-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, OOyEfgNdmOh40FQ2ytc3+Gsmo8QD7Md+NeQeEzRt9+21o+UIyz9o/Ma6CSEo/juI /BvThEX0DaK/h7mYzaeDyg== 0000950123-94-001632.txt : 19941017 0000950123-94-001632.hdr.sgml : 19941017 ACCESSION NUMBER: 0000950123-94-001632 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19941014 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILLIPS PETROLEUM CO CENTRAL INDEX KEY: 0000078214 STANDARD INDUSTRIAL CLASSIFICATION: 2911 IRS NUMBER: 730400345 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-54987 FILM NUMBER: 94552753 BUSINESS ADDRESS: STREET 1: PHILLIPS BUILDING STREET 2: 800 PLAZA OFFICE BUILDING CITY: BARTLESVILLE STATE: OK ZIP: 74004 BUSINESS PHONE: 9186616600 424B3 1 PRELIMINARY PROSPECTUS SUPPLEMENT 1 Pursuant to Rule 424(b)(3) Registration No. 33-54987 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 13, 1994 Prospectus Supplement (to Prospectus dated October 11, 1994) PHILLIPS PETROLEUM COMPANY $ 1994 PASS THROUGH TRUSTS % PASS THROUGH CERTIFICATES, SERIES 1994-A1 % PASS THROUGH CERTIFICATES, SERIES 1994-A2 The Pass Through Certificates offered hereby consist of Phillips Petroleum Company % Pass Through Certificates, Series 1994-A1, in the aggregate amount of $ and Phillips Petroleum Company % Pass Through Certificates, Series 1994-A2, in the aggregate amount of $ , which will represent fractional undivided interests in the Phillips Petroleum Company Pass Through Trust, 1994-A1, and the Phillips Petroleum Company Pass Through Trust, 1994-A2, respectively. Each Pass Through Trust will be formed pursuant to a separate Pass Through Trust Agreement, in each case between Phillips Petroleum Company (the "Company"), and Shawmut Bank Connecticut, National Association, not in its individual capacity but solely as the Pass Through Trustee under such Pass Through Trust. The property of each Pass Through Trust will consist of equipment notes (the "Equipment Notes") being issued as nonrecourse obligations by four separate Owner Trusts in connection with four separate leveraged lease transactions. The proceeds of the Equipment Notes will be used (i) to repay and refinance interim loans made to each of the Owner Trusts to pay up to 80% of the acquisition cost of specific items of transportation equipment described herein (the "Equipment") which have been sold by the Company to such Owner Trusts and leased back by such Owner Trusts to the Company and (ii) to pay certain costs and expenses incurred in connection with the acquisition of the Equipment. ----------------------------------------------- (Continued on next page) THE PASS THROUGH CERTIFICATES, SUBJECT TO CERTAIN EXCEPTIONS MORE FULLY DESCRIBED UNDER "ERISA CONSIDERATIONS", MAY NOT BE PURCHASED BY, OR WITH THE ASSETS OF, ANY EMPLOYEE BENEFIT PLAN SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR INDIVIDUAL RETIREMENT ACCOUNT OR PLAN SUBJECT TO SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT. ----------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -----------------------------------------------
- --------------------------------------------------------------------------------------------------------------------- PASS THROUGH AGGREGATE APPLICABLE FINAL DISTRIBUTION INITIAL PUBLIC CERTIFICATES AMOUNT INTEREST RATE DATE OFFERING PRICE(1)(2) - --------------------------------------------------------------------------------------------------------------------- SERIES 1994-A1 $ % 100% SERIES 1994-A2 100 TOTAL $ $ - ---------------------------------------------------------------------------------------------------------------------
(1) Plus accrued interest, if any, at the applicable rate from the date of issuance of such Pass Through Certificates. (2) All of the proceeds from the sale of the Pass Through Certificates will be used to purchase the Equipment Notes issued by the Owner Trustee on behalf of four Owner Trusts. The underwriting fees aggregate $ with respect to Series 1994-A1 and $ with respect to Series 1994-A2, which constitutes . % of the aggregate amount of the Pass Through Certificates. The underwriting fees and certain other expenses relating to the offering, estimated at $ , will be paid by the Owner Trustee on behalf of the Owner Participants. The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended. ---------------------------------------------------------------------- The Pass Through Certificates are offered by the Underwriter, subject to prior sale, when, as and if issued and accepted by the Underwriter and subject to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify such offers and to reject orders in whole or in part. It is expected that the delivery of the Pass Through Certificates will be made in book-entry form through the facilities of The Depository Trust Company on or about October , 1994, against payment therefor in immediately available funds. CHEMICAL SECURITIES INC. The date of this Prospectus Supplement is October , 1994. 2 Equipment Notes, each of which may have a different principal amount, interest rate, maturity date and schedule of principal payments, will be issued on behalf of each Owner Trust under the Indentures as nonrecourse obligations of Wilmington Trust Company, acting not in its individual capacity but solely as Owner Trustee of such Owner Trust, and will be purchased from the Owner Trustee by the Pass Through Trustee. The aggregate principal amount of the Equipment Notes issued under each Indenture will not exceed 80% of the acquisition cost of the Equipment subject to such Indenture. For each Pass Through Trust, all of the Equipment Notes purchased by the Pass Through Trustee will have identical interest rates, in each case equal to the rate applicable to the Pass Through Certificates of such Pass Through Trust set forth on the cover page hereof, and will have a maturity date on or before the final distribution date for such Pass Through Trust. Interest paid on the Equipment Notes held in each Pass Through Trust will be passed through to the related Certificateholders on each March 27 and September 27, commencing on March 27, 1995, at the applicable rate per annum set forth on the cover page hereof until the final distribution date for such Pass Through Trust. Principal paid on the Equipment Notes held in each Pass Through Trust will be passed through to the related Certificateholders in scheduled amounts on March 27 or September 27, or both, of each specified year, commencing on , , for the Series 1994-A1 Pass Through Certificates and commencing on , , for the Series 1994-A2 Pass Through Certificates, until the final distribution date for such Pass Through Trust. Prior to the maturity thereof, the Equipment Notes relating to any Equipment may be purchased at the direction of the Owner Participant and such Equipment Notes may be prepaid by the Owner Trustee, under the circumstances and at the prices described in this Prospectus Supplement under "Description of the Equipment Notes -- Prepayment." Any such purchase or prepayment would result in an early distribution of principal paid in respect of the Pass Through Certificates. THE PASS THROUGH CERTIFICATES REPRESENT INTERESTS IN THE RELATED PASS THROUGH TRUST ONLY AND ALL PAYMENTS AND DISTRIBUTIONS SHALL BE MADE ONLY FROM THE PROPERTY OF SUCH PASS THROUGH TRUST. THE PASS THROUGH CERTIFICATES DO NOT REPRESENT AN INTEREST IN, OBLIGATION OF, OR GUARANTEE BY THE COMPANY. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PASS THROUGH CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN ANY OVER-THE-COUNTER MARKET OR OTHERWISE AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 3 PROSPECTUS SUMMARY The following is a summary of more detailed information contained elsewhere in this Prospectus Supplement and the accompanying Prospectus and should be read only in conjunction with this Prospectus Supplement and the Prospectus. THE OFFERING Glossary................... A glossary of certain of the significant defined terms used in this Prospectus Supplement is included as Appendix A to this Prospectus Supplement. Diagram of Payments........ A diagram of payments illustrating certain of the payment flows in the Pass Through Trust structure for Equipment being leased by the Company appears on page S-10 of this Prospectus Supplement. The Offering............... The Pass Through Certificates offered hereby consist of Phillips Petroleum Company % Pass Through Certificates, Series 1994-A1 (the "Series A1 Pass Through Certificates"), in the aggregate amount of $ and % Pass Through Certificates, Series 1994-A2 (the "Series A2 Pass Through Certificates"), in the aggregate amount of $ . Each such series of Pass Through Certificates is a "Series" and the Pass Through Certificates of both such Series, collectively, are the "Pass Through Certificates." The Series A1 Pass Through Certificates and the Series A2 Pass Through Certificates will be issued by Phillips Petroleum Company Pass Through Trust, 1994-A1 and Phillips Petroleum Company Pass Through Trust, 1994-A2, respectively (each, a "Pass Through Trust"), to be formed pursuant to the Pass Through Trust Agreement 1994-A1 and Pass Through Trust Agreement 1994-A2, respectively (each, a "Pass Through Agreement") in each case between the Company and Shawmut Bank Connecticut, National Association ("Shawmut Bank Connecticut"), as pass through trustee under each such Pass Through Trust (the "Pass Through Trustee") for the benefit of the registered holders (the "Certificateholders") of the related Series of Pass Through Certificates. Certificates Offered; Book-Entry Registration.... Each Pass Through Certificate will represent a fractional undivided interest in the related Pass Through Trust. The Pass Through Certificates of each Pass Through Trust will be issued in fully registered form only. The Pass Through Certificates of each Pass Through Trust will be represented by one or more permanent global Pass Through Certificates registered in the name of Cede & Co. ("Cede"), as the nominee of The Depository Trust Company ("DTC"). No person acquiring an interest in the Pass Through Certificates will be entitled to receive a definitive certificate representing such person's interest in the related Pass Through Trust, except in the event that definitive certificates are issued under the limited circumstances described herein. See "Description of the Pass Through Certificates -- Book-Entry Registration" in the Prospectus. Trust Property............. The property held in each Pass Through Trust (the "Trust Property") will consist of equipment notes (the "Equipment Notes") issued as nonrecourse obligations by Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee (the "Owner Trus- S-3 4 tee") under four separate owner trusts (each, an "Owner Trust") pursuant to four separate trust indentures and security agreements (each, an "Indenture") between the Owner Trustee and Shawmut Bank Connecticut, as indenture trustee (the "Indenture Trustee"). The proceeds of such Equipment Notes will be used (i) to repay and refinance interim loans made to each of the Owner Trusts to pay up to 80% of the acquisition cost of each of four classes of equipment (each, a "Class") consisting of 1,676 covered hoppers and 708 tank rail cars (the "Rail Cars"), three Falcon 20 corporate aircraft (the "F-20 Aircraft"), one Falcon 50 corporate aircraft (the "F-50 Aircraft") and 136 mobile aircraft refueling vehicles (the "Vehicles"), respectively, which have been leased to the Company in four separate leveraged lease transactions (the Rail Cars, the F-20 Aircraft, the F-50 Aircraft and the Vehicles, collectively, the "Equipment") and (ii) to pay certain costs and expenses incurred in connection with the acquisition of the Equipment. The aggregate acquisition cost of the Equipment of each Class is as follows: the Rail Cars, $77,651,450; the F-20 Aircraft, $15,510,000; the F-50 Aircraft, $10,400,000; and the Vehicles, $7,690,100. The Equipment of each Class is owned by a separate Owner Trust, and the Equipment Notes issued on behalf of each Owner Trust will be payable only from the assets of such Owner Trust. (See "Description of the Equipment Notes -- General" for a description of which Equipment Notes constitute the property of the respective Pass Through Trusts.) Each Pass Through Trust will include Equipment Notes with identical interest rates, in each case equal to the rate applicable to the Pass Through Certificates of such Pass Through Trust as set forth on the cover of this Prospectus Supplement, and will have maturity dates on or before the final distribution date for such Pass Through Trust. For each Pass Through Trust, the aggregate principal amount of the Equipment Notes held in such Pass Through Trust will equal the aggregate amount of the related Series of Pass Through Certificates. Denominations.............. The Pass Through Certificates of each Pass Through Trust will be issued in registered form without coupons in minimum denominations of $1,000 or any integral multiple thereof, except that one Pass Through Certificate with respect to each Pass Through Trust may be in an amount that is not a multiple of $1,000. Distribution Dates......... March 27 and September 27, commencing on March 27, 1995. Special Distribution Dates...................... The 27th day of any month. Record Dates............... The 15th day preceding a Distribution Date or a Special Distribution Date, as the case may be. Distributions of Scheduled Payments................. Payments of interest on the Equipment Notes held in each Pass Through Trust are scheduled to be received by the Pass Through Trustee on each March 27 and September 27, commencing on March 27, 1995, and, subject to receipt, are to be distributed to the related Certificateholders on the corresponding Distribution Dates. Interest on the Equipment Notes will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Payments of principal on such Equipment Notes are scheduled to be received in specified amounts on S-4 5 March 27 or September 27, or both, of each specified year, commencing on , , in the case of the Pass Through Trust relating to the Series A1 Pass Through Certificates, and commencing on , , in the case of the Pass Through Trust relating to the Series A2 Pass Through Certificates, and, subject to receipt, are to be distributed to the related Certificateholders on the corresponding Distribution Dates. Such scheduled payments of principal of, and interest on, the Equipment Notes are referred to herein as "Scheduled Payments." See "Description of the Pass Through Certificates -- Payments and Distributions" in the Prospectus. Distributions of Special Payments......... For any Pass Through Trust, any payments of principal, premium, if any, or interest, other than Scheduled Payments, received by the Pass Through Trustee on any of the Equipment Notes held in such Pass Through Trust will be distributed on a Special Distribution Date after (i) not less than 20 days' notice in the case of a Special Payment on account of a prepayment of any Equipment Note or (ii) notice as soon as is practicable after confirmation by the Pass Though Trustee of the receipt of funds in the case of any other Special Payment. Method of Distributions............ Under the terms of each Pass Through Agreement, the Company and the Pass Through Trustee will treat the persons in whose names the related Pass Through Certificates are registered as the owners of such Pass Through Certificates for the purpose of receiving payments of principal and interest on such Pass Through Certificates and for all other purposes whatsoever. Neither the Company, the Pass Through Trustee nor any other agent of the Company or the Pass Through Trustee will have any responsibility or liability for the payment of principal or interest on the Pass Through Certificates. So long as the Pass Through Certificates are registered in the name of Cede, as nominee of DTC, distributions on the Pass Through Certificates of any Pass Through Trust will be made in same-day funds to DTC. See "Description of Pass Through Certificates -- Book-Entry Registration" in the Prospectus. DTC will in turn make distributions in same-day funds to those participants in DTC who are credited with ownership of the Pass Through Certificates ("DTC Participants") in amounts proportionate to the principal amount of each such DTC Participant's respective holdings of beneficial interests in the Pass Through Certificates. Corresponding payments by the DTC Participants to beneficial owners of the Pass Through Certificates will be the responsibility of such DTC Participants and will be made in accordance with customary industry practices. See "Description of the Pass Through Certificates -- Book-Entry Registration" in the Prospectus. At such time, if ever, as the Pass Through Certificates are issued in definitive form and not registered in the name of Cede, as nominee for DTC, distribution by the Pass Through Trustee to the holders of Pass Through Certificates, other than the final distribution, will be made by check mailed to each holder of Pass Through Certificates of record on the applicable record date at its address appearing on the register or, upon application by such Certificateholder to the Pass Through Trustee, by wire transfer in immediately available funds to a bank account of such Certificateholder. The final distribution with respect S-5 6 to the Pass Through Certificates of any Pass Through Trust will be made only upon presentation and surrender thereof at the office or agency of the Pass Through Trustee. See "Description of the Pass Through Certificates -- Book Entry Registration" and "-- Payments and Distributions" in the Prospectus. Equipment Notes: Security and Payments.... For each Owner Trust, the principal amount of the Equipment Notes issued on behalf of such Owner Trust, premium, if any, and interest thereon will be secured by a security interest in the Class of Equipment owned by such Owner Trust and by an assignment to the Indenture Trustee of certain of the Owner Trustee's rights under the related Lease, including the right to receive rental payments payable by the Company thereunder. With respect to the Equipment owned by each Owner Trust, the Company will be obligated to make rental payments on account of such Equipment that will be at least equal to all scheduled payments of principal of and interest on the Equipment Notes issued on behalf of such Owner Trust when, and as scheduled to be, due and payable. Unless and until an Indenture Event of Default has occurred and is continuing under an Indenture, the Indenture Trustee generally may not exercise any of the rights of the Owner Trustee under the related Lease, except the right to receive rental payments due under such Lease. Even when an Indenture Event of Default has occurred and is continuing, certain rights under such Lease may be exercised by the Owner Trustee and the Owner Participant. There will be no cross-collateralization provisions in the Indentures and, consequently, the Equipment Notes issued on behalf of an Owner Trust will not be secured by any Class of Equipment owned by any other Owner Trust or any Lease relating to any other such Class of Equipment. There will be no cross-default provisions in the Indentures and, consequently, events resulting in an Indenture Event of Default under one Indenture may not result in an Indenture Event of Default under any other Indenture. If the Equipment Notes issued on behalf of an Owner Trust are in default, the Equipment Notes issued on behalf of any other Owner Trust may not be in default and, if not in default, no remedies will be exercisable under the Indenture with respect to such other Equipment Notes. See "Description of the Equipment Notes -- Security" in the Prospectus. Equipment Notes: Prepayment or Purchase with Premium............. If all or any items of any Class of Equipment become obsolete, surplus or operationally uneconomic to the Company's requirements, the Company may, subject to certain limitations, terminate the relevant Lease with respect to such item or items of Equipment, and in connection with such voluntary termination, the related Equipment Notes will be prepaid in whole (in the case of a termination with respect to all items of a Class of Equipment) or in part (in the case of a termination with respect to less than all items of a Class of Equipment) at a prepayment price equal to the product of (x) the aggregate principal amount of such Equipment Notes and (y) a fraction the numerator of which shall be the acquisition cost of such item(s) of Equipment and the denominator of which shall be the aggregate acquisition cost of all items of such Class of Equipment, plus accrued but unpaid interest S-6 7 thereon and a premium thereon, if any. Such premium, if any, with respect to each Equipment Note will be in an amount sufficient, when added to the principal repaid, to provide an amount upon prepayment that, if invested in United States Treasury securities with maturities comparable to the remaining weighted average life of such Equipment Note, would preserve the pretax coupon yield of such Equipment Note. In addition, the Equipment Notes issued with respect to any Class of Equipment will be subject to prepayment or purchase at the direction of the related Owner Participant in whole, but not in part, prior to the maturity thereof at a price equal to the aggregate principal amount of such Equipment Notes plus accrued but unpaid interest thereon and premium, if any (calculated as described above), if, subject to certain restrictions, one or more Lease Events of Default under the related Lease has occurred and has continued. See "Description of Equipment Notes -- Prepayment" in this Prospectus Supplement for a more complete description of an Owner Participant's purchase rights, including a description of the circumstances in which an Owner Participant's purchase rights will and will not be subject to a payment of premium on the Equipment Notes. In any such case, such prepayment price shall include all other amounts due the Indenture Trustee or any holder of such Equipment Notes. See "Description of the Equipment Notes -- Prepayment" and "-- The Leases -- Purchase Options" in this Prospectus Supplement for a discussion of prepayments with a premium in connection with the Company's exercise of certain options or elections relating to the purchase of Equipment under certain circumstances. Equipment