawing under the Policy in an
amount sufficient to enable the Trustee to pay such Outstanding Amount.
AVOIDANCE DRAWING
If, at any time, the Trustee has actual knowledge of the issuance of any
Final Order, the Trustee is to give prompt notice to the Liquidity Provider and
the Policy Provider of such Final Order and, prior to the expiration of the
Policy, to request a Policy Drawing for the relevant Avoided Payment and to
deliver to the Policy Provider a copy of the documentation required by the
Policy with respect to such Final Order. To the extent that any portion of such
Avoided Payment is to be paid to the Trustee (and not to any receiver,
conservator, debtor-in-possession or trustee in bankruptcy as provided in the
Policy), the Trustee shall establish as a Distribution Date the date that is the
earlier of three Business Days after the date of the expiration of the Policy
and the Business Day that immediately follows the 25th day after that notice for
distribution of such portion of the proceeds of such Policy Drawing.
LIQUIDITY PROVIDER DRAWING
On or after the Business Day which is 24 months from the earliest to occur
of (1) the date on which an Interest Drawing shall have been made under the
Liquidity Facility and remains unreimbursed from payments made by Continental at
the end of such 24-month period, (2) the date on which any Downgrade Drawing,
67
Non-Extension Drawing or Final Drawing that was deposited into the Cash
Collateral Account shall have been applied to pay any scheduled payment of
interest on the Senior Notes and remains unreimbursed from payments made by
Continental at the end of such 24-month period and (3) the date on which all of
the Senior Notes have been accelerated and remain unpaid by Continental at the
end of such 24-month period (in each case, disregarding any reimbursements from
payments by the Policy Provider and from proceeds from the sale of Collateral
distributed by the Trustee during such 24-month period) (such Business Day, the
"Liquidity Provider Reimbursement Date"), the Policy Provider (upon 20 days'
prior notice from the Trustee on behalf of the Liquidity Provider) will be
required to honor drawings under the Policy by the Trustee on behalf of the
Liquidity Provider for all outstanding drawings under the Liquidity Facility,
together with interest thereon.
GENERAL
All proceeds of any Policy Drawing under the Policy (other than a Policy
Drawing as described in "--The Policy--Liquidity Provider Drawing") by the
Trustee are to be deposited by the Trustee in a separate policy account and from
there distributed to the Senior Noteholders without regard to the subordination
provisions of the Indenture. In the case of any Avoided Payments, however, all
or part of the Policy Drawing will be paid directly to the bankruptcy receiver,
conservator, debtor-in-possession or trustee to the extent such amounts have not
been paid by the Senior Noteholders.
The Policy does not cover (i) shortfalls, if any, attributable to the
liability of the Trustee for withholding taxes, if any (including interest and
penalties in respect of that liability), (ii) any interest on the Senior Notes
in excess of the Capped Interest Rate, (iii) any Senior Notes Premium or other
acceleration payment payable in respect of the Senior Notes, (iv) any Break
Amount, (v) any failure of the Trustee to make any payment due to the Senior
Noteholders from funds received or (vi) any amount with respect to the
Subordinated Notes.
The Policy Provider's obligation under the Policy will be discharged to the
extent that funds are received by the Trustee for distribution to the Senior
Noteholders, whether or not the funds are properly distributed by the Trustee.
The Policy is noncancellable. The Policy expires and terminates without any
action on the part of the Policy Provider or any other person on the date (the
"Termination Date") that is one year and one day following the date on which the
Outstanding Amount is paid on the Senior Notes, unless an Insolvency Proceeding
has commenced and has not been concluded or dismissed on the Termination Date,
in which case on the later of (i) the date of the conclusion or dismissal of
such Insolvency Proceeding without continuing jurisdiction by the court in such
Insolvency Proceeding and (ii) the date on which the Policy Provider has made
all payments required to be made under the terms of such Policy in respect of
Avoided Payments. No portion of the premium under the Policy is refundable for
any reason including payment or provision being made for payment.
The Policy is issued under and pursuant to, and shall be construed under,
the laws of the State of New York.
DEFINITIONS
"Avoided Payment" means with respect to the Policy any amount paid or
required to be paid thereunder that is voided under any applicable bankruptcy,
insolvency, receivership or similar law in an Insolvency Proceeding, and, as a
result of which, the Trustee, the Liquidity Provider or any Senior Noteholder is
required to return all or any portion of such voided payment (including any
disgorgement from the Senior Noteholders or the Liquidity Provider resulting
from an Insolvency Proceeding whether such disgorgement is determined on a
theory of preferential conveyance or otherwise) in accordance with a final,
non-appealable order of a court of competent jurisdiction.
"Final Order" means the order referred to in the definition of the term
"Avoided Payment".
"Insolvency Proceeding" means the commencement, after the Senior Notes
Issuance Date, of any bankruptcy, insolvency, readjustment of debt,
reorganization, marshalling of assets and liabilities or similar
68
proceedings by or against Continental or the Liquidity Provider and the
commencement, after the Senior Notes Issuance Date, of any proceedings by
Continental or the Liquidity Provider for the winding up or liquidation of its
affairs or the consent, after the Senior Notes Issuance Date, to the appointment
of a trustee, conservator, receiver or liquidator in any bankruptcy, insolvency,
readjustment of debt, reorganization, marshalling of assets and liabilities or
similar proceedings of or relating to Continental or the Liquidity Provider.
THE POLICY PROVIDER AGREEMENT
The Trustee, Continental and the Policy Provider have entered into an
insurance and indemnity agreement (the "Policy Provider Agreement") pursuant to
which Continental has agreed to reimburse the Policy Provider for amounts paid
pursuant to claims made under the Policy. Pursuant to the Policy Provider
Agreement, Continental has agreed to pay the Policy Provider a premium based on
the outstanding principal of the Senior Notes and a fee in connection with any
prepayment of the Senior Notes and to reimburse the Policy Provider for certain
expenses.
POLICY PROVIDER
The Policy Provider is MBIA Insurance Corporation. Moody's rates the
financial strength of MBIA Insurance Corporation "Aaa".
69
DESCRIPTION OF THE APPRAISAL
SH&E, an independent aviation appraisal and consulting firm, has prepared
an appraisal of the spare parts included in the Collateral as of June 25, 2003.
A letter, dated July 23, 2003 (as revised November 13, 2003), summarizing such
appraisal is annexed to this Prospectus as Appendix II. The appraisal is subject
to a number of assumptions and limitations and was prepared based on certain
specified methodologies. In preparing its appraisal, SH&E conducted only a
limited physical inspection of certain locations at which Continental maintains
the spare parts. An appraisal that is subject to other assumptions and
limitations and based on other methodologies may result in valuations that are
materially different from those contained in SH&E's appraisal.
The spare parts included in the Collateral fall into two categories,
"rotables" and "expendables". Rotables are parts that wear over time and can be
repeatedly restored to a serviceable condition over a period approximating the
life of the flight equipment to which they relate ("Rotables"). For example,
thrust reversers, auxiliary power units and landing gear are Rotables.
