REGISTRATION STATEMENT
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CONTINENTAL AIRLINES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4512 74-2099724
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
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)
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Jennifer L. Vogel, Esq.
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
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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. |_|
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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. |_|
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITES TO BE REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE(1)
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Floating Rate Secured Notes
Due 2007 $200,000,000 100% $200,000,000 $16,180(2)
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(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 equal to $12,740.53 against the registration fee payable for this
registration statement due to a post-filing adjustment of the registration
fee for the Continental Airlines, Inc. registration statment 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.
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SUBJECT TO COMPLETION, DATED APRIL __, 2003
PROSPECTUS
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.
$200,000,000
CONTINENTAL AIRLINES, INC.
OFFER TO EXCHANGE
FLOATING RATE SECURED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
FOR ANY AND ALL OUTSTANDING FLOATING RATE SECURED NOTES DUE 2007
We are offering to issue the new notes to satisfy our obligations contained
in the registration rights agreement entered into when the old notes were sold
in transactions exempt from, or not subject to, registration under the
Securities Act.
The terms of the new notes will be substantially identical to the terms of
the old notes, except that the new notes will be registered under the Securities
Act of 1933, the transfer restrictions, registration rights and provisions for
additional interest relating to the old notes will not apply to the new notes,
and the new notes will be available only in book-entry form.
There is no existing market for the new notes. The new notes will not be
listed on any national securities exchange.
All old 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.
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THE NOTES AND THE EXCHANGE OFFER INVOLVE RISKS. SEE "RISK FACTORS" ON PAGE
20.
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PRINCIPAL INTEREST FINAL SCHEDULED
AMOUNT RATE(1) PAYMENT DATE
------------ ------------------------- ----------------
$200,000,000 USD 3-Month LIBOR + 0.90% December 6, 2007
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(1) Subject to a maximum rate of 12% applicable only for periods as to which
Continental has failed to pay accrued interest when due and failed to cure
such nonpayment.
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 PAGE
PRESENTATION OF INFORMATION......3 DESCRIPTION OF THE NOTES.........45
FORWARD-LOOKING STATEMENTS.......3 General.......................45
WHERE YOU CAN FIND MORE Payments of Principal
INFORMATION..................3 and Interest...............45
INCORPORATION OF CERTAIN Determination of LIBOR........46
DOCUMENTS BY REFERENCE.......4 Break Amount..................47
PROSPECTUS SUMMARY...............5 Redemption....................47
The Exchange Offer............5 Collateral....................48
Summary of Terms of Notes.....8 Event of Default..............52
Collateral....................9 Remedies......................53
Cash Flow Structure..........10 Controlling Party.............55
The Notes....................11 Priority of Distributions.....55
Summary Financial and Possible Issuance of
Operating Data............16 Subordinated Notes.........57
RISK FACTORS....................20 Modifications and Waiver
Terrorist Attacks and of the Indenture and
International Certain Other Agreements....57
Hostilities...............20 Merger, Consolidation and
Risk Factors Relating Transfer of Assets.........58
to the Company............20 Indemnification...............59
Risk Factors Relating Governing Law.................59
to the Airline Industry...23 The Trustee...................59
Risk Factors Relating Book Entry; Delivery
to the Notes and and Form...................59
the Exchange Offer........24 DESCRIPTION OF THE
Risk Factors Relating LIQUIDITY FACILITY...........62
to the Policy Provider....27 General.......................62
USE OF PROCEEDS.................27 Drawings......................62
RATIO OF EARNINGS TO Reimbursement of Drawings.....64
FIXED CHARGES...............28 Liquidity Events of Default
THE COMPANY.....................29 and Termination............66
Domestic Operations..........29 Liquidity Provider............66
International Operations.....30 DESCRIPTION OF THE POLICY
Outlook......................31 AND THE POLICY
DESCRIPTION OF THE POLICY PROVIDER AGREEMENT...........67
PROVIDER....................35 The Policy....................67
General......................35 General.......................69
MBIA Financial Information...35 Definitions...................69
Financial Strength Rating The Policy Provider
of MBIA...................36 Agreement..................70
THE EXCHANGE OFFER..............37 DESCRIPTION OF THE APPRAISAL.....71
Terms of the Exchange CERTAIN U.S. FEDERAL INCOME
Offer.....................37 TAX CONSEQUENCES.............73
Interest on the New Notes....39 Exchange of Old Notes
Procedures for Tendering.....40 for New Notes..............73
Acceptance of Old Notes PLAN OF DISTRIBUTION.............73
for Exchange; Delivery LEGAL MATTERS....................74
of New Notes..............41 EXPERTS..........................74
Book-Entry Transfer..........42 INDEX OF TERMS...........APPENDIX I
Guaranteed Delivery APPRAISAL LETTER........APPENDIX II
Procedures................42
Withdrawal of Tenders........42
Conditions...................43
Exchange Agent...............43
Fees and Expenses............44
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.
FORWARD-LOOKING STATEMENTS
This Prospectus and the documents we incorporate by reference may contain
statements that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include any statements that
predict, forecast, indicate or imply future results, performance or
achievements, and may contain the words "believe", "anticipate", "expect",
"estimate", "project", "will be", "will continue", "will result", or words or
phrases of similar meaning.
Any such forward-looking statements are not assurances of future
performance and involve risks and uncertainties. Actual results may vary
materially from anticipated results for a number of reasons, including those
stated in our 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 special 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.
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
(the "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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
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
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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
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................................ 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
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.
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
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 December 6, 2002, Continental issued an
aggregate of $200,000,000 Floating Rate Secured
Notes due 2007 in transactions exempt from or not
subject to the registration requirements of the
Securities Act.
When we use the term "Old Notes" in this
Prospectus, we mean the Floating Rate Secured
Notes due 2007 which were issued on December 6,
2002 and which were not registered with the
Commission.
When we use the term "New Notes" in this
Prospectus, we mean the Floating Rate Secured
Notes due 2007 registered with the Commission and
offered hereby in exchange for the Old Notes.
When we use the term "Notes" in this Prospectus,
the related discussion applies both to the Old
Notes and the New Notes.
Registration Rights
Agreement................. On December 6, 2002, Continental entered into a
Registration Rights Agreement with the Initial
Purchaser providing, among other things, for the
Exchange Offer being made pursuant to this
Prospectus.
The Exchange Offer........... Continental is offering New Notes in exchange for
an equal principal amount of Old Notes. The New
Notes will be issued to satisfy Continental's
obligations under the Registration Rights
Agreement. As of the date of this Prospectus,
$200,000,000 aggregate principal amount of Old
Notes are outstanding. Old Notes may be tendered
only in integral multiples of $1,000.
Resale of New Notes.......... We believe that you can offer for resale, resell
or otherwise transfer the New Notes without
complying with the registration and prospectus
delivery requirements of the Securities Act if:
o you acquire the New Notes in the ordinary
course of your business;
o you have no arrangement or understanding with
any person to participate in the distribution
of the New Notes; and
o you are not an "affiliate", as defined in the
Rule 405 under the Securities Act, of
Continental or a broker-dealer who acquired
Old Notes directly from Continental for your
own account.
If any of these conditions is not satisfied and
you transfer any New 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 Notes in
exchange for Old 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 Notes. A broker-dealer may use this
prospectus for an offer to resell, resale or
other transfer of such New 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 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 Notes................. If you wish to accept the Exchange Offer, you
must deliver your Old 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
Notes. A Letter of Transmittal has been sent to
Noteholders and a form is attached as an exhibit
to the Registration Statement.
If you hold Old 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 Notes and your Old
Notes are not immediately available, you cannot
deliver your Old 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 or
you cannot complete the book-entry transfer
procedures prior to the Expiration Date, you may
tender your Old 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 Notes at any
time prior to 5:00 p.m., New York City time, on
the Expiration Date. To withdraw a tender of Old
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 Notes
and Delivery of New
Notes..................... Subject to certain conditions, any and all Old
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 Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date.
Registration, Clearance
and Settlement............ The New 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 Notes..... Once the Exchange Offer has been completed, if
you do not exchange your Old Notes for New 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 Notes, unless (i)
such Old 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 Notes for New 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 Notes for the New
Notes.
SUMMARY OF TERMS OF NOTES
Principal Amount.................. $200,000,000
Loan to Collateral Value (1)...... 42.8%
Interest Payment Dates............ March 6, June 6, September 6 and December 6
Final Scheduled Payment Date...... December 6, 2007
Final Legal Maturity Date......... December 6, 2009
Minimum Denomination.............. $1,000
Section 1110 Protection (2)....... Yes
Liquidity Facility Coverage (3)... 8 quarterly
interest payments
Policy Provider Coverage (3)...... Interest when due and principal
no later than the Final Legal Maturity Date
(1) This percentage has been determined by dividing the outstanding principal
amount of the Notes (minus Cash Collateral) by the appraised value of the
Collateral determined as of December 25, 2002. Continental is required to
provide to the Policy Provider and the Trustee a semiannual appraisal of
the Collateral. If any such subsequent appraisal indicates that the loan to
Collateral value is greater than 45%, Continental is required to provide
additional collateral or to reduce the principal amount of Notes
outstanding so that the loan to Collateral value is not greater than 45%.
Continental deposited $13,056,950 as Cash Collateral at the initial
issuance of the Old Notes so that the initial loan to Collateral value
would not exceed 45%, based on the appraisal determined as of August 25,
2002. The loan to Collateral value, determined using the appraisal as of
December 25, 2002, would have been 45.8% without giving effect to such
deposit of Cash Collateral. Continental expects to satisfy the 45%
requirement at the time of the next appraisal due in August 2003, based
upon its projected purchases of spare parts, in which case Continental will
be entitled to withdraw such Cash Collateral. However, no assurance can be
given that such 45% requirement will be satisfied. An appraised value is
only an estimate and reflects certain assumptions. See "Description of the
Appraisal".
(2) 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.
(3) The amounts available under the Liquidity Facility and the Policy for the
payment of accrued interest have been calculated utilizing the Capped
Interest Rate, which is the maximum interest rate applicable only for
periods as to which Continental has failed to pay accrued interest when due
and failed to cure such nonpayment.
COLLATERAL
The 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
o 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,
o any engine utilized on any such aircraft or
o 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 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 December 25, 2002:
SPARE PARTS QUANTITY(1)
-----------------------
AIRCRAFT MODEL EXPENDABLES ROTABLES TOTAL APPRAISED VALUE(2)
-------------- ----------- -------- ------- ------------------
737-700................ 877 24 901
737-700/800............ 278,912 6,942 285,854
737-800................ 3,777 191 3,968
737-900................ 821 10 831
------- ------- -------
737-7/8/9 Subtotal..... 284,387 7,167 291,554 $185,972,600
757-200................ 185,731 3,391 189,122 69,352,800
757-300................ 10,946 96 11,042 3,116,700
767-200................ 25,485 227 25,712 8,946,700
767-400................ 51,147 1,586 52,733 55,741,200
777-200................ 111,210 3,006 114,216 113,712,000
------- ------- ------- ------------
Total.................. 668,906 15,473 684,379 $436,841,900
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(1) This quantity of spare parts used in preparing the appraised value was
determined as of December 25, 2002. 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.
CASH FLOW STRUCTURE
Set forth below is a diagram illustrating the structure of certain cash
flows applicable to the Notes.
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(1) The Liquidity Facility is sufficient to cover eight consecutive quarterly
interest payments, but does not cover any other amounts payable on the
Notes.
(2) The Policy covers regular interest payments and outstanding principal no
later than the Final Legal Maturity Date, but does not cover any other
amounts payable on the Notes.
THE NOTES
Issuer....................... Continental Airlines, Inc.
Notes Offered................ Floating Rate Secured Notes due 2007.
Use of Proceeds.............. The proceeds from the sale of the Old Notes were
used for general corporate purposes. Continental
will not receive any proceeds from the exchange
of the New Notes for the Old Notes.
Trustee and Paying Agent..... Wilmington Trust Company.
Liquidity Provider........... Morgan Stanley Capital Services.
Policy Provider.............. MBIA Insurance Corporation.
Final Scheduled Payment
Date...................... The entire principal amount of the Notes is
scheduled for payment on December 6, 2007.
Final Legal Maturity Date.... December 6, 2009.
Interest..................... The Notes will accrue interest at a variable rate
per annum set forth on the cover page of this
Prospectus. The interest rate will be subject to
a maximum equal to the Capped Interest 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. For all other periods, the interest
rate on the Notes will not be capped. 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
Notes--Determination of LIBOR".
Interest Payment Dates....... March 6, June 6, September 6 and December 6,
commencing on March 6, 2003.
Record Dates................. The fifteenth day preceding the related Interest
Payment Date.
Optional Redemption.......... Continental may elect to redeem all or (so long
as no Payment Default has occurred and is
continuing) some of the Notes at any time prior
to maturity. The redemption price in such case
will be the principal amount of the Notes,
together with accrued and unpaid interest, LIBOR
break amount, if any, and, if redeemed prior to
the third 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
----------------------------- -------
1st 1.50%
2nd 1.00
3rd 0.50
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 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
o 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,
o any engine utilized on any such aircraft or
o 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 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
Ratio..................... 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 ratio
is greater than 45% or the ratio of the value of
Rotables included in the Collateral to the loan
is less than 150%, Continental is required to
provide additional collateral or to reduce the
principal amount of Notes outstanding so that the
loan to collateral value ratio is not greater
than 45% and the Rotables value to loan ratio is
not less than 150%.
Section 1110 Protection...... Continental's outside counsel has provided its
opinion to the Trustee and the Policy Provider
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.