Notes: Prepayment or Purchase Without Premium.......... If all or any items of any Class of Equipment suffer an Event of Loss, the related Equipment Notes will be prepaid in whole (if all such items of Equipment suffer such event) or in part (if less than all of such items of Equipment suffer such event). In any such case, such prepayment shall be at a prepayment price equal to the product of (x) the aggregate principal amount of such Equipment Notes and (y) a fraction the numerator of which shall be the acquisition cost of such item(s) of Equipment and the denominator of which shall be the aggregate acquisition cost of all items of such Class of Equipment, plus accrued but unpaid interest thereon to the prepayment date but without premium. See "Description of the Equipment Notes -- Prepayment" in this Prospectus Supplement for a description of an Owner Participant's Equipment Note purchase rights, including a description of the circumstances in which such purchase rights will and will not be subject to the payment of premium on the related Equipment Notes. Assumption of Equipment Notes.......... In connection with the exercise of its purchase option with respect to any of the items of Equipment and subject to certain limitations, the Company may, on the date of purchase thereof, elect to assume the obligations of the Owner Trustee under the portion of the Equipment Notes relating to such items of Equipment in lieu of prepaying the principal of, premium, if any, and interest on such portion of such Equipment Notes. If the Company elects to assume the obligations of the Owner Trustee in respect of such portion of such Equipment S-7 8 Notes, then the Company will execute and deliver appropriate documentation providing for the assumption of such obligations on a full recourse basis by the Company and maintaining a security interest in such items of Equipment to secure such assumed obligations. See "Description of the Equipment Notes -- The Leases -- Purchase Options." The Pass Through Trustee; The Indenture Trustee.... Shawmut Bank Connecticut will be the Pass Through Trustee for each Pass Through Trust. See "Description of the Pass Through Certificates -- The Pass Through Trustee; the Indenture Trustee" in the Prospectus. In addition, Shawmut Bank Connecticut will be the Paying Agent, Authenticating Agent and Registrar for the Pass Through Certificates and the Indenture Trustee under the Indentures pursuant to which the Equipment Notes will be issued. Federal Income Tax Consequences............. The Pass Through Trusts will not be classified as associations taxable as corporations, but, rather, will be classified as grantor trusts under Section 671 of the Internal Revenue Code of 1986, as amended (the "Code"), and each Certificateholder will be treated as the owner of a pro rata undivided interest in each of the Equipment Notes and any other property held in the related Pass Through Trust. Each Certificateholder will be required to report on its federal income tax return its pro rata share of the entire income from each of the Equipment Notes and other property held in the related Pass Through Trust, in accordance with such Certificateholder's method of accounting. See "Federal Income Tax Consequences" in the Prospectus. ERISA Considerations....... The Pass Through Certificates may not be purchased by, or with the assets of, any employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or individual retirement account or plan subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"; such plans and accounts are hereinafter collectively referred to as "ERISA Plans") unless such ERISA Plan, or the assets thereof, is eligible for a prohibited transaction exemption issued by the Department of Labor which exemption applies to the purchase and holding of the Pass Through Certificates by such ERISA Plan (such exemption, a "Prohibited Transaction Exemption"). In addition, certain governmental and non-electing church plans are not subject to Title I of ERISA or Section 4975 of the Code and, therefore, may invest in the Pass Through Certificates. The purchase by any person of any Pass Through Certificate constitutes a representation by such person to the Company, each Owner Participant, the Owner Trustee, the Indenture Trustee and the Pass Through Trustee that such person is not an ERISA Plan and that such person is not acquiring, and has not acquired, such Pass Through Certificate with assets of an ERISA Plan, or, if such person is an ERISA Plan or is acquiring or has acquired such Pass Through Certificate with the assets of an ERISA Plan, such purchase constitutes a representation by such person to the Company, such Owner Participant, the Owner Trustee, the Indenture Trustee and the Pass Through Trustee that a Prohibited Transaction Exemption applies to such purchase and the holding of such Pass Through Certificate. S-8 9 PHILLIPS PETROLEUM COMPANY Phillips Petroleum Company, incorporated in Delaware in 1917, is a fully integrated oil company engaged in petroleum exploration and production on a worldwide basis, petroleum refining and marketing, and natural gas gathering and processing, principally in the United States. Phillips also produces and distributes chemicals worldwide. Its principal executive offices are located in the Phillips Building, Bartlesville, Oklahoma 74004 (telephone (918) 661-6600). The words "Company" and "Phillips" as used in this Prospectus Supplement and the accompanying Prospectus refer to Phillips Petroleum Company or Phillips Petroleum Company and its consolidated subsidiaries. RECENT DEVELOPMENTS Effective December 28, 1994, regulations under the Oil Pollution Act of 1990 ("OPA 90") will require that all vessel owners carrying certain substances, including crude oil, have on board a certificate of financial responsibility ("COFR") issued by the U.S. Coast Guard. The COFR will serve as evidence of financial responsibility for all pollution damages within limits set by the applicable law and regulation. Without such a certificate the vessel will not be permitted to enter U.S. waters. At present it is uncertain whether vessel owners will be able or willing to meet the financial responsibility tests required or procure acceptable forms of insurance, guaranties, or bonds to receive the required COFR. Further, it remains unclear whether cargo owners, such as the Company, will be able to effectively provide acceptable forms of financial security on behalf of vessel owners to support issuance of a COFR. The Company currently relies on water borne foreign crude oil as feedstock for a significant portion of its U.S. refining capacity. This oil is transported by vessels owned by third parties and chartered by the Company. A reduction in the number of vessel owners able to transport crude oil in U.S. waters, as a result of their inability to obtain COFRs, could constrain availability of foreign crude oil in the United States generally and adversely affect the Company's operations. The Company and others have efforts under way to address compliance with the OPA 90 regulations, but the outcome of such efforts is presently unsettled. USE OF PROCEEDS The Pass Through Certificates will be issued to refinance the original debt financing of four leveraged lease transactions which have been entered into by the Company, as lessee, with respect to the four Classes of Equipment and to pay certain costs and expenses incurred in connection with the acquisition of the Equipment. The proceeds from the sale of such Pass Through Certificates will be used by the Pass Through Trustee on behalf of the related Pass Through Trust to purchase Equipment Notes. The Equipment Notes will be issued as nonrecourse obligations of four owner trusts (each, an "Owner Trust" created pursuant to a "Trust Agreement") by Wilmington Trust Company, not in its individual capacity but solely as the owner trustee (the "Owner Trustee") for the benefit of the owner participant named therein (each, an "Owner Participant"), in connection with four leveraged lease transactions. The proceeds of the Equipment Notes will be used (i) to repay and refinance interim loans made to each of the Owner Trusts by Chemical Bank, an affiliate of the underwriter, Chemical Securities Inc. (see "Underwriting"), in an aggregate amount of approximately $87 million, which proceeds were used by each Owner Trust to pay up to 80% of the acquisition cost of the Equipment of the relevant Class that is being leased by such Owner Trust to the Company pursuant to the relevant equipment lease agreement (each, a "Lease") and (ii) to pay certain costs and expenses incurred in connection with the acquisition of the Equipment. The aggregate acquisition cost of the Equipment of each Class is as follows: the Rail Cars, $77,651,450; the F-20 Aircraft, $15,510,000; the F-50 Aircraft, $10,400,000; and the Vehicles, $7,690,100. The Equipment Notes to be sold to the Pass Through Trusts will be issued by each Owner Trust and authenticated by Shawmut Bank Connecticut, as indenture trustee (the "Indenture Trustee"), under a separate trust indenture and security agreement (each, an "Indenture") between the Owner Trustee and the Indenture Trustee. Each Owner Participant has provided from sources other than the proceeds of the interim loans provided by Chemical Bank, the portion of the acquisition cost for the relevant Class of Equipment S-9 10 which portion did not, in the case of any Owner Participant, exceed 30% of such acquisition cost. No Owner Participant is personally liable for any amount payable under the related Indenture or the Equipment Notes issued thereunder. The underwriting fees and certain other expenses relating to the offering of the Pass Through Certificates will be paid on behalf of the Owner Participants by the Owner Trustee. Such fees and expenses to be paid by the Owner Trustee on behalf of the Owner Participants will be payable from sources other than the proceeds of the sale of the Equipment Notes. DIAGRAM OF PAYMENTS The following diagram illustrates certain aspects of the payment flows in the Pass Through Trust structure for each leveraged lease transaction among the Company, the Owner Trustee, an Owner Participant, the Indenture Trustee, the Pass Through Trustee and the relevant Certificateholders. One or more Equipment Notes will be issued for each Class of Equipment, and each Pass Through Trust may hold Equipment Notes relating to more than one Class of Equipment. The Company has leased each Class of Equipment from the Owner Trustee under a separate Lease and is obligated to make scheduled rental payments for each Class of Equipment under the related Lease. As a result of the assignment under the related Indenture of certain rights of the Owner Trustee under such Lease, the Company will make these payments directly to the Indenture Trustee. From these rental payments the Indenture Trustee will pay to the Pass Through Trustee for each Pass Through Trust the interest or interest and principal due from the Owner Trustee on the Equipment Notes issued under the related Indenture and held in such Pass Through Trust. After such payments have been made, the Indenture Trustee will pay the remaining balance, if any, to the Owner Trustee for the benefit of the related Owner Participant. The Pass Through Trustee will distribute to the Certificateholders of each Pass Through Trust payments received on the Equipment Notes held in such Pass Through Trust. [Image No. 1] - --------------- * Each Class of Equipment will be subject to a separate Lease and a separate Indenture. S-10 11 DESCRIPTION OF THE PASS THROUGH CERTIFICATES The following description of the particular terms of the Pass Through Certificates offered hereby supplements, and to the extent inconsistent therewith replaces, the description of the general terms and provisions of the Pass Through Certificates set forth in the Prospectus, reference to which is hereby made. The statements set forth under this caption are summaries and do not purport to be complete. The summaries make use of terms defined in, and are qualified in their entirety by reference to, the provisions of the applicable Pass Through Agreement, the form of which has been filed as an exhibit to the Registration Statement of which the Prospectus is a part. GENERAL The Pass Through Certificates offered hereby will be issued by Phillips Petroleum Company Pass Through Trust, 1994-A1 and Phillips Petroleum Company Pass Through Trust, 1994-A2, to be formed pursuant to Pass Through Agreement 1994-A1 and Pass Through Agreement 1994-A2, respectively, to be entered into between the Company and the Pass Through Trustee on the date of issuance of the related Pass Through Certificates. Each Pass Through Agreement will contain substantially the same terms and conditions, except that the interest rate, scheduled repayments of principal, and maturity date applicable to the Equipment Notes held in each Pass Through Trust, the aggregate principal amount of such Equipment Notes, and the final distribution date applicable to each Pass Through Trust will differ. The Pass Through Agreements, the Participation Agreements, the Equipment Notes, the Indentures and the Leases will not contain any debt or other financial covenants or any other provisions that would afford Certificateholders protection in the event of a highly leveraged transaction involving the Company. Each Pass Through Certificate will represent a fractional undivided interest in the Pass Through Trust created by the Pass Through Agreement pursuant to which such Pass Through Certificate was issued. The property of each Pass Through Trust (the "Trust Property") will include the Equipment Notes held in such Pass Through Trust, all monies at any time paid thereon and all monies due and to become due thereunder and funds from time to time deposited with the Pass Through Trustee in accounts relating to such Pass Through Trust. BOOK-ENTRY FORM The Pass Through Certificates of each Pass Through Trust will be issued in fully registered form only and will be represented by one or more permanent global Pass Through Certificates registered in the name of Cede & Co. ("Cede") as the nominee of The Depository Trust Company ("DTC"). No person acquiring an interest in a global Pass Through Certificate ("Certificate Owner") will be entitled to receive a definitive certificate representing such person's interest in such global Pass Through Certificates, except in the limited circumstances set forth in the Prospectus under "Description of the Pass Through Certificates -- Book-Entry Registration." Unless and until definitive certificates are issued under the limited circumstances described in the Prospectus, all references to actions by Certificateholders shall refer to actions taken by DTC upon instructions from those participants in DTC who are credited with ownership of the Pass Through Certificates ("DTC Participants"), and all references herein to distributions, notices, reports and statements to Certificateholders shall refer, as the case may be, to distributions, notices, reports and statements to DTC or Cede, as the registered holder of the Pass Through Certificates, or to DTC Participants for distribution to Certificate Owners in accordance with DTC procedures. See "Description of the Pass Through Certificates -- Book-Entry Registration" in the Prospectus. DTC will have no knowledge of the actual Certificate Owners. Certificate Owners will not receive written confirmation from DTC of their purchase, but are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the DTC Participants through which the Certificate Owners entered the transaction. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability to transfer interests in a permanent global Pass Through Certificate. S-11 12 Secondary trading in long-term notes and debentures of corporate issuers is generally settled in clearinghouse or next-day funds. In contrast, the Pass Through Certificates will trade in DTC's Same Day Funds Settlement System until maturity, and secondary market trading activity in the Pass Through Certificates will therefore be required by DTC to settle in immediately available funds. No assurance can be given as to the effect, if any, of settlement in immediately available funds on trading activity in the Pass Through Certificates. PAYMENTS AND DISTRIBUTIONS The Distribution Dates for each Pass Through Trust are March 27 and September 27. Payments of interest on the Equipment Notes held in each Pass Through Trust are scheduled to be received by the Pass Through Trustee on each March 27 and September 27, commencing on March 27, 1995, and, subject to receipt, are to be distributed to the related Certificateholders on the corresponding Distribution Dates. The record date for any Distribution Date will be the 15th day preceding such Distribution Date. For each Pass Through Trust, the Equipment Notes held in such Pass Through Trust will accrue interest on the unpaid principal amount thereof at the rate per annum set forth on the cover of this Prospectus Supplement applicable to the related Pass Through Certificates, which is calculated on the basis of a 360-day year consisting of twelve 30-day months. Payments of principal on the Equipment Notes held in each Pass Through Trust are scheduled to be received in specified amounts on March 27 or September 27, or both, of each specified year, commencing on , , in the case of the Pass Through Trust relating to the Series A1 Pass Through Certificates, and commencing on , , in the case of the Pass Through Trust relating to the Series A2 Pass Through Certificates, and, subject to receipt, are to be distributed to the related Certificateholders on the corresponding Distribution Dates. (See "Pool Factors" below). For each Pass Through Trust, the Special Distribution Dates will be the 27th day of any month. The record date for any Special Distribution Date will be the 15th day preceding such Special Distribution Date. If any Distribution Date or Special Distribution Date is not a Business Day, distributions scheduled to be made on such Distribution Date or Special Distribution Date may be made on the next succeeding Business Day without additional interest. (Pass Through Agreements, Section 12.09) So long as the Pass Through Certificates are registered in the name of Cede, as nominee of DTC, distributions on the Pass Through Certificates of any Pass Through Trust will be made in same-day funds to DTC. See "Description of Pass Through Certificates -- Book-Entry Registration" in the Prospectus. DTC will in turn make distributions in same-day funds to DTC Participants in amounts proportionate to the principal amount of each such DTC Participant's respective holdings of beneficial interests in the Pass Through Certificates. Corresponding payments by the DTC Participants to Certificate Owners will be the responsibility of such DTC Participants and will be made in accordance with customary industry practices. See "Description of the Pass Through Certificates -- Book-Entry Registration" in the Prospectus. At such time, if any, as the Pass Through Certificates are issued in the form of definitive certificates and not to Cede, as nominee for DTC, distributions by the Pass Through Trustee will be made by check mailed to each Certificateholder of record of such Pass Through Trust on the applicable record date at its address appearing on the register maintained with respect to such Pass Through Trust or, upon application by such Certificateholder to the Pass Through Trustee, by wire transfer in immediately available funds to a bank account of such Certificateholder. The final distribution for each Pass Through Trust, however, will be made only upon presentation and surrender of the Certificates for such Pass Through Trust at the office or agency of the Pass Through Trustee specified in the notice given by the Pass Through Trustee of such final distribution. The Pass Through Trustee will mail such notice of the final distribution to the Certificateholders of such Pass Through Trust, specifying the date set for such final distribution and the amount of such distribution. S-12 13 THE PAYING AGENT, AUTHENTICATING AGENT AND REGISTRAR Shawmut Bank Connecticut will be the Paying Agent, Authenticating Agent and Registrar for each Pass Through Trust. Shawmut Bank Connecticut is also the Indenture Trustee under each of the Indentures pursuant to which the Equipment Notes will be issued. POOL FACTORS As of the date of issuance of the Pass Through Certificates by the Pass Through Trustee, and assuming that no prepayment or default in respect of any Equipment Notes shall occur, the aggregate scheduled repayments of principal on such Equipment Notes for each Pass Through Trust, and the resulting Pool Factors for such Pass Through Trusts after taking into account each repayment, are set forth below:
PASS THROUGH TRUST, PASS THROUGH TRUST, 1994-A1 1994-A2 --------------------------- --------------------------- SCHEDULED SCHEDULED PRINCIPAL PRINCIPAL PAYMENTS PAYMENTS ON EQUIPMENT ON EQUIPMENT DISTRIBUTION DATES NOTES POOL FACTOR NOTES POOL FACTOR ------------------ ------------ ----------- ------------ ----------- March 27, 1995...................... September 27, 1995.................. March 27, 1996...................... September 27, 1996.................. March 27, 1997...................... September 27, 1997.................. March 27, 1998...................... September 27, 1998.................. March 27, 1999...................... September 27, 1999.................. March 27, 2000...................... September 27, 2000.................. March 27, 2001...................... September 27, 2001.................. March 27, 2002...................... September 27, 2002.................. March 27, 2003...................... September 27, 2003.................. March 27, 2004...................... September 27, 2004.................. March 27, 2005...................... September 27, 2005.................. March 27, 2006...................... September 27, 2006.................. March 27, 2007...................... September 27, 2007.................. March 27, 2008...................... September 27, 2008.................. March 27, 2009...................... September 27, 2009.................. March 27, 2010...................... September 27, 2010.................. March 27, 2011...................... September 27, 2011..................