Expendables consist of parts that can be restored to a serviceable condition but
have a life less than the related flight equipment and parts that generally are
used once and thereby consumed or thereafter discarded. For example, engine
cowlings, engine blades and duct assemblies are repairable expendable parts and
bolts, screws, tubes and hoses are consumable expendable parts. Spare engines
are not included in the Collateral. Set forth below is certain information about
the spare parts of the types included in the Collateral and the appraised value
of such spare parts set forth in SH&E's appraisal referred to above:
SPARE PARTS QUANTITY(1)
-------------------------------- APPRAISED
AIRCRAFT MODEL EXPENDABLES ROTABLES TOTAL VALUE
-------------- ----------- -------- ------- ---------------
737-700................................. 675 36 711
737-700/800............................. 276,685 6,279 282,964
737-800................................. 3,964 199 4,163
737-900................................. 851 10 861
------- ------ -------
737-7/8/9 Subtotal...................... 282,175 6,524 288,699 $169,807,900
757-200................................. 175,886 3,364 179,250 72,852,100
757-300................................. 10,459 97 10,556 2,940,400
767-200................................. 25,387 208 25,595 8,907,900
767-400................................. 52,193 1,525 53,718 55,818,300
777-200................................. 106,538 2,555 109,093 93,148,300
------- ------ ------- ------------
Total................................... 652,638 14,273 666,911 $403,474,400
---------------
(1) This quantity of spare parts used in preparing the appraised value was
determined as of June 25, 2003. Since spare parts are regularly used,
refurbished, purchased, transferred and discarded in the ordinary course of
Continental's business, the quantity of spare parts included in the
Collateral and their appraised value will change over time. Continental is
required to provide to the Policy Provider and the Trustee a semiannual
appraisal of the Collateral. See "Description of the Subordinated
Notes--Collateral".
An appraisal is only an estimate of value. An appraisal should not be
relied upon as a measure of realizable value. The proceeds realized upon a sale
of any Collateral may be less than its appraised value. The value of the
Collateral if remedies are exercised under the Indenture will depend on market
and economic conditions, the supply of similar spare parts, the availability of
buyers, the condition of the Collateral and other factors. In addition, since
spare parts are regularly used, refurbished, purchased, transferred and
discarded in the ordinary course of business, the quantity of spare parts
included in the Collateral and their appraised value will change over time.
Accordingly, Continental cannot assure you that the proceeds realized upon any
such exercise of remedies would be sufficient to satisfy in full payments due on
the Senior Notes and the Subordinated Notes. If such proceeds are not sufficient
to repay all such amounts due on the Subordinated
70
Notes, then holders (to the extent not repaid from the proceeds of the sale of
Collateral) would have only unsecured claims against Continental.
71
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
EXCHANGE OF OLD SUBORDINATED NOTES FOR NEW SUBORDINATED NOTES
The following summary describes the material U.S. federal income tax
consequences to Subordinated Noteholders of the exchange of the Old Subordinated
Notes for New Subordinated Notes. This summary is intended to address the
beneficial owners of Subordinated Notes 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, or estates or trusts the
income of which is subject to U.S. federal income taxation regardless of its
source that will hold the Subordinated Notes as capital assets. The summary does
not address all of the federal income tax consequences that may be relevant to
all Subordinated Noteholders in light of their particular circumstances
(including, for example, any special rules applicable to tax-exempt
organizations, broker-dealers, insurance companies, foreign entities and persons
who are not citizens or residents of the United States) and does not address any
tax consequences other than federal income tax consequences.
The exchange of Old Subordinated Notes for New Subordinated Notes (the
"Exchange") pursuant to the Exchange Offer will be treated as a continuation of
the holder's investment in the Old Subordinated Notes and will not be a taxable
event for U.S. federal income tax purposes. As a result, a holder of an Old
Subordinated Note whose Old Subordinated Note is accepted in an Exchange Offer
will not recognize gain or loss on the Exchange. Similarly, there would be no
federal income tax consequences to a Subordinated Noteholder that does not
participate in the Exchange Offer. A tendering holder's tax basis in the New
Subordinated Notes will be the same as such holder's tax basis in its Old
Subordinated Notes. A tendering holder's holding period for the New Subordinated
Notes received pursuant to the Exchange Offer will include its holding period
for the Old Subordinated Notes surrendered therefor.
ALL HOLDERS OF OLD SUBORDINATED NOTES ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE EXCHANGE OF OLD SUBORDINATED NOTES FOR NEW SUBORDINATED
NOTES AND OF THE OWNERSHIP AND DISPOSITION OF NEW SUBORDINATED NOTES RECEIVED IN
THE EXCHANGE OFFER IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Subordinated Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Subordinated Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Subordinated Notes received
in exchange for Old Subordinated Notes where such Old Subordinated Notes were
acquired as a result of market-making activities or other trading activities.
Continental has agreed that, starting on the Expiration Date and ending on the
close of business 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until such date all
broker-dealers effecting transactions in the New Subordinated Notes may be
required to deliver a prospectus.
Continental will not receive any proceeds from any sale of New Subordinated
Notes by broker-dealers. New Subordinated Notes received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Subordinated Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Subordinated Notes. Any broker-dealer that resells New Subordinated Notes that
were received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such New Subordinated
Notes may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit of any such resale of New Subordinated Notes and any
72
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Starting on the Expiration Date, Continental will promptly send additional
copies of this Prospectus and any amendment or supplement to this Prospectus to
any broker-dealer that requests such documents in the Letter of Transmittal.
Continental has agreed to pay all expenses incident to the Exchange Offer other
than commissions or concessions of any brokers or dealers, fees of counsel to
the Subordinated Noteholders and certain transfer taxes, and will indemnify the
holders of the New Subordinated Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Subordinated Notes is being passed upon for
Continental by Hughes Hubbard & Reed LLP, New York, New York.
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/A-1) for the year ended December 31, 2002 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, and audited consolidated financial statements to be included in
subsequently filed documents will be, incorporated herein by reference in
reliance upon such reports of Ernst & Young LLP pertaining to such consolidated
financial statements (to the extent covered by consents filed with the
Commission) given on the authority of such firm as experts in accounting and
auditing.
The references to SH&E, and to its appraisal report, dated as of July 23,
2003 (as revised November 13, 2003), are included herein in reliance upon the
authority of such firm as an expert with respect to the matters contained in its
appraisal reports.
FORWARD-LOOKING STATEMENTS
This Prospectus and the documents we incorporate by reference may contain
"forward-looking statements". 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 Commission reports incorporated in this Prospectus by reference or
as stated in "Risk Factors".
All forward-looking statements attributable to us are expressly qualified
in their entirety by the cautionary statements above.
WHERE YOU CAN FIND MORE INFORMATION
Continental files annual, quarterly and current reports, proxy statements
and other information with the Commission under the Securities Exchange Act of
1934. You may read and copy this information at the Public Reference Room of the
Commission, Judiciary Plaza, 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 Commission at (800) SEC-0330.
73
The Commission also maintains an internet web site that contains reports,
proxy statements and other information about issuers, like Continental, who file
reports electronically with the Commission. The address of that site is
HTTP://WWW.SEC.GOV.
You may also inspect reports, proxy statements and other information about
Continental at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
Continental's annual report on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, as well as any amendments and exhibits to those
reports, are available free of charge through Continental's website at
HTTP://WWW.CONTINENTAL.COM/COMPANY/INVESTOR as soon as reasonably practicable
after it files them with, or furnishes them to, the Commission.