Liquidity Facility........... Under the Liquidity Facility, the Liquidity
Provider will, if necessary, make advances in an
aggregate amount sufficient to pay interest on
the Notes on up to eight successive quarterly
Interest Payment Dates. Drawings under the
Liquidity Facility cannot be used to pay any
other amount in respect of the Notes.
Upon each drawing under the Liquidity Facility to
pay interest on the Notes, the Trustee will
reimburse the Liquidity Provider for the amount
of such drawing. Such reimbursement obligation
and all interest, fees and other amounts owing to
the Liquidity Provider under the Liquidity
Facility and certain other agreements will rank
senior to the Notes in right of payment.
Policy Coverage.............. Under the Policy, the Policy Provider is required
to honor drawings to cover:
o Any shortfall on any Distribution Date in
funds to be distributed as accrued interest
on the Notes.
o Any shortfall on the Final Legal Maturity
Date in funds to be distributed as principal
of, and accrued interest on, the Notes.
o Any shortfall in the proceeds of the
disposition of the remaining Collateral from
the amount required to pay principal of, and
accrued interest on, the Notes on the
Distribution Date established in connection
with such disposition.
o If certain payments with respect to the Notes
are by court order determined to be a
"preferential transfer" under the U.S.
Bankruptcy Code or otherwise required to be
returned, the amount of such payments.
o After the continuance of a Payment Default
for eight consecutive Interest Periods, any
shortfall in funds required to pay principal
of, and accrued interest on, the Notes on the
Distribution Date established in connection
with such Payment Default. If such
Distribution Date would occur prior to the
Final Scheduled Payment Date, instead of
paying such shortfall on such Distribution
Date, the Policy Provider may, so long as no
Policy Provider Default is continuing, elect
to pay:
o Any shortfall on such Distribution Date in
funds required to pay accrued interest on
the Notes.
o 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 Notes
on such Distribution Date.
Notwithstanding such election by the Policy
Provider, 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 then
outstanding principal balance of the Notes and
accrued and unpaid interest thereon. Further,
notwithstanding such election by the Policy
Provider, upon the occurrence of a Policy
Provider Default, the Trustee shall, on any
Business Day elected by the Trustee upon 20 days'
written notice to the Policy Provider, make a
drawing under the Policy for an amount equal to
the then outstanding principal balance of the
Notes and accrued and unpaid interest thereon.
Any shortfall for which a drawing under the
Policy may be made as described above will be
calculated after the application of funds
available through drawings under the Liquidity
Facility and withdrawals from the Cash Collateral
Account.
The Policy Provider is 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, 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
remain unreimbursed from payments made by
Continental at the end of such 24-month period,
(2) the date on which any Downgrade Drawing,
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 Notes and remain unreimbursed
from payments made by Continental at the end of
such 24-month period and (3) the date on which
all of the 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.
The reimbursement of drawings under the Policy
ranks junior to further distributions on the
Notes.
Control of Trustee........... 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 provisions that
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:
o The Policy Provider or, if a Policy Provider
Default is continuing, the holders of more
than 50% in aggregate unpaid principal amount
of the Notes then outstanding.
o Under certain circumstances, the Liquidity
Provider.
STANDARD &
MOODY'S POOR'S
------- ----------
Threshold Rating for
the Liquidity Provider....... Short Term............ P-1 A-1
Liquidity Provider Rating.... Morgan Stanley, the parent company of Morgan
Stanley Capital Services, meets the Threshold
Rating requirement and has guaranteed Morgan
Stanley Capital Services' obligations under the
Liquidity Facility.
MOODY'S
-------
Policy Provider Rating....... Financial Strength................ Aaa
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 certain reclassifications to conform to the current year
presentation) 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 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 months ended March 31, 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 for fleet impairment
losses and other special charges) that Continental considers necessary for the
fair presentation of the financial position and results of operations for these
periods. Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31,
2003 2002 2002 2001 2000 1999 1998
-------- ------- ---------- -------- -------- -------- ------
(IN MILLIONS OF DOLLARS, EXCEPT OPERATING DATA, PER SHARE DATA AND RATIOS)
FINANCIAL DATA--OPERATIONS:(1)
Operating Revenue.................... $ 2,042 $ 1,993 $ 8,402 $ 8,969 $ 9,899 $ 8,639 $ 7,927
Operating Expenses................... 2,266 2,180 8,714 8,825 9,170 8,024 7,226
--------- -------- -------- -------- -------- -------- ---------
Operating Income (Loss).............. (224) (187) (312) 144 729 615 701
Non-operating Income (Expense), net.. (86) (67) (303) (258) (167) 183 (59)
--------- -------- -------- -------- -------- -------- ---------
Income (Loss) before Income Taxes
and Cumulative Effect of Changes
in Accounting Principles.......... (310) (254) (615) (114) 562 798 642
Net Income (Loss).................... $ (221) $ (166) $ (451) $ (95) $ 342 $ 455 $ 383
======== ======== ======= ======= ======= ======= ========
Earnings (Loss) per Share:
Basic............................. $ (3.38) $(2.61) $(7.02) $(1.72) $ 5.62 $ 6.54 $ 6.34
======== ======== ======= ======= ======= ======= ========
Diluted........................... $ (3.38) $(2.61) $(7.02) $(1.72) $ 5.45 $ 6.20 $ 5.02
======== ======== ======= ======= ======= ======= ========
Shares used for Computation:
Basic............................. 65.3 63.5 64.2 55.5 60.7 69.5 60.3
Diluted........................... 65.3 63.5 64.2 55.5 62.8 73.9 80.3
Ratio of Earnings to Fixed Charges
(2).................................. -- -- -- -- 1.51x 1.80x 1.93x
======== ======== ======= ======= ======= ======= ========
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------------
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)........ 9,245 10,057 41,016 44,238 46,896 45,540 43,625
Revenue passenger miles
(millions) (3)...................... 13,274 14,032 59,349 61,140 64,161 60,022 53,910
Cargo ton miles (millions)............ 233 208 908 917 1,096 1,000 856
Available seat miles (millions) (4)... 19,076 18,951 80,122 84,485 86,100 81,946 74,727
Passenger load factor (5)............. 69.6% 74.0% 74.1% 72.4% 74.5% 73.2% 72.1%
Passenger revenue per available
seat mile (cents)................... 8.45 8.77 8.61 8.98 9.84 9.12 9.23
Total revenue per available seat mile
(cents)............................. 9.31 9.40 9.27 9.58 10.52 9.75 9.85
Operating cost per available seat mile
(cents) (6)......................... 10.25 10.09 9.53 9.22 9.68 9.07 9.03
Special items per available seat mile. 0.34 0.48 0.31 (0.36) N/A 0.09 0.14
Average yield per revenue passenger mile
(cents) (7)......................... 12.14 11.84 11.63 12.42 13.20 12.45 12.79
Average price per gallon of fuel,
excluding fuel taxes (cents)........ 98.50 60.17 69.97 78.24 84.21 46.56 46.83
Average price per gallon of fuel,
including fuel taxes (cents)........ 102.87 64.39 74.01 82.48 88.54 50.78 51.20
Fuel gallons consumed (millions)...... 305 308 1,296 1,426 1,533 1,536 1,487
Average fare per revenue passenger.... $174.27 $165.21 $168.25 $171.59 $180.66 $164.11 $158.02
Average length of aircraft flight (miles) 1,257 1,191 1,225 1,185 1,159 1,114 1,044
Average daily utilization of each
aircraft (hours) (8)................ 9:19 9:31 9:31 10:19 10:36 10:29 10:13
Actual aircraft in fleet at end of
period (9).......................... 362 364 366 352 371 363 363
REGIONAL JET AND TURBOPROP STATISTICS
(10):
Revenue passenger miles
(millions) (3)...................... 1,078 835 3,952 3,388 2,947 2,149 1,564
Available seat miles (millions) (4)... 1,767 1,424 6,219 5,437 4,735 3,431 2,641
Passenger load factor (5)............. 61.0% 58.6% 63.5% 62.3% 62.2% 62.6% 59.2%
CONSOLIDATED STATISTICS:
Consolidated passenger load factor.... 68.9% 73.0% 73.3% 71.8% 73.9% 72.8% 71.7%
Consolidated breakeven passenger load
factor (11)......................... 84.5% 87.4% 82.5% 73.5% 67.9% 64.0% 63.6%
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
(IN MILLIONS OF DOLLARS)
FINANCIAL DATA--BALANCE SHEET:
ASSETS:
Cash, Cash Equivalents and Short-Term Investments................ $ 1,181 $ 1,342
Other Current Assets............................................. 1,079 935
Total Property and Equipment, net................................ 6,824 6,968
Routes and Airport Operating Rights, net......................... 1,003 1,009
Other Assets..................................................... 503 486
------------ ------------
Total Assets............................................... $ 10,590 $ 10,740
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities.............................................. $ 3,137 $ 2,926
Long-Term Debt and Capital Leases................................ 5,096 5,222
Deferred Credits and Other Long-Term Liabilities................. 1,546 1,572
Minority Interest................................................ 19 7
Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Convertible Subordinated Debentures
of Continental (12)........................................... 241 241
Redeemable Preferred Stock of Subsidiary (13).................... 5 5
Stockholders' Equity............................................. 546 $ 767
------------ ------------
Total Liabilities and Stockholders' Equity................. $ 10,590 $ 10,740
============ ============
--------------
(1) Includes the following special expense (income) items (in millions):
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------------
2003 2002 2002 2001 2000 1999 1998
------ ------ ------ ------ ------ ------ ------
Operating expense (income):
Fleet impairment and restructuring
charges............................... $ 65 $ 90 $242 $ 61 $ -- $ 81 $122
Air Transportation Safety and System
Stabilization Act grant............... -- -- 12 (417) -- -- --
Severance and other special charges..... -- -- -- 63 -- -- --
Nonoperating expense (income):
Gain on sale of assets.................. -- -- -- -- (9) (326) --
Impairment of investments............... -- -- -- 22 -- -- --
Cumulative effect of change in accounting,
net of taxes............................ -- -- -- -- -- 33 --
(2) For purposes of calculating this ratio, earnings consist of income before
income taxes and cumulative effect of changes in accounting principles
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 March 31, 2003 and 2002
and the years ended December 31, 2002 and 2001, earnings were inadequate
to cover fixed charges and the coverage deficiency was $307 million, $257
million, $616 million and $143 million, respectively.
(3) The number of scheduled miles flown by revenue passengers.
(4) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(5) Revenue passenger miles divided by available seat miles.
(6) Includes applicable special items noted in (1).
(7) The average revenue received for each mile a revenue passenger is carried.
(8) The average number of hours per day that an aircraft flown in revenue
service is operated (from gate departure to gate arrival).
(9) Excludes aircraft that are either temporarily or permanently removed rom
service.
(10) These statistics reflect operations of Continental Express (as operated by
ExpressJet). In April 2002, ExpressJet's parent company Holdings completed
an initial public offering, and Continental's ownership in Holdings was
reduced to 53.1% of its outstanding common stock. Pursuant to a capacity
purchase agreement, Continental currently purchases all of ExpressJet's
available seat miles for a negotiated price.
(11) 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
3.0, 4.9, 3.3, (3.0), (0.1), (2.3) and 1.6 percentage points in each of
the periods, respectively.
(12) The sole assets of the Trust are convertible subordinated debentures
issued by Continental with an aggregate principal amount of $250 million,
which bear interest at the rate of 6% per annum and mature on November 15,
2030. Upon repayment, the Mandatorily Redeemable Preferred Securities of
Subsidiary Trust will be mandatorily redeemed.
(13) In connection with an internal reorganization by Holdings, Continental's
53.1% majority owned 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 is included on our
balance sheet as redeemable preferred stock of subsidiary.
RISK FACTORS
TERRORIST ATTACKS AND INTERNATIONAL HOSTILITIES
THE 2001 TERRORIST ATTACKS AND THE MILITARY ACTION 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, the Stabilization Act and Continental's
cost-cutting measures. Moreover, additional terrorist attacks, even if not made
directly on the airline industry, or the fear of such attacks, particularly in
light of the war in Iraq, could further negatively affect Continental and the
airline industry. The current hostilities in the Middle East have further
decreased demand for air travel, which could 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, the war 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 2002 and the first quarter of 2003 and until recently have
been at historically high levels. Even though Continental has hedged
approximately 80% of its fuel requirements for the second quarter of 2003, the
continued military action in Iraq, post war unrest in that country, other
conflicts in the Middle East, political events in Venezuela and Nigeria, or
significant events in other oil-producing nations could cause fuel prices to
increase further and may reduce the availability of fuel. 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 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
continued military action 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 losses of $451 million in 2002 and $221 million in the
first quarter of 2003, and expects to incur a significant loss for the full year
2003. Passenger revenue per available seat mile for Continental's mainline jet
operations has continued to decline since September 11, 2001, dropping 4.1% for
the year ended December 31, 2002 versus the same period in 2001 and 3.6% in the
first quarter of 2003 versus the first quarter of 2002. Overall passenger
revenue declined 7.0% during 2002 compared to 2001, and was flat in the first
quarter of 2003 compared to the same period in 2002. Business traffic in most
markets continues to be weak, and carriers continue to offer reduced fares to
attract passengers, which lowers Continental's passenger revenue and yields and
raises Continental's break-even load factor. 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.
If Continental does so, then Continental would report greater fixed costs, which
could result in lower or more volatile earnings or both. For example, for the
year ended December 31, 2002, Continental's net loss of $451 million included
net income for ExpressJet of $84 million. For the quarter ended March 31, 2003,
Continental's net loss of $221 million included net income for ExpressJet of $26
million.