S-13 14 DESCRIPTION OF THE EQUIPMENT NOTES The following description of the particular terms of the Equipment Notes supplements, and to the extent inconsistent therewith replaces, the description of the general terms and provisions of the Equipment Notes set forth in the Prospectus, reference to which is hereby made. The statements under this caption are summaries and do not purport to be complete. The summaries make use of terms defined in, and are qualified in their entirety by reference to, the provisions of the Indentures, the Equipment Notes, the Leases, the Participation Agreements, the Trust Agreements and other related documents to be used in connection with the transactions described herein, the forms of which have been filed as exhibits to the Registration Statement of which the accompanying Prospectus forms a part. The provisions of the Indenture, the Equipment Notes, the Lease and the Participation Agreement which relate to each Class of Equipment and that are summarized below are substantially the same, except where otherwise indicated. GENERAL The Equipment Notes will be nonrecourse obligations of the Owner Trustee, in each case acting for an Owner Trust for the benefit of the relevant Owner Participant, and will be authenticated under the related Indenture by the Indenture Trustee. The Equipment Notes are not obligations of, or guaranteed by, the Company. For each Class of Equipment, Equipment Notes, each of which will have a different interest rate, maturity date and schedule of principal payments, will be issued under the related Indenture. The aggregate principal amounts of the Equipment Notes to be issued with respect to each Class of Equipment, and the respective principal amounts of such Equipment Notes to be held in each of the Pass Through Trusts, are as follows:
PASS THROUGH TRUST PASS THROUGH TRUST 1994-A1 1994-A2 CLASS OF % % TOTAL PER EQUIPMENT EQUIPMENT NOTES EQUIPMENT NOTES CLASS OF EQUIPMENT --------- ------------------ ------------------ ------------------ Rail Cars........................ $ $ $ F-20 Aircraft.................... F-50 Aircraft.................... Vehicles......................... $ $ $ ---------- ---------- ----------
For each Pass Through Trust, the Equipment Notes held in such Pass Through Trust will accrue interest on the unpaid principal amount thereof at the rate per annum set forth on the cover of this Prospectus Supplement applicable to the related Pass Through Certificates, which will be payable to the Pass Through Trustee on each March 27 and September 27, commencing on March 27, 1995, until the final distribution date for such Pass Through Trust. Interest on the Equipment Notes will be calculated on the basis of a 360-day year consisting of twelve 30-day months. For any Equipment Notes, any overdue payment of principal, interest or any other amount payable thereon will accrue interest from the due date for such amount to the date such amount is paid in full at a rate per annum equal to 2% plus the interest rate otherwise applicable to such Equipment Note. (Indentures, Section 2.01) S-14 15 Each Pass Through Trust will hold Equipment Notes upon which principal is payable in installments on March 27 or September 27, or both, of each year, commencing on , , in the case of Equipment Notes held in the Pass Through Trust relating to the Series A1 Pass Through Certificates, and commencing on , , in the case of Equipment Notes held in the Pass Through Trust relating to the Series A2 Pass Through Certificates, in each case according to the schedule of principal installment dates and amounts set forth below. PASS THROUGH TRUST, 1994-A1 % EQUIPMENT NOTES
AGGREGATE PAYMENT DATES RAIL CARS F-20 AIRCRAFT F-50 AIRCRAFT VEHICLES TOTAL ------------- --------- ------------- ------------- -------- --------- March 27, 1995......................... September 27, 1995..................... March 27, 1996......................... September 27, 1996..................... March 27, 1997......................... September 27, 1997..................... March 27, 1998......................... September 27, 1998..................... ======= ========= ========= ====== =======
PASS THROUGH TRUST, 1994-A2 % EQUIPMENT NOTES
AGGREGATE PAYMENT DATES RAIL CARS F-20 AIRCRAFT F-50 AIRCRAFT VEHICLES TOTAL ------------- --------- ------------- ------------- -------- --------- March 27, 1999......................... September 27, 1999..................... March 27, 2000......................... September 27, 2000..................... March 27, 2001......................... September 27, 2001..................... March 27, 2002......................... September 27, 2002..................... March 27, 2003......................... September 27, 2003..................... March 27, 2004......................... September 27, 2004..................... March 27, 2005......................... September 27, 2005..................... March 27, 2006......................... September 27, 2006..................... March 27, 2007......................... September 27, 2007..................... March 27, 2008......................... September 27, 2008..................... March 27, 2009......................... September 27, 2009..................... March 27, 2010......................... September 27, 2010..................... March 27, 2011......................... September 27, 2011..................... ======= ========= ========= ====== =======
S-15 16 If any amount payable under any Equipment Notes or the related Indenture falls due on a day that is not a Business Day, then such amount may be paid on the next succeeding Business Day without additional interest. (Indentures, Section 2.04) SECURITY For each Class of Equipment, the principal amount of the related Equipment Notes, premium, if any, and interest thereon will be secured by (i) an assignment by the Owner Trustee to the Indenture Trustee of the Owner Trustee's rights (except for certain limited rights described below) under the applicable Lease, including the right to receive rent and other payments thereunder and (ii) a security interest granted to the Indenture Trustee in the items of Equipment of such Class, subject to the rights of the Company under such Lease and to certain other permitted liens and encumbrances (Indentures, Granting Clause). Unless and until an Indenture Event of Default under an Indenture shall have occurred and be continuing, the Indenture Trustee may not exercise any of the rights of the Owner Trustee under the related Lease, except the right to receive payments of rent thereunder and certain other rights. The assignment by the Owner Trustee to the Indenture Trustee of its rights under each Lease will exclude rights of the Owner Trustee and the Owner Participant relating to (i) indemnification by the Company for certain matters, (ii) proceeds of public liability insurance payable to the Owner Trustee and the Indenture Trustee in their respective individual capacities and to the Owner Participant under insurance maintained by the Company under such Lease, (iii) proceeds of any insurance policies separately maintained by such Owner Trustee in its individual capacity or by the Owner Participant and (iv) certain amounts payable to the Owner Trustee or the Owner Participant for its own account other than as lessor under such Lease. PREPAYMENT Prepayment with Premium. If all or any items of any Class of Equipment become obsolete, surplus or operationally uneconomic to the Company's requirements, the Company may, subject to certain limitations, terminate the relevant Lease with respect to such item or items of Equipment, and in connection with such voluntary termination, the related Equipment Notes will be prepaid in whole (in the case of a termination with respect to all items of a Class of Equipment) or in part (in the case of a termination with respect to less than all items of a Class of Equipment). (Leases, Section 10) Such prepayment shall be at a prepayment price for such Equipment Notes equal to the product of (x) the aggregate principal amount of such Equipment Notes and (y) a fraction the numerator of which shall be the acquisition cost of such item(s) of Equipment and the denominator of which shall be the aggregate acquisition cost of all items of such Class of Equipment, together with accrued but unpaid interest thereon to the prepayment date, plus an additional amount, if any, which, when added to such principal and interest would, if invested at such time in United States Treasury securities with maturities comparable to the Remaining Weighted Average Life (as defined below) of such Equipment Notes, yield the holder thereof a pretax yield equivalent to the yield the holder would have realized had such holder held such Equipment Note to its maturity date (the "Make-Whole Premium"). Prepayment of the Equipment Notes with a premium also may occur in connection with the Company's exercise of certain options or elections relating to the purchase of any items of Equipment under certain circumstances. See "The Leases -- Purchase Options." The Make-Whole Premium for any Equipment Note to be prepaid will be calculated by an independent investment banking institution of national standing appointed by the Company (an "Independent Investment Banker"). In calculating the Make-Whole Premium, the Independent Investment Banker will first determine the Treasury Rate (as defined below) applicable to such Equipment Note. The Independent Investment Banker then will determine the sum of present values of all remaining scheduled payments of principal and interest on such Equipment Note discounted semi-annually on each March 27 and September 27 at a rate equal to the Treasury Rate based on a 360-day year of twelve 30-day months. If the sum of these present values exceeds the unpaid principal amount of the Equipment Note to be prepaid plus any accrued but unpaid interest, the difference will be the Make-Whole Premium payable upon prepayment. If the sum is equal to or less than such amount of principal and accrued interest, there will be no Make-Whole Premium payable upon prepayment of such Equipment Note. In addition to the amounts described above, the aggregate prepayment S-16 17 price to be paid on such prepayment date will include all other amounts due the Indenture Trustee or any holder of the applicable Equipment Notes under the related Indenture, Participation Agreement and Lease. For purposes of determining the Make-Whole Premium, "Treasury Rate" means with respect to each Equipment Note, a per annum rate (expressed as a semiannual equivalent and as a decimal and, in the case of United States Treasury bills, converted to a bond equivalent yield), determined to be the per annum rate equal to the semiannual yield to maturity for United States Treasury securities maturing on the Average Life Date (as defined below) of such Equipment Note, as determined by interpolation between the most recent weekly average yields to maturity for two series of United States Treasury securities, (A) one maturing as close as possible to, but earlier than, the Average Life Date of such Equipment Note and (B) the other maturing as close as possible to, but later than, the Average Life Date of such Equipment Note, in each case as published in the most recent H.15(519) (or, if a weekly average yield to maturity for United States Treasury securities maturing on the Average Life Date of such Equipment Note is reported in the most recent H.15(519), as published in H.15(519)). H.15(519) means "Statistical Release H.15(519), Selected Interest Rates", or any successor publication, published by the Board of Governors of the Federal Reserve System. The most recent H.15(519) means the latest H.15(519) which is published prior to the close of business on the third Business Day preceding the scheduled prepayment date. "Average Life Date" means, for any Equipment Note, the date which follows the prepayment date by a period equal to the Remaining Weighted Average Life of such Equipment Note. "Remaining Weighted Average Life" means, for any Equipment Note, as of any prepayment date, the number of days equal to the quotient obtained by dividing (a) the sum of the products obtained by multiplying (i) the amount of the remaining principal payments on such Equipment Notes by (ii) the number of days from and including such prepayment date to but excluding the scheduled payment date of such principal payment by (b) the unpaid principal amount of such Equipment Note. For any Class of Equipment, if (i) one or more Lease Events of Default under the related Lease has occurred and has continued for a period of six consecutive months or more during which time such Equipment Notes could, but shall not, have been accelerated and the Indenture Trustee could, but has not been, exercising remedies under the related Lease or (ii) such Equipment Notes have been accelerated, then such Equipment Notes will be subject to purchase by the Owner Trustee, in whole but not in part, upon 30 days' prior notice from the Owner Trustee to the Indenture Trustee at a purchase price equal to the unpaid principal amount of such Equipment Notes, together with accrued interest thereon, plus all other sums then due and payable to the holders of the Equipment Notes, including, subject to the next sentence, any Make-Whole Premium thereon. In connection with such purchase, Make-Whole Premium, if any, shall be payable unless such purchase is made (x) after the acceleration of such Equipment Notes or (y) pursuant to clause (i) of the preceding sentence after the expiration of 120 days following the later of (A) the occurrence of one or more Lease Events of Default continuing on the date notice of such purchase is given or (B) the expiration of any period during which the Indenture Trustee is required to refrain from exercising remedies under the related Indenture and, in the case of this clause (y), the Indenture Trust has not, prior to the receipt of such notice of purchase, commenced the exercise of remedies under the related Lease intended to dispossess the Company of its interest in the related Equipment and is not then stayed or otherwise prevented by operation of law from doing so. (Indentures, Section 4.04) Prepayment Without Premium. If all or any items of any Class of Equipment suffer an Event of Loss, the related Equipment Notes will be prepaid in whole (if all such items of Equipment suffer such event) or in part (if less than all of such items of Equipment suffer such event). See "The Leases--Events of Loss" below. Any such prepayment shall be at a prepayment price equal to the product of (x) the aggregate principal amount of such Equipment Notes and (y) a fraction the numerator of which shall be the acquisition cost of such item(s) of Equipment and the denominator of which shall be the aggregate acquisition cost of all items of such Class of Equipment, together with accrued but unpaid interest thereon to the prepayment date, but without Make-Whole Premium. See the immediately preceding paragraph for a description of the Owner Participant's Equipment Note purchase rights, including a description of the circumstances in which such purchase rights will not be subject to the payment of premium on the Equipment Notes. (Indentures, Section 4.04) Non-Pro Rata Prepayment. The Equipment Notes issued under the Indenture relating to the Rail Cars have maturities and scheduled principal installments related to the term of the Rail Car Lease for particular S-17 18 groups of Rail Cars. In connection with (i) the termination of the Rail Car Lease with respect to less than all of the Rail Cars, (ii) an Event of Loss with respect to less than all of the Rail Cars and (iii) the Company's exercise of its purchase option with respect to less than all of the Rail Cars, the principal amount of the Equipment Notes to be prepaid in connection with any such event will be made with respect to the Equipment Notes issued in respect of the group or groups relating to such Rail Cars, which will not necessarily be on a pro-rata basis with respect to all Equipment Notes issued pursuant to the Indenture related to the Rail Cars. Consequently, in connection with any such event, the Equipment Notes constituting the Trust Property of each Pass Through Trust will not necessarily be prepaid on a pro rata basis. INVESTMENT OF FUNDS Funds, if any, held from time to time by the Indenture Trustee pursuant to the express terms of any Indenture or Lease and not required to be distributed pursuant to the terms of any such Indenture will be invested and reinvested in Permitted Investments at the written direction and risk and expense of the Company, except that in the absence of such direction and after a Lease Event of Default shall have occurred and be continuing, such amounts shall be invested and reinvested solely in obligations of, or obligations guaranteed by, the United States of America or any of its agencies for the payment of which the full faith and credit of the United States of America is pledged. (Indentures, Section 6.04) INDENTURE EVENTS OF DEFAULT, NOTICE AND WAIVER Events of default under each Indenture (each, an "Indenture Event of Default") include: (a) any Lease Event of Default under the Lease related to such Indenture shall have occurred and be continuing (other than a Lease Event of Default solely by reason of a failure by the Company to pay any amounts which are not subject to the lien of the Indenture unless the Owner Participant directs that such failure constitutes an Indenture Event of Default) (see "The Leases -- Lease Events of Default" below); (b) default by the Owner Trustee in making any payment when due of principal of, premium, if any, or interest on any Equipment Note issued pursuant to such Indenture and the continuance of such default unremedied for 10 Business Days after the same shall become due and payable; (c) any failure by the Owner Trustee or the Owner Participant to observe or perform any covenant or obligation in such Indenture or the related Equipment Notes (other than as set forth in clause (b)) or in the related Participation Agreement if, but only if, such failure is not remedied within a period of 30 days after there has been given to the Owner Trustee, the Owner Participant and the Company by the Indenture Trustee a written notice specifying such failure and requiring it to be remedied; provided that, if such failure is capable of being remedied, no such failure shall constitute an Indenture Event of Default for a period of 360 days after such notice so long as the Owner Trustee or the Owner Participant is diligently proceeding to remedy such failure; (d) any representation or warranty made by the Owner Trustee or the Owner Participant under the related Participation Agreement, or by the Owner Trustee under such Indenture, or by any representative of the Owner Trustee or the Owner Participant in any document or certificate furnished to the Indenture Trustee or the Pass Through Trustee in connection therewith or pursuant thereto, shall prove at any time to have been incorrect as of the date made in any respect material to the interests of the holders of Equipment Notes and such incorrectness shall remain material in such respect and continue unremedied for a period of 30 days after there has been given to the Owner Trustee and the Owner Participant by the Indenture Trustee or the Pass Through Trustee a written notice specifying such incorrectness, stating that such incorrectness is a default under such Indenture and requiring it to be remedied; or (e) the occurrence of certain events of bankruptcy, reorganization or insolvency of the Owner Trustee (as Owner Trustee and not in its individual capacity), the Owner Trust or the Owner Participant or similar events. (Indentures, Section 4.01) S-18 19 Each Indenture provides that, unless and until an Indenture Event of Default thereunder has occurred and is continuing, the Indenture Trustee generally may not exercise any of the rights of the Owner Trustee under the Lease assigned to the Indenture Trustee under such Indenture, except the right to receive rental payments due under such Lease. Whether or not an Indenture Event of Default has occurred and is continuing, the Owner Trustee and the Owner Participant may exercise certain rights under such Lease. There are no cross-default provisions in the Indentures and any event resulting in an Indenture Event of Default under one Indenture will not necessarily result in the occurrence of an Indenture Event of Default under the other Indentures. If the Company shall fail to make any payment of Basic Rent under the Lease related to the applicable Indenture within 10 Business Days after the same shall become due, and if such failure of the Company to make such payment of Basic Rent shall not constitute the fourth or subsequent consecutive or the seventh or subsequent cumulative such failure, then as long as no other Indenture Event of Default shall have occurred and be continuing under such Indenture the Owner Participant or the Owner Trustee may (but need not) pay to the Indenture Trustee, at any time prior to the expiration of a period of 10 Business Days (a "Ten Day Period") after written notice of such default is given to the Owner Trustee by the Indenture Trustee or the Pass Through Trustee (prior to the expiration of which Ten-Day Period the Indenture Trustee shall not declare the related Lease in default or exercise any of the rights, powers or remedies pursuant thereto), an amount equal to the full amount of such payment of Basic Rent, together with any interest due thereon on account of the delayed payment thereof, and such payment by the Owner Participant or the Owner Trustee shall be deemed to cure any such Indenture Event of Default which arose from such failure of the Company (but such cure shall not relieve the Company of any of its obligations). (Indentures, Section 4.04(a)) If the Company shall fail to make any other payment (other than Basic Rent) or to perform or observe any other covenant, condition or agreement to be performed or observed by it under the Lease or certain other agreements related to the applicable Indenture and if (but only if) the performance or observance thereof can be effected by the payment of money alone, then as long as no other Indenture Event of Default under such Indenture shall have occurred and be continuing the Owner Participant or the Owner Trustee may (but need not) pay to the Indenture Trustee (or to such other person as may be entitled to receive the same), at any time prior to the expiration of a Ten-Day Period after the later of (x) the expiration of the grace period, if any, provided with respect to such failure on the part of the Lessee in the relevant Lease and (y) the date that written notice of such default is given to the Owner Trustee by the Indenture Trustee or the Pass Through Trustee (prior to the expiration of which Ten-Day Period the Indenture Trustee shall not declare the relevant Lease in default or exercise any of the rights, powers or remedies pursuant thereto), all sums necessary to effect the payment of such defaulted amount or the performance or observance of such covenant, condition or agreement, together with any interest due thereon on account of the delayed payment thereof, and such payment by the Owner Participant or the Owner Trustee shall be deemed to cure any Indenture Event of Default which arose from such failure of the Lessee (but such cure shall not relieve the Company of any of its obligations); provided, however, that the Owner Trustee and the Owner Participant shall not be entitled to effect cures described in this sentence in amounts that, cumulatively, exceed $7,800,000 in the aggregate under the Indenture related to the Rail Cars, $1,500,000 in the aggregate under the Indenture related to the F-20 Aircraft, $1,000,000 in the aggregate under the Indenture related to the F-50 Aircraft and $1,000,000 in the aggregate under the Indenture related to the Vehicles. (Indentures, Section 4.04(a)) Each Indenture provides that the Indenture Trustee must, after the occurrence of any event that is a default under such Indenture and is actually known to the Indenture Trustee, notify the Pass Through Trustee of such default. (Indentures, Section 5.01) The holders of not less than a majority in aggregate principal amount of outstanding Equipment Notes issued under an Indenture to which an Indenture Event of Default relates may on behalf of all holders thereof waive any past Indenture Event of Default thereunder and its consequences, except that consent from each holder of Equipment Notes issued under such Indenture is required with respect to a waiver of such a default in the payment of the principal of, Make-Whole Premium, if any, or interest on any such Equipment Notes or S-19 20 in respect of any covenant or provision of such Indenture that, pursuant to the provisions of such Indenture, cannot be modified or amended without the consent of each such holder. (Indentures, Section 4.06) The