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments, exhibits and appendices, the "Registration
Statement") filed by Continental with the Securities and Exchange Commission
under the Securities Act. This Prospectus omits certain of the information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement for further information with respect to Continental and
the securities offered hereby. Although statements concerning and summaries of
certain documents are included herein, reference is made to the copy of such
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission.
74
APPENDIX I--INDEX OF TERMS
PAGE
----
Agent's Message........................ 37
American Airlines...................... 21
Applicable Date........................ 42
ATOP................................... 37
Aviation Security Act.................. 22
Avoided Payment........................ 68
Base Rate.............................. 63
Book-Entry Confirmation................ 35
Break Amount........................... 42
Bush Intercontinental.................. 27
Business Day........................... 53
Capped Interest Rate................... 61
Cash Collateral........................ 43
Cash Collateral Account................ 62
Cede................................... 57
CMI.................................... 27
Collateral............................. 43
Collateral Agents...................... 43
Collateral Agreements.................. 43
Collateral Maintenance Agreement....... 43
Collateral Ratios...................... 44
Commission............................. 4
Company................................ 27
Continental............................ 27
Continental Bankruptcy Event........... 48
Controlling Party...................... 51
Copa................................... 29
Debt Balance........................... 47
Default................................ 48
Definitive Notes....................... 57
Delta.................................. 28
Designated Locations................... 47
Distribution Date...................... 41
Downgrade Drawing...................... 62
DTC.................................... 35
DTC Participant........................ 37
earnings............................... 26
Eligible Institution................... 36
Embraer................................ 20
Equipment.............................. 50
Event of Default....................... 48
Event of Loss.......................... 47
PAGE
----
Exchange............................... 72
Exchange Agent......................... 39
Exchange Offer......................... 6
Expiration Date........................ 34
ExpressJet............................. 27
FAA.................................... 18
Fair Market Value...................... 43
Final Drawing.......................... 63
Final Legal Maturity Date.............. 59
Final Order............................ 68
Final Scheduled Payment Date........... 40
Fixed charges.......................... 26
Global Notes........................... 57
holder................................. 35
Holdings............................... 27
Hopkins International.................. 27
Houston................................ 27
Indenture.............................. 40
Indirect Participants.................. 57
Initial Interest Period................ 41
Initial Purchaser...................... 6
Insolvency Proceeding.................. 68
Interest Drawing....................... 61
Interest Payment Date.................. 40
Interest Period........................ 41
Issuance Date.......................... 32
KLM.................................... 29
Letter of Transmittal.................. 32
Liberty International.................. 27
LIBOR.................................. 41
Liquidity Event of Default............. 64
Liquidity Expenses..................... 53
Liquidity Facility..................... 61
Liquidity Facility LIBOR............... 63
Liquidity Obligations.................. 53
Liquidity Provider..................... 61
Liquidity Provider Guarantor........... 65
Liquidity Provider Reimbursement
Date................................. 68
Maximum Available Commitment........... 61
Moody's................................ 62
New Subordinated Notes................. 6
Newark................................. 27
I-1
PAGE
----
Non-Extension Drawing.................. 63
Non-Performance Payment Date........... 67
Non-Performing......................... 53
Non-Performing Period.................. 66
Northwest Airlines..................... 28
Note Owners............................ 57
Noteholders............................ 41
Notes.................................. 6
Old Subordinated Notes................. 6
Operative Documents.................... 40
Outstanding Amount..................... 66
Participating Broker-Dealer............ 33
Payment Default........................ 48
Pledged Spare Parts.................... 43
Policy................................. 66
Policy Drawing......................... 53
Policy Expenses........................ 53
Policy Provider........................ 66
Policy Provider Agreement.............. 69
Policy Provider Default................ 51
Policy Provider Election............... 67
Policy Provider Obligations............ 53
Premium................................ 42
Prior Funds............................ 66
Qualified Spare Parts.................. 43
Rating Agency.......................... 44
Reference Agency Agreement............. 41
Reference Agent........................ 41
Reference Date......................... 41
Registration Event..................... 33
Registration Rights Agreement.......... 32
Registration Statement................. 74
Relevant Date.......................... 66
PAGE
----
Required Amount........................ 61
Rotable Ratios......................... 44
Rotables............................... 70
SARS................................... 30
Scheduled Interest Payment Date........ 40
Section 1110........................... 49
Section 1110 Period.................... 50
Security Agent......................... 43
Security Agreement..................... 43
Senior Collateral Ratio................ 43
Senior Noteholders..................... 61
Senior Notes........................... 6
Senior Notes Issuance Date............. 59
Senior Notes Premium................... 60
Senior Notes Stated Interest Rate...... 59
Senior Rotable Ratio................... 44
SH&E................................... 23
Shelf Registration Statement........... 33
Standard & Poor's...................... 62
Stated Interest Rate................... 40
Subordinated Collateral Ratio.......... 44
Subordinated Noteholders............... 41
Subordinated Notes..................... 6
Subordinated Rotable Ratio............. 44
Support Documents...................... 59
Termination Date....................... 68
Termination Notice..................... 64
Threshold Rating....................... 62
TIA.................................... 48
Trustee................................ 40
TSA.................................... 22
United................................. 21
US Airways............................. 21
I-2
APPENDIX II--APPRAISAL LETTER
SH&E INTERNATIONAL AIR TRANSPORT CONSULTANCY
2003 SEMI-ANNUAL APPRAISAL OF SELECTED SPARE PARTS
Prepared for:
CONTINENTAL AIRLINES
Prepared by:
SH&E INC.
JULY 23, 2003
(REVISED NOVEMBER 13, 2003)
TABLE OF CONTENTS
1 1.0 INTRODUCTION, DETERMINATION & ASSUMPTIONS ....... 1
1.1 Introduction ................................. 1
1.2 Determination ................................ 2
1.3 Assumptions .................................. 4
2 2.0 DESCRIPTION OF ASSETS ........................... 5
2.1 Spare Parts Nomenclature ...................... 5
2.2 Summary of the Continental Inventory .......... 8
2.3 Comparison of the Appraisals .................. 10
2.3.1 Inventory Size Comparison ............... 10
2.3.2 Observations ............................ 12
3 3.0 METHODOLOGY ..................................... 13
3.1 Definition of Terms ........................... 13
3.1.1 Base Value .............................. 13
3.1.2 Current Market Value .................... 13
3.2 Spare Parts Appraisal Methodology ............. 14
3.2.1 Sampling Process ........................ 14
3.2.2 Sample Valuation ........................ 15
3.2.3 Current Market Value Determination ...... 15
3.2.4 Condition and Quantity Adjustment ....... 16
4 4.0 THE MARKET FOR THE SUBJECT ASSETS ............... 17
5 5.0 QUALIFICATIONS .................................. 18
6 6.0 LIMITATIONS ..................................... 19
Appendix A - Value by Aircraft Type by Material Class
Appendix B - Summary of Inventory Adjustments
Appendix C - Proportion of Serviceable & Unserviceable Parts
Table of Contents Page i
(SH&E LOGO)
1
1.0 INTRODUCTION, DETERMINATION & ASSUMPTIONS
1.1 INTRODUCTION
In support of the Continental Airlines Floating Secured Notes due 2007,
Continental Airlines, Inc. ("Continental" or the "Client") has retained Simat,
Helliesen & Eichner, Inc. ("SH&E") to conduct periodic appraisals of selected
spare parts owned by Continental (collectively the "Subject Assets"). The
appraisals provide SH&E's opinion as to the Current (or Fair) Market Value
("CMV") of the Subject Assets.