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. During 2002, the amount of
Continental's long-term debt increased 26%. Continental also has significant
operating leases and facility rental costs. 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 March 31, 2003, Continental had approximately:
o $5.6 billion (including current maturities) of long-term debt and
capital lease obligations.
o $248 million liquidation amount of Continental-obligated mandatorily
redeemable preferred securities of trust ($241 million net of
unamortized discount).
o $546 million of stockholders' equity.
o $1.18 billion in cash, cash equivalents and short-term investments.
Continental has substantial commitments for capital expenditures, including
for the acquisition of new aircraft. As of March 31, 2003, Continental had firm
commitments for 67 aircraft from Boeing, with an estimated cost of approximately
$2.5 billion. The 67 aircraft are scheduled to be delivered between late 2003
and mid 2008, with four Boeing 737-800 aircraft scheduled for delivery in the
fourth quarter of 2003. Continental has been offered backstop financing for
approximately 12 firm aircraft and is currently in negotiations regarding the
offer. Continental does not have backstop financing or any other financing
currently in place for the remainder of the aircraft. In addition, at March 31,
2003, Continental had firm commitments to purchase 13 spare engines related to
the new Boeing aircraft for approximately $80 million. Continental does not have
any financing currently in place for such spare engines. These spare engines are
scheduled to be delivered through March 2005. Further financing will be needed
to satisfy Continental's capital commitments for its aircraft and
aircraft-related expenditures such as engines, spare parts and related items.
There can be no assurance that sufficient financing will be available for the
aircraft on order and other capital expenditures.
As of March 31, 2003, ExpressJet had firm commitments for an additional 74
regional jets from Empresa Brasileira de Aeronautica S.A. ("Embraer"), with an
estimated aggregate cost of $1.5 billion. Effective February 26, 2003,
ExpressJet and Embraer amended the purchase agreement to slow the pace of
regional jet deliveries. ExpressJet will take delivery of 24 regional jets
during the remainder of 2003 (for a total of 36 in 2003), down from its original
plan for 48 deliveries, and will take 21 aircraft deliveries in 2004, down from
36. As a result, ExpressJet will increase its aircraft deliveries to 21 and
eight for 2005 and 2006, up from two and zero for these years, respectively.
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. In addition, ExpressJet expects to purchase 15 spare engines for
approximately $41 million through 2006. ExpressJet does not have any financing
currently in place for such spare engines. ExpressJet would have no obligation
to acquire the spare engines if the firm order aircraft are not delivered for
any reason.
Continental also has significant operating lease and facility rental
obligations. 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, each of
Moody's, Standard and Poor's and Fitch, Inc. downgraded the credit ratings of a
number of major airlines, including Continental's credit ratings. Additional
downgrades were made in March and April 2003 and further downgrades are possible
due to the impact of the war in Iraq. Reductions in Continental's credit ratings
have increased the interest Continental pays on new issuances of debt and may
increase the cost and reduce the availability of financing to Continental in the
future.
Continental does not have debt obligations that would be accelerated as a
result of a credit rating downgrade, but under two letters of credit facilities
securing our worker's compensation program, Continental could be required to
substitute approximately $67 million of cash collateral for spare engines that
currently serve as collateral if the rating of its senior unsecured debt is
lowered below CCC- by Standard & Poor's or Caa3 by Moody's. Continental's
senior unsecured debt is currently rated "CCC+" on CreditWatch with negative
implications by Standard & Poor's and "Caa2" with negative outlook by
Moody's.
SIGNIFICANT CHANGES OR EXTENDED PERIODS OF HIGH FUEL COSTS OR FUEL SUPPLY
DISRUPTIONS WOULD MATERIALLY AFFECT CONTINENTAL'S OPERATING RESULTS
Until recently, fuel costs have been at historically high levels and
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 15.3% and
9.5% of Continental's operating expenses for the three months ended March 31,
2003 and 2002, respectively. Fuel prices and supplies are influenced
significantly by international political and economic circumstances, such as the
political crises in Venezuela and Nigeria and the war 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 (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 80% of its fuel requirements for the second quarter of 2003
with petroleum call options at approximately $33 per barrel. Continental has not
hedged its fuel requirements beyond the end of the second quarter of 2003. If a
future fuel supply shortage were to arise from OPEC production curtailments, a
disruption of oil imports, the continued military action in Iraq, post war
unrest in that country, other conflicts in the Middle East, or otherwise, higher
fuel prices or further 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. Continental's mechanics, represented by the International
Brotherhood of Teamsters, ratified a new four-year collective bargaining
agreement in December 2002. The mechanics agreement makes an adjustment to
current pay and recognizes current industry conditions with a provision to
re-open negotiations regarding wages, pension and health insurance provisions in
January 2004. 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 the pilot 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, and United may further decrease
them and may emerge from bankruptcy with significantly lower labor costs than
Continental's. Delta and Northwest Airlines have each recently announced that
they are seeking to decrease their labor costs significantly, and American
Airlines, Inc. ("American Airlines") has recently agreed with its major labor
groups on labor cost reductions, although two of the labor groups have announced
that they intend to call a new vote regarding these recently agreed cost
reductions. In addition, Northwest Airlines has publicly acknowledged that it
may file for bankruptcy unless it renegotiates its outstanding labor agreements.
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.
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, including American Airlines and Northwest
Airlines, 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 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. Other major
U.S. airlines have alliances or planned alliances more extensive than
Continental's. 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 which are less than optimal. 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,
although pursuant a supplemental appropriations bill approved by both houses of
Congress and signed by the President in April 2003, some of these costs will be
reimbursed by the U.S. government. 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. The FAA from time to time issues directives and other
regulations relating to the maintenance and operation of aircraft that require
significant expenditures. Some FAA requirements cover, among other things,
retirement of older aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and other environmental
concerns, commuter aircraft safety and increased inspections and maintenance
procedures to be conducted on older aircraft. Continental expects to continue
incurring expenses to comply with the FAA's regulations.
Additional laws, regulations, taxes and airport rates and charges have been
proposed from time to time that could significantly increase the cost of airline
operations or reduce revenue. 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.
CONTINENTAL'S OPERATIONS ARE AFFECTED BY THE SEASONALITY ASSOCIATED WITH THE
AIRLINE INDUSTRY
Due to greater demand for air travel during the summer months, revenue in
the airline industry in the second and third quarters of the year is generally
stronger than revenue in the first and fourth quarters of the year for most U.S.
air carriers. Continental's results of operations generally reflect this
seasonality, but have also been impacted by numerous other factors that are not
necessarily seasonal, including the extent and nature of competition from other
airlines, fare actions, excise and similar taxes, security fees, changing levels
of operations, fuel prices, weather, air traffic control delays, foreign
currency exchange rates and general economic conditions.
RISK FACTORS RELATING TO THE 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 Notes will be rejected. The New Notes will be
issued in exchange for the Old Notes only after timely receipt by the Exchange
Agent of the Old 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 Notes in exchange for New 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 Notes
notification of defects or irregularities with respect to tenders of Old Notes
for exchange.
If you do not exchange your Old Notes for New Notes pursuant to the
Exchange Offer, or if your tender of Old Notes is not accepted, your Old Notes
will continue to be subject to the restrictions on transfer of such Old Notes as
set forth in the legend thereon. In general, you may not offer or sell Old 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 Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old 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 December 25, 2002. A letter, dated January 24,
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 subsequent appraisal
indicates that the loan to Collateral value is greater than 45%, Continental is
required to provide additional collateral or to reduce the principal amount of
Notes outstanding so that the loan to Collateral value is not greater than 45%.
Continental deposited $13,056,950 as Cash Collateral at the initial issuance of
the Old Notes so that the initial loan to Collateral value would not exceed 45%,
based on the appraisal determined as of August 25, 2002. The loan to Collateral
value, determined using the appraisal as of December 25, 2002, would have been
45.8%, without giving effect to such deposit of Cash Collateral. Continental
expects to satisfy the 45% requirement at the time the next appraisal is
required based upon its projected purchases of spare parts, in which case
Continental will be entitled to withdraw such Cash Collateral. However, no
assurance can be given that such 45% requirement will be satisfied. See
"Description of the 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 Notes. If a Policy Provider Default occurs and such proceeds are not
sufficient to repay all such amounts due on the Notes, then holders (to the
extent not repaid from the proceeds of the sale of Collateral) would have only
unsecured claims against Continental and the Policy Provider.
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. Northwest Airlines has publicly acknowledged that
it may file for bankruptcy unless it renegotiates its outstanding labor
agreements, and other airlines may file for bankruptcy protection as well.
Moreover, recent 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
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 provisions that
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 under the Indenture and the Collateral
Agreements, including accelerating the Notes or foreclosing the lien on the
Collateral securing the Notes. See "Description of the Notes--Remedies".
The Controlling Party will be:
o The Policy Provider or, if a Policy Provider Default is continuing,
the holders of more than 50% in aggregate unpaid principal amount of
the Notes then outstanding.
o Under certain circumstances, the Liquidity Provider.
MAXIMUM INTEREST RATE IF CONTINENTAL DEFAULTS
If Continental fails to pay accrued interest on the Notes when due on a
Distribution Date and fails to cure such nonpayment, the interest rate for the
interest due on such Distribution Date will be subject to a maximum equal to the
Capped Interest Rate. If Continental cures such nonpayment, such maximum rate
will not apply. However, the amounts available under the Liquidity Facility and
the Policy for the payment of accrued interest are limited by the same maximum
rate. Accordingly, if Continental fails to make a payment of interest when due
and the interest rate then applicable exceeds the Capped Interest Rate, the
amount that the Trustee may draw under the Liquidity Facility and Policy (or, if
applicable, withdraw from the Cash Collateral Account) to make such payment will
be calculated at the Capped Interest Rate. If Continental subsequently cures,
Continental will be obligated to pay the accrued interest calculated without
regard to such maximum rate. If Continental fails to cure, the Noteholders will
not have a claim for interest due on such Distribution Date above the amount
calculated at the Capped Interest Rate.
CERTAIN LIMITATIONS WITH RESPECT TO THE COLLATERAL
The Notes are secured by a lien on the Pledged Spare Parts. See
"Description of the 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
Notes--Collateral--Designated Locations". The lien of the Notes will not apply
to any spare part not located at a Designated Location.
Upon initial issuance of the Old Notes, Continental made a cash collateral
deposit with the Security Agent of $13,056,950 so that the initial loan to
Collateral value would not exceed 45%. In addition, Continental is required to
provide to the Policy Provider and the Trustee a semiannual appraisal of the
Collateral. If any such subsequent appraisal indicates that the loan to
Collateral value is greater than 45%, Continental is required to provide
additional collateral or to reduce the principal amount of Notes outstanding so
that the loan to Collateral value is not greater than 45%. 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 Notes below the then current rating
for the Notes (determined without regard to the Policy) or a withdrawal or
suspension of the rating of the Notes. See "Description of the
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 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 NOTES
Prior to the Exchange Offer, there has been no public market for the Notes.
Continental does not intend to apply for listing of the Notes on any national
securities exchange or otherwise. Morgan Stanley & Co. Incorporated (the
"Initial Purchaser") has previously made a market in the Old Notes and
Continental has been advised by the Initial Purchaser that it presently intends
to make a market in the New 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 Notes or the New Notes, and
any such market-making activity may be discontinued at any time without notice
at the sole discretion of the Initial Purchaser. There can be no assurance as to
the liquidity of the public market for the Notes or that any active public
market for the 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 Notes.
RISK FACTORS RELATING TO THE POLICY PROVIDER
IF THE FINANCIAL CONDITION OF THE POLICY PROVIDER DECLINES, THE RATING OF THE
NOTES MAY DECLINE
The Aaa rating by Moody's of the Notes is based, primarily, on the
existence of the Policy that insures the complete and timely payment of interest
relating to the Notes on each Interest Payment Date and the payment of
outstanding principal no later than the Final Legal Maturity Date. MBIA
Insurance Corporation, the Policy Provider, has issued the Policy. If the Policy
Provider's financial condition declines or if it becomes insolvent, the Trustee
may be unable to recover the full amount due under the Policy. In addition, such
a decline or insolvency could lead Moody's to downgrade the ratings of the Notes
because of a concern that the Policy Provider may be unable to make payments to
the holders of the Notes under the Policy. For information on the financial
information generally available relating to the Policy Provider, see
"Description of the Policy Provider" and "Description of the Policy and the
Policy Provider Agreement--The Policy".
POLICY PROTECTION IS LIMITED
Although the Trustee may make drawings under the Policy for interest
payments on each Interest Payment Date, the Trustee may not make drawings for
principal payments until the Final Legal Maturity Date except in certain limited
circumstances. This limits the protection afforded to holders of Notes by the
Policy.
USE OF PROCEEDS
There will be no cash proceeds payable to Continental from the issuance of
the New Notes pursuant to the Exchange Offer. The proceeds from the sale of the
Old 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 three months ended March 31, 2003 were:
THREE MONTHS ENDED
MARCH 31, 2003 YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
--(1) --(1) --(1) 1.51 1.80 1.93
----------
(1) For the three months ended March 31, 2003 and the years ended December 31,
2002 and 2001, earnings were inadequate to cover fixed charges and the
coverage deficiency was $307 million, $616 million and $143 million,
respectively.
For purposes of the ratios, "earnings" means the sum of:
o our pre-tax income (loss); and
o our fixed charges, net of interest capitalized.
"Fixed charges" represent:
o the interest we pay on borrowed funds;
o the amount we amortize for debt discount, premium and issuance expense
and interest previously capitalized; and
o that portion of rentals considered to be representative of interest
expense.