Company is required under each Participation Agreement to furnish to the Pass Through Trustee, the Owner Participant, the Owner Trustee and the Indenture Trustee promptly upon any officer of the Company obtaining knowledge of any condition or event that constitutes a Lease Event of Default, an officer's certificate specifying the nature and period of existence of such event and what action the Company has taken or is taking or proposes to take with respect thereto. (Participation Agreements, Section 5) REMEDIES Each Indenture provides that, subject to the Owner Trustee's right to cure certain defaults and to purchase the related Equipment Notes, if an Indenture Event of Default has occurred and is continuing unremedied thereunder, the Indenture Trustee may exercise certain specified rights or remedies available to it under applicable law, including, if a Lease Event of Default under the related Lease has occurred, one or more of the remedies with respect to the items of the related Class of Equipment afforded to the Owner Trustee by the related Lease for Lease Events of Default thereunder. (See "The Leases -- Lease Events of Default" below.) Such remedies may be exercised by the Indenture Trustee to the exclusion of the Owner Trustee and the Owner Participant. Any items of Equipment sold in the exercise of such remedies will be free and clear of any rights of those parties (other than, in certain cases, rights of redemption provided by law and rights to certain proceeds as described in the next paragraph), including the rights of the Company under the applicable Lease. No exercise of any remedies by the Indenture Trustee, however, may affect the rights of the Company under a Lease unless a Lease Event of Default under such Lease has occurred and is continuing, and the Indenture Trustee may not sell any part of the related trust estate under such Indenture unless the related Equipment Notes have been accelerated. (Indentures, Article IV) Notwithstanding the rights and powers of the Indenture Trustee described above, the Indenture Trustee shall not foreclose the lien of any Indenture as a result of an Indenture Event of Default that constitutes or occurs solely by virtue of one or more Lease Events of Default under the related Lease unless (i) the Indenture Trustee shall have exercised, or, to the extent it is then entitled to do so under such Indenture and such Lease, shall contemporaneously commence the exercise of, one or more of the remedies provided for in such Lease intended to dispossess the Company of its interest in the related Class of Equipment or (ii) the Indenture Trustee is stayed or otherwise prevented by operation of law from exercising such remedies under such Lease; provided, however, that in the event that the Indenture Trustee is so stayed or otherwise prevented by operation of law from exercising such remedies under such Lease, then it shall nevertheless refrain from foreclosing the lien of such Indenture (A) if, and for so long as, the only Lease Event of Default under the related Lease that has occurred and is continuing is a Lease Event of Default resulting solely from a proceeding for reorganization of the Company under Chapter 11 of the Bankruptcy Code and the Company has assumed or otherwise agreed to continue to perform its obligations under such Lease or (B) until the earlier of (1) the later of (x) the expiration of a period of 120 days during which the Indenture Trustee was so stayed or otherwise prevented by operation of law from exercising such remedies under such Lease and (y) if such stay or operation of law is being contested by appropriate legal proceedings, the expiration of the period during which such contest is being conducted (but in no event longer than 60 days after the expiration of the 120-day period described in clause (x) above) and (2) the date that the Indenture Trustee ceases to be so stayed or otherwise prevented by operation of law from exercising such remedies under such Lease and complies with clause (i) above; provided further, however, that the Indenture Trustee shall not be required to refrain from foreclosing the Lien of such Indenture if there shall have occurred and be continuing any Indenture Event of Default other than a Lease Event of Default. (Indentures, Section 4.04(c)) If an Indenture Event of Default occurs under an Indenture as a result of certain specified events of bankruptcy, insolvency or reorganization of the Owner Trustee, the Owner Trust, the Owner Participant or the Company, then the unpaid principal of the related Equipment Notes, together with interest accrued but unpaid thereon and all other amounts due thereunder and under such Indenture, immediately and without further act shall become due and payable. If any other Indenture Event of Default occurs and is continuing under an Indenture, the Indenture Trustee, acting on its own or at the direction of the holders of not less than S-20 21 a majority in aggregate principal amount of outstanding Equipment Notes issued under such Indenture, may declare the principal of all such Equipment Notes due and payable, together with all accrued but unpaid interest thereon and all other amounts due and payable thereunder and under such Indenture, by giving 10 days' prior written notice to the Owner Trustee. The holders of not less than a majority in aggregate principal amount of all such outstanding Equipment Notes may rescind any such declaration by written notice to the Owner Trustee, the Indenture Trustee and the Company, at any time prior to the sale or disposition of the property subject to the Lien of the Indenture if (i) there has been paid to or deposited with the Indenture Trustee an amount sufficient to pay all overdue installments of interest on all such Equipment Notes and the principal of and premium on any Equipment Notes that has become due otherwise than by such declaration, (ii) the rescission would not conflict with any judgment or decree and (iii) all Indenture defaults and Indenture Events of Default under such Indenture (other than the nonpayment of principal and interest that has become due solely because of such declaration) have been cured or waived. (Indentures, Section 4.02) In the event of the bankruptcy of an Owner Participant or an Owner Trust, the ability of the Indenture Trustee to exercise its remedies under the applicable Indenture against the bankrupt party might be limited and payments required to be made under the related Lease might be interrupted, although the Indenture Trustee would retain its status as a secured creditor in respect of the Owner Trust's interest in such Lease and the related items of Equipment. In addition, in the event of such bankruptcy it is possible that the related Lease might be rejected as an executory contract or unexpired lease. Such a rejection, if successful, would leave the Indenture Trustee as a secured creditor in respect of the Owner Trust's interest in such Lease and the related items of Equipment with a claim against the bankrupt estate in the amount owing under the related Equipment Notes. The holders of not less than a majority in aggregate principal amount of outstanding Equipment Notes issued under any Indenture may direct the Indenture Trustee to exercise or refrain from exercising any trust or power conferred on the Indenture Trustee upon the occurrence of an Indenture of Default. The Indenture Trustee shall not be required to exercise or refrain from exercising any such trust or power if it shall have reasonable grounds for believing that it is not adequately indemnified with respect thereto. (Indentures, Section 5.03) If an Indenture Event of Default occurs and continues, any sums held or received by the Indenture Trustee under the related Indenture may be applied to reimburse the Indenture Trustee for any tax, expense, charge or other loss incurred by it and to pay any other amounts due the Indenture Trustee prior to any payments to holders of the Equipment Notes with respect to which such Indenture Event of Default relates. (Indentures, Section 3.03) It is impossible to predict the resale value for any item of Equipment to be sold upon the exercise of the Indenture Trustee's remedies under the related Indenture, and there can be no assurance that the net proceeds realized from the sale or other disposition of any Equipment in the exercise of such remedies will be sufficient to satisfy in full amounts due and payable on the related Equipment Notes. MODIFICATION OF AGREEMENTS Without the consent of not less than a majority in interest of the aggregate principal amount of the outstanding Equipment Notes under an Indenture, the provisions of such Indenture, the related Lease, the related Participation Agreement, and the related Trust Agreement may not be amended or modified, except to the extent indicated below. (Indentures, Sections 9.01 and 9.05) Certain provisions of the Indentures, the Leases (including provisions relating to maintenance, insurance and possession of the Equipment), the Participation Agreements and the Trust Agreements may be amended or modified without the consent of the Indenture Trustee or any of the holders of the Equipment Notes related thereto. Without the consent of each holder of an Equipment Note affected thereby, no amendment or modification of the Indenture pursuant to which such Equipment Notes were issued or the related Lease or Participation Agreement may (i) reduce the principal amount of or Make-Whole Premium, if any, or interest payment payable on such Equipment Note or change the date on which any such principal, Make-Whole Premium, if any, or any interest payment is due and payable or otherwise affect the terms of payment of such S-21 22 Equipment Note, (ii) to the extent payable to such holder, extend the time of, or reduce the aggregate amount of, or release the Company from its obligation to pay, rent, stipulated loss value or any other amounts payable under, or as provided in, such Lease upon the occurrence of an Event of Loss or termination value and any other amounts payable with respect to the applicable Equipment, (iii) create any security interest with respect to the property subject to the Lien of such Indenture ranking prior to or on a parity with the security interest created by such Indenture or deprive the holder of any such Equipment Note of the lien of such Indenture upon the property subject thereto, or (iv) reduce the percentage of the aggregate principal amount of such Equipment Notes necessary to modify or amend any provision of such Indenture or to waive compliance therewith. Subject to the preceding sentence, the Indenture Trustee may, without the consent of any holder of Equipment Notes, consent to any amendment or modification of the related Indenture, Lease or Trust Agreement upon receipt of an officer's certificate of the Company and, as to any matters of law, an opinion of counsel (which counsel may be an employee of the Company) stating that such amendment or modification does not materially adversely affect the interests of the holders of the Equipment Notes. (Indentures, Sections 9.01 and 9.05) THE LEASES General. The Owner Trustee has leased the items of each Class of Equipment to the Company on behalf of the related Owner Trust, and the Company has taken possession of such items of Equipment subject to the terms of the related Lease. Terms and Rentals. Each item of Equipment has been leased by the Owner Trustee to the Company for a term commencing on the related Lease Commencement Date and expiring on a date not earlier than the latest maturity date of the related Equipment Notes, unless previously terminated or extended, as permitted by the related Lease. The scheduled rental payments by the Company under each Lease are payable on each March 27 and September 27, commencing on March 27, 1995, and have been assigned under the related Indenture by the Owner Trustee to the Indenture Trustee. (Leases, Article 3; Indentures, Granting Clause) The Company is obligated to make rental payments under each Lease that will be at least equal to all scheduled payments of principal of and interest on the related Equipment Notes when, and as scheduled to be, due and payable. The Company's obligations to make rental payments and to cause other payments to be made under each Lease are general obligations of the Company. Net Lease. The Company's obligations in respect of each Class of Equipment are those of a lessee under a "net lease." Accordingly, the Company is obligated to pay all costs of operating such Equipment and, at its expense, to maintain, inspect, service, repair, test and overhaul such Equipment so as to keep such Equipment in good operating condition, ordinary wear and tear excepted, and in a manner consistent with the Company's maintenance practices in respect of similar equipment owned or leased by it. In the case of any Aircraft, the Company also is obligated to maintain the airworthiness certification of such Aircraft in good standing at all times under the Aviation Act other than during temporary periods of storage or periods of grounding ordered by the FAA. Except as set forth below, the Company is obligated to replace or cause to be replaced all parts that may from time to time be incorporated or installed in or attached to any item of Equipment and that may become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use. Any such replacement part becomes subject to the related Lease and the lien of the related Indenture in lieu of the part replaced. (Leases, Section 9.3; Indentures, Granting Clause) The Company must make all alterations, modifications and additions to each item of Equipment necessary to meet the applicable requirements of any governmental authority with jurisdiction over the Company's operations and such item of Equipment. The Company may in good faith contest the validity or application of any such requirement in any reasonable manner which, among other things, does not impair the Lien of the related Indenture or create any material risk or danger of the sale of, loss of or interference with the use or possession of any item of Equipment or interfere with the payment of rent under the related Lease. (Leases, Section 9.1) The Company may make other alterations, modifications and improvements to any item of Equipment, so long as such alteration, modification or improvement does not materially diminish the value, utility or S-22 23 remaining economic useful life below that immediately prior to such alteration, modification or improvement, assuming that such item of Equipment was then in the condition required by the related Lease. (Leases, Section 9.2) Subleasing. The Company is permitted to sublease any Rail Car or Aircraft to any business entity which is not subject to bankruptcy proceedings other than Chapter 11 of the Bankruptcy Code (and in such case, only if all appropriate court approvals are obtained to protect the interest of the Lessor in such Rail Car or Aircraft) so long as no Lease Default or Lease Event of Default under the related Lease shall have occurred and be continuing at the time the Company enters into such sublease. The Company is permitted to sublease any Vehicle to any business which is not subject to bankruptcy proceedings so long as no Lease Default or Lease Event of Default shall have occurred and be continuing under the Vehicle Lease at the time the Company enters into such sublease. The term of any such sublease of any item of Equipment may not extend beyond the expiration of the term of the related Lease. Any such sublease of any item of Equipment will be subject and subordinate to the related Lease and the rights and interests of the Lessor thereunder, except that any such sublease of Vehicles entered into prior to the Lease Commencement Date may not be subject and subordinate on the Lease Commencement Date but if the term of any such sublease is renewed then on such renewal date (but in no event later than one year after the Lease Commencement Date), the Company has agreed to cause such sublease to be made subject and subordinate to the Vehicle Lease and the rights and interests of the Lessor thereunder. (Leases, Section 8.3) Liens. Each item of Equipment is required to be maintained free of any Liens, other than the respective rights of the Owner Participant, the Owner Trustee, Indenture Trustee, the holders of the related Equipment Notes, the Company and any permitted sublessee arising under the related Indenture, Lease, Participation Agreement and Trust Agreement, and other than certain limited liens permitted under the Lease relating thereto including: (i) Liens for taxes either not yet due or being contested in good faith by appropriate proceedings, so long as, among other things, there exists no material risk of sale, forfeiture, loss or loss of or interference with use or possession of such item of Equipment, the interference with the payment of rent in respect thereof or the impairment of the lien of the related Indenture thereon; (ii) materialmen's, mechanics', supplier's, laborer's, repairmen's, employees' or other like Liens arising against the Company or any permitted sublessee in the ordinary course of business securing obligations the payment of which is either not yet due or is being contested in good faith by appropriate proceedings, so long as, among other things, there exists no material risk of sale, forfeiture, loss or loss of or interference with use or possession of such item of Equipment or the impairment of the lien of the related Indenture thereon or interference with the payment of rent in respect thereof; (iii) Liens arising from judgments or awards against the Company or any permitted sublessee with respect to which (x) at the time an appeal or proceeding for review is being prosecuted in good faith and for the payment of which adequate reserves have been provided as required by generally accepted accounting principles or other appropriate provisions have been made and with respect to which there shall have been secured a stay of execution pending such appeal or proceeding for review and, among other things, there exists no material risk of sale, forfeiture, loss or loss of or interference with use or possession of such item of Equipment, interference with the payment of rent in respect thereof or impairment of the lien of the related Indenture thereon; (iv) Liens bonded to the reasonable satisfaction of the Owner Participant; and (v) certain Liens required to be removed by the related Owner Trustee, Owner Participant, Indenture Trustee or Pass Through Trustee. (Leases, Section 7) Insurance. The Company will, at its own expense, cause to be carried and maintained with insurance companies (which may be captive insurance companies affiliated with the Company) (i) physical damage insurance in respect of all Equipment and (ii) public liability insurance with respect to third-party personal injury and property damage, in such amounts and against such risks customarily insured against by the Company in respect of similar equipment and subject to certain other limitations including such public liability insurance being reasonably and economically available to the Company. There is no assurance that the Company will carry any insurance in the future, or, if it is carried, as to the amount of such insurance or as to the amount of the deductible limits in respect of such insurance. (Leases, Section 12) Use. The Company, any of its affiliates or any permitted sublessee shall be entitled to use any Rail Car only in the United States, Canada and Mexico and only in the manner for which it was designed and intended S-23 24 and so as to subject it only to ordinary wear and tear. The Company, any of its affiliates or any permitted sublessee shall be entitled to use any Vehicle only in the United States and only in the manner for which it was designed and intended and so as to subject it only to ordinary wear and tear. The Company or any permitted sublessee shall be entitled to fly or locate any Aircraft in any area other than a recognized war zone unless such Aircraft is located in such area as a result of an isolated or extraordinary event beyond the control of the Company and the Company is using all reasonable efforts to remove the Aircraft from such area. (Leases, Section 8.2) Termination. The Company may, subject to certain limitations set forth in the related Lease, on any scheduled rent payment date on at least 90 days' prior written notice to the Owner Trustee and the Indenture Trustee (which notice may be revoked by the Company not less than 30 days prior to the proposed termination date) terminate the lease term with respect to any item of Equipment if the Company determines in good faith that such item of Equipment has become obsolete, surplus or operationally uneconomic to the Company's requirements. The Company, as non-exclusive agent for the Owner Trustee, is then required to use its reasonable best efforts to obtain bids for the cash purchase of such item of Equipment on the proposed termination date. No bid may be submitted by the Company (or any of its affiliates) or any agent or person acting on behalf of the Company. (Leases, Section 10) On the termination date, the Owner Trustee is required to sell such item of Equipment to the party submitting the highest cash bid. The proceeds of such sale, net of all expenses of the sale, will be paid to the Owner Trustee. If the net proceeds received from such sale are less than the applicable termination value, the Company is required to pay to the Owner Trustee an amount equal to that deficiency, together with certain other amounts, which under any circumstance will be sufficient to satisfy all amounts due to the holders of the related Equipment Notes under the related Indenture and Participation Agreement. All funds to be paid to the Lessor shall, so long as the related Indenture shall not have been discharged, be paid directly to the Indenture Trustee. Upon such payment, the Equipment Notes will be prepaid in full (if all items of Equipment under such Lease are terminated) or in part (if less than all items of Equipment under such Lease are terminated). (See "Description of the Equipment Notes -- Prepayment.") If, after receiving a termination notice from the Company, the Owner Participant pays to the Indenture Trustee on behalf of the holders of the related Equipment Notes the aggregate principal amount of such Equipment Notes which is due and payable together with any premium which is due and payable and accrued but unpaid interest and any other sums due and payable to the Indenture Trustee or the holders of such Equipment Notes under such Lease, the related Indenture or Participation Agreement on account thereof, the Owner Participant may retain such item of Equipment with respect to which the Company has given a notice of termination, provided that if the Owner Participant fails to make such payment after giving notice of its intention to retain such items of Equipment, the Lease shall not be terminated for such items of Equipment, although the Company, at its option, may submit another notice of termination with respect to such items of Equipment and the Owner Participant shall not be permitted to elect to retain such Equipment. (Leases, Section 10) Purchase Options. Subject to certain limitations set forth in the related Lease, the Company may elect to purchase any item of Equipment on the Early Buy Out Date for such item of Equipment and terminate the related Lease in respect of such item of Equipment. In connection with any such purchase, the Company is required with respect to the Equipment Notes relating to such item of Equipment being purchased either (x) to pay the principal of such Equipment Notes in an amount described in the next sentence plus Make-Whole Premium, if any, and interest payable thereon or (y) to assume the obligations of the Owner Trustee under such portion of such Equipment Notes, the related Indenture, the related Participation Agreement and certain agreements related thereto. The principal amount of the Equipment Notes to be paid or assumed, as the case may be, in connection with any such purchase shall be equal to the product of (x) the aggregate principal amount of such Equipment Notes and (y) a fraction the numerator of which shall be the acquisition cost of such item of Equipment and the denominator of which shall be the aggregate acquisition cost of all items of the Class of Equipment of which such item of Equipment is a part. If the Company elects to purchase such item of Equipment and pay the amount described in clause (x) above, then upon payment to the Owner Trustee of the full purchase price for such item of Equipment determined in accordance with such Lease and S-24 25 all other amounts owing to the parties to the related Participation Agreement, the Owner Trustee will transfer all of its right, title and interest in and to such item of Equipment to the Company and the related Lease and the Lien of the related Indenture will terminate with respect to