The original appraisal of the Subject Assets was completed October 31, 2002 (the
"Original Appraisal"). The first annual full re-appraisal was completed January
24, 2003 (the "2003 Annual Appraisal") and the 2003 semi-annual appraisal was
completed July 23, 2003 (the "2003 Semi-annual Appraisal").
THIS REPORT IS A REVISION TO THE JULY 23, 2003 SEMI-ANNUAL APPRAISAL REPORT AND
WAS OCCASIONED BY THE DISCOVERY OF THE ERRONEOUS INCLUSION OF PARTS LOCATED AT
FOREIGN STATIONS IN THE DATA PROVIDED TO SH&E FOR THE APPRAISAL. THE MATERIAL
LOCATED AT FOREIGN STATIONS WAS DETERMINED TO HAVE A CMV OF $28.8 MILLION AND
HAS BEEN REMOVED FROM THIS REPORT. UNLESS EXPLICITLY STATED TO THE CONTRARY, ALL
VALUES AND QUANTITIES PROVIDED IN THIS REPORT REFER TO THE CORRECTED DATA.
As part of the 2003 Semi-annual Appraisal, SH&E conducted limited physical
inspections of Continental's warehouse facilities at Los Angeles (2 locations),
Houston - George Bush Intercontinental (4 locations) and Guam. Together, these
locations accounted for 38.9% of the Subject Asset value.
(SH&E LOGO)
Page 1
1.2 DETERMINATION
SH&E has determined the aggregate adjusted(1) Current Market Value of the
Subject Assets to be:
$ 403.5 MILLION
This is a decrease of $11.9 million from the Original Appraisal dated October
31, 2002 and was principally caused by an increase in the proportion of
unserviceable parts. The CMV of the inventory increased by approximately $10.7
million due to an increase in the number of higher cost rotable parts although
this increase was offset by a decrease in value of $7.1 million caused by a
change in part condition mix arising from the usage of the new rotables and
their replacement by slightly lower value overhauled parts. The actual physical
size of the inventory decreased by 63,372 parts, the majority of which were low
cost expendable hardware items. Changes in the serviceability mix, and
underlying parts values accounted for a decrease of $15.5 million in the change
in the aggregate CMV.
----------
(1) Adjustments were made to the CMV to reflect part condition, serviceability
level and inventory accuracy
(SH&E LOGO) Page 2
TABLE 1-1: UNADJUSTED CURRENT MARKET VALUE ($ 000)
SH&E Value Group Serviceable Unserviceable Total
---------------- ----------- ------------- -----
737-7/8/9 $147,039.4 $ 45,876.1 $192,915.4
757-200 $ 66,793.4 $ 15,493.5 $ 82,286.9
757-300 $ 2,749.0 $ 485.8 $ 3,234.8
767-200 $ 6,394.8 $ 6,394.6 $ 12,789.4
767-400 $ 52,931.4 $ 7,356.8 $ 60,288.2
777-200 $ 80,162.3 $ 26,158.4 $106,320.7
---------- ---------- ----------
Total $356,070.4 $101,765.2 $457,835.6
TABLE 1-12: ADJUSTED CURRENT MARKET VALUE (SERVICEABILITY AND ACCURACY)
SH&E Value Group Serviceable Unserviceable Total
---------------- ----------- ------------- -----
737-7/8/9 $146,892.3 $ 22,915.1 $169,807.4
757-200 $ 66,666.5 $ 6,185.6 $ 72,852.1
757-300 $ 2,746.3 $ 194.1 $ 2,940.4
767-200 $ 6,362.8 $ 2,545.1 $ 8,907.9
767-400 $ 52,878.5 $ 2,939.8 $ 55,818.3
777-200 $ 80,082.2 $ 13,066.1 $ 93,148.3
---------- ---------- ----------
Total $355,628.6 $ 47,845.8 $403,474.4
(SH&E LOGO) Page 3
1.3 ASSUMPTIONS
SH&E relied on the following assumptions while performing this valuation:
- The global commercial aviation industry and, more specifically, the
aviation spare parts aftermarket will continue to recover from the
financial distress experienced since early 2001.
- The SH&E values assume the Subject Assets meet all relevant
specifications and performance capabilities.
- SH&E relied upon Continental's determination as to the
serviceability or unserviceability of the Subject Assets. Any
variation in status would affect the values referenced herein.
- SH&E has not addressed any ownership rights and has assumed that the
Subject Assets are owned by the Client.
- The Subject Asset's records are in compliance with International
Civil Aviation Organization (ICAO) standards and furthermore, all
Life Limited Parts ("LLP's") records are traceable "back to
birth"(2).
- All normally required maintenance has been performed including
compliance with all mandatory Airworthiness Directives.
- All of the data and information provided by Continental is an
accurate representation of the actual conditions or circumstances of
the Subject Assets.
- The Subject Assets have not been involved in any major incident or
accident that resulted in significant damage to the asset.
----------
(2) "Back-to-birth" records are those that provide operating history
information for each LLP from the date of its first delivery by the
Original Equipment Manufacturer (OEM) to its first operator and for each
subsequent installation.
(SH&E LOGO) Page 4
2
2.0 DESCRIPTION OF ASSETS
2.1 SPARE PARTS NOMENCLATURE
Aircraft and engine spare parts are generally categorized as follows:
ROTABLES
Rotable parts are those components that can be repeatedly and economically
restored to a serviceable condition over a period approximating the life of the
flight equipment to which they are related. When in need of overhaul, rotable
components are generally worth 30-50% of new and, after overhaul, they are
typically worth 70-85% of new depending on the age of the aircraft type.
Examples of rotable parts include thrust reversers, auxiliary power units,
landing gears, generators, valves and actuators. Rotable parts normally have an
unique serial number.
REPAIRABLES
Repairables are those components or parts that can be economically restored to a
serviceable or overhauled condition, but that have a life that is considerably
less than the life of the flight equipment to which they are related. In
addition, they can only be overhauled or repaired a limited number of times.
When in need of overhaul or repair, repairable parts are typically worth 30-50%
of new and, after overhaul 60-80 % of new.
In the Continental system, repairable parts, because they are ultimately
consumed, are classified as Expendables with a notation in the part record that
the part is to be "recovered" and inspected to determine if a repair or overhaul
is cost effective.
Examples of repairable or Recoverable Expendable parts include engine cowlings,
fairings, and engine blades, flap track assemblies, certain bearings, duct
assemblies and fittings.
(SH&E LOGO) Page 5
EXPENDABLES
Expendables are parts or material that, once used, cannot be re-used and, if not
serviceable, they generally cannot be overhauled or repaired.
LIFE LIMITED PARTS
Life limited parts (LLP) have a finite operating life that is defined by hours,
cycles or calendar limit and are usually found in engines and landing gear
assemblies. When a LLP reaches its life limit, it cannot be overhauled or
repaired and must be destroyed.
The condition of aircraft and engine parts is classified as follows:
NEW
New parts are parts that have never been used and are normally in the
manufacturer's original packaging.