THE COMPANY
Continental Airlines, Inc. ("Continental" or the "Company") is a major
United States air carrier engaged in the business of transporting passengers,
0cargo 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 its indirect 53.1%-owned
subsidiary, ExpressJet Airlines, Inc. (operating as Continental Express and
referred to in this Prospectus as "ExpressJet") and its wholly owned subsidiary,
Continental Micronesia, Inc. ("CMI"), served 225 airports worldwide at March 31,
2003. As of March 31, 2003, Continental flew to 130 domestic and 95
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 March 31, 2003, and is one of the leading airlines providing service to
Mexico and Central America, serving 28 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 March 31, 2003, Continental operated 67% of
the average daily jet departures from Liberty International, 84% of the average
daily jet departures from Bush Intercontinental, and 67% 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. In connection with the offering,
Continental's ownership of Holdings fell to 53.1%. 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 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 March 31, 2003, ExpressJet served 97 destinations in the U.S., 13
cities in Mexico and five 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 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.
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) and American Eagle Airlines,
Inc. In 2002, Continental introduced the first train-to-plane alliance in the
United States with Amtrak.
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 ("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 is planned for
Summer 2003, subject to satisfaction of certain conditions.
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 March 31, 2003 Continental and ExpressJet served
16 European cities, five Canadian cities, six Mexican cities, six Central
American cities, four South American cities, 14 Caribbean destinations, Tel
Aviv, Hong Kong (though service between Hong Kong and Newark was suspended in
April 2003) and Tokyo.
Continental's Houston hub is the focus of its operations in Mexico and
Central America. As of March 31, 2003, Continental and ExpressJet flew from Bush
Intercontinental to 20 cities in Mexico, every country in Central America, six
cities in South America, three cities in Canada, three cities in Europe, two
Caribbean destinations and Tokyo.
From Continental's Cleveland hub, Continental and ExpressJet flew to
Montreal, Toronto, London, Cancun, Mexico, Nassau and San Juan, Puerto Rico as
of March 31, 2003.
CONTINENTAL MICRONESIA
From its hub operations based on the island of Guam, as of March 31, 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. In January 2002, Continental placed its code on selected
flights operated by KLM and KLM Cityhopper from Amsterdam to more than 40
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 agreement terminates in
May 2003, unless extended by the parties.
Continental also currently has international codesharing agreements with
Air Europa, Air China, EVA Airways Corporation (an airline based in Taiwan),
British European, Virgin Atlantic Airways ("Virgin") 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.
OUTLOOK
The current U.S. domestic airline environment is the worst in Continental's
history, and may deteriorate further if hostilities in the Middle East continue.
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 have 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. Northwest Airlines has
publicly acknowledged that it may file for bankruptcy unless it renegotiates its
outstanding labor agreements, and 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 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, until recently
fuel prices had significantly escalated due to the war in Iraq and political
tensions in Venezuela and Nigeria. 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
2003 (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,
continued military action in Iraq or another conflict elsewhere in the world, a
significant spread of Severe Acute Respiratory Syndrome, or "SARS", decreased
consumer demand or sustained high fuel prices. However, Continental expects to
incur a significant loss for the full year in 2003, regardless of such adverse
factors.
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 military action 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 continued military action in Iraq.
Among the many factors that threaten Continental and the airline industry
generally are the following:
o 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 currently expects its net cash flows for the
second quarter of 2003, excluding amounts expected to be received from
the U.S. government discussed in the third bullet point below, to be
slightly negative at approximately $0.5 million per day, including
required debt payments and capital expenditures. In addition,
Continental expects to incur significant losses in that quarter and
for the full year 2003.
o 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 has caused a
further decline in passenger traffic, particularly to Hong Kong and
certain other cities in Asia that Continental serves. Both of these
events have disproportionately affected Continental's international
passenger traffic. Continental has responded to the reduced actual and
anticipated demand by announcing temporary capacity reductions on
certain trans-Atlantic and trans-Pacific routes (including the
suspension of its flights between Hong Kong and Newark) 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.
o Fuel costs rose significantly at the end of 2002 and until recently
have been at historically high levels. Even though Continental has
hedged approximately 80% of its fuel requirements for the second
quarter of 2003, the continued military action in Iraq, post war
unrest in that country, 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, for every one dollar increase in the price of crude oil,
Continental's annual fuel expense would be approximately $40 million
higher.
o 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 a supplemental appropriations bill approved
by both houses of Congress and signed by the President in April 2003,
Continental and other U.S. carriers will be reimbursed for certain
security fees paid or collected by such carriers and compensated for
other security related costs. Although Continental is still in the
process of estimating the amount of reimbursement and compensation
that it will receive, Continental believes that it will be in the
range of $175 million to $200 million.
o 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. Continental had approximately
$1.18 billion of cash, cash equivalents and short-term investments at
March 31, 2003. Continental continues to hold 53.1% of the outstanding
stock of Holdings, the publicly traded parent of its regional jet
subsidiary, which stock 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.
o 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.
o 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 (implementation of
which is subject to certain conditions) with Northwest Airlines and
Delta to permit Continental to compete more effectively with other
carriers and alliance groups.
o Continental is engaged in labor negotiations with the union
representing its pilots. Continental cannot predict the outcome of
these negotiations or the financial impact on Continental of any new
labor contract with its pilots. Recent significant concession
agreements with labor groups at US Airways and United have had the
effect of lowering industry standard wages and benefits. In addition,
American Airlines has recently agreed with its major labor groups on
labor cost reductions, although two of the labor groups have announced
that they intend to call a new vote regarding these recently agreed
cost reductions. Continental's negotiations may be influenced by these
and other labor cost developments.
o Continental has several noncontributory defined benefit plans covering
substantially all of Continental's employees. As of December 31, 2002,
these plans were underfunded by approximately $1.2 billion as measured
by SFAS 87, "Employers Accounting for Pensions". Continental's
contributions for the remainder of 2003 are expected to be $89 million
as of March 31, 2003. Absent any changes to the plans (which in most
cases are subject to collective bargaining agreements with our unions)
or a waiver of required payments from the Internal Revenue Service,
the minimum funding requirement in 2004 is expected to be
significantly greater than in 2003.
o At April 15, 2003, under the most restrictive provisions of a credit
facility agreement with an outstanding balance of $165 million at
March 31, 2003, Continental is required to maintain a minimum
unrestricted cash balance of $600 million. Also, a separate credit
facility agreement with an outstanding balance of $43 million at March
31, 2003 requires, beginning in June 2003, Continental 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.
DESCRIPTION OF THE POLICY PROVIDER
GENERAL
The information set forth in this section, including any financial
statements incorporated by reference herein, has been provided by MBIA Insurance
Corporation ("MBIA" or the "Policy Provider") for inclusion in this Prospectus,
and such information has not been independently verified by Continental, the
Initial Purchaser, the Trustee or the Liquidity Provider. Accordingly,
notwithstanding anything to the contrary herein, none of Continental, the
Initial Purchaser, the Trustee or the Liquidity Provider assumes any
responsibility for the accuracy, completeness, or applicability of such
information.
MBIA is the principal operating subsidiary of MBIA Inc., a New York Stock
Exchange listed company (the "Parent Company"). The Parent Company is not
obligated to pay the debts of or claims against MBIA. MBIA is domiciled in the
State of New York and licensed to do business in and subject to regulation under
the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of
the United States and the Territory of Guam. MBIA has three branches, one in the
Republic of France, one in the Republic of Singapore and one in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments, and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by MBIA, changes
in control, and transactions among affiliates. Additionally, MBIA is required to
maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
MBIA does not accept any responsibility for the accuracy or completeness of
this Prospectus or any information or disclosure contained herein, or omitted
herefrom, other than with respect to the accuracy of the information regarding
the Policy Provider set forth under the heading "Description of the Policy
Provider" or incorporated by reference herein. Additionally, MBIA makes no
representation regarding the Notes or the advisability of investing in the
Notes.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
MBIA FINANCIAL INFORMATION
The following document filed by the Parent Company with the Commission is
incorporated herein by reference:
o the Parent Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
Any documents filed by the Parent Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this
Prospectus and prior to the termination of the offering of the New Notes shall
be deemed to be incorporated by reference in this Prospectus and to be a part
hereof. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this Prospectus, shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The consolidated financial statements of MBIA, a wholly owned subsidiary of
the Parent Company, and its subsidiaries as of December 31, 2002 and December
31, 2001 and for each of the three years in the period ended December 31, 2002,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of the Parent Company for the year ended
December 31, 2002 are hereby incorporated by reference into this Prospectus and
shall be deemed to be a part hereof. All financial statements of MBIA and its
subsidiaries included in documents filed by the Parent Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this Prospectus and prior to the termination of the
offering of the New Notes shall be deemed to be incorporated by reference into
this Prospectus and to be a part hereof from the respective dates of filing such
documents.
The Parent Company files annual, quarterly, and special reports,
information statements and other information with the Commission under File No.
1-9583. Copies of the Commission filings (including the Parent Company's Annual
Report on Form 10-K for the year ended December 31, 2002) are available (i) over
the Internet at the Commission web site at HTTP://WWW.SEC.GOV; (ii) at the
Commission's public reference room in Washington D.C.; and (iii) at no cost,
upon request to MBIA Insurance Corporation, 113 King Street, Armonk, New York
10504. The telephone number of MBIA is (914) 273-4545.
The tables below present selected financial information of MBIA determined
in accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities ("SAP") as well as generally accepted
accounting principles ("GAAP"):
SAP
------------------------------------------
DECEMBER 31, DECEMBER 31,
2002 2001
------------------------------------------
(AUDITED) (AUDITED)
(IN MILLIONS)
Admitted Assets $9,212 $8,545
Liabilities 6,054 5,688
Capital and Surplus 3,158 2,857
GAAP
------------------------------------------
DECEMBER 31, DECEMBER 31,
2002 2001
------------------------------------------
(AUDITED) (AUDITED)
(IN MILLIONS)
Assets $10,588 $9,460
Liabilities 4,679 4,234
Shareholders' Equity 5,909 5,226
FINANCIAL STRENGTH RATING OF MBIA
Moody's rates the financial strength of MBIA "Aaa".
The above rating reflects the current assessment by Moody's of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above rating
may be obtained only from Moody's. The above rating is not a recommendation to
buy, sell, or hold any Notes, and such rating may be subject to revision or
withdrawal at any time by Moody's. Any downward revision or withdrawal of the
above rating may have an adverse effect on the market price of the Notes. MBIA
does not guaranty the market price of the Notes nor does it guaranty that the
rating on the Notes will not be revised or withdrawn.
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. The summary does not purport to be complete and is
qualified in its entirely by reference to all of the provisions of the
Registration Rights Agreement, which has been filed as an exhibit to the
Registration Statement and copies of which 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 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:
o 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 Notes within 120 days
after December 6, 2002, which is the date on which the Old Notes were
issued (the "Issuance Date");
o cause the Registration Statement to become effective under the
Securities Act within 180 days after the Issuance Date;
o cause the Registration Statement to remain effective until the closing
of the Exchange Offer; and
o 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 Letter of Transmittal (which together constitute the Exchange Offer),
all Old 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 Notes will
be issued in exchange for an equal face amount of outstanding Old Notes accepted
in the Exchange Offer. Old 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 Notes as of [_____], 2003. The Exchange Offer
is not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the obligation to accept Old Notes for exchange pursuant
to the Exchange Offer is subject to certain conditions, as set forth herein
under "--Conditions".
Old 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
Notes for the purposes of receiving the New Notes and delivering New 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
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by holders thereof (other
than (i) a broker-dealer who acquired such Old 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 Notes are acquired in the ordinary course of such
holders' business and such holders are not engaged in, and do not intend to
engage in, a distribution of such New Notes and have no arrangement with any
person to participate in a distribution of such New Notes.
By tendering the Old Notes in exchange for New Notes, each holder, other
than a broker-dealer, will represent to Continental that:
o it is not an affiliate of Continental (as defined in Rule 405 under
the Securities Act) nor a broker-dealer tendering Old Notes acquired
directly from Continental for its own account;
o any New Notes to be received by it will be acquired in the ordinary
course of its business; and
o it is not engaged in, and does not intend to engage in, a distribution
of such New Notes and has no arrangement or understanding to
participate in a distribution of the New Notes.
If a holder of Old Notes is engaged in or intends to engage in a
distribution of the New Notes or has any arrangement or understanding with
respect to the distribution of the New 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 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 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 Notes
received in exchange for Old Notes where such Old 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 Exp+iration 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 Notes pursuant to the Registration Statement and at no
cost to the holders of Old Notes:
o as promptly as practicable file with the Commission a shelf
registration statement (the "Shelf Registration Statement") covering
resales of the Old Notes;
o 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
o 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 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 neither the consummation of the Exchange Offer nor the
declaration by the Commission of the Shelf Registration Statement to be
effective (each, a "Registration Event") occurs on or prior to the 210th
calendar day following the Issuance Date, the interest rate per annum borne by
the 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 Notes otherwise become transferable by
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 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 Notes who do not exchange their Old Notes for New Notes in the
Exchange Offer will no longer be entitled to registration rights and will not be
able to offer or sell their Old Notes, unless such Old 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 Notes and the Exchange Offer--Consequences of Failure to Exchange".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean [________], 2003 (30 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.
Notwithstanding any extension of the Exchange Offer, if the Exchange Offer is
not consummated by July 4, 2003, the interest rate borne by the Notes is subject
to increase. See "--General".