such item of Equipment. If the Company elects to purchase such item of Equipment and assume the obligations of the Owner Trustee described in clause (y) above, then the Company will execute and deliver appropriate documentation providing for the assumption of such obligations on a full recourse basis by the Company, maintaining a security interest in such item of Equipment to secure such assumed obligations, and upon payment to the Owner Trustee of the full purchase price (or, if such purchase price is paid in installments as described in the next sentence, the first installment of such purchase price) for such item of Equipment determined in accordance with such Lease and all other amounts owing to the parties in connection therewith, the Owner Trustee will transfer all of its right, title and interest in and to such item of Equipment to the Company and the related Lease will terminate with respect to such item of Equipment, except that if the item of Equipment subject to such purchase is an Aircraft, the Owner Trustee shall only transfer its right, title and interest in such Equipment upon payment of the full purchase price for such Equipment whether or not such purchase price is paid in installments. In connection with any such assumption of Equipment Notes described in the preceding sentence, the Company may elect to pay certain amounts payable to the Owner Trustee for the benefit of the related Owner Participant in installments over a period not to exceed one year, and, in which case, the Owner Trustee shall retain a security interest in the Equipment subject to such purchase subordinate to the security interest maintained in such Equipment for the benefit of the holders of the assumed Equipment Notes, and, in addition, the Owner Trustee shall have such cure rights and other rights as are specified in "Description of the Equipment Notes -- Indenture Events of Default, Notice and Waiver" until all such installments of the purchase price have been paid in full. (Leases, Section 22.6, Participation Agreements, Section 10.3, Indenture, Article VII) See also "Federal Income Tax Consequences -- General" in the Prospectus. After any assumption of any Equipment Notes described in the preceding paragraph, if less than all obligations under the related Equipment Notes are assumed, the obligations of the Company so assumed and the obligations under the relevant Lease remaining assigned under the related Indenture shall constitute separate obligations of the Company and default under either thereof shall not necessarily result in the occurrence of a default under the other. There will be no cross-collateralization of the Equipment securing the obligations assumed by the Company and the obligations remaining secured under the relevant Indenture. Consequently, the items of Equipment related to such assumption will not constitute security for the obligations remaining secured under the relevant Indenture, nor will the Equipment remaining subject to such Indenture constitute security for such assumed obligations. (Indenture, Article VII) At the end of the term of each Lease, after the final maturity of the related Equipment Notes, the Company has certain options to renew the lease term for any item of Equipment or purchase such item of Equipment. (Leases, Article 22) Events of Loss. If an Event of Loss (as defined below) occurs with respect to an item of Equipment, the Company shall give notice to the Lessor and the Indenture Trustee within 90 days of the occurrence thereof and either (i) pay to the Lessor within 240 days of such occurrence the applicable stipulated loss value (which is an amount at least sufficient to pay in full the allocable principal amount of the related Equipment Notes plus accrued but unpaid interest thereon) together with certain other amounts which under any circumstances will be sufficient to satisfy all amounts due payable to the holders of such Equipment Notes on account of such Event of Loss under the related Indenture and Participation Agreement, and any other amounts owed by the Company to the Owner Trustee or the Owner Participant under the related Lease or Participation Agreement or (ii) within 180 days of such occurrence and subject to certain other limitations, replace such item of Equipment with an item of Equipment which has a value, utility and remaining economic useful life at least equal to the item of Equipment being replaced assuming it was in the condition required by the related Lease. (Leases, Section 11) See "Description of the Equipment Notes -- Prepayment." If an Event of Loss occurs with respect to an engine on, but not the Airframe of, any Aircraft, the Company is required, within 180 days after the occurrence of such Event of Loss, to replace such engine with another engine having a value and utility at least equal to, and being in as good operating condition as, such engine being replaced, assuming such engine was of the value and utility and in the condition and repair S-25 26 required by the related Lease immediately prior to such Event of Loss, provided that after any replacement, all engines on such Aircraft shall be suitable for use thereon. (Aircraft Leases, Section 11.7) An "Event of Loss" with respect to an Airframe or an engine thereon includes any of the following events: (i) such equipment suffers damage or destruction which, in the Company's opinion, makes repairs uneconomic or renders such equipment permanently unfit for normal use; (ii) such equipment shall suffer an actual or constructive total loss; (iii) such equipment is permanently returned to the manufacturer pursuant to any patent indemnity provisions; (iv) such equipment suffers a requisition of title by any governmental authority; (v) such equipment suffers theft or disappearance or is the subject of a condemnation, a confiscation, a seizure or a requisition of use by any governmental authority that results in the Company's loss of possession for a period in excess of 6 months (or such longer period not to exceed one year from the end of such 6 month period if the location of such equipment is known and the Company is diligently pursuing recovery); and (vi) such equipment shall be the subject of any rule, regulation, order or other action of any governmental authority which results in the prohibition of the operation of such equipment for a period of at least six consecutive months but less than twelve consecutive months, unless the Company is diligently taking steps necessary or desirable to permit the normal use of such property by the Company. (Aircraft Leases, Section 11.1) An "Event of Loss" with respect to a Rail Car or Vehicle includes any of the following events: (i) such equipment suffers damage or contamination which, in the Company's opinion, makes repair uneconomic or renders such equipment permanently unfit for normal use for any reason whatsoever other than obsolescence; (ii) such equipment suffers an actual or constructive total loss; (iii) such equipment is permanently returned to the manufacturer pursuant to any patent indemnity provisions; (iv) such equipment suffers theft or disappearance, has title thereto taken or appropriated by any governmental authority under the power of eminent domain or otherwise; or is taken or requisitioned for use by any governmental authority thereof under the power of eminent domain or otherwise, and, in the case of any such theft, disappearance, taking, appropriation or requisition, the period thereof exceeds 90 days; (v) such equipment suffers theft or disappearance, has title thereto taken or appropriated by any governmental authority under the power of eminent domain or otherwise; (vi) any governmental authority with jurisdiction over the Company's operations and such equipment requires an alteration, modification or addition to such equipment which would be economically impractical to make; or (vii) in the case of the Rail Cars only, such equipment is prohibited from being used in the normal course of interstate rail commerce by any federal governmental authority for a period in excess of six months. (Rail Car Lease and Vehicle Lease, Section 11.1) S-26 27 Lease Events of Default. Events of default under each Lease (each, a "Lease Event of Default") include, among other things: (a) failure by the Company to make any scheduled rental payment or any payment of applicable stipulated loss value or termination value under such Lease within 10 Business Days after the same shall have become due and payable; (b) failure by the Company to pay any supplemental rent under such Lease or the related Participation Agreement or certain other agreements entered into by the Company within 15 Business Days after the Company has received written demand therefor from the person entitled to receive such payment; (c) any representation or warranty made by the Company in such Lease or the related Participation Agreement shall prove to be untrue or incorrect in any material respect when made and such untruth or incorrectness shall continue to be material and unremedied for a period of 30 days after receipt by the Company of written notice thereof from the Lessor or the Indenture Trustee; (d) the occurrence of certain events of bankruptcy, reorganization or insolvency of the Company or similar events; or (e) failure by the Company to perform or observe any other covenant, condition or agreement to be performed or observed by it under the related Lease or Participation Agreement, and such failure shall continue unremedied for a period of 60 days from the date the Company has received written notice of such failure from the Owner Trustee, the Owner Participant or the Indenture Trustee, provided that if such failure is capable of being remedied, no such failure shall constitute a Lease Event of Default for a period of 360 days after receipt of such notice so long as the Company is diligently proceeding to remedy such failure. (Leases, Section 14) There are no cross-default provisions in the Leases and any event resulting in a Lease Event of Default under any particular Lease will not necessarily result in the occurrence of a Lease Event of Default under the other Leases. If a Lease Event of Default under a Lease has occurred and is continuing, the Indenture Trustee, as assignee of the Owner Trustee's rights under such Lease, may, subject to certain rights of the Owner Trustee and the Owner Participant under the related Indenture, exercise one or more of the remedies provided in such Lease with respect to any or all of the Equipment subject thereto. Those remedies include the right to repossess such Equipment, to sell such Equipment free and clear of the Company's rights, and to require the Company to pay as liquidated damages any unpaid rent plus an amount equal to the excess of the stipulated loss value for such Equipment specified in such Lease (which is an amount at least sufficient to pay in full the aggregate unpaid principal amount of the outstanding related Equipment Notes plus accrued but unpaid interest thereon) over the actual fair market value of such Equipment. (Leases, Section 15; Indentures, Article IV) REGISTRATION OF THE AIRCRAFT The Owner Trustee in its individual capacity has represented and warranted that it is a United States citizen. For any Aircraft, the Owner Trustee has agreed that if it has actual knowledge that it has ceased to be a United States citizen at a time when citizenship is necessary for the registration of such Aircraft in the United States, or if lack thereof would adversely affect the Company or the related Owner Participant, it will immediately resign as Owner Trustee and the Owner Participant then may appoint a successor Owner Trustee that, among other things, is a United States citizen. The Owner Participant under each Aircraft Participation Agreement has represented that it is a United States citizen and has agreed that if it ceases to be, or believes itself likely to cease to be, a United States citizen and the related Aircraft would be ineligible for registration in the United States in the name of the Owner Trustee, then the Owner Participant shall give notice thereof to the Indenture Trustee and the Company and shall promptly effect a voting trust or take any other action necessary to maintain United States registration of the related Aircraft. (Aircraft Participation Agreements, Section 6.5) S-27 28 UNDERWRITING Subject to the terms and conditions set forth in the underwriting agreement (the "Underwriting Agreement") between the Company and Chemical Securities Inc. (the "Underwriter") relating to the Pass Through Certificates, the Company has agreed to cause each Pass Through Trust to sell to the Underwriter, and the Underwriter has agreed to purchase, the aggregate amount of Pass Through Certificates of each Series. The Underwriter is committed to purchase all such Pass Through Certificates if any are purchased. The Underwriter proposes to offer the Pass Through Certificates of each Series to the public at the initial public offering price for such Series set forth on the cover page of this Prospectus Supplement and to certain dealers at such public offering price less a concession not to exceed % of such public offering price. The Underwriter may allow, and such dealers may reallow, a discount not in excess of % of any such public offering price to certain other dealers. The Pass Through Certificates are a new issue of securities with no established trading market, and the Company does not intend to apply for the listing of the Pass Through Certificates on a national securities exchange. The Company has been advised by the Underwriter that the Underwriter intends to make a market in the Pass Through Certificates but is not obligated to do so and may discontinue market making at any time without notice. No assurance can be given as to the liquidity of the trading market for the Pass Through Certificates. The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933. The Underwriter is an affiliate of Chemical Bank which is a lender to the Company. In addition, Chemical Bank and its affiliates participate on a regular basis in various general financing and banking transactions for the Company and its affiliates. John L. Adams, a member of the board of directors of Phillips Gas Company, a subsidiary of the Company, is a vice chairman and a member of the board of directors of Texas Commerce Bancshares, Inc. and a member of the board of directors of Texas Commerce Bank National Association, each an affiliate of the Underwriter. As further described under "Use of Proceeds," the proceeds of the offering of the Pass Through Certificates will be used by the Pass Through Trustee to purchase Equipment Notes issued as nonrecourse obligations of the Owner Trusts, and a substantial portion of the proceeds of the Equipment Notes will be used to repay and refinance interim loans extended by Chemical Bank to the Owner Trusts. Accordingly, because more than 10% of the net proceeds of the offering will be paid to an affiliate of the Underwriter, a member of the National Association of Securities Dealers, Inc. (the "NASD"), the offering is being made pursuant to the provisions of Article III, Section 44(c)(8) of the NASD Rules of Fair Practice. LEGAL MATTERS The validity of the Pass Through Certificates offered hereby is being passed upon for the Company by Dale J. Billam, Esq., Senior Counsel of the Company, and Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017, special counsel for the Company, and for the Underwriter by Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019. Both Simpson Thacher & Bartlett and Cravath, Swaine & Moore may rely on the opinion of Shipman & Goodwin, counsel for Shawmut Bank Connecticut, individually and as Pass Through Trustee, as to the authorization, execution and delivery of the Pass Through Agreements and the Pass Through Certificates by Shawmut Bank Connecticut. S-28 29 APPENDIX A GLOSSARY OF CERTAIN TERMS The following is a glossary of certain terms used in this Prospectus Supplement. To the extent the definitions of terms used in this glossary are also used in the Pass Through Agreements, the Indentures or the Leases, such definitions are qualified in their entirety by reference to the definitions of such terms contained therein. "Aircraft" means the Airframes, together with the engines installed on such Airframes, sold by the Company to the Owner Trustee on the Lease Commencement Date and leased back to the Company pursuant to the Aircraft Lease. "Aircraft Lease" means each of the two separate lease agreements between the Owner Trustee and the Company, relating to the three Falcon 20 corporate aircraft and to the Falcon 50 corporate aircraft, respectively. "Aircraft Participation Agreement" means each of the two Participation Agreements relating to the Aircraft among the Owner Trustee, the Company, the Indenture Trustee, the Owner Participant and the Pass Through Trustee, relating to the three Falcon 20 corporate aircraft and the Falcon 50 corporate aircraft, respectively. "Airframe" means each of the three Falcon 20 corporate aircraft and Falcon 50 corporate aircraft (excluding engines from time to time installed thereon) leased by the Owner Trustee to the Company pursuant to the Aircraft Lease. "Authenticating Agent" means, for each Pass Through Trust, Shawmut Bank Connecticut, National Association. "Aviation Act" means the Federal Aviation Act of 1958, as amended, and the applicable regulations thereunder. "Bankruptcy Code" means Title 11 of the United States Code (11 U.S.C. et seq.), as amended, or any successor provisions thereto. "Business Day" means any day other than a Saturday, Sunday or a day on which commercial banking institutions are authorized or required by law to be closed in New York, New York, Bartlesville, Oklahoma, the city and state in which the principal corporate trust office of the Owner Trustee is located, or the city and state in which the principal corporate trust office of the Indenture Trustee is located. "Certificateholder" means, for any Pass Through Trust, the registered holder of any Pass Through Certificate issued by such Pass Through Trust. "Certificate Owner" means a person having a beneficial interest in a Pass Through Certificate. "Class" or "Class of Equipment" means each of (i) the Rail Cars, (ii) the three Falcon 20 corporate aircraft subject to an Aircraft Lease, (iii) the Falcon 50 corporate aircraft subject to an Aircraft Lease and (iv) the Vehicles. "Code" means the United States Internal Revenue Code of 1986, as amended. "Commission" means the United States Securities and Exchange Commission. "Company" means Phillips Petroleum Company, a Delaware corporation. "Distribution Date" means, for each Pass Through Trust, March 27 and September 27 of each year until payment of all the Scheduled Payments to be made under the Equipment Notes has been made, commencing March 27, 1995. "Early Buy Out Date" means September 27, 2002, in respect of certain Rail Cars, September 27, 2004, in respect of certain other Rail Cars, September 27, 2006, in respect of certain other Rail Cars, September 27, A-1 30 2008, in respect of certain other Rail Cars and September 27, 2009, in respect of the remaining Rail Cars; September 27, 1997, in respect of the Falcon 20 corporate aircraft; September 27, 2000, in respect of the Falcon 50 corporate aircraft; and September 27, 2003, in respect of the Vehicles. "Equipment Notes" means, for each Class of Equipment, the equipment notes issued by the Owner Trustee pursuant to the related Indenture and any equipment note issued in exchange therefor or replacement thereof pursuant to the related Indenture. "Event of Loss" means, for any Class of Equipment, each of the events designated as such in the related Lease. For a description of certain events constituting Events of Loss, see "Description of the Equipment Notes -- The Leases -- Events of Loss." "FAA" means the United States Federal Aviation Administration. "Indenture" means each of the four separate trust indenture and security agreements between the Owner Trustee and the Indenture Trustee, in each case under which the Owner Trustee will issue Equipment Notes relating to a Class of Equipment. "Indenture Event of Default" means, for any Indenture, each of the events designated as an event of default in such Indenture. For a description of certain events constituting Indenture Events of Default, see "Description of the Equipment Notes -- Indenture Events of Default, Notice and Waiver." "Indenture Trustee" means Shawmut Bank Connecticut, National Association, a national banking association, in its capacity as indenture trustee under each Indenture, and any successor thereunder. "Lease" means each of the Aircraft Leases, the Rail Car Lease and the Vehicle Lease. "Lease Commencement Date" means, for each Lease, September 28, 1994. "Lease Event of Default" means, for any Lease, each of the events designated as an event of default in such Lease. For a description of certain events constituting Lease Events of Default, see "Description of the Equipment Notes -- The Leases -- Lease Events of Default." "Lessee" means the Company. "Lessor" means the Owner Trustee. "Lien" means any mortgage, pledge, security interest, lien, encumbrance, or disposition of title. "Owner Participant" means, with respect to each Class of Equipment, the owner participant for whose benefit the Owner Trustee owns such Class of Equipment, and its permitted successors and assigns. "Owner Trust" means a trust created for the benefit of an Owner Participant under which the Owner Trustee is acting as trustee. "Owner Trustee" means Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity, but solely as Owner Trustee. "Participation Agreement" means each of the Aircraft Participation Agreements, the Rail Car Participation Agreement and the Vehicle Participation Agreement. "Pass Through Agreement" means each of the Pass Through Trust Agreements between the Company and the Pass Through Trustee, in accordance with which the Pass Through Trusts will be formed. "Pass Through Certificates" means the Phillips Petroleum Company 1994 Pass Through Certificates, Series A1, and the Phillips Petroleum Company 1994 Pass Through Certificates, Series A2, to be issued by the Pass Through Trustee pursuant to the related Pass Through Agreement and which represent fractional undivided interests in the related Pass Through Trusts. "Pass Through Trust" means Phillips Petroleum Company Pass Through Trust, 1994 A1, and Phillips Petroleum Company Pass Through Trust, 1994 A2, each to be formed pursuant to the related Pass Through Agreement. A-2 31 "Pass Through Trustee" means Shawmut Bank Connecticut, National Association, a national banking association, in its capacity as pass through trustee under the Pass Through Agreements and each Pass Through Trust, and its successors and assigns thereunder. "Paying Agent" means, for each Pass Through Trust, Shawmut Bank Connecticut, National Association. "Permitted Investments" means (i) direct obligations of the United States of America and agencies thereof for which the full faith and credit of the United States is pledged, (ii) obligations fully guaranteed by the United States of America, (iii) certificates of deposit issued by, or bankers acceptances of, or time deposits with, any bank, trust company or national banking association incorporated or doing business under the laws of the United States of America or one of the States thereof having combined capital and surplus and retained earnings of at least $500,000,000 (including the Indenture Trustee and the Owner Trustee if such conditions are met) and having a rating assigned to the long-term unsecured debt of such institutions by Standard & Poor's Corporation and Moody's Investors Service, Inc. at least equal to AA and Aa2, respectively, (iv) commercial paper of companies, banks, trust companies or national banking associations incorporated or doing business under the laws of the United States of America or one of the States thereof and in each case having a rating assigned to such commercial paper by Standard & Poor's Corporation or Moody's Investors Service, Inc. equal to the highest rating assigned by such organization, and (v) a money market fund registered under the Investment Company Act of 1940, as amended, the portfolio of which is limited to United States government obligations and United States agency obligations; provided that if all of the above investments are unavailable, the entire amount to be invested may be used to purchase Federal Funds from an entity described in (iii) above; and provided further that no investment shall be eligible as a "Permitted Investment" unless the final maturity or date of return of such investment is 90 days or less from the date of purchase thereof. "Pool Balance" means, for any Pass Through Trust, as of any date of determination the aggregate unpaid principal amount of the Equipment Notes that constitute Trust Property of such Pass Through Trust on such date plus the amount