OVERHAULED
Overhauled parts are rotable or repairable parts that have been repaired and
tested to defined overhaul standards that can be specified by the manufacturer,
an airline or the repair vendor. The overhaul process restores the part to near
new service standard.
SERVICEABLE
Serviceable parts are parts that have been inspected and tested and found to be
within prescribed service limits.
(SH&E LOGO) Page 6
AS REMOVED
An `As Removed' part is in the condition that it was when it was removed from an
operator's aircraft or engine. Such a part can be installed, if operating
normally prior to removal, without prior testing on an aircraft or engine in the
same operator's fleet. In all other cases, an As Removed part must be inspected
and tested in an approved manner before it can be declared serviceable.
UNSERVICEABLE
Unserviceable (sometimes referred to as Repairable) components or parts have
been either removed from service for not working correctly or, upon inspection
and testing, were found not to meet certain prescribed standards. Such parts can
be sent to suitably qualified facilities for repair or overhaul as required.
BEYOND ECONOMIC REPAIR
An unserviceable part that, when inspected and tested, is found to require
repairs that are estimated to cost more than the part is worth is declared
`Beyond Economic Repair' (BER) and is usually scrapped.
AIRWORTHINESS OF PARTS
All parts, regardless of whether or not they are classified as `New',
`Overhauled' or `Serviceable' only remain airworthy as long as the part
continues to comply with all manufacturer's storage, maintenance and FAA
Airworthiness Directives requirements.
(SH&E LOGO) Page 7
2.2 SUMMARY OF THE CONTINENTAL INVENTORY
The Subject Assets are selected airframe, avionic and engine spare parts for
Continental's in-service fleet of Boeing 737-700, 737-800 and 737-900 together
with Boeing 757-200, 757-300, 767-200, 767-400 and 777-200 aircraft. The
aircraft inventories include the total inventory population for all of those
aircraft except for the 757-200. The 757 parts include only those acquired after
October 1994.
SH&E was provided with an electronic inventory listing from CO's `SCEPTRE/ICS'
inventory management system dated as of June 25, 2003. For this revised report,
Continental provided SH&E with details of parts at foreign locations and SH&E
removed those parts from the June inventory.
The corrected inventory listed each Continental part number ("MEPN") and
information for each MEPN by fleet, category (expendable or rotable), historic
average cost (also last purchase price and catalogue price if available), and
the percentage serviceable. The inventory consisted of 26,275 line items with a
total of 792,147 individual parts. A total of 2,648 line items containing
125,236 parts (see Appendix B) were excluded from the inventory as provided by
Continental for the following reasons:
1. The parts are owned by vendors but tracked in the Continental
maintenance system (brake and tire sets).
2. The parts are branded parts specific to Continental and can only be
used by the airline (seat covers, carpet and cushion, and fabric).
These parts were also removed from the previous appraisal.
The majority of the Subject Assets were assessed to be in a new or overhauled
maintenance condition although the proportion of new parts has decreased
slightly from the prior appraisal.
(SH&E LOGO) Page 8
Continental represents that the accuracy of the inventory management systems
found by SH&E at the inspected facilities was representative of other stations
in the system and SH&E found no indications to the contrary. It should be noted
that SH&E did not compare or reconcile the part cost basis provided to SH&E with
values reported on Continental's Balance Sheet.
TABLE 2-1: SELECTED SPARE PARTS DISTRIBUTION (BEFORE EXCLUSIONS)
Value Group Fleet Expendable Rotable Grand Total
737-7/8/9 737-700 1,236 36 1,272
737-700/800 317,795 6,279 324,074
737-800 9,910 199 10,109
737-900 1,289 10 1,299
------- ------- -------
737-7/8/9 Total 330,230 6,524 336,754
757-200 757-200 202,615 3,460 206,075
757-300 757-300 12,232 125 12,357
767-200 767-200 26,246 214 26,460
767-400 767-400 73,114 1,570 74,684
777-200 777-200 132,947 2,870 135,817
------- ------- -------
Grand Total 777,384 14,763 792,147
REVISED NOVEMBER 2003
(SH&E LOGO) Page 9
2.3 COMPARISON OF THE APPRAISALS
For the 2003 Semi-annual Appraisal SH&E used data as of June 25, 2003 and in the
2003 Annual Appraisal, the inventory was dated as of December 25, 2002.
2.3.1 INVENTORY SIZE COMPARISON
The inventory as of June 25, 2003, corrected to exclude the foreign material,
contained 1,096 fewer Continental part numbers and contained 63,372 fewer
individual parts as compared to the previous inventory. The following tables
summarize the differences(3).
TABLE 2-2: INVENTORY AS OF JUNE 2003 (REVISED)
Aircraft Lines Parts
-------- ------ -------
737-7/8/9 5,771 288,699
757-200 7,105 179,250
757-300 631 10,556
767-200 1,280 25,595
767-400 3,785 53,718
777-200 5,055 109,093
------ -------
Grand Total 23,627 666,911
REVISED NOVEMBER 2003
TABLE 2-3: INVENTORY AS OF DECEMBER 2002
Aircraft Lines Parts
--------- ------ -------
737-7/8/9 5,756 279,537
757-200 7,386 212,424
757-300 659 12,080
767-200 1,260 26,418
767-400 3,867 67,304
777-200 5,795 132,520
----- -------
Grand Total 24,723 730,283
(3) These summary tables reflect the current part count after all inventory
adjustments. See Appendix B for a detailed summary of inventory
adjustments.
(SH&E LOGO) Page 10
TABLE 2-4: INVENTORY - DIFFERENCES
Aircraft Lines Parts
-------- ----- -----
737-7/8/9 15 9,162
757-200 -281 -33,174
757-300 -28 -1,524
767-200 20 -823
767-400 -82 -13,586
777-200 -740 -23,427
------ -------
Grand Total -1,096 -63,372
(SH&E LOGO) Page 11
2.3.2 OBSERVATIONS
- Continental recently completed the construction of a new spare parts
facility at Newark Liberty International Airport that consolidates
material from several locations and incorporates modern, more efficient,
inventory handling equipment and procedures. As of June 2003 the Company
was still in the process of moving parts into the new facility and the
facility was not ready for inspection. SH&E will inspect the facility at
the next Annual Appraisal scheduled in January 2004.
- SH&E performed its first visit to the Guam facility. The facility is the
major parts storage location for aircraft operated by Continental
Micronesia, Inc. It should be noted that in the fourth quarter of 2002,
the facility was damaged by a typhoon. Our inspection disclosed that the
facility had been repaired and some parts, previously exposed to an
excessive amount of water, had been inspected, repaired if necessary, and
repackaged.
(SH&E LOGO) Page 12
3
3.0 METHODOLOGY
3.1 DEFINITION OF TERMS
3.1.1 BASE VALUE
The Base Value ("BV") is the appraiser's opinion of the underlying economic
value of an asset in an open, unrestricted and stable market environment with a
reasonable balance of supply and demand, and also assumes full considerations of
its "highest and best use". An asset's BV 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.
Since BV pertains to a somewhat idealized asset and market combination it may
not necessarily reflect the actual value of the asset in question, but is a
nominal starting value to which adjustments may be applied to determine an
actual value. Since BV is related to long-term market trends, the BV definition
is normally applied to analyses of historical values and projections of residual
values and lease rates.