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 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:
o to delay acceptance of any Old Notes, to extend the Exchange Offer or
to terminate the Exchange Offer and not permit acceptance of Old 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
o to amend the terms of the Exchange Offer in any manner deemed by it to
be advantageous to the holders of the Old 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 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 NOTES
The New Notes will bear interest at the Stated Interest Rate from the most
recent date to which interest has been paid on the Old Notes. Accordingly,
registered holders of New 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. Old Notes accepted for exchange will cease to accrue interest from and
after the date of completion of the Exchange Offer. Holders of Old Notes whose
Old Notes are accepted for exchange will not receive any payment for accrued
interest on the Old 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 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 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
o certificates for such Old Notes must be received by the Exchange Agent
along with the Letter of Transmittal;
o a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old 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
o the holder must comply with the guaranteed delivery procedures
described below.
The method of delivery of Old 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 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 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 Notes may tender such Old Notes in the Exchange
Offer. The term "holder" with respect to the Exchange Offer means any person in
whose name Old 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 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 Notes, either make appropriate arrangements to register ownership of the Old
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 "Eligible Institution") unless the Old
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 Notes listed therein, such Old Notes must be
endorsed or accompanied by bond powers and a proxy which authorizes such person
to tender the Old Notes on behalf of the registered holder, in each case as the
name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old 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 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 Notes not
properly tendered or any Old 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
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 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 Notes, nor shall any of them incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived. Any Old 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 Notes, unless otherwise provided in the Letter of
Transmittal, as soon as practicable 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
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 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 NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Notes properly tendered will be accepted promptly after the Expiration
Date, and the New Notes will be issued promptly after acceptance of the Old
Notes. See "--Conditions" below. For purposes of the Exchange Offer, Old 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 Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of:
o certificates for such Old Notes or a timely Book-Entry Confirmation of
such Old Notes into the Exchange Agent's account at DTC;
o a properly completed and duly executed Letter of Transmittal or an
Agent's Message in lieu thereof; and
o all other required documents.
If any tendered Old Notes are not accepted for any reason set forth in the
terms and conditions of the Exchange Offer or if Old Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Notes will be returned without expense to the tendering holder
thereof (or, in the case of Old Notes tendered by the book-entry transfer
procedures described below, such nonexchanged Old Notes will be credited to an
account maintained with DTC) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old 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 Notes in the Exchange Offer. Any DTC Participant may make
book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into
the Exchange Agent's account at DTC in accordance with DTC's ATOP procedures for
transfer. However, although delivery of Old 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 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 Notes desires to tender such Old Notes, and
(i) the Old Notes are not immediately available, or (ii) time will not permit
such holder's Old 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:
o the tender is made through an Eligible Institution;
o 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
Notes and the amount of Old 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 Old
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
o the certificates for all physically tendered Old 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 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 Notes to be withdrawn, identify the Old Notes to be withdrawn
(including the principal amount of such Old Notes) and (where certificates for
Old Notes have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing holder. If certificates
for Old 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 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 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 Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old 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 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
Notes will be credited to an account maintained with DTC for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old 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 Notes will not be
required to be accepted for exchange, nor will New Notes be issued in exchange
for, any Old Notes, and Continental may terminate or amend the Exchange Offer as
provided herein before the acceptance of such Old 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 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 Notes to be received by
such holder or holders of Old 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.
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 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 Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old 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 Notes
tendered, or if tendered Old 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 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.
DESCRIPTION OF THE NOTES
The following summary describes the material terms of the Notes. The
summary does not purport to be complete and is qualified in its entirety by all
provisions of the Notes, the Indenture, the Security Agreement, the Collateral
Maintenance Agreement and the Reference Agency Agreement (collectively, the
"Operative Documents"), each of which has been filed as an exhibit to the
Registration Statement and copies of which are 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 Notes were, and the New Notes will be, issued by Continental under
an Indenture (the "Indenture") among Continental, Wilmington Trust Company, as
trustee (the "Trustee"), the Policy Provider and the Liquidity Provider.
The forms and terms of the New Notes are the same in all material respects
as the form and terms of the Old Notes, except that:
o the New Notes will be registered under the Securities Act;
o the New Notes will not contain restrictions on transfer or provisions
relating to registration rights or interest rate increases; and
o the New Notes will be available only in book-entry form.
The New 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 Notes will be issued only in minimum
denominations of $1,000 or integral multiples thereof, except that one Note may
be issued in a different denomination. (Section 2.1(b))
The Notes are secured by a lien on the Collateral. The Notes rank equally
in right of payment with all of Continental's other unsubordinated obligations,
except to the extent of the assets subject to such lien, as to which the Notes
effectively rank senior.
On the Issuance Date, the Trustee, for the benefit of the 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 has issued $200,000,000 in aggregate principal amount of Old
Notes. The Notes are limited to $200,000,000 of principal in the aggregate.
Subject to the provisions of the Indenture, the entire principal amount of the
Notes is scheduled to be paid to the Noteholders on December 6, 2007 (the "Final
Scheduled Payment Date"). The "Final Legal Maturity Date" is December 6, 2009.
Interest accrues on the unpaid principal amount of each Note at the
variable rate per annum set forth on the cover page of this Prospectus (plus, if
applicable, 0.50% during the period specified in the Registration Rights
Agreement), 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 "Stated Interest Rate"). For all
other periods, the interest rate on the Notes will not be capped. 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 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 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 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 2.7)
Payments of interest on the Notes are supported by a Liquidity Facility
provided by the Liquidity Provider for the benefit of the holders of the Notes.
The Liquidity Facility will provide an amount sufficient to pay interest on the
Notes at the 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 Premium, if any, or Break Amount, if any,
with respect to, the Notes. See "Description of the Liquidity Facility".
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 Notes at the Stated Interest Rate is supported by the Policy provided by
the Policy Provider. Payment of principal of the Notes no later than the Final
Legal Maturity Date is also supported by the Policy. See "Description of the
Policy and the Policy Provider Agreement--The Policy".
Payments of interest and principal 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 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
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 (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, the Trustee, the Liquidity Provider and the
Policy Provider. Holders of the Notes (the "Noteholders") may obtain such
information from the Trustee.
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 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 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 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 Notes to and including the date of
redemption. In addition, if a Note is redeemed before the third anniversary of
the Issuance Date (except in connection with a redemption to satisfy the maximum
Collateral Ratio or minimum Rotable Ratio requirement 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 Note: (i) if redeemed before the first anniversary of
the Issuance Date, 1.5%; (ii) if redeemed on or after such first anniversary and
before the second anniversary of the Issuance Date, 1.0%; and (iii) if redeemed
on or after such second anniversary and before the third anniversary of the
Issuance Date, 0.5%. (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 Noteholder whose Notes are to
be redeemed, identifying the Notes and the principal amount thereof to be
redeemed. If less than all of the Notes are to be redeemed, the Trustee will
select the 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
redemption date, interest will cease to accrue on the Notes or portions thereof
called for redemption, unless Continental fails to make the redemption payment
for such Notes. (Sections 4.3, 4.4 and 4.5)
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 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
o 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,
o any engine utilized on any such aircraft or
o 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 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 Issuance Date, Continental entered into a Security Agreement (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 Issuance Date, Continental entered into a Collateral
Maintenance Agreement (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 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 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 "Collateral Ratio" applicable to the Notes, which shall mean a
percentage determined by dividing (i) the aggregate principal amount of all
outstanding 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. Such
valuations will also be used to calculate the "Rotable Ratio" applicable to the
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 Notes minus the sum of
the Cash Collateral held by the Collateral Agent. The calculation of the
Collateral Ratio and Rotable Ratio will be set forth in a certificate of
Continental. (Collateral Maintenance Agreement, Article 2)
If the Collateral Ratio as so determined is greater than 45%, Continental
will be required, within 90 days after the date of Continental's certificate
calculating such Collateral Ratio, to:
o subject additional Qualified Spare Parts to the lien of the Security
Agreement;
o 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 Notes at Continental's request (a "Rating Agency") that the use of
such additional collateral and the related agreements to reduce the
Collateral Ratio will not result in a reduction of the rating for the
Notes below the then current rating for the Notes (such rating
determined without regard to the Policy) or a withdrawal or suspension
of the rating of the Notes;
o 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);
o deliver Notes to the Trustee for cancellation; o redeem some or all of
the Notes; or
o any combination of the foregoing;
such that the Collateral Ratio, as recalculated giving effect to such action
(but otherwise using the information most recently used to determine the
Collateral Ratio), would not be greater than 45%. (Collateral Maintenance
Agreement, Section 3.1(a))
If the Rotable Ratio as so determined is less than 150%, Continental will
be required, within 90 days after the date of Continental's certificate
calculating such Rotable Ratio, to:
o subject additional Rotables to the lien of the Security Agreement;
o 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);
o deliver Notes to the Trustee for cancellation;
o redeem some or all of the Notes; or
o any combination of the foregoing;
such that the Rotable Ratio, as recalculated giving effect to such action (but
otherwise using the information most recently used to determine the Rotable
Ratio), would not be less than 150%. (Collateral Maintenance Agreement, Section
3.1(b))
If Continental provides additional Cash Collateral to comply with 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 Ratio (calculated to exclude
such Cash Collateral) not to be greater than 45% and to cause the Rotable Ratio
(calculated to exclude such Cash Collateral) not to be less than 150%.
(Collateral Maintenance Agreement, Section 3.1(e)) If the Collateral Ratio is
less than the maximum Collateral Ratio and the Rotable Ratio is greater than the
minimum Rotable Ratio, 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)).
Continental deposited Cash Collateral of $13,056,950 with the Security
Agent upon initial issuance of the Old Notes, which resulted in an initial
Collateral Ratio of 45% based on the initial appraisal as of August 25, 2002,
prepared by SH&E. See "Description of the Appraisal". Without giving effect to
such deposit, the initial Collateral Ratio would have been 48%. Using the
appraisal of the Collateral determined as of December 25, 2002, and without
giving effect to such deposit, the Collateral Ratio would have been 45.8%. See
"Description of the Appraisal". The calculation of the Collateral Ratio at the
time of the next semiannual appraisal due in August 2003 will be made without
giving effect to such Cash Collateral deposit. Continental expects to satisfy
the maximum Collateral Ratio requirement at that time based on its projected
purchases of spare parts, in which case Continental will be entitled to withdraw
such Cash Collateral. However, no assurance can be given that the maximum
Collateral Ratio requirement will be satisfied based on such purchases. If it is
not, Continental will be required to take one or more of the other actions
described above (other than providing Cash Collateral) to satisfy such
requirement.
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 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
-------------- -------
o Boeing 737-700, Boeing 737-800 and
Boeing 737-900 Aircraft.............................. 63.Aircraft
o Boeing 757-200 and Boeing 757-300 Aircraft........... 23.Aircraft
o Boeing 767-200 and Boeing 767-400 Aircraft........... 13.Aircraft
o 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 Notes or deliver Notes to the Trustee for cancellation
(or a combination thereof) in a percentage of the outstanding principal amount
of all 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 the
appraised value of the Collateral. (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. (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 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 the Company'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 the Company 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 the Company 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 Ratio, as subsequently determined, to
exceed the maximum Collateral Ratio.
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.
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:
o 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
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").
o Failure by Continental to observe or perform (or cause to be obtained
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.
o 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.
o 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 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)
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 (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)
Except to enforce the right to receive payment when due of principal,
interest, Premium, if any, and Break Amount, if any, 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 the 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 and during such 60-day period, and the Controlling Party has not given
the Trustee a direction inconsistent with the request. (Section 7.6)
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, 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
compliance with the provisions of a security agreement is not affected by any
provision of the U.S. Bankruptcy Code or any power of the bankruptcy court. Such
right to take possession may not be exercised for 60 days following the date of
commencement of the reorganization proceedings. Thereafter, such right to take
possession may be exercised during such proceedings unless, within the 60-day
period or any longer period consented to by the relevant parties, the debtor
agrees to perform its future obligations and cures 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.
CONTROLLING PARTY
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,
except for certain provisions that cannot be amended or waived without the
consent of each Noteholder affected thereby. 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))
The "Controlling Party" will be:
o The Policy Provider or, if a Policy Provider Default is continuing,
the holders of more than 50% in aggregate unpaid principal amount of
the Notes then outstanding.
o 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 and the Policy
Provider Agreement--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))
"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 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:
o 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 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 Noteholder in respect of payments made to the Trustee
in connection with the protection or realization of the value of the
Collateral.
o To the Liquidity Provider to the extent required to pay the Liquidity
Expenses and to the Policy Provider to pay the Policy Expenses.
o 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.
o 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 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.
o 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
Noteholder, to the extent required to pay certain fees, taxes, charges
and other amounts payable.
o To the Noteholders to the extent required to pay in full amounts due
on such Distribution Date.
o To the Policy Provider to the extent required to pay Policy Provider
Obligations (other than amounts payable pursuant to the first four
clauses above).
o To the Trustee for the payment of certain fees and expenses (other
than amounts payable pursuant to the first and fifth clauses above).
o 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 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 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.
POSSIBLE ISSUANCE OF SUBORDINATED NOTES
Continental may elect to issue additional notes under the Indenture that
are subordinated in the right to receive distributions to the Notes (the
"Subordinated Notes"). The Indenture provides that Continental's ability to
issue any Subordinated Notes is contingent upon its obtaining written
confirmation from the Rating Agency that the issuance of such Subordinated Notes
will not result in a withdrawal or downgrading of the rating of the Notes
(without regard to the Policy).