of the principal payments on such Equipment Notes held by the Pass Through Trustee and not yet distributed (other than earnings thereon and without giving effect to any losses on investments thereof). The Pool Balance as of any Distribution Date or Special Distribution Date shall be computed after giving effect to the payment of principal, if any, on such Equipment Notes and the distribution thereof being made on that date. "Pool Factor" means, for any Pass Through Trust, as of any date of determination the quotient (rounded to the seventh decimal place) computed by dividing (i) the Pool Balance by (ii) the aggregate original amount of the Pass Through Certificates of the related Series. The Pool Factor as of any Distribution Date or Special Distribution Date shall be computed after giving effect to the payment of principal, if any, on such Equipment Notes and the distribution thereon being made on that date. "Rail Cars" means the 1,676 covered hoppers and 708 tank rail cars sold by the Company to the Owner Trustee on the Lease Commencement Date and leased back to the Company under the Rail Car Lease. "Rail Car Lease" means the lease agreement between the Owner Trustee and the Company under which the Owner Trustee leases the Rail Cars to the Company. "Rail Car Participation Agreement" means the Participation Agreement relating to the Rail Cars among the Owner Trustee, the Company, the Indenture Trustee, the Owner Participant and the Pass Through Trustee. "Registrar" means, for each Pass Through Trust, Shawmut Bank Connecticut, National Association. "Scheduled Payment" means any payment of interest on, or principal of and interest on, any Equipment Note that constitutes Trust Property thereof, scheduled to be received by the Pass Through Trustee on a Distribution Date, except any such payment that is received more than five days after the applicable Distribution Date (which payment will be treated as a Special Payment). "Series" means Phillips Petroleum Company Pass Through Certificates, Series 1994-A1, and Phillips Petroleum Company Pass Through Certificates, Series 1994-A2. A-3 32 "Special Distribution Date" means the date on which a Special Payment is scheduled to be distributed, which date will be the 27th day of any month. "Special Payment" means, for any Pass Through Trust, any payments of principal, Make-Whole Premium or interest other than Scheduled Payments received by the Pass Through Trustee on any of the Equipment Notes held in such Pass Through Trust and any proceeds from the sale of any such Equipment Notes received by the Pass Through Trustee. "Trust Property" means, for the Pass Through Trust, all money, instruments, including the related Equipment Notes, and other property held as the property of such Pass Through Trust, including all distributions thereon and proceeds thereof. "Vehicles" mean the 136 mobile aircraft refueling vehicles sold by the Company to the Owner Trustee on the Lease Commencement Date and leased back to the Company under the Vehicle Lease. "Vehicle Lease" means the lease agreement between the Owner Trustee and the Company under which the Owner Trustee leases the Vehicles to the Company. "Vehicle Participation Agreement" means the Participation Agreement relating to the Vehicles among the Owner Trustee, the Company, the Indenture Trustee, the Owner Participant and the Pass Through Trustee. A-4 33 PROSPECTUS PHILLIPS PETROLEUM COMPANY PASS THROUGH CERTIFICATES Up to $110,000,000 aggregate amount of Pass Through Certificates (the "Pass Through Certificates") may be offered for sale from time to time pursuant to this Prospectus and one or more Prospectus Supplements. The Pass Through Certificates may be offered in one or more series (each, a "Series") in amounts, at prices and on terms to be determined at the time of sale. For each Series of Pass Through Certificates offered pursuant to this Prospectus and a Prospectus Supplement, a separate Pass Through Trust (a "Pass Through Trust") will be formed pursuant to a separate Pass Through Trust Agreement (a "Pass Through Agreement") between Phillips Petroleum Company (the "Company") and Shawmut Bank Connecticut, National Association, as the Pass Through Trustee under such Pass Through Trust. Each Pass Through Certificate in a Series will evidence a fractional undivided interest in the related Pass Through Trust and will have no rights, benefits or interest in respect of any other Pass Through Trust or the Trust Property held in any other such Pass Through Trust. The Trust Property of each Pass Through Trust will consist of equipment notes (the "Equipment Notes") issued as nonrecourse obligations by one or more Owner Trusts, in connection with leveraged lease transactions. The Equipment Notes will be issued to refinance or finance a portion of the payment made or to be made by each such Owner Trust to the Company for the acquisition cost of specified items of transportation equipment sold and leased back by the Company (the "Equipment"). The Prospectus Supplement relating to each offering will describe certain terms of the Pass Through Certificates offered thereby, the respective Pass Through Trusts, the Equipment Notes to be purchased by such Pass Through Trusts, the leveraged lease transactions and the Equipment relating to such Equipment Notes. With respect to one or more items of Equipment, the Owner Trustee may issue one or more Equipment Notes, each of which may have a different interest rate and final maturity date. For each Series of Pass Through Certificates, the Pass Through Trustee will purchase one or more Equipment Notes issued with respect to one or more items of Equipment such that all of the Equipment Notes held in the related Pass Through Trust will have identical interest rates, in each case equal to the rate applicable to the Pass Through Certificates issued by such Pass Through Trust, and such that the latest maturity date for such Equipment Notes will occur on or before the final distribution date for such Pass Through Certificates. For any item of Equipment, the related Equipment Notes will be secured by a security interest in the Lease relating thereto, including the right to receive rent payable by the Company under such Lease and in the related items of Equipment subject to such Lease (except that for certain vehicles included in the Equipment the security interest in such vehicles may not be perfected). None of the Equipment Notes held in the respective Pass Through Trusts will be obligations of, or guaranteed by, the Company. The amounts payable by the Company under the Leases from time to time will be at least equal to the amounts of all principal, premium, if any, and interest payable on the related Equipment Notes from time to time. Interest paid on the Equipment Notes held in each Pass Through Trust will be passed through to the registered holders of the Pass Through Certificates for such Pass Through Trust (for each Pass Through Trust, the "Certificateholders") on the dates and at the rate per annum set forth in the Prospectus Supplement relating to such Pass Through Certificates until the final distribution date for such Pass Through Trust. Principal paid on the Equipment Notes held in each Pass Through Trust will be passed through to the Certificateholders in scheduled amounts on the dates set forth in the Prospectus Supplement relating to such Pass Through Certificates until the final distribution date for such Pass Through Trust. The Pass Through Certificates represent interests in the related Pass Through Trust only, and all payments and distributions shall be made only from the property of such Pass Through Trust. The Pass Through Certificates do not represent an interest in or obligation of the Company. The Pass Through Certificates may be sold to or through underwriters or directly to other purchasers or through agents. The Prospectus Supplement relating to each offering will set forth the names of any underwriters, dealers or agents involved in the sale of the Pass Through Certificates in connection with which this Prospectus is being delivered, the amounts, if any, to be purchased by underwriters and the compensation, if any, of such underwriters or agents. Prior to their issuance, there will have been no market for the Pass Through Certificates of any Series and there can be no assurance that one will develop. Unless otherwise indicated in the applicable Prospectus Supplement, the Company does not intend to apply for the listing of any Series of Pass Through Certificates on a national securities exchange. See "Plan of Distribution." This Prospectus may not be used to consummate sales of any Pass Through Certificates unless accompanied by the Prospectus Supplement applicable to the Pass Through Certificates being sold. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS- SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- The date of this Prospectus is October 11, 1994. 34 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SECURITIES OFFERED HEREBY OR OTHER SECURITIES OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. --------------------- No dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any underwriter, dealer or agent. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy Securities by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. --------------------- AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Offices of the Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, such material can be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005, and the Pacific Stock Exchange, Incorporated, 301 Pine Street, San Francisco, California 94104, on which certain of the Company's securities are listed. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended, and its Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 1994, all of which have previously been filed by the Company with the Commission, are incorporated by reference in this Prospectus. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Securities shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in this Prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom a copy of this Prospectus has been delivered, upon the written or oral request of such person, a copy of any or all of the documents referred to above which have been or may be incorporated by reference herein (other than exhibits to such documents unless such exhibits are specifically incorporated by reference in such documents). Requests for such copies should be directed to Dale J. Billam, Secretary, Phillips Petroleum Company, 1234 Adams Building, Bartlesville, Oklahoma 74004 (telephone (918) 661-5638). 2 35 PHILLIPS PETROLEUM COMPANY Phillips Petroleum Company, incorporated in Delaware in 1917, is a fully integrated oil company engaged in petroleum exploration and production on a worldwide basis, petroleum refining and marketing, and natural gas gathering and processing, principally in the United States. Phillips also produces and distributes chemicals worldwide. Its principal executive offices are located in the Phillips Building, Bartlesville, Oklahoma 74004 (telephone (918) 661-6600). The words "Company" and "Phillips" as used in this Prospectus refer to Phillips Petroleum Company or Phillips Petroleum Company and its consolidated subsidiaries. RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED) The following table sets forth the Company's ratio of earnings to fixed charges for the periods indicated:
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ----------- -------------------------------- 1994 1993 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- ---- ---- Ratio of earnings to fixed charges..................... 2.8 3.0 2.3 2.1 2.0 2.8 1.9
For the purpose of computing the ratio of earnings to fixed charges, earnings consist of income before income taxes, extraordinary items and cumulative effect of change in accounting principle, plus fixed charges (excluding capitalized interest and the portion of the preferred dividend requirements of a subsidiary to the extent not deducted in determining pretax income, but including amortization of interest previously capitalized), less equity in undistributed earnings of companies owned less than 50 percent. Fixed charges consist of interest (including capitalized interest) on all indebtedness, amortization of debt discount and expense, that portion of rental expense that the Company believes to be representative of interest and the amounts accrued to cover the preferred stock dividend requirements of a subsidiary. A statement setting forth the computation of the unaudited ratios of earnings to fixed charges is filed as an exhibit to the Registration Statement of which this Prospectus is a part. OUTLINE OF PASS THROUGH TRUST STRUCTURE For each Series of Pass Through Certificates (as such terms are defined below) offered pursuant to this Prospectus and the related Prospectus Supplement, a separate pass through trust (a "Pass Through Trust") will be formed pursuant to a Pass Through Trust Agreement (a "Pass Through Agreement") between the Company and Shawmut Bank Connecticut, National Association as pass through trustee (the "Pass Through Trustee"), for the benefit of the registered holders (the "Certificateholders") of the series (a "Series") of certificates (the "Pass Through Certificates") evidencing fractional undivided interests in such Pass Through Trust. The property held in each Pass Through Trust (the "Trust Property") will consist of equipment notes issued in connection with one or more leveraged lease transactions (the "Equipment Notes"), as specified in the applicable Prospectus Supplement. As more fully described below under "Use of Proceeds," in connection with each leveraged lease transaction, one or more Equipment Notes may be issued, each of which may have different interest rates and final maturity dates. Concurrently with the execution and delivery of each Pass Through Agreement, the Pass Through Trustee, on behalf of the related Pass Through Trust, will enter into one or more participation agreements or a supplement thereto (each, a "Participation Agreement") pursuant to which it will, among other things, purchase one or more Equipment Notes, such that the Equipment Notes that constitute the property of such Pass Through Trust will have identical interest rates, in each case equal to the rate applicable to the Pass Through Certificates issued by such Pass Through Trust, and such that the latest maturity date for such Equipment Notes will occur on or before the final distribution date applicable to such Pass Through Certificates. For each Pass Through Trust, the aggregate amount of the related Series of Pass Through Certificates will equal the aggregate principal amount of the Equipment Notes constituting the Trust Property of such Pass Through Trust. The Pass Through Trustee will distribute the amount of payments of principal, premium, if any, and interest received by it as holder of the Equipment Notes to the Certificateholders of the 3 36 Pass Through Trust in which such Equipment Notes are held. See "Description of the Pass Through Certificates" and "Description of the Equipment Notes." USE OF PROCEEDS Each Series of Pass Through Certificates offered pursuant to this Prospectus and a related Prospectus Supplement will be issued to facilitate the refinancing or financing of the debt portion of one or more leveraged sale-lease back transactions entered into or to be entered into by the Company, as seller and lessee, with respect to one or more of the items of transportation equipment, comprised of covered hopper and tank railroad cars (the "Rail Cars"), corporate aircraft (the "Aircraft") and mobile aircraft refueling vehicles (the "Vehicles"); (the Rail Cars, Aircraft and Vehicles, collectively, the "Equipment"), as specified in the applicable Prospectus Supplement. At the time of issuance of the applicable Series of Pass Through Certificates, none of the related items of Equipment will represent collateral for an outstanding liability of the Company. Each Prospectus Supplement will provide further descriptive and identifying information with respect to the Equipment. The proceeds from the sale of such Pass Through Certificates will be used by the Pass Through Trustee on behalf of the related Pass Through Trust to purchase Equipment Notes. The Equipment Notes will be issued as nonrecourse obligations of one or more owner trusts (each, an "Owner Trust" created pursuant to a "Trust Agreement") by Wilmington Trust Company, not in its individual capacity but solely as the owner trustee (the "Owner Trustee") for the benefit of the owner participant named therein (each, an "Owner Participant"), in connection with one or more leveraged lease transactions, in each case to refinance or finance a portion of the Owner Trust's acquisition cost of one or more items of Equipment that are leased by such Owner Trust to the Company pursuant to a separate lease agreement (each, a "Lease"), as specified in the applicable Prospectus Supplement. The Equipment Notes to be sold to any Pass Through Trust will be issued by the Owner Trust and authenticated by Shawmut Bank Connecticut, National Association, as indenture trustee (the "Indenture Trustee") under a separate trust indenture and security agreement (each, an "Indenture") between the Owner Trustee and the Indenture Trustee. Each Owner Participant will have provided or will be obligated to provide, from sources other than the proceeds of the related Equipment Notes, the portion of the acquisition cost for the related Equipment specified in the applicable Prospectus Supplement. No Owner Participant, however, will be personally liable for any amount payable under the related Indenture or the Equipment Notes issued thereunder. DESCRIPTION OF THE PASS THROUGH CERTIFICATES In connection with each offering of a Series of Pass Through Certificates, a separate Pass Through Trust will be formed pursuant to a separate Pass Through Agreement to be entered into between the Company and the Pass Through Trustee. The following summary relates to each of the Pass Through Agreements, the Pass Through Trusts to be formed thereby and the Pass Through Certificates to be issued by each Pass Through Trust, except as otherwise described in the applicable Prospectus Supplement. The discussion that follows is a summary and does not purport to be complete. The summary includes descriptions of the material terms of the Pass Through Agreements and the Indentures, the forms of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. The forms of the related Participation Agreements, Leases and Trust Agreements have also been filed as exhibits to the Registration Statement of which this Prospectus forms a part. This summary makes use of terms defined in and is qualified in its entirety by reference to the Pass Through Agreements. GENERAL Unless otherwise provided in the applicable Pass Through Agreement, the Pass Through Certificates will be issued in fully registered, certificated form only. Each Pass Through Certificate will represent a fractional undivided interest in the separate Pass Through Trust formed by the Pass Through Agreement pursuant to which such Pass Through Certificate is issued. The property of each Pass Through Trust will consist of the Equipment Notes held in such Pass Through Trust, all monies at any time paid thereon, all monies due and to 4 37 become due thereunder and funds from time to time deposited with the Pass Through Trustee in accounts relating to such Pass Through Trust. Each Pass Through Certificate will represent a pro rata share of the outstanding principal amount of the Equipment Notes and other property held in the related Pass Through Trust and will be issued, unless otherwise specified in the applicable Prospectus Supplement, in minimum denominations of $1,000 or any integral multiple of $1,000, except that one Pass Through Certificate with respect to each Pass Through Trust may be in a multiple of less than $1,000. (Pass Through Agreement, Articles II and III) Interest will be passed through to Certificateholders of each Pass Through Trust at the rate per annum payable on the Equipment Notes held in such Pass Through Trust, as set forth for such Pass Through Trust on the cover page of the applicable Prospectus Supplement. The Pass Through Certificates represent interests in the related Pass Through Trust only, and all payments and distributions shall be made only from the Trust Property of such Pass Through Trust. The Pass Through Certificates do not represent an interest in or obligation of the Company, the Pass Through Trustee, any related Owner Participant, the Owner Trustee in its individual capacity or any affiliate of any of the foregoing. Each Certificateholder by its acceptance of a Pass Through Certificate agrees to look solely to the income and proceeds from the property held in the related Pass Through Trust as provided in the applicable Pass Through Agreement (Pass Through Agreement, Section 3.08) The Pass Through Agreements, except as otherwise described in the applicable Prospectus Supplement, the Participation Agreements, the Equipment Notes, the Indentures and the Leases, do not contain any debt or other financial covenants or any other provisions that would afford Certificateholders protection in the event of a highly leveraged transaction involving the Company. BOOK-ENTRY REGISTRATION If specified in the applicable Prospectus Supplement, the Pass Through Certificates will be subject to the provisions described below. Upon issuance, each Series of the Pass Through Certificates will be represented by one fully registered global certificate. Each global certificate will be deposited with, or on behalf of, The Depository Trust Company ("DTC"), and registered in the name of Cede & Co. ("Cede"), its nominee. No Certificateholder will be entitled to receive a certificated Pass Through Certificate, except as set forth below. DTC has advised the Company that DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to Section 17A of the Exchange Act. DTC was created to hold securities for its participants ("DTC Participants") and to facilitate the clearance and settlement of securities transactions among DTC Participants through electronic book-entries, thereby eliminating the need for physical movement of certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Access to DTC's book-entry system is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly. Certificateholders that are not DTC Participants but desire to purchase, sell or otherwise transfer ownership of, or other interests in, Pass Through Certificates may do so only through DTC Participants. In addition, Certificateholders will receive all distributions of principal and interest from the Pass Through Trustee through the DTC Participants. Under the rules, regulations and procedures creating and affecting DTC and its operation, DTC is required to make book-entry transfers of Pass Through Certificates among DTC Participants on whose behalf it acts and to receive and transmit distributions of principal of, and premium, if any, and interest on, the Pass Through Certificates. Under the book-entry system, Certificateholders may experience some delay in their receipt of payments, since such payments will be forwarded by the Pass Through Trustee to Cede, as nominee for DTC, and DTC in turn will forward the payments to the appropriate DTC Participants. Distributions by DTC Participants to Certificateholders will be the sole responsibility of such DTC Participants and will be made in accordance with customary industry practices. Accordingly, although Certificateholders will not have possession of the Pass Through Certificates, the rules of 5 38 DTC provide a mechanism by which DTC Participants will receive payments and will be able to transfer their interests. Although the DTC Participants are expected to convey the rights represented by their interests in any global security to the related Certificateholders, because DTC can only act on behalf of DTC Participants, the ability of Certificateholders to pledge Pass Through Certificates to persons or entities that are not DTC Participants, or to otherwise act with respect to such Pass Through Certificates, may be limited due to the lack of physical certificates for such Pass Through Certificates. Neither the Company, the Pass Through Trustee nor any other agent of the Company or the Pass Through Trustee will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the Pass Through Certificates or for supervising or reviewing any records relating to such beneficial ownership interests. Since the only "Holder" will be Cede, as nominee of DTC, Certificateholders will not be recognized by the Pass Through Trustee as Holders, as such term is used in the applicable Pass Through Agreement, and Certificateholders will be permitted to exercise the rights of Holders only indirectly through DTC and DTC Participants. The Pass Through Certificates will be issued in fully registered, certificated