3.1.2 CURRENT MARKET VALUE
The Current (or Fair) Market Value ("CMV" or "FMV") is the appraiser's opinion
of the most likely trading price that may be generated for an individual asset
under the market circumstances that are perceived to exist at the time in
question. CMV assumes that the asset is valued for its highest, best use, that
the parties to the hypothetical sale transaction are willing, able, prudent and
knowledgeable. Neither are under any 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. Unless
stated otherwise, the total CMV of multiple assets represents the aggregate of
the individual asset's Current Market Values were they to be sold on an
asset-by-asset basis and not the value of the assets if sold in bulk.
(SH&E LOGO) Page 13
3.2 SPARE PARTS APPRAISAL METHODOLOGY
SH&E's standard parts appraisal can be summarized as a calculation of an
adjustment to the owner's internal inventory value. The statistically based
adjustment is achieved by the development of a representative, dollar-weighted,
stratified sample of the parts, the valuation of that sample and then, the
application of a derived adjustment factor to the sample and then to the entire
population of parts. That process is more fully described below.
3.2.1 SAMPLING PROCESS
SH&E obtained an itemized database of the parts to be valued from Continental.
The data identified each part by aircraft type, rotable or expendable category,
description, manufacturer's part number, quantity, and percent serviceable. The
data also provided an average acquisition cost for each part. Some parts were
listed with zero cost and those were handled separately.
SH&E compiled a single database of the selected Continental inventory that
contained 23,627 line items after exclusions. The inventory was then grouped by
aircraft type with common trading characteristics and subsequently, by category.
For this valuation, SH&E initially grouped all 737 aircraft together but kept
the 757 and 767 parts separate. It should be noted that the later model 767-400
has significant systems and parts commonality with the 777 aircraft.
Each of the groupings was then sorted by descending unit cost value and then
divided into four to six separate strata of approximately equal total value
based on Continental's reported cost or value for each line item. A further
stratum was created in some cases to provide consideration for parts with a
reported zero average acquisition value. Approximately 1,500 line items were
selected for the initial sampling and these served as the basis of the pricing
and physical sampling process. The pricing sample was further increased to
include all matching parts in SH&E's internal parts database.
(SH&E LOGO) Page 14
3.2.2 SAMPLE VALUATION
The CMV of the individual parts that make up each sample was determined by
investigating the current sale price for new or overhauled parts, based on
information from independent third parties and SH&E files.
SH&E performed a detailed pricing survey for the 2003 Annual Appraisal and spot
checked values from each pool of parts and found no material change in
individual parts' values. New pricing was performed on a small group of parts
with higher values to validate their pricing consistency with similar parts from
the prior appraisal. A small sample of new parts was also sent to several major
parts vendors who provided current trading values. As before, most of these
parts are associated with new production aircraft with a limited secondary
market and many of the returned vendor-provided values were new or catalogue
prices.
3.2.3 CURRENT MARKET VALUE DETERMINATION
SH&E applied the results of the sample pricing to each appropriate strata and,
in addition, applied price matches from other sources. The sources included
airline parts pooling price lists and inventory and purchase records from seven
major U.S. and European airlines and were reviewed in order to determine
additional current market values. More than five million parts pricing records
were examined in order to match a part number and reference price for each part
in the Continental inventory.
Although not required to re-price the inventory for the 2003 Semi-annual
Appraisal, there were several large new additions to SH&E's pricing database
since the prior appraisal, and all pricing was updated using the new
information. SH&E obtained a market price for the small sample of parts based on
an assumption that each part would be purchased independently, as a single unit,
and in a new or overhauled condition for rotables and new condition for
expendables. In cases where more than one quote was obtained, SH&E attempted to
determine the most reasonable value.
This file matching procedure, using both the initial sample and SH&E's internal
resources, was successful in determining market price for approximately 18,400
line items representing approximately 78% of the line items and 85% of the
historic cost.
(SH&E LOGO) Page 15
3.2.4 CONDITION AND QUANTITY ADJUSTMENT
The CMV of unserviceable parts was calculated using ratios of serviceable to
unserviceable values obtained from prior SH&E parts appraisals and were applied
to SH&E's findings made during the physical inspection and audit.
Continental provided SH&E with a percentage unserviceable by part number. This
statistic was tested against internal records but, during this appraisal, no
supplier audits or surveys' were made to validate the unserviceable percentages
provided by the airline. Selected vendor audits will be performed during the
2004 Annual Appraisal.
For the 2003 Semi-annual Appraisal, SH&E revisited Continental's parts
facilities in Los Angeles and Houston, George Bush and performed a first time
visit to Guam to physically inspect the assets and to verify the accuracy of the
inventory reporting system. SH&E sampled 694 line items representing 3,622
individual parts and $51.8 million on a historical cost basis at the three
facilities and found discrepancies in 10 parts' records representing
approximately $20,000 of cost. The error represented by these parts is well
within the quantity adjustment applied to the entire population of parts by
SH&E. As before, the accuracy of Continental's inventory was above industry
standard. SH&E's review of the associated records also revealed no
discrepancies.
(SH&E LOGO) Page 16
4
4.0 THE MARKET FOR THE SUBJECT ASSETS
Since the prior appraisal, the market for Continental's spare parts has improved
slightly as part dealers are reentering the market in greater numbers to
purchase new generation parts, of the type in this inventory. While there is
little immediate need for most of these parts as the associated aircraft are so
new, there is a significant incentive to acquire these parts in advance of
customer demand because in most cases, there are few, if any, of these parts on
the secondary market.
Most of the Continental inventory is associated with aircraft that have enjoyed
extensive production runs and also have a wide operator base. The exceptions are
the 757-300 and the 767-400 aircraft, both of which have limited production runs
and small operator bases. There have been a total of 62 757-300 aircraft ordered
for 8 operators and 37 767-400 aircraft ordered for two operators, Continental
and Delta. There is, however, very significant commonality between the 757-200
and 757-300 aircraft and also between the 767-400 and the 777.
The non-OEM parts aftermarket, generally estimated to approximate $1.2 billion
in annual revenues, has obtained the majority of its product from either airline
surplus sales or from dismantled aircraft. There have been no significant sales
of surplus parts for the late generation aircraft represented by this parts
inventory or for their associated engines. Nor have any of these aircraft types
been dismantled for parts other than incident-related aircraft. Consequently,
there is very little of this type of material available on the parts
aftermarket. The same is true for the engine market where the OEMs have
maintained tight control of any aftermarket relating to newer generation
engines. SH&E is of the opinion that the Subject Assets, if offered for sale,
would include some of the most marketable material in the commercial aviation
parts aftermarket.
(SH&E LOGO) Page 17
5
5.0 QUALIFICATIONS
Founded in 1963 and with offices in New York, Boston, Washington and London,
SH&E is the world's largest consulting firm specializing in commercial aviation.
Its staff of over 90 personnel encompasses expertise in all disciplines of the
industry and the firm has provided appraisal, consulting, strategic planning and
technical services to airlines, leasing companies, government agencies, airframe
and engine manufacturers, and financial institutions.