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:
o To provide for uncertificated Notes in addition to or in place of
certificated Notes.
o 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.
o To comply with any requirements of the Commission in connection with
the qualification of the Indenture under the TIA.
o To provide for a replacement Liquidity Provider.
o To provide for the effectiveness of any additional Collateral
Agreement.
o To provide for the issuance of the Subordinated Notes.
o 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 relating to transfers and exchanges of the Notes or
beneficial interests therein.
o To provide for any successor Trustee or Collateral Agent.
o To cure any ambiguity, defect or inconsistency.
o 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 and the Policy Provider can amend or modify any provision of
the Collateral Maintenance Agreement (including the provisions described under
"--Appraisals and Maintenance of Ratios", "--Fleet Reduction", "--Liens",
"--Maintenance", "--Insurance" and "--Use and Possession") without the consent
of the Trustee, the Collateral Agent or any Noteholders, except for certain
limited provisions. 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. 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. However, no such
amendment, supplement or waiver may, without the consent of each Noteholder
affected:
o Reduce the amount of Notes whose holders must consent to an amendment,
supplement or waiver.
o Reduce the rate or extend the time for payment of interest on any
Note.
o 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 Note.
o Change the place of payment where, or the coin or currency in which,
any Note (or the redemption price thereof), interest thereon, or
Premium, if any, or Break Amount, if any, with respect thereto, is
payable.
o Change the priority of distributions and application of payments
specified in the Indenture (except to provide for distributions on
Subordinated Notes after the distribution to Noteholders as originally
provided in the Indenture).
o 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 Note.
o 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 Note on or after the respective due dates.
o Impair the right of any Noteholder to institute suit for the
enforcement of any amount payable on any Note when due. (Section 10.2)
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:
o 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.
o 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.
o 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.
o 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)
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 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 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 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 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. (Section 2.5(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 Notes
as Definitive Notes to Note Owners. (Section 2.5(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 Note, however, will be made only upon
presentation and surrender of such Note at the office or agency specified in the
notice of final distribution to 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 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 Notes.
Any 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 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 Notes.
DESCRIPTION OF THE LIQUIDITY FACILITY
The following summary describes the material terms of the Liquidity
Facility and certain provisions of the Indenture relating to the Liquidity
Facility. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Liquidity Facility and the
Indenture, each of which has been filed as an exhibit to the Registration
Statement and copies of which are available as set forth under "Where You Can
Find More Information".
GENERAL
Morgan Stanley Capital Services Inc. (the "Liquidity Provider") has entered
into a revolving credit agreement (the "Liquidity Facility") with the Trustee
with respect to the Notes. 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 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 Notes on up to eight
consecutive quarterly Interest Payment Dates at the 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 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
The aggregate amount available under the Liquidity Facility at March 6,
2003, the first Interest Payment Date after the Issuance Date, was
$48,733,333.33.
Except as otherwise provided below, the Liquidity Facility will enable 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
on the Notes at the 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 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 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 Notes on such day and without regard to expected future payments of
principal.
"Capped Interest Rate" is 12% per annum.
The Liquidity Facility does not provide for drawings thereunder to pay for
principal of, or Premium, if any, or Break Amount, if any, with respect to, the
Notes or any interest thereon in excess of an amount equal to eight full
quarterly installments of interest calculated at the Capped Interest Rate
thereon. (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 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
Notes--Controlling Party" or "Description of the Policy and the Policy Provider
Agreement--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 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 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 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 Facility is subsequently
provided, the balance of the Cash Collateral Account will be repaid to the
replaced Liquidity Provider.
A "Replacement Facility" means an irrevocable liquidity facility (or
liquidity facilities) in substantially the form of the replaced Liquidity
Facility, including reinstatement provisions, or in such other form (which may
include a letter of credit) as shall permit the Rating Agency to confirm in
writing its ratings then in effect for the Notes (before downgrading of such
ratings, if any, as a result of the downgrading of the Liquidity Provider but
without regard to the Policy), which shall have been consented to by the Policy
Provider, which consent shall not be unreasonably withheld or delayed, in a face
amount (or in an aggregate face amount) equal to the amount of interest payable
on the Notes (at the Capped Interest Rate and without regard to expected future
payments of principal) on the eight Interest Payment Dates following the date of
replacement of the Liquidity Facility and issued by a person (or persons) having
unsecured short-term debt ratings issued by each of Moody's and Standard &
Poor's which are equal to or higher than the Threshold Rating. (Indenture,
Appendix I) The provider of any Replacement Facility will have the same rights
(including, without limitation, priority distribution rights and rights as
"Controlling Party") under the Indenture as the initial 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:
o 364 days after the Issuance Date (counting from, and including, the
Issuance Date).
o The date on which the Trustee delivers to the Liquidity Provider a
certification that all of the Notes have been paid in full.
o The date on which the Trustee delivers to the Liquidity Provider a
certification that a Replacement Facility has been substituted for
such Liquidity Facility.
o The fifth Business Day following receipt by the Trustee of a
Termination Notice from the Liquidity Provider (see "--Liquidity
Events of Default and Termination").
o The date on which no amount is or may (by reason of reinstatement)
become available for drawing under the Liquidity Facility.
o 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))
Subject to certain limitations, Continental may, at its option, arrange for
a Replacement Facility at any time to replace the Liquidity Facility (including,
without limitation, any Replacement Facility described in the following
sentence). In addition, if the Liquidity Provider shall determine not to extend
the Liquidity Facility, then the Liquidity Provider may, at its option, arrange
for a Replacement Facility to replace the Liquidity Facility (i) during the
period no earlier than 40 days and no later than 25 days prior to the then
scheduled expiration date of the Liquidity Facility and (ii) at any time after
such scheduled expiration date. The Liquidity Provider may also arrange for a
Replacement Facility to replace the Liquidity Facility at any time after a
Downgrade Drawing thereunder. If any Replacement Facility is provided at any
time after a Downgrade Drawing or a Non-Extension Drawing, the funds on deposit
in the Cash Collateral Account will be returned to the Liquidity Provider being
replaced. (Indenture, Section 3.5 (e))
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))
Drawings under the Liquidity Facility will be made by delivery by the
Trustee of a certificate in the form required by the Liquidity Facility. Upon
receipt of such a certificate, the Liquidity Provider is obligated to make
payment of the drawing requested thereby in immediately available funds. Upon
payment by the Liquidity Provider of the amount specified in any drawing under
the Liquidity Facility, the Liquidity Provider will be fully discharged of its
obligations under the Liquidity Facility with respect to such drawing and will
not thereafter be obligated to make any further payments under the Liquidity
Facility in respect of such drawing to the Trustee or any other person.
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 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:
o Such amount will be released on any Distribution Date to the Liquidity
Provider to the extent that such amount exceeds the Required Amount.
o Any portion of such amount withdrawn from the Cash Collateral Account
to pay interest on the Notes will be treated in the same way as
Interest Drawings.
o 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 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 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:
o The acceleration of the Notes.
o 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
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:
o The Liquidity Facility will expire on the fifth Business Day after the
date on which such Termination Notice is received by the Trustee.
o The Trustee will promptly request, and the Liquidity Provider will
make, a Final Drawing in an amount equal to the then Maximum Available
Commitment.
o Any drawing remaining unreimbursed as of the date of termination will
be automatically converted into a Final Drawing.
o 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 Notes--Priority of Distributions". (Liquidity
Facility, Section 6.01) Upon the circumstances described above under
"Description of the 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 Notes is Morgan Stanley Capital
Services Inc. The obligations of Morgan Stanley Capital Services Inc. are
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.
DESCRIPTION OF THE POLICY AND THE POLICY PROVIDER AGREEMENT
The following summary describes the material terms of the Policy and
certain provisions of the Policy Provider Agreement. The summary does not
purport to be complete and is qualified in its entirety by reference to all of
the provisions of the Policy, which has been filed as an exhibit to the
Registration Statement and copies of which are available as set forth under
"Where You Can Find More Information".
THE POLICY
The Policy Provider has issued a certificate guarantee insurance policy
(the "Policy") in favor of the Trustee for the benefit of the Noteholders and
the Liquidity Provider. 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 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 Notes at the 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 Notes together with accrued and unpaid interest thereon at the Stated
Interest Rate (calculated assuming that Continental will not cure the nonpayment
of interest and excluding any accrued and unpaid 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 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 "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 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:
o Any shortfall on the Non-Performance Payment Date in funds required to
pay accrued interest on the Notes.
o 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 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,
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 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 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 requests by the Trustee for a Policy Drawing under the Policy (other
than a Policy Drawing as described in "--Liquidity Provider Drawing") are to be
made by it no later than 1:00 p.m. (New York City time) on (or, in the case of
any Avoided Payment, at least three Business Days prior to) the applicable
Distribution Date and in the form required by the Policy and delivered to the
Policy Provider in accordance with the Policy. All proceeds of any Policy
Drawing under the Policy (other than a Policy Drawing as described in
"--Liquidity Provider Drawing") by the Trustee are to be deposited by the
Trustee in a separate policy account and from there distributed to the
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 Noteholders. If any request for a Policy Drawing is rejected as not meeting
the requirements of the Policy, the Trustee is to resubmit such request so as to
meet such requirements.
The Policy provides that if such a request for a Policy Drawing is properly
submitted or resubmitted it will pay to the Trustee for deposit in a separate
policy account the applicable payment under the Policy no later than 3:00 p.m.
on the later of the relevant Distribution Date and the date the request is
received by the Policy Provider (if the request is received by 1:00 p.m. on such
date) or the next Business Day (if the request is received after that time).
Once any payment under the Policy is paid to the Trustee, the Policy
Provider will have no further obligation in respect of such payment. THE POLICY
PROVIDER SHALL NOT BE REQUIRED TO MAKE ANY PAYMENT EXCEPT AT THE TIMES AND IN
THE AMOUNTS AND UNDER THE CIRCUMSTANCES EXPRESSLY SET FORTH IN THE POLICY.
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 Notes in
excess of the Capped Interest Rate, (iii) any Premium or other acceleration
payment payable in respect of the Notes, (iv) any Break Amount or (v) any
failure of the Trustee to make any payment due to the Noteholders from funds
received.
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
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 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 Noteholder is
required to return all or any portion of such voided payment (including any
disgorgement from the 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 Issuance Date, of
any bankruptcy, insolvency, readjustment of debt, reorganization, marshalling of
assets and liabilities or similar proceedings by or against Continental or the
Liquidity Provider and the commencement, after the 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 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 Notes and a fee in connection with any
prepayment of the Notes and to reimburse the Policy Provider for certain
expenses.
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 December 25,
2002. A letter, dated January 24, 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)
-----------------------------------
AIRCRAFT MODEL EXPENDABLES ROTABLES TOTAL APPRAISED VALUE
-------------- ----------- --------- ------- ---------------
737-700............ 877 24 901
737-700/800........ 278,912 6,942 285,854
737-800............ 3,777 191 3,968
737-900............ 821 10 831
------- -------- --------
737-7/8/9
Subtotal...... 284,387 7,167 291,554 $185,972,600
757-200............ 185,731 3,391 189,122 69,352,800
757-300............ 10,946 96 11,042 3,116,700
767-200............ 25,485 227 25,712 8,946,700
767-400............ 51,147 1,586 52,733 55,741,200
777-200............ 111,210 3,006 114,216 113,712,000
------- --------- --------- ------------
Total.............. 668,906 15,473 684,379 $436,841,900
------------
(1) This quantity of spare parts used in preparing the appraised value was
determined as of December 25, 2002. 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 Notes--Collateral".
In connection with the issuance of the Old Notes, SH&E prepared an
appraisal, dated as of October 31, 2002, of the spare parts of the types
included in the Collateral owned by Continental as of August 25, 2002, prepared
on substantially the same basis as the appraisal described above. The total
appraised value of the spare parts according to such appraisal was $415,429,000.
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 Notes. If a Policy Provider Default occurs and such proceeds are not
sufficient to repay all such amounts due on the Notes, then holders (to the
extent not repaid from the proceeds of the sale of Collateral) would have only
unsecured claims against Continental and the Policy Provider.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
EXCHANGE OF OLD NOTES FOR NEW NOTES
The following summary describes the material generally applicable U.S.
federal income tax consequences to Noteholders of the exchange of the Old Notes
for New Notes. This summary is intended to address the beneficial owners of
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
Notes as capital assets. The summary does not address all of the federal income
tax consequences that may be relevant to all 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 Notes for New Notes (the "Exchange") pursuant to the
Exchange Offer will be treated as a continuation of the holder's investment in
the Old Notes and will not be a taxable event for U.S. federal income tax
purposes. As a result, a holder of an Old Note whose Old 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 Noteholder that does not
participate in the Exchange Offer. A tendering holder's tax basis in the New
Notes will be the same as such holder's tax basis in its Old Notes. A tendering
holder's holding period for the New Notes received pursuant to the Exchange
Offer will include its holding period for the Old Notes surrendered therefor.
ALL HOLDERS OF OLD 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 NOTES FOR NEW NOTES AND OF THE OWNERSHIP AND DISPOSITION
OF NEW NOTES RECEIVED IN THE EXCHANGE OFFER IN LIGHT OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New 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 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 Notes received in exchange for Old Notes where
such Old 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 Notes may be required to
deliver a prospectus.
Continental will not receive any proceeds from any sale of New Notes by
broker-dealers. New 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 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 Notes. Any broker-dealer
that resells New 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 Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
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 Holders and certain transfer taxes, and will indemnify the Holders of the
New Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the 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), as amended, 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 consolidated balance sheets of MBIA Inc. and subsidiaries and MBIA
Insurance Corporation and subsidiaries as of December 31, 2002 and December 31,
2001 and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2002, incorporated herein by reference, have been incorporated herein in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing. Any
other audited financial statements of such companies that are incorporated or
that are deemed to be incorporated herein by reference that are the subject of a
report by PricewaterhouseCoopers LLP, independent accountants, will be so
incorporated by reference in reliance upon such reports and upon the authority
of such firms as experts in accounting and auditing to the extent covered by
consents of PricewaterhouseCoopers LLP filed with the SEC.