form to Certificateholders, or their nominees, rather than to DTC or its nominee, only if (i) DTC advises the Pass Through Trustee in writing that it is no longer willing or able or qualified to discharge properly its responsibilities as depository with respect to the Pass Through Certificates, and the Pass Through Trustee and the Company are unable to locate a qualified successor, (ii) the Company, at its option, elects to terminate the book-entry system through DTC or (iii) after the occurrence of an Event of Default, Certificateholders holding a majority of the beneficial ownership interests in the Pass Through Certificates advise the Pass Through Trustee and DTC through DTC Participants in writing that continuation of a book-entry system through DTC is no longer in the best interest of the Certificateholders. In such event, the Pass Through Trustee will notify all Certificateholders through DTC Participants of the availability of such certificated Pass Through Certificates. Upon surrender by DTC of the registered global certificate representing the affected Series of Pass Through Certificates and receipt of instructions for re-registration, the Pass Through Trustee will reissue the Pass Through Certificates in certificated form to Certificateholders or their nominees. Such certificated Pass Through Certificates will be freely transferable and exchangeable at the office of the Pass Through Trustee upon compliance with the requirements set forth in the related Pass Through Agreement. No service charge will be imposed for any registration of transfer or exchange, but payment of a sum sufficient to cover any tax or other governmental charge will be required. All payments made under any Lease or any Indenture in respect of the Equipment Notes will be in immediately available funds. Such payments will be passed through to DTC in immediately available funds. Secondary trading in long-term notes and debentures of corporate issuers is generally settled in clearinghouse or next-day funds. In contrast, the Pass Through Certificates will trade in DTC's Same Day Funds Settlement System until maturity, and secondary market trading activity in the Pass Through Certificates will therefore be required by DTC to settle in immediately available funds. No assurance can be given as to the effect, if any, of settlement in immediately available funds on trading activity in the Pass Through Certificates. PAYMENTS AND DISTRIBUTIONS Except under certain circumstances, after the Indenture Trustee has made principal and interest payments to the Pass Through Trustee for each of the Pass Through Trusts on the related Equipment Notes held in such Pass Through Trust, the Indenture Trustee will pay the remaining balance, if any, of rental payments received from the Company to the Owner Trustee for the benefit of the related Owner Participant. The Pass Through Trustee for each such Pass Through Trust will distribute to the Certificateholders of such Pass Through Trust payments received on the Equipment Notes held in such Pass Through Trust as described below. Payments of principal of, and interest on the unpaid amount of, the Equipment Notes held in each Pass Through Trust will be scheduled to be received by the Pass Through Trustee on the dates specified in the applicable Prospectus Supplement (such scheduled payments of principal of, and interest on, the Equipment 6 39 Notes are referred to herein as "Scheduled Payments," and the dates specified for distributions of Scheduled Payments to the Pass Through Trustee in the applicable Prospectus Supplement are referred to herein as "Regular Distribution Dates"). For each Pass Through Trust, the Pass Through Trustee will distribute on each Regular Distribution Date to the related Certificateholders any Scheduled Payment timely received by the Pass Through Trustee. If a Scheduled Payment is not received by the Pass Through Trustee on or before a Regular Distribution Date but is received within five days thereafter, it will be distributed on the date received to the Certificateholders. Each such distribution of a Scheduled Payment will be made by the Pass Through Trustee to the Certificateholders of record of such Pass Through Trust on the fifteenth day prior to such Regular Distribution Date, subject to certain exceptions. Each such Certificateholder will be entitled to receive a pro rata share of any such distribution. (Pass Through Agreement, Sections 4.01 and 4.02) If a Scheduled Payment is received more than five days after the applicable Regular Distribution Date, it will be treated as a Special Payment and will be distributed as described below. After any prepayment of principal, any redemption or any default with respect to some or all of the Equipment Notes held in any Pass Through Trust, any Certificateholder of such Pass Through Trust should refer to the Pool Balance and the Pool Factor (as such terms are defined below) for such Pass Through Trust reported periodically by the Pass Through Trustee, in order to calculate such Certificateholder's pro rata share of such Pass Through Trust. See "Pool Factors" and "Statements to Certificateholders" below. For any Pass Through Trust, any payments of principal, premium, if any, or interest, other than Scheduled Payments, received by the Pass Through Trustee on any of the Equipment Notes held in such Pass Through Trust, including payments received (i) for the prepayment of such Equipment Notes in connection with certain events specified in the applicable Prospectus Supplement, (ii) upon an Indenture Event of Default in respect of such Equipment Notes or the exercise of remedies under the related Indenture, and (iii) on account of the sale of such Equipment Notes by the Pass Through Trustee (such payments are referred to herein as "Special Payments"), will be distributed on the dates determined as set forth in the applicable Prospectus Supplement (each, a "Special Distribution Date" and, together with the Regular Distribution Dates, the "Distribution Dates"). Prior to any Special Payment for any Pass Through Trust, the Pass Through Trustee will notify the Certificateholders of record of such Pass Through Trust of such Special Payment and the anticipated Special Distribution Date therefor in accordance with the Pass Through Agreement. Each distribution of a Special Payment, other than the final distribution, for any Pass Through Trust will be made by the Pass Through Trustee to the Certificateholders of record of such Pass Through Trust on the fifteenth day prior to such Special Distribution Date, unless otherwise specified in the applicable Prospectus Supplement. Each such Certificateholder will be entitled to receive a pro rata share of any such distribution. (Pass Through Agreement, Section 4.02) Each Pass Through Agreement requires that the Pass Through Trustee establish and maintain, for the related Pass Through Trust and for the benefit of the related Certificateholders, one or more non-interest bearing accounts (each a "Certificate Account") for the deposit of Scheduled Payments on the Equipment Notes held in such Pass Through Trust and one or more accounts which will, except in connection with Permitted Investments as discussed below, be non-interest bearing (each a "Special Payments Account") for the deposit of Special Payments on such Equipment Notes. The Pass Through Trustee is required to deposit any Scheduled Payments relating to a Pass Through Trust received by it in the related Certificate Account and to deposit any Special Payments so received by it in the related Special Payments Account pending distribution thereof. (Pass Through Agreement, Section 4.01) Special Payments that are not promptly distributed by the Pass Through Trustee will, to the extent practicable, be invested by the Pass Through Trustee in Permitted Investments pending the distribution of such funds on a Special Distribution Date, and the income and earnings on such investments will be distributed with such Special Payment. "Permitted Investments" are obligations of the United States of America (for the payment of which its full faith and credit is pledged) maturing in not more than 60 days or such lesser time as is necessary for the distribution of any such funds on a Special Distribution Date. (Pass Through Agreement, Article I and Section 4.04) Distributions by the Pass Through Trust from the Certificate Account or the Special Payments Account of any Pass Through Trust on any Distribution Date will be paid to each Certificateholder of record of such Pass Through Trust on the applicable record date at its address appearing on the register maintained for such 7 40 Pass Through Trust. (Pass Through Agreement, Section 4.02) The final distribution for each Pass Through Trust, however, will be made only upon presentation and surrender of the Pass Through Certificates for such Pass Through Trust at the office or agency of the Pass Through Trustee specified in the notice of such final distribution given by the Pass Through Trustee. The Pass Through Trustee will mail such notice of the final distribution to the Certificateholders of such Pass Through Trust, specifying the date set for such final distribution and the amount of such distribution. (Pass Through Agreement, Section 11.01) See "Termination of Pass Through Trusts" below. If any Distribution Date is not a Business Day, distributions scheduled to be made on such Distribution Date may be made on the next succeeding Business Day without additional interest. (Pass Through Agreement, Section 12.09) POOL FACTORS Except as provided below, the Pool Factor (as defined below) for any Pass Through Trust will decline in proportion to the scheduled repayments of principal on the Equipment Notes held in such Pass Through Trust as described in the applicable Prospectus Supplement. Where any Equipment Note held in a Pass Through Trust has been prepaid, a scheduled repayment of principal thereon has not been made or certain actions have been taken following a default thereon, as discussed in the applicable Prospectus Supplement or below in "Events of Default and Certain Rights Upon an Event of Default," the Pool Factor and the Pool Balance (as defined below) of such Pass Through Trust will be recomputed after giving effect thereto and notice thereof will be mailed to the Certificateholders of such Pass Through Trust. Each Pass Through Trust will have a separate Pool Factor. Unless otherwise described in the applicable Prospectus Supplement, the "Pool Balance" for each Pass Through Trust indicates, as of any date, the aggregate unpaid principal amount of the Equipment Notes held in such Pass Through Trust on such date plus any amounts in respect of principal on such Equipment Notes held by the Pass Through Trustee and not yet distributed. The Pool Balance for each Pass Through Trust as of any Distribution Date will be computed after giving effect to the payment of principal, if any, on the Equipment Notes held in such Pass Through Trust and the distribution thereof being made on that date. (Pass Through Agreement, Article I) Unless otherwise described in the applicable Prospectus Supplement, the "Pool Factor" for each Pass Through Trust as of any Distribution Date is the quotient (rounded to the seventh decimal place) computed by dividing (i) the Pool Balance by (ii) the aggregate original principal amount of the Pass Through Certificates issued in respect of such Pass Through Trust. The Pool Factor for each Pass Through Trust as of any Distribution Date shall be computed after giving effect to the payment of principal, if any, on the Equipment Notes held in such Pass Through Trust and the distribution thereof being made on that date. The Pool Factor for each Pass Through Trust will initially be 1.0000000; thereafter, the Pool Factor for each Pass Through Trust will decline as described above to reflect reductions in the Pool Balance of such Pass Through Trust. For any Pass Through Trust, the amount of any Certificateholder's pro rata share of the Pool Balance of such Pass Through Trust can be determined by multiplying the original denomination of such Certificateholder's Pass Through Certificate by the Pool Factor for such Pass Through Trust as of the applicable Distribution Date. (Pass Through Agreement, Article I) STATEMENTS TO CERTIFICATEHOLDERS On each Distribution Date, the Pass Through Trustee will include with each distribution of a Scheduled Payment or Special Payment to Certificateholders of record of the related Pass Through Trust a statement, giving effect to such distribution being made on such Distribution Date, setting forth the following information (per $1,000 in aggregate amount of Pass Through Certificates for such Pass Through Trust, as to (i) and (ii) below): (i) the amount of such distribution allocable to principal and allocable to premium, if any; (ii) the amount of such distribution allocable to interest; and (iii) the Pool Balance and the Pool Factor for such Pass Through Trust. 8 41 In addition, after the end of each calendar year, the Pass Through Trustee will prepare for each person who at any time during the preceding calendar year was a Certificateholder of record a report containing the sum of the amounts determined pursuant to clauses (i) and (ii) above with respect to the related Pass Through Trust for such calendar year or, in the event such person was a Certificateholder during a portion of such calendar year, for the applicable portion of such calendar year. (Pass Through Agreement, Section 4.03) VOTING OF EQUIPMENT NOTES The Pass Through Trustee, as holder of the Equipment Notes held in each Pass Through Trust, has the right to vote and give consents and waivers in respect of such Equipment Notes under the related Indentures. Each Pass Through Agreement sets forth the circumstances in which the Pass Through Trustee shall direct any action or cast any vote as the holder of the Equipment Notes held in such Pass Through Trust at its own discretion and the circumstances in which the Pass Through Trustee shall seek instructions from the Certificateholders of such Pass Through Trust. Prior to an Event of Default (as defined below) with respect to any Pass Through Trust, the principal amount of the Equipment Notes held in such Pass Through Trust directing any action or being voted for or against any proposal will be in proportion to the principal amount of Pass Through Certificates held by the Certificateholders of such Pass Through Trust taking the corresponding position. (Pass Through Agreement, Article VI and Section 10.01) EVENTS OF DEFAULT AND CERTAIN RIGHTS UPON AN EVENT OF DEFAULT Each Pass Through Agreement defines an event of default for the corresponding Pass Through Trust (an "Event of Default") as the occurrence and continuance of an event of default under one or more of the related Indentures (an "Indenture Event of Default"). The Indenture Events of Default under the Indentures will be described in the applicable Prospectus Supplement and will include events of default under the related Leases ("Lease Events of Default"). Since the Equipment Notes outstanding under an Indenture may be held in more than one Pass Through Trust, a continuing Indenture Event of Default under such Indenture would result in an Event of Default with respect to each such Pass Through Trust. All of the Equipment Notes issued under the same Indenture will relate to the items of Equipment identified and described in a Prospectus Supplement. There will be no cross-collateralization or cross-default provisions in the Indentures; consequently, events resulting in an Indenture Event of Default under any particular Indenture will not necessarily result in an Indenture Event of Default occurring under any other Indenture. If an Indenture Event of Default occurs in fewer than all of the Indentures related to a Pass Through Trust, the Equipment Notes issued pursuant to the related Indentures with respect to which an Indenture Event of Default has not occurred will continue to be held in such Pass Through Trust and payments of principal of, premium, if any, and interest on such Equipment Notes will continue to be distributed to the Certificateholders of such Pass Through Trust as originally scheduled. Under each Indenture the Owner Trustee has the right under certain circumstances to cure an Indenture Event of Default that results from the occurrence of a Lease Event of Default under the related Lease. If the Owner Trustee chooses to exercise such cure right, the Indenture Event of Default and consequently the Event of Default under any Pass Through Trust holding the related Equipment Notes will be deemed to be cured. See the applicable Prospectus Supplement for a more detailed discussion of certain provisions described in this paragraph. Each Pass Through Agreement provides that if an Indenture Event of Default under an Indenture relating to Equipment Notes held in the corresponding Pass Through Trust shall have occurred and be continuing, the Pass Through Trustee (i) may vote all of the Equipment Notes issued under such Indenture that are held in such Pass Through Trust, and (ii) upon the direction of the Certificateholders evidencing fractional undivided interests aggregating not less than a majority in interest of the Pass Through Certificates at the time outstanding in respect of such Pass Through Trust shall vote a corresponding majority of such Equipment Notes, in each case in favor of directing the related Indenture Trustee to declare the unpaid principal amount of all Equipment Notes issued under such Indenture and any accrued and unpaid interest 9 42 thereon to be due and payable. Each Pass Through Agreement also provides that if an Indenture Event of Default under an Indenture relating to Equipment Notes held in the corresponding Pass Through Trust shall have occurred and be continuing, the Pass Through Trustee may, and upon the direction of the Certificateholders evidencing fractional undivided interests aggregating not less than a majority in interest of the Pass Through Certificates at the time outstanding in respect of such Pass Through Trust shall, vote Equipment Notes issued under such Indenture that are held in such Pass Through Trust in favor of directing the related Indenture Trustee as to the time, method and place of conducting any proceeding for any remedy available to such Indenture Trustee or of exercising any trust or power conferred on such Indenture Trustee under such Indenture. (Pass Through Agreement, Sections 6.01 and 6.04) If the Equipment Notes outstanding under an Indenture are held by more than one Pass Through Trust, then the ability of the Certificateholders of any one Pass Through Trust to cause the Indenture Trustee for any Equipment Notes held in such Pass Through Trust to accelerate the payment on such Equipment Notes under the related Indenture or to direct the exercise of remedies by such Indenture Trustee under the related Indenture will depend, in part, upon the proportion between the aggregate principal amount of the Equipment Notes outstanding under such Indenture and held in such Pass Through Trust and the aggregate principal amount of all Equipment Notes outstanding under such Indenture. If the Equipment Notes outstanding under an Indenture are held by more than one Pass Through Trust, then each such Pass Through Trust will hold Equipment Notes with different terms from those of the Equipment Notes held in any other Pass Through Trust and, therefore, the Certificateholders of a Pass Through Trust may have divergent or conflicting interests from those of the Certificateholders of the other Pass Through Trusts holding Equipment Notes relating to the same Indenture. In addition, so long as the same institution or an affiliate of such institution acts as Pass Through Trustee of each Pass Through Trust, in the absence of instructions from the Certificateholders of any such Pass Through Trust, the Pass Through Trustee for such Pass Through Trust could for the same reason be faced with a potential conflict of interest upon an Indenture Event of Default. In such event, the initial Pass Through Trustee has indicated that it would resign as Pass Through Trustee of one or all of such Pass Through Trusts, and a successor pass through trustee would be appointed in accordance with the terms of the applicable Pass Through Agreement. See "The Pass Through Trustee; the Indenture Trustee" below for a discussion of resignation procedures. As an additional remedy, if an Indenture Event of Default under an Indenture has occurred and is continuing, each Pass Through Agreement provides that the Pass Through Trustee of the corresponding Pass Through Trust holding Equipment Notes issued under such Indenture may, and upon the direction of the Certificateholders evidencing fractional undivided interests aggregating not less than a majority in interest of the Pass Through Certificates at the time outstanding in respect of such Pass Through Trust will, sell all or part of such Equipment Notes for cash to any person at a price or prices that it may reasonably deem advisable. Any proceeds received by such Pass Through Trust upon any such sale will be deposited in the Special Payments Account for such Pass Through Trust and will be distributed to the Certificateholders of such Pass Through Trust on a Special Distribution Date. (Pass Through Agreement, Sections 6.01 and 6.02) The market for Equipment Notes in default may be very limited and there can be no assurance that they could be sold for a reasonable price. Furthermore, so long as the same institution or any affiliate of such institution acts as Pass Through Trustee of each Pass Through Trust, it may be faced with a conflict in deciding from which Pass Through Trust to sell Equipment Notes to available buyers. If the Pass Through Trustee sells any such Equipment Notes with respect to which an Indenture Event of Default exists for less than the outstanding principal amount thereof, the Certificateholders of such Pass Through Trust will receive a smaller amount of principal distributions than anticipated and will not have any claim for the shortfall against the Pass Through Trustee, the Company, the Owner Trust, the Owner Trustee or any related Owner Participant. Furthermore, neither the Pass Through Trustee nor the Certificateholders of such Pass Through Trust could take any action with respect to any remaining Equipment Notes held in such Pass Through Trust so long as no Indenture Event of Default existed with respect thereto. For any Pass Through Trust, any amount distributed to the Pass Through Trustee by the Indenture Trustee under any Indenture on account of the Equipment Notes held in such Pass Through Trust following an Indenture Event of Default under such Indenture will be deposited in the Special Payments Account for 10 43 such Pass Through Trust and will be distributed to the Certificateholders of such Pass Through Trust on a Special Distribution Date. In addition, if, following an Indenture Event of Default under any Indenture, the related Owner Trustee exercises its option, if any, to prepay or purchase the outstanding Equipment Notes issued under such Indenture as described in the related Prospectus Supplement, the price paid by such Owner Trustee to the Pass Through Trustee for such Equipment Notes held in such Pass Through Trust will be deposited in the related Special Payments Account and will be distributed to the Certificateholders of such Pass Through Trust on a Special Distribution Date. Such price must be at least equal to the outstanding principal amount of such Equipment Notes plus accrued and unpaid interest thereon. (Pass Through Agreement, Sections 4.01 and 4.02) Any funds representing payments received with respect to any Equipment Notes held in a Pass Through Trust in default, or the proceeds from the sale by the Pass Through Trustee of any such Equipment Notes, held by the Pass Through Trustee in the Special Payments Account for such Pass Through Trust will, to the extent practicable, be invested by the Pass Through Trustee in Permitted Investments pending the distribution of such funds on a Special Distribution Date. (Pass Through Agreement, Article I and Section 4.04) Each Pass Through Agreement provides that the Pass Through Trustee will, within 90 days after the occurrence of a default (as defined below) under the corresponding Pass Through Trust, notify the Certificateholders of such Pass Through Trust by mail of all uncured or unwaived defaults with respect to such Pass Through Trust known to it. The Pass Through Trustee will be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interests of such Certificateholders, except in the case of default in the payment of principal of, premium, if any, or interest on any of the Equipment Notes held in such Pass Through Trust. The term "default," for the purpose of the provision described in this paragraph only, means the occurrence of any Event of Default with respect to a Pass Through Trust as described above, except that in