SH&E's appraisal staff are all members of the International Society of Transport
Aircraft Trading (ISTAT), the internationally recognized body for the
certification of aircraft appraisers. SH&E performs all appraisals in accordance
with the definitions, guidelines and standards set forth by ISTAT. SH&E's
officer responsible for all appraisals is an ISTAT Senior Appraiser.
SH&E annually values approximately $20 billion of aviation assets including
commercial and military equipment, airline fleets and lease portfolios. The
appraisals range from full appraisals involving detailed aircraft and record
inspections conducted by SH&E's technical staff to the valuation of tax-based
leases. SH&E's proprietary aircraft residual value model is widely accepted by
the rating agencies as a reliable forecasting tool. In addition to the above
aircraft valuations, SH&E annually values in excess of $3 billion worth of
aircraft spare parts and spare engines. SH&E routinely values flight simulators,
hangar tooling, ground equipment, gates, slots, maintenance facilities and Fixed
Base Operations.
A related service that SH&E offers its Clients is Asset Management. Over the
last few years, SH&E has been the principal asset manager responsible for the
recovery and subsequent re-marketing of a number of individual aircraft and some
significant portfolios.
This active participation in the market place provides SH&E with practical and
first hand knowledge of the values and lease rates of aircraft, engines and
parts.
(SH&E LOGO) Page 18
6
6.0 LIMITATIONS
SH&E used information supplied by the Client together with in-house data
accumulated through other recent studies of aircraft parts transactions.
SH&E's opinions are based upon historical relationships and expectations that it
believes are reasonable.
Some of the underlying assumptions, including those described above are detailed
explicitly or implicitly elsewhere in this report, may not materialize because
of unanticipated events and circumstances. SH&E's opinions could, and would,
vary materially, should any of the above assumptions prove to be inaccurate.
The opinions expressed herein are not given for, or as an inducement or
endorsement for, any financial transaction. They are prepared for the exclusive
use of the addressee. SH&E accepts no responsibility for damages, if any, that
result from decisions made or actions taken based on this report.
This report does not address the validity of title or ownership of the items
discussed herein.
This report reflects SH&E's expert opinion and best judgment based upon the
information available to it at the time of its preparation. SH&E does not have,
and does not expect to have, any financial interest in the appraised property.
For SH&E:
/s/ CLIVE G. MEDLAND
Clive G. Medland, FRAeS
Senior Vice President
Senior Appraiser
International Society of
Transport Aircraft Trading
November 13, 2003
(SH&E LOGO) Page 19
SH&E INTERNATIONAL AIR TRANSPORT CONSULTANCY
APPENDIX A
VALUE BY AIRCRAFT TYPE BY MATERIAL CLASS
SELECTED SPARE PARTS VALUATION SUMMARY
BY MATERIAL CLASS
ADJUSTED CURRENT MARKET ($000)
ASSET GROUP ROTABLE EXPENDABLE TOTAL
----------- ------- ---------- -----
737-7/8/9 $146,892.3 $ 22,915.1 $169,807.4
757-200 $ 66,666.5 $ 6,185.6 $ 72,852.1
757-300 $ 2,746.3 $ 194.1 $ 2,940.4
767-200 $ 6,362.8 $ 2,545.1 $ 8,907.9
767-400 $ 52,878.5 $ 2,939.8 $ 55,818.3
777-200 $ 80,082.2 $ 13,066.1 $ 93,148.3
--------- ---------- ---------- ----------
Grand Total $355,628.6 $ 47,845.8 $403,474.4
SH&E INTERNATIONAL AIR TRANSPORT CONSULTANCY
APPENDIX B
SUMMARY OF INVENTORY ADJUSTMENTS
SELECTED SPARE PARTS: SUMMARY OF INVENTORY ADJUSTMENTS
BEGINNING INVENTORY
STARTING CO INVENTORY
-----------------------------------
GROUP LINES QTY
----- ----- ---
737-7/8/9 6,365 336,754
757-200 7,691 206,075
757-300 690 12,357
767-200 1,330 26,460
767-400 4,141 74,684
777-200 6,058 135,817
----------- ------ -------
Grand Total 26,275 792,147
=========== ====== =======
ADJUSTMENTS
LESS BRAKES AND TIRES
-----------------------------------
GROUP LINES QTY
----- ----- ---
737-7/8/9 0 0
757-200 3 96
757-300 2 28
767-200 2 9
767-400 1 45
777-200 3 315
----------- ------ -------
Grand Total 11 493
=========== ====== =======
LESS CO SPECIFIC ITEMS
-----------------------------------
GROUP LINES QTY
----- ----- ---
737-7/8/9 594 48,055
757-200 583 26,729
757-300 57 1,773
767-200 48 856
767-400 355 20,921
777-200 1,000 26,409
----------- ----- -------
Grand Total 2,637 124,743
=========== ===== =======
TOTAL EXCLUSIONS
-----------------------------------
GROUP LINES QTY
----- ----- ---
737-7/8/9 594 48,055
757-200 586 26,825
757-300 59 1,801
767-200 50 865
767-400 356 20,966
777-200 1,003 26,724
----------- ----- -------
Grand Total 2,648 125,236
=========== ===== =======
FINAL INVENTORY
INVENTORY AFTER ADJUSTMENTS
-----------------------------------
GROUP LINES QTY
----- ----- ---
737-7/8/9 5,771 288,699
757-200 7,105 179,250
757-300 631 10,556
767-200 1,280 25,595
767-400 3,785 53,718
777-200 5,055 109,093
----------- ------ -------
Grand Total 23,627 666,911
=========== ====== =======
SH&E INTERNATIONAL AIR TRANSPORT CONSULTANCY
APPENDIX C
PROPORTION OF SERVICEABLE AND
UNSERVICEABLE PARTS
CONTINENTAL AIRLINES SELECTED PARTS VALUATION SUMMARY ($000) JUNE 2003 (REVISED)
------------------------------------------------------------------------------------------------------------------------------------
UNADJUSTED CURRENT MARKET VALUE ADJUSTED CURRENT MARKET VALUE
----------------------------------------------------------- -------------------------------------------------------------------
VALUE GROUP SERVICEABLE UN-SERVICEABLE TOTAL SERVICEABLE UN-SERVICEABLE TOTAL % UNSERVICEABLE
----------- ----------- -------------- ----- ----------- -------------- ----- ---------------
737-7/8/9 $147,039.4 $ 45,876.1 $192,915.4 $146,892.3 $ 22,915.1 $169,807.4 13.5%
757-200 $ 66,793.4 $ 15,493.5 $ 82,286.9 $ 66,666.5 $ 6,185.6 $ 72,852.1 8.5%
757-300 $ 2,749.0 $ 485.8 $ 3,234.8 $ 2,746.3 $ 194.1 $ 2,940.4 6.6%
767-200 $ 6,394.8 $ 6,394.6 $ 12,789.4 $ 6,362.8 $ 2,545.1 $ 8,907.9 28.6%
767-400 $ 52,931.4 $ 7,356.8 $ 60,288.2 $ 52,878.5 $ 2,939.8 $ 55,818.3 5.3%
777-200 $ 80,162.3 $ 26,158.4 $106,320.7 $ 80,082.2 $ 13,066.1 $ 93,148.3 14.0%
--------- ---------- ---------- ---------- ---------- ---------- ---------- ----
TOTAL $356,070.4 $101,765.2 $457,835.6 $355,628.6 $ 47,845.8 $403,474.4 11.9%
========= ========== ========== ========== ========== ========== ========== ====
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and Bylaws provide that the
Company will indemnify each of its directors and officers to the full extent
permitted by the laws of the State of Delaware and may indemnify certain other
persons as authorized by the Delaware General Corporation Law (the "GCL").