The references to SH&E, and to its appraisal reports, dated as of October
31, 2002 and January 24, 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.
APPENDIX I--INDEX OF TERMS
PAGE PAGE
Agent's Message.................42 Final Scheduled Payment
American Airlines...............23 Date.......................... .45
Applicable Date.................47 Fixed charges.....................28
ATOP............................42 GAAP..............................36
Aviation Security Act...........23 Global Notes......................59
Avoided Payment.................69 holder............................40
Base Rate.......................65 Holdings..........................29
Book-Entry Confirmation.........40 Hopkins International.............29
Break Amount....................47 Houston...........................29
Bush Intercontinental...........29 Indenture.........................45
Business Day....................57 Indirect Participants.............59
Capped Interest Rate............62 Initial Interest Period...........46
Cash Collateral.................48 Initial Purchaser.................26
Cash Collateral Account.........63 Insolvency Proceeding.............70
Cede............................59 Interest Drawing..................62
CMI.............................29 Interest Payment Date.............45
Collateral......................48 Interest Period...................46
Collateral Agents...............48 Issuance Date.....................37
Collateral Agreements...........48 KLM...............................31
Collateral Maintenance Liberty International.............29
Agreement.....................48 LIBOR.............................46
Collateral Ratio................48 Liquidity Event of Default........66
Commission.......................3 Liquidity Expenses................56
Company.........................29 Liquidity Facility................62
Continental.....................29 Liquidity Facility LIBOR..........65
Continental Bankruptcy Liquidity Obligations.............56
Event.........................53 Liquidity Provider................62
Controlling Party...............55 Liquidity Provider Guarantor......66
Copa............................31 Liquidity Provider
Debt Balance....................52 Reimbursement Date..............68
Default.........................53 Maximum Available
Definitive Notes................60 Commitment......................62
Delta...........................30 MBIA..............................35
Designated Locations............52 Moody's...........................63
Distribution Date...............46 New Notes..........................5
Downgrade Drawing...............63 Newark............................29
DTC.............................40 Non-Extension Drawing.............64
DTC Participant.................42 Non-Performance Payment Date......67
earnings........................28 Non-Performing....................56
Eligible Institution............40 Non-Performing Period.............67
Embraer.........................21 Northwest Airlines................30
Equipment.......................54 Note Owners.......................60
Event of Default................52 Noteholders.......................47
Event of Loss...................52 Notes..............................5
Exchange........................73 Old Notes..........................5
Exchange Agent..................43 Operative Documents...............45
Exchange Offer...................5 Outstanding Amount................67
Expiration Date.................39 Parent Company....................35
ExpressJet......................29 Participating Broker-Dealer.......38
FAA.............................20 Payment Default...................52
Fair Market Value...............48 Pledged Spare Parts...............48
Final Drawing...................64 Policy............................67
Final Legal Maturity Date.......45 Policy Drawing....................57
Final Order.....................69
Policy Expenses.................57 SARS..............................32
Policy Provider.................35 Scheduled Interest Payment
Policy Provider Agreement.......70 Date...........................45
Policy Provider Default.........55 Section 1110......................54
Policy Provider Election........68 Security Agent....................48
Policy Provider Obligations.....56 Security Agreement................48
Premium.........................47 SH&E..............................25
Prior Funds.....................67 Shelf Registration Statement......38
Qualified Spare Parts...........48 Standard & Poor's.................63
Rating Agency...................49 Stated Interest Rate..............45
Reference Agency Agreement......46 Subordinated Notes................57
Reference Agent.................46 Support Documents.................45
Reference Date..................46 Termination Date..................69
Registration Event..............38 Termination Notice................66
Registration Rights Agreement...37 Threshold Rating..................63
Registration Statement...........3 TIA...............................53
Relevant Date...................67 Trustee...........................45
Replacement Facility............63 TSA...............................23
Required Amount.................62 United............................23
Rotable Ratio...................48 US Airways........................23
Rotables........................71 Virgin............................31
SAP.............................36
APPENDIX II--APPRAISAL LETTER
SH&E INTERNATIONAL AIR TRANSPORT CONSULTANCY
A FULL APPRAISAL OF SELECTED SPARE PARTS
Prepared for:
CONTINENTAL AIRLINES
Prepared by:
SH&E
JANUARY 24, 2003
TABLE OF CONTENTS
1 1.0 INTRODUCTION, DETERMINATION &
ASSUMPTIONS....................................................................1
1.1 Introduction.......................................................1
1.2 Determination......................................................1
1.3 Assumptions........................................................3
2 2.0 DESCRIPTION OF ASSETS................................................4
2.1 Spare Parts Nomenclature...........................................4
2.2 Summary of the Continental Inventory...............................7
2.3 Comparison of the Two Appraisals...................................8
2.3.1 Inventory Size Comparison....................................9
2.3.2 Significant Changes in the Inventory........................10
2.3.3 Other Observations..........................................11
3 3.0 METHODOLOGY.........................................................12
3.1 Definition of Terms...............................................12
3.1.1 Base Value..................................................12
3.1.2 Current Market Value........................................12
3.2 Spare Parts Appraisal Methodology.................................13
3.2.1 Sampling Process............................................13
3.2.2 Sample Valuation............................................14
3.2.3 Current Market Value Determination..........................14
3.2.4 Condition and Quantity Adjustment...........................15
4 4.0 THE MARKET FOR THE SUBJECT ASSETS...................................16
5 5.0 QUALIFICATIONS......................................................17
6 6.0 LIMITATIONS.........................................................18
Appendix A - Value by Aircraft Type by Material Class
Appendix B - Summary of Inventory Adjustments
Appendix C - Proportion of Serviceable & Unserviceable Parts
1.0 INTRODUCTION, DETERMINATION
& ASSUMPTIONS
1.1 INTRODUCTION
Continental Airlines, Inc. ("Continental" the "Client") has retained Simat,
Helliesen & Eichner, Inc. ("SH&E") to prepare an update to its opinion of the
Current (or Fair) Market Value ("CMV") of an inventory of selected spare parts
owned by Continental (collectively the "Subject Assets"). This report is an
update to SH&E's previous report dated October 31, 2002.
As part of the appraisal, SH&E conducted limited physical inspections of
Continental's warehouse facilities at Newark (3 locations), Cleveland, Los
Angeles (2 locations), Houston - George Bush Intercontinental (4 locations),
Houston - Hobby, Honolulu (2 locations) and Orlando. Together, these locations
account for 80% of the subject asset value.
1.2 DETERMINATION
SH&E has determined the aggregate Adjusted(1) Current Market Value of the
Subject Assets to be:
$ 436.8 MILLION
As a point of reference, this updated appraisal represents an increase of $21.4
million from the valuation provided in the previous report dated October 31,
2002 that was based on an inventory listing as of August 25, 2002.
--------------------
(1) Adjustments were made to the CMV to reflect serviceability levels and
inventory accuracy
--------------------------------------------------------------------------------
TABLE 1-1: CONTINENTAL AIRLINES SELECTED SPARE PARTS VALUATION SUMMARY ($000)
--------------------------------------------------------------------------------
UNADJUSTED CURRENT MARKET VALUE
Serviceable Unserviceable Total
--------------------------------------------------------------------------------
737-7/8/9 $157,991.7 $56,175.8 $214,167.6
757-200 $62,373.7 $17,599.7 $79,973.4
757-300 $2,944.5 $434.0 $3,378.4
767-200 $6,340.1 $7,193.2 $13,533.3
767-400 $51,935.1 $9,576.8 $61,511.8
777-200 $97,444.4 $32,665.2 $130,109.6
--------- --------- ----------
Total $379,029.5 $123,644.7 $502,674.2
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE 1-2: CONTINENTAL AIRLINES SELECTED SPARE PARTS VALUATION SUMMARY ($000)
--------------------------------------------------------------------------------
ADJUSTED CURRENT MARKET VALUE
SH&E Value
Group Serviceable Unserviceable Total
--------------------------------------------------------------------------------
737-7/8/9 $157,991.7 $27,980.8 $185,972.6
757-200 $62,373.7 $6,979.1 $69,352.8
757-300 $2,944.5 $172.2 $3,116.7
767-200 $6,340.1 $2,606.6 $8,946.7
767-400 $51,935.1 $3,806.1 $55,741.2
777-200 $97,444.4 $16,267.6 $113,712.0
--------- --------- ----------
Total $379,029.5 $57,812.4 $436,841.9
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1.3 ASSUMPTIONS
SH&E relied on the following assumptions while performing this valuation:
O 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.
O The SH&E values assume the Subject Assets meet all relevant
specifications and performance capabilities.
O SH&E relied upon Continental's determination as to the serviceability
or unserviceability of the Subject Assets. Any variation in their
status would affect the values referenced herein.
O SH&E has not addressed any ownership rights and has assumed that the
Subject Assets are owned by the Client.
O 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).
O All normally required maintenance has been performed including
compliance with all mandatory Airworthiness Directives.
O All of the data and information provided by Continental is an accurate
representation of the actual conditions or circumstances of the
Subject Assets.
O 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.
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, these parts are classified as Expendables (because
they are ultimately consumed) with a notation in the part record that the part
is to be "recovered" and inspected to determine if repair is cost effective
prior to being scrapped.
Examples of repairable or Recoverable Expendable parts include engine cowlings,
fairings, and engine blades, flap track assemblies, certain bearings, duct
assemblies and fittings.
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.
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.
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 December 25, 2002. The 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 25,465 line items with a total of 789,737 individual
parts. A total of 2,110 line items containing 105,358 parts (see Appendix B)
were excluded from this appraisal for the following reasons:
1. The parts are for an aircraft modification program that will be
completed by the next appraisal (cockpit doors).
2. The parts are assets supplied and owned by vendors but tracked in the
Continental maintenance system (brake and tire sets).
3. Or, are branded parts specific to Continental and can only be used by
the airline (seat covers, carpet and cushion, and fabric).
These parts except for the cockpit doors, which are new items, were also removed
from the previous appraisal.
The majority of the Subject Assets were assessed to be in a new or overhauled
maintenance condition. Continental claimed 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
--------------------------------------------------------------------------------
Value Group Fleet Expendable Rotable Total
--------------------------------------------------------------------------------
737-700/800 278,912 6,942 285,854
737-800 3,777 191 3,968
737-900 821 10 831
--- -- ---
737-7/8/900 Total 284,387 7,167 291,554
757-200 757-200 185,731 3,391 189,122
757-300 757-300 10,946 96 11,042
767-200 767-200 25,485 227 25,712
767-400 767-400 51,147 1,586 52,733
777-200 777-200 111,210 3,006 114,216
------- ----- -------
Grand Total 668,906 15,473 684,379
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
*These summary tables reflect the current part count after all inventory
adjustments. See Appendix B for a detailed summary of inventory adjustments.
2.3 COMPARISON OF THE TWO APPRAISALS
For this appraisal SH&E used data as of December 25, 2002; in the prior
appraisal, the inventory was dated as of August 25, 2002
2.3.1 INVENTORY SIZE COMPARISON
The inventory as of December 25, 2002 contained 742 more Continental part
numbers and contained 59,454 more individual parts. The following table
summarizes the differences.
--------------------------------------------------------------------------------
TABLE 2-2: INVENTORY AS OF DECEMBER 2002
--------------------------------------------------------------------------------
Aircraft Lines Parts
--------------------------------------------------------------------------------
737-7/8/9 6,036 335,753
757-200 7,568 212,363
757-300 674 12,662
767-200 1,298 26,574
767-400 3,970 67,597
777-200 5,919 134,788
----- -------
Grand Total 25,465 789,737
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE 2-3: INVENTORY AS OF AUGUST 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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE 2-4: INVENTORY - DIFFERENCES
--------------------------------------------------------------------------------
Aircraft Lines Parts
--------------------------------------------------------------------------------
737-7/8/9 280 56,216
757-200 182 (61)
757-300 15 582
767-200 38 156
767-400 103 293
777-200 124 2,268
--- -----
Grand Total 742 59,454
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
*THE COUNT OF PARTS AS OF JANUARY 2003 IS BEFORE ALL INVENTORY ADJUSTMENTS. SEE
APPENDIX B FOR A DETAILED SUMMARY OF INVENTORY ADJUSTMENTS.
The change in inventory represents an increase in unadjusted current market
value of approximately $47.9 Million.
2.3.2 SIGNIFICANT CHANGES IN THE INVENTORY
SH&E noted that the proportion of unserviceable parts has increased by
approximately $50 million (before maintenance adjustment) since the previous
inventory. This change was expected as it was noted during the prior appraisal
that the proportion of unserviceable parts was relatively low compared with U.S.
industry average.
SH&E also noted that Continental acquired 4 new APUs(3) with an approximate
current market value of $2.5 million.
--------------------
(3) An APU is an Auxiliary Power Unit. It is a small jet engine used to provide
electrical and pneumatic power to aircraft system when on the ground and
power for starting the main engines. Certain of the engines can be used to
provide emergency in-flight electrical power.
2.3.3 OTHER OBSERVATIONS
O At Newark Liberty International Airport, Continental is building a new
spare parts facility which is due for completion in April 2003. Once
complete, parts from the current hanger location and off-airport
warehouse will be consolidated into the single facility.
O The Guam station holds inventory representing approximately $25
million in value and was recently damaged by a typhoon. Accordingly,
SH&E was unable to inspect this facility. Continental reports that the
facility is being repaired. Continental further informs us that the
associated damage, to the spare parts was minimal, and affected parts
are being repaired. SH&E will inspect the facility at the next
appraisal update.
O SH&E observed different packaging standards between different stations
although all were acceptable by industry standards. SH&E recommended
that all parts in excess of $2,500 be individually packaged even when
stored within a bin.
O Previously at the Houston - Morales (MOR) location, SH&E discovered
several rotable parts were reported as being present at the facility
inventory when they were actually installed on an aircraft.
Continental was aware of the problem and advised it was being
corrected. SH&E retested samples of this inventory and the problem
appears to have been corrected.
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.
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 25,465 line items. 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.
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, manufacturers' parts lists and SH&E
files.
SH&E performed a detailed pricing survey for the prior appraisal and, for this
update, spot checked values from each pool of parts and found no significant
change in the individual part's 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 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 prices
or catalogue values.
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. Over 30 different sources
including price catalogs from the major manufacturers, US government procurement
data, airline parts pooling price lists and inventory and purchase records from
seven major U.S. and European airlines files were reviewed in order to determine
additional current market values. More than three million parts pricing records
were examined in order to match a part number and reference price for each part
in the Continental inventory.
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 17,500
line items representing approximately 71% of the line items and 74% of the
historic cost.
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 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 audit will be performed during the next
full appraisal.
For this update, SH&E revisited Continental's parts facilities in Newark,
Cleveland, Los Angeles and Houston (George Bush) and performed first time visits
to Honolulu, Houston Hobby and Orlando to physically inspect the assets and to
verify the accuracy of the inventory reporting system. As before the accuracy of
Continental's inventory was above industry standard and Honolulu and Cleveland
both had no discrepancies. SH&E's review of the associated records also revealed
no discrepancies.
The physical sample audit indicated accuracy above U.S. industry norms, however,
SH&E did note that the airline creates a large number of "kits." A kit is a
package of parts, either multiple units of the same part or a collection of
necessary parts needed to complete a certain maintenance task. Sometimes the kit
contains a rotable item along with the necessary expendable material to perform
installation. Almost all the material was new. It should be noted that the
"kitting" process makes the kit unique to Continental but the parts can be made
generic simply by disassembling the kit. For this valuation the kit parts were
treated as independent parts.
4.0 THE MARKET FOR THE SUBJECT
ASSETS
The potential market for Continental Airlines' spare parts remains positive. In
the main, the parts are associated with aircraft that have enjoyed extensive
production runs and also have a wide operator base. The two exceptions are the
757-300 and the 767-400; these aircraft have both limited production runs and
small operator bases. There have been a total of 63 757-300 aircraft ordered for
7 operators and 37 767-400 aircraft ordered for two operators, Continental and
Delta. That said, there is very significant commonality between the 757-200 and
757-300 aircraft and also between the 767-400 and the 777.
The parts aftermarket, generally estimated to exceed $1.3 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 airframe material available on the parts
aftermarket. The same is true for the engine market where the Original Equipment
Manufacturers ("OEM") have maintained a 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.
5.0 QUALIFICATIONS
Founded in 1963 and with offices in New York, Boston, Washington, London and
Amsterdam, 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 remarketing 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.
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
January 24, 2003
SH&E INTERNATIONAL AIR TRANSPORT CONSULTANCY
APPENDIX A
VALUE BY AIRCRAFT TYPE BY MATERIAL CLASS
SELECTED SPARE PARTS VALUATION SUMMARY BY MATERIAL
CLASS
Dollars in (000)
------------------------------------------------------------------------
VALUE GROUP ROTABLE EXPENDABLE GRAND TOTAL
------------------------------------------------------------------------
737-7/8/9 $153,526.8 $32,445.7 $185,972.6
------------------------------------------------------------------------
757-200 $49,898.8 $19,454.1 $69,352.8
------------------------------------------------------------------------
757-300 $2,267.0 $849.7 $3,116.7
------------------------------------------------------------------------
767-200 $6,611.4 $2,335.3 $8,946.7
------------------------------------------------------------------------
767-400 $46,714.4 $9,026.8 $55,741.2
------------------------------------------------------------------------
777-200 $88,442.0 $25,270.0 $113,712.0
------------------------------------------------------------------------
TOTAL $347,460.4 $89,381.5 $436,841.9
------------------------------------------------------------------------
SH&E INTERNATIONAL AIR TRANSPORT CONSULTANCY
APPENDIX B
SUMMARY OF INVENTORY ADJUSTMENTS
SELECTED SPARE PARTS: SUMMARY OF INVENTORY
ADJUSTMENTS
------------------------ ------------------------------- ---------------------- --------------------- ----------------------
Starting CO Inventory Less brakes, tires, cockpit Less CO specific Total Adjustments Inventory After
doors parts to Inventory Adjustments
------------------------ ------------------------------- ---------------------- --------------------- ----------------------
Group Lines Qty Group Lines Qty Reason Group Lines Qty Group Lines Qty Group Lines Qty
------------------------ ------------------------------- ---------------------- --------------------- ----------------------
737-7/8/9 6,036 335,753 737-7/8/9 1 50 DOOR 737-7/8/9 470 44,149 737-7/8/9471 44,199 737-7/8/5,565 291,554
757-200 7,568 212,363 757-200 3 99 BRAKE/TIRE 757-200 395 23,142 757-200 398 23,241 757-200 7,170 189,122
757-300 674 12,662 757-300 2 14 BRAKE/TIRE 757-300 46 1,606 757-300 48 1,620 757-300 626 11,042
767-200 1,298 26,574 767-200 2 9 BRAKE/TIRE 767-200 38 853 767-200 40 862 767-200 1,258 25,712
767-400 3,970 67,597 767-400 1 35 BRAKE/TIRE 767-400 282 14,829 767-400 283 14,864 767-400 3,687 52,733
777-200 5,919 134,788 777-200 3 294 BRAKE/TIRE 777-200 867 20,278 777-200 870 20,572 777-200 5,049 114,216
------------------------ ------------------------------- ---------------------- --------------------- ----------------------
Total 25,465 789,737 Total 12 501 Total 2,098 104,857 Total 2,110105,358 Total 23,355 684,379
------------------------ ------------------------------- ---------------------- --------------------- ----------------------
*CO specific parts include: seat covers, carpet, cushions, curtains, fabric, cloth, placards
SH&E INTERNATIONAL AIR TRANSPORT CONSULTANCY
APPENDIX C
PROPORTION OF SERVICEABLE AND
UNSERVICEABLE PARTS
COMPARISON OF THE SELECTED PARTS INVENTORY VALUATIONS
DOLLARS IN (000)
-----------------------------------------------------------------------------------------------------------------------
CONTINENTAL AIRLINES SELECTED SPARE PARTS VALUATION SUMMARY ($000) DECEMBER 2002
-----------------------------------------------------------------------------------------------------------------------
UNADJUSTED CURRENT MARKET VALUE ADJUSTED CURRENT MARKET VALUE
-----------------------------------------------------------------------------------------------------------------------
Value Group Serviceable Unserviceable Total Serviceable Unserviceable Total %
Unserviceable
-----------------------------------------------------------------------------------------------------------
737-7/8/9 $157,991.7 $56,175.8 $214,167.6 $157,991.7 $27,980.8 $185,972.6 15%
757-200 $62,373.7 $17,599.7 $79,973.4 $62,373.7 $6,979.1 $69,352.8 10%
757-300 $2,944.5 $434.0 $3,378.4 $2,944.5 $172.2 $3,116.7 6%
767-200 $6,340.1 $7,193.2 $13,533.3 $6,340.1 $2,606.6 $8,946.7 29%
767-400 $51,935.1 $9,576.8 $61,511.8 $51,935.1 $3,806.1 $55,741.2 7%
777-200 $97,444.4 $32,665.2 $130,109.6 $97,444.4 $16,267.6 $113,712.0 14%
-----------------------------------------------------------------------------------------------------------------------
TOTAL $379,029.5 $123,644.7 $502,674.2 $379,029.5 $57,812.4 $436,841.9 13%
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
CONTINENTAL AIRLINES SELECTED SPARE PARTS VALUATION SUMMARY ($000) AUGUST 2002
-----------------------------------------------------------------------------------------------------------------------
UNADJUSTED CURRENT MARKET VALUE ADJUSTED CURRENT MARKET VALUE
-----------------------------------------------------------------------------------------------------------------------
Value Group Serviceable Unserviceable Total Serviceable Unserviceable Total % Unserviceable
-----------------------------------------------------------------------------------------------------------
737-7/8/9 $158,726.5 $33,816.2 $192,542.7 $158,726.5 $16,811.8 $175,538.3 10%
757-200 $62,627.8 $15,171.1 $77,799.0 $62,627.8 $6,009.3 $68,637.2 9%
757-300 $2,927.8 $372.3 $3,300.1 $2,927.8 $147.6 $3,075.4 5%
767-200 $6,948.4 $4,070.4 $11,018.7 $6,948.4 $1,407.8 $8,356.1 17%
767-400 $50,651.2 $5,196.2 $55,847.3 $50,651.2 $2,056.1 $52,707.3 4%
777-200 $100,107.0 $14,129.3 $114,236.3 $100,107.0 $7,007.5 $107,114.6 7%
-----------------------------------------------------------------------------------------------------------------------
TOTAL $381,988.8 $72,755.4 $454,744.2 $381,988.8 $33,440.2 $415,429.0 8%
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
DIFFERENCES (DECEMBER 2002 - AUGUST 2002) ($000)
-----------------------------------------------------------------------------------------------------------------------
UNADJUSTED CURRENT MARKET VALUE ADJUSTED CURRENT MARKET VALUE
-----------------------------------------------------------------------------------------------------------------------
Value Group Serviceable Unserviceable Total Serviceable Unserviceable Total
-----------------------------------------------------------------------------------------------------------------------
737-7/8/9 ($734.8) $22,359.6 $21,624.9 ($734.8) $11,169.0 $10,434.2
757-200 ($254.1) $2,428.6 $2,174.5 ($254.1) $969.8 $715.7
757-300 $16.6 $61.6 $78.3 $16.6 $24.6 $41.3
767-200 ($608.3) $3,122.8 $2,514.5 ($608.3) $1,198.8 $590.6
767-400 $1,283.9 $4,380.6 $5,664.5 $1,283.9 $1,750.0 $3,033.9
777-200 ($2,662.6) $18,535.9 $15,873.3 ($2,662.6) $9,260.0 $6,597.4
-----------------------------------------------------------------------------------------------------------
TOTAL ($2,959.3) $50,889.3 $47,930.0 ($2,959.3) $24,372.3 $21,413.0
-----------------------------------------------------------------------------------------------------------------------
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
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)."
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 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.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on April 22, 2003.
CONTINENTAL AIRLINES, INC.
By: /S/ JENNIFER L. VOGEL
-------------------------------
Jennifer L. Vogel
Vice President, General Counsel
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated, on April 22, 2003.
SIGNATURE TITLE
---------------------------------- -----------------------------------
GORDON M. BETHUNE* Chairman of the Board, Chief
---------------------------------- Executive Officer (Principal
Gordon M. Bethune Executive Officer) and Director
LAWRENCE W. KELLNER* President, Chief Operating Officer
---------------------------------- and Director
Lawrence W. Kellner
/S/ JEFFREY J. MISNER Senior Vice President and Chief
---------------------------------- Financial Officer
Jeffrey J. Misner (Principal Financial Officer)
/S/ CHRIS KENNY Vice President and Controller
---------------------------------- (Principal Accounting Officer)
Chris Kenny
THOMAS J. BARRACK, JR.* Director
----------------------------------
Thomas J. Barrack, Jr.
DAVID BONDERMAN* Director
----------------------------------
David Bonderman
KIRBYJON CALDWELL* Director
----------------------------------
Kirbyjon Caldwell
PATRICK FOLEY* Director
----------------------------------
Patrick Foley
DOUGLAS H. MCCORKINDALE* Director
----------------------------------
Douglas H. McCorkindale
GEORGE G.C. PARKER* Director
----------------------------------
George G.C. Parker
RICHARD W. POGUE* Director
----------------------------------
Richard W. Pogue
SIGNATURE TITLE
---------------------------------- -----------------------------------
WILLIAM S. PRICE III* Director
----------------------------------
William S. Price III
---------------------------------- Director
Donald L. Sturm
KAREN HASTIE WILLIAMS* Director
----------------------------------
Karen Hastie Williams
CHARLES A. YAMARONE* Director
----------------------------------
Charles A. Yamarone
*BY: /S/ JENNIFER L. VOGEL
----------------------------------
Jennifer L. Vogel
Attorney-in-Fact
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
4.1 Indenture, dated as of December 6, 2002, 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
4.2 Form of Exchange Floating Rate Secured 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
4.4 Spare Parts Security Agreement, dated as of December 6, 2002, between
Continental Airlines, Inc. and Wilmington Trust Company, as Security
Agent
4.5 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
4.6 Revolving Credit Agreement, dated as of December 6, 2002, between
Wilmington Trust Company, as Trustee, and Morgan Stanley Capital
Services Inc., as Liquidity Provider
4.7 Guarantee Agreement, dated as of December 6, 2002, by Morgan Stanley,
relating to the Revolving Credit Agreement
4.8 Financial Guarantee Insurance Policy #39753 of MBIA Insurance
Corporation
4.9 Exchange and Registration Rights Agreement, dated as of December 6,
2002, between Continental Airlines, Inc. and Morgan Stanley & Co.
Incorporated
4.10 Purchase Agreement, dated as of December 2, 2002, 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
Notes
12.1 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Hughes Hubbard & Reed LLP (included in its opinion filed as
exhibit 5.1)
23.4 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 Notes Due 2007, on Form T-1 (to be filed by amendment)
99.1 Form of Letter of Transmittal
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
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