determining whether any such Event of Default has occurred any grace period or notice in connection therewith shall be disregarded. (Pass Through Agreement, Section 7.02) Each Pass Through Agreement provides that for the corresponding Pass Through Trust, subject to the duty of the Pass Through Trustee during a default to act with the required standard of care, the Pass Through Trustee is entitled to be indemnified by the Certificateholders of such Pass Through Trust before proceeding to exercise any right or power under such Pass Through Trust at the request of such Certificateholders. (Pass Through Agreement, Section 7.03) In certain cases, the Certificateholders of a Pass Through Trust evidencing fractional undivided interests aggregating not less than a majority in interest of the Pass Through Certificates at the time outstanding in respect of such Pass Through Trust may on behalf of all the Certificateholders of such Pass Through Trust waive any past default or Event of Default with respect to such Pass Through Trust and thereby annul any direction given by such Certificateholders to the Pass Through Trustee or the related Indenture Trustee with respect thereto, except (i) a default in the deposit or distribution of any Scheduled Payment or Special Payment, (ii) a default in payment of the principal of, premium, if any, or interest on any of the Equipment Notes held in such Pass Through Trust and (iii) a default in respect of any covenant or provision of the corresponding Pass Through Agreement that cannot be modified or amended without the consent of each Certificateholder of such Pass Through Trust affected thereby. Any such waiver, however, will be effective to waive any such past default or Event of Default if, but only if, the correlative Indenture Event of Default has been waived under the related Indenture by the requisite holders of the Equipment Notes outstanding thereunder. (Pass Through Agreement, Section 6.05) Each Indenture provides that, with certain exceptions, the holders of a majority in aggregate unpaid principal amount of the Equipment Notes issued thereunder may on behalf of all such holders waive any past default or Indenture Event of Default thereunder. If, as described above, the Certificateholders of a Pass Through Trust elect to waive a past default or Event of Default with respect to such Pass Through Trust, the principal amount of the Equipment Notes issued under the related Indenture and held in such Pass Through Trust will be counted in favor of the waiver of the corresponding past default or Indenture Event of Default under the related Indenture when the Indenture Trustee determines whether such past default or Indenture Event of Default has been waived by the requisite majority in aggregate unpaid principal amount of 11 44 Equipment Notes under such Indenture. If, for example, the Equipment Notes issued under an Indenture held in a Pass Through Trust constitute only 45% in aggregate unpaid principal amount of the Equipment Notes issued and unpaid under such Indenture, even if all the Certificateholders of such Pass Through Trust were to instruct the Pass Through Trustee not to waive a past default or Event of Default with respect to such Pass Through Trust and, consequently, to vote such Equipment Notes against the waiver of the corresponding past default or Indenture Event of Default under such Indenture, the Equipment Notes so voted by the Pass Through Trustee on behalf of such Pass Through Trust would not alone be sufficient under the terms of such Indenture to compel the Indenture Trustee to refrain from giving such waiver. Moreover, there would be no assurance that the Certificateholders of any other Pass Through Trust holding Equipment Notes issued under such Indenture would at such time vote such Equipment Notes against such waiver. Therefore, if the Certificateholders of a Pass Through Trust or Pass Through Trusts waive a past default or Event of Default such that the principal amount of the Equipment Notes held either individually in such Pass Through Trust or in the aggregate in such Pass Through Trusts constitutes the required majority in aggregate unpaid principal amount under the applicable Indenture, such past default or Indenture Event of Default under such Indenture will be waived whether or not the Certificateholders of any other Pass Through Trust holding Equipment Notes issued under such Indenture waive such past default or Event of Default with respect to such other Pass Through Trust. MODIFICATIONS OF THE AGREEMENTS Each Pass Through Agreement contains provisions permitting the Company and the Pass Through Trustee to enter into an agreement supplemental to the corresponding Pass Through Trust, without the consent of the Certificateholders of such Pass Through Trust, to (i) evidence the succession of another corporation to the Company and the assumption by such corporation of the Company's obligations under such Pass Through Agreement, (ii) add to the covenants of the Company for the protection of the related Certificateholders, (iii) surrender any right or power conferred upon the Company in such Pass Through Agreement, (iv) cure any ambiguity or correct or supplement any defective or inconsistent provision of such Pass Through Agreement, or make any other provisions in regard to matters or questions arising thereunder, provided that such action will not adversely affect the interests of the related Certificateholders, (v) correct or amplify the description of property that constitutes Trust Property or the conveyance of such property to the Pass Through Trustee, (vi) evidence and provide for a successor Pass Through Trustee for such Pass Through Trust, (vii) modify, eliminate or add to the provisions of such Pass Through Agreement to the extent necessary to qualify such Pass Through Agreement under the Trust Indenture Act or any similar federal statute enacted thereafter, or (viii) add, eliminate or change any provision under such Pass Through Agreement that will not adversely affect the interests of the Certificateholders, provided that in each case such modification does not cause the corresponding Pass Through Trust to become taxable as an "association," within the meaning of Treasury Regulation Section 301.7701-4 (Pass Through Agreement, Section 9.01). Each Pass Through Agreement also provides that the Company and the Pass Through Trustee, with the consent of the Certificateholders evidencing fractional undivided interests aggregating not less than a majority in interest of the Pass Through Certificates at the time outstanding in respect of the corresponding Pass Through Trust, may execute supplemental agreements adding any provisions to or changing or eliminating any of the provisions of such Pass Through Agreement or modifying the rights of such Certificateholders. No such supplemental agreement may, however, without the consent of each such Certificateholder so affected, (a) reduce in any manner the amount of, or delay the timing of, any receipt by the Pass Through Trustee of payments on the Equipment Notes held in such Pass Through Trust, or distributions in respect of any Pass Through Certificate of such Pass Through Trust, or change any date of payment on any such Pass Through Certificate or change the place of payment where, or the coin or currency in which, such Pass Through Certificates are payable, or impair the right of any such Certificateholder to institute suit for the enforcement of any payment when due, (b) except as provided in such Pass Through Agreement, permit the disposition of any Equipment Note held in such Pass Through Trust, or permit the creation of any lien on the Trust Property or otherwise deprive any Certificateholder of the benefit of the ownership of the Equipment Notes held in such Pass Through Trust or the lien of the related Indenture, (c) reduce the percentage of the aggregate fractional undivided interests of such Pass Through Trust that is required to approve any supplemental agreement or any 12 45 waiver provided for in such Pass Through Agreement or (d) cause the Pass Through Trust to become taxable as an "association," within the meaning of Treasury Regulation Section 301.7701-4. (Pass Through Agreement, Section 9.02) MODIFICATIONS, CONSENTS AND WAIVERS UNDER THE INDENTURES AND RELATED AGREEMENTS If the Pass Through Trustee, as the holder of any Equipment Notes held in a Pass Through Trust, receives a request for its consent to any amendment, modification, waiver or supplement under the Indenture or other document relating to such Equipment Notes (including any Lease), the Pass Through Trustee will mail a notice of such proposed amendment, modification, waiver or supplement to each Certificateholder of such Pass Through Trust as of the date of such notice. The Pass Through Trustee will request instructions from such Certificateholders as to whether or not to consent to such amendment, modification, waiver or supplement. The Pass Through Trustee will vote or consent with respect to such Equipment Notes in the same proportion as the Pass Through Certificates of such Pass Through Trust are actually voted by such Certificateholders by a certain date specified in such notice to Certificateholders. If an Event of Default relating to such Indenture has occurred and is continuing under such Pass Through Trust, the Pass Through Trustee may, in the absence of instructions from Certificateholders holding a majority in interest of the Pass Through Certificates at the time outstanding in respect of such Pass Through Trust, in its own discretion consent to such amendment, modification, waiver or supplement, and may so notify the related Indenture Trustee. (Pass Through Agreement, Section 10.01) TERMINATION OF PASS THROUGH TRUSTS The obligations of the Company and the Pass Through Trustee with respect to a Pass Through Trust will terminate upon the distribution to the Certificateholders of such Pass Through Trust of all amounts required to be distributed to them pursuant to the corresponding Pass Through Agreement and the disposition of all property held in such Pass Through Trust. The Pass Through Trustee will notify each Certificateholder of record of such Pass Through Trust by mail of, among other things, the termination of such Pass Through Trust, the amount of the proposed final payment and the proposed date for the distribution of such final payment for such Pass Through Trust. The final distribution for each Certificateholder of such Pass Through Trust will be made only upon surrender of such Certificateholder's Pass Through Certificates at the office or agency of the Pass Through Trustee specified in such termination notice. (Pass Through Agreement, Section 11.01) THE PASS THROUGH TRUSTEE; THE INDENTURE TRUSTEE Shawmut Bank Connecticut, National Association will be the initial Pass Through Trustee for each of the Pass Through Trusts. The Pass Through Trustee and any of its affiliates may hold Pass Through Certificates in their own names. (Pass Through Agreement, Section 7.05) Unless otherwise specified in the related Prospectus Supplement, Shawmut Bank Connecticut, National Association may also be the Indenture Trustee under the Indentures under which the Equipment Notes have been or will be issued. Shawmut Bank Connecticut, National Association may act as trustee under other indentures with respect to other indebtedness of the Company. The Company from time to time may borrow from, and maintain deposit accounts with, Shawmut Bank Connecticut, National Association and its affiliates. The Pass Through Trustee may resign under any or all of the Pass Through Trusts at any time. The Pass Through Trustee is required to resign with respect to a Pass Through Trust if it obtains knowledge of an Avoidable Tax (generally, a state or local tax on such Pass Through Trust or its Certificateholders that would be avoided if the Pass Through Trustee were located in another state) unless the Company or the Owner Trustee pays such tax. If the Pass Through Trustee fails to comply with Section 310 of the Trust Indenture Act or ceases to be eligible to continue as Pass Through Trustee with respect to a Pass Through Trust and, in either such case, fails to so comply or to resign after written request by any Certificateholder that has been a bona fide Certificateholder of the applicable Pass Through Trust for at least six months or if the Pass Through Trustee becomes incapable of acting as Pass Through Trustee or becomes insolvent, then the Company may 13 46 remove such Pass Through Trustee, or any Certificateholder of such Pass Through Trust for at least six months may, on behalf of itself and all others similarly situated, petition any court of competent jurisdiction for the removal of such Pass Through Trustee and the appointment of a successor trustee. In addition, the Pass Through Trustee of any Pass Through Trust may be removed without cause by the Certificateholders holding more than 50% in aggregate amount of the related Pass Through Certificates. In the case of the resignation or removal of the Pass Through Trustee, the Company will appoint a successor, subject to the right of the Certificateholders holding more than 50% in aggregate amount of the related Pass Through Certificates to appoint a different successor within one year thereafter. If no successor Pass Through Trustee is appointed and accepts its appointment, then any Certificateholder that has been a bona fide Certificateholder of the relevant Pass Through Trust for at least six months may, or the resigning Pass Through Trustee may, petition a court for the appointment of a successor. The resignation or removal of the Pass Through Trustee for any Pass Through Trust and the appointment of the successor trustee for such Pass Through Trust does not become effective until acceptance of the appointment by the successor trustee. (Pass Through Agreement, Section 7.09) Pursuant to such resignation and successor trustee provisions, it is possible that a different trustee could be appointed to act as the successor trustee with respect to each Pass Through Trust. All references in this Prospectus to the Pass Through Trustee are to the respective trustees acting in such capacity under each of the Pass Through Trusts and should be read to take into account the possibility that each of the Pass Through Trusts could have a different successor trustee in the event of such a resignation or removal. Each Pass Through Agreement provides that the Company will pay the Pass Through Trustee's fees and expenses. Each Pass Through Agreement further provides that the Pass Through Trustee in its individual capacity will be entitled to indemnification by the Company for, and will be held harmless against, any loss, liability or expense and any tax (other than taxes attributable to the Pass Through Trustee's compensation) incurred by the Pass Through Trustee in its individual capacity in connection with the acceptance or administration of the corresponding Pass Through Trust to the extent provided in the applicable Participation Agreement (see "Description of the Equipment Notes -- The Participation Agreements"). In certain circumstances, the Pass Through Trustee will be entitled to be reimbursed from, and will have a lien prior to the Pass Through Certificates upon, the applicable Pass Through Trust for any tax (other than income or similar taxes) incurred in its trust capacity in connection with the acceptance or administration of such Pass Through Trust. (Pass Through Agreement, Section 7.07) DESCRIPTION OF THE EQUIPMENT NOTES The discussion that follows is a summary that does not purport to be complete and is qualified in its entirety by the detailed information appearing in the applicable Prospectus Supplement. The following summary includes descriptions of the material terms of the Equipment Notes and the Indentures. Except as otherwise indicated below or as described in the applicable Prospectus Supplement, the following summary applies to the Equipment Notes, the Indentures, the Leases and the Participation Agreements related to the Equipment. Additional provisions with respect to the Equipment Notes, the Indentures, the Leases and the Participation Agreements relating to any particular offering of Pass Through Certificates will be described in the applicable Prospectus Supplement. To the extent that any provision in any Prospectus Supplement is inconsistent with any provision of this summary, the provision of such Prospectus Supplement will control. GENERAL The Equipment Notes will be issued as nonrecourse obligations of the applicable Owner Trust, in each case by the Owner Trustee under such Owner Trust for the benefit of the Owner Participant under such Owner Trust, and will be authenticated under an Indenture by the Indenture Trustee. All of the Equipment Notes issued under the same Indenture will relate to, and will be secured by, one or more items of Equipment identified and described in the relevant Prospectus Supplement which are or will be leased to the Company pursuant to a Lease between the Owner Trustee under the applicable Owner Trust and the Company. The Equipment subject to each Lease and the Equipment Notes issued under the related Indenture will be identified and described in the applicable Prospectus Supplement. Under each Lease of Equipment, the Company will be obligated to make rental payments that will be at least equal to the scheduled payments of 14 47 principal of and interest on the related Equipment Notes when, and as scheduled to be, due and payable. The Equipment Notes will not, however, be obligations of, or guaranteed by, the Company. The Company's obligations to pay rent and to cause other payments to be made under each Lease will be general obligations of the Company. PRINCIPAL AND INTEREST PAYMENTS Interest received by the Pass Through Trustee on the Equipment Notes constituting Trust Property of each Pass Through Trust will be passed through to the Certificateholders of such Pass Through Trust on a pro rata basis on the dates and at the rate per annum set forth in the applicable Prospectus Supplement. Interest on the Equipment Notes will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Each Pass Through Trust will hold Equipment Notes on which principal is payable in scheduled amounts and on specified dates as set forth in the applicable Prospectus Supplement. Principal received by the Pass Through Trustee on such Equipment Notes will be passed through to the Certificateholders of such Pass Through Trust on a pro rata basis as set forth in the applicable Prospectus Supplement. PREPAYMENT The applicable Prospectus Supplement will describe the circumstances, whether voluntary or involuntary, under which the related Equipment Notes may or must be prepaid prior to the stated maturity date thereof, in whole or in part, the premium, if any, applicable upon certain prepayments and other terms applying to the prepayment of such Equipment Notes. SECURITY The Equipment Notes issued under each of the Indentures will be secured by (i) an assignment by the related Owner Trust to the Indenture Trustee of such Owner Trust's rights (except for certain limited rights described below) under the Lease or Leases to which it is a party covering the related item or items of Equipment including the right to receive rent and other payments thereunder, (ii) a security interest granted to the Indenture Trustee in such related Equipment, subject to the rights of the Company under such Lease or Leases and to certain other permitted liens and encumbrances. The assignment by the Owner Trust to the Indenture Trustee of its rights under each Lease will exclude rights of the Owner Trustee and the related Owner Participant relating to (i) indemnification by the Company for certain matters, (ii) proceeds of public liability insurance payable to the Owner Trustee and the Indenture Trustee in their respective individual capacities and to the Owner Participant under insurance maintained by the Company under such Lease and (iii) proceeds of any insurance policies separately maintained by such Owner Trustee in its individual capacity or by such Owner Participant. The right of the Indenture Trustee, however, to exercise any of the rights of the Owner Trustee under the related Lease, except the right to receive payments of rent due thereunder, will be subject to certain limitations as described in the applicable Prospectus Supplement. There will be no cross-collateralization provisions in the Indentures and consequently the Equipment Notes issued by an Owner Trust will not be secured by any items of Equipment held by any other Owner Trust or the Leases relating thereto. There will be no cross-default provisions in the Indentures and consequently events resulting in an Indenture Event of Default under any particular Indenture may not result in an Indenture Event of Default occurring under any other Indenture. PAYMENTS AND LIMITATIONS OF LIABILITY All payments of principal, of premium, if any, and interest on any Equipment Notes will be made only from the assets subject to the lien of the related Indenture or the income and proceeds received by the Indenture Trustee therefrom, including rent payable by the Company under the related Lease. The Equipment Notes will not be direct obligations of, or guaranteed by, the Company. The Company's obligations to pay rent and to cause other payments to be made under each Lease will be general obligations of the Company. 15 48 Neither the Owner Trustee nor the Indenture Trustee (in their individual capacities) nor any Owner Participant will be liable to any Certificateholder or, in the case of the Owner Trustee, in its individual capacity, to the Company or the Indenture Trustee for any amounts payable under the Equipment Notes or the Indentures or, except as provided in the Indentures and the Participation Agreements and except for the gross negligence or willful misconduct of the Owner Trustee, for any liability thereunder. INDENTURE EVENTS OF DEFAULT AND REMEDIES For any Pass Through Trust, the applicable Prospectus Supplement will describe the Indenture Events of Default under the Indentures related to the Equipment Notes to be held by such Pass Through Trust, the remedies that the related Indenture Trustee may exercise with respect to the related Equipment, either at their own initiative or upon instructions from holders of the related Equipment Notes, and other provisions relating to the occurrence of an Indenture Event of Default the exercise of remedies and any limitations or restrictions thereon. There will be no cross-default provisions in the Indentures and events resulting in an Indenture Event of Default under any particular Indenture will not necessarily result in an Indenture Event of Default under any other Indenture. THE LEASES The following terms are applicable to each Lease: Terms and Rentals. Each item of Equipment is or will be leased by an Owner Trust to the Company for a term commencing on the date of the Owner Trustee's acceptance thereof pursuant to the related Participation Agreement and expiring on a date not earlier than the latest maturity date of the related Equipment Notes, unless previously terminated or extended, as permitted by the related Lease. The scheduled rental payments by the Company under each Lease will be payable on the dates specified in the applicable Prospectus Supplement. Such rental payments will be assigned under the related Indenture by the Owner Trust to the Indenture Trustee to provide the funds necessary to make payments of principal and interest due from such Owner Trust on the Equipment Notes issued under such Indenture. Any Prospectus Supplement may provide that, under certain circumstances, the scheduled rental payments under any applicable Lease may be adjusted; in that case, however, each such Lease will provide that under no circumstances will the adjusted rental payments that the Company will be unconditionally obligated to make or cause to be made under such Lease and any other Lease to which the same Owner Trust is a party, after such adjustment be less than the scheduled payments of principal and interest on the Equipment Notes issued under the Indenture relating to such Lease or Leases. See "Description of the Equipment Notes -- Payments and Limitations of Liability." Scheduled payments of principal and interest on the Equipment Notes will be made on the dates specified in the applicable Prospectus Supplement. Net Lease. The Company's obligations under each Lease in respect of the Equipment leased thereunder will be those of a lessee under a "net lease." Accordingly, the Company will be obligated to pay all costs of operating the Equipment and its expenses, to maintain, service, repair and overhaul the Equipment so as to keep the Equipment in good condition, ordinary wear and tear excepted, and in a manner consistent with the Company's maintenance practices in respect of similar equipment owned or leased by it. In the case of a Lease of an Aircraft, the Company