Section 145 of the GCL provides as follows:
"(a) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
the person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that the person is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
a manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the present or former director, officer, employee or agent is proper in
the circumstances because the person has met the applicable standard of
conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such
II-1
directors, or if such directors so direct, by independent legal counsel in
a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in this
section. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon
such terms and conditions, if any, as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in such person's official capacity and as to action in another capacity
while holding such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against such person and incurred by such person in
any such capacity, or arising out of such person's status as such, whether
or not the corporation would have the power to indemnify such person
against such liability under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorneys' fees)."
II-2
The Certificate of Incorporation and Bylaws also limit the personal
liability of directors to the Company and its stockholders for monetary damages
resulting from certain breaches of the directors' fiduciary duties. The bylaws
of the Company provide as follows:
"No Director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (i) for any breach of
the Director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
GCL, or (iv) for any transaction from which the Director derived any
improper personal benefit. If the GCL is amended ... to authorize corporate
action further eliminating or limiting the personal liability of directors,
then the liability of a Director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the GCL, as so amended."
The Company maintains directors' and officers' liability insurance.
ITEM 21. EXHIBITS.
The Index to Exhibits to this Registration Statement is incorporated herein
by reference.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (1)(i) and (1)(ii) shall not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished
to the Commission by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's
II-3
annual report pursuant to section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant, pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by any such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether or not such indemnification is against
public policy as expressed in the Securities Act of 1933 and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on November 20, 2003.
CONTINENTAL AIRLINES, INC.
By: /s/ JENNIFER L. VOGEL
------------------------------------
Jennifer L. Vogel
Senior Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated, on November 20, 2003.
SIGNATURE TITLE
--------- -----
* Chairman of the Board, Chief Executive Officer
--------------------------------------------------- (Principal Executive Officer) and Director
Gordon M. Bethune
* President, Chief Operating Officer and Director
---------------------------------------------------
Lawrence W. Kellner
* Senior Vice President and Chief Financial Officer
--------------------------------------------------- (Principal Financial Officer)
Jeffrey J. Misner
* Vice President and Controller
--------------------------------------------------- (Principal Accounting Officer)
Chris Kenny
* Director
---------------------------------------------------
Thomas J. Barrack, Jr.
* Director
---------------------------------------------------
David Bonderman
* Director
---------------------------------------------------
Kirbyjon Caldwell
* Director
---------------------------------------------------
Patrick Foley
* Director
---------------------------------------------------
Douglas H. McCorkindale
Director
---------------------------------------------------
Henry L. Meyer III
II-5
SIGNATURE TITLE
--------- -----
* Director
---------------------------------------------------
George G.C. Parker
* Director
---------------------------------------------------
Richard W. Pogue
* Director
---------------------------------------------------
William S. Price III
* Director
---------------------------------------------------
Karen Hastie Williams
* Director
---------------------------------------------------
Ronald B. Woodard
* Director
---------------------------------------------------
Charles A. Yamarone
*By: /s/ JENNIFER L. VOGEL
-----------------------------------------
Jennifer L. Vogel
Attorney-in-Fact
II-6
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
4.1 Amended and Restated Indenture, dated as of May 9, 2003,
among Continental Airlines, Inc., Wilmington Trust Company,
as Trustee, Morgan Stanley Capital Services Inc., as
Liquidity Provider, and MBIA Insurance Corporation, as
Policy Provider, made with respect to the issuance of
Floating Rate Secured Notes due 2007 and the Floating Rate
Secured Subordinated Notes due 2007 (incorporated by
reference to Exhibit 4.1 to Continental Airlines, Inc.'s
Registration Statement on Form S-4 (File No. 333-104689)
(the "April 2003 S-4"))
4.2 Form of Exchange Floating Rate Secured Subordinated Note Due
2007 (included in Exhibit 4.1)
4.3 Collateral Maintenance Agreement, dated as of December 6,
2002, between Continental Airlines, Inc. and MBIA Insurance
Corporation (incorporated by reference to Exhibit 4.3 to the
April 2003 S-4)
4.4 Amendment No. 1 to Collateral Maintenance Agreement, dated
as of May 9, 2003, between Continental Airlines, Inc. and
MBIA Insurance Corporation (incorporated by reference to
Exhibit 4.11 to the April 2003 S-4)
4.5 Spare Parts Security Agreement, dated as of December 6,
2002, between Continental Airlines, Inc. and Wilmington
Trust Company, as Security Agent (incorporated by reference
to Exhibit 4.4 to the April 2003 S-4)
4.6 Amendment No. 1 to Spare Parts Security Agreement, dated as
of May 9, 2003, between Continental Airlines, Inc. and
Wilmington Trust Company, as Security Agent (incorporated by
reference to Exhibit 4.12 to the April 2003 S-4)
4.7 Reference Agency Agreement, dated as of December 6, 2002,
among Continental Airlines, Inc., Wilmington Trust Company,
as Trustee, and Wilmington Trust Company, as Reference Agent
(incorporated by reference to Exhibit 4.5 to the April 2003
S-4)
4.8 Amendment No. 1 to Reference Agency Agreement, dated as of
May 9, 2003, between Continental Airlines, Inc., Wilmington
Trust Company, as Trustee, and Wilmington Trust Company, as
Reference Agent (incorporated by reference to Exhibit 4.13
to the April 2003 S-4)
4.9 Revolving Credit Agreement, dated as of December 6, 2002,
between Wilmington Trust Company, as Trustee, and Morgan
Stanley Capital Services Inc., as Liquidity Provider
(incorporated by reference to Exhibit 4.6 to the April 2003
S-4)
4.10 Guarantee Agreement, dated as of December 6, 2002, by Morgan
Stanley, relating to the Revolving Credit Agreement
(incorporated by reference to Exhibit 4.7 to the April 2003
S-4)
4.11 Financial Guarantee Insurance Policy #39753 of MBIA
Insurance Corporation (incorporated by reference to Exhibit
4.8 to the April 2003 S-4)
4.12 Exchange and Registration Rights Agreement, dated as of May
9, 2003, between Continental Airlines, Inc. and Morgan
Stanley & Co. Incorporated*
4.13 Purchase Agreement, dated as of May 2, 2003, between
Continental Airlines, Inc. and Morgan Stanley & Co.
Incorporated, as Initial Purchaser*
5.1 Opinion of Hughes Hubbard & Reed LLP relating to validity of
the New Subordinated Notes*
12.1 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Ernst & Young LLP
23.2 Consent of Hughes Hubbard & Reed LLP (included in its
opinion filed as exhibit 5.1)
23.3 Consent of Simat, Helliesen & Eichner, Inc.
24.1 Powers of Attorney*
25.1 Statement of Eligibility of Wilmington Trust Company for the
Floating Rate Secured Subordinated Notes Due 2007, on Form
T-1*
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees*
99.4 Form of Letter to Clients*
---------------
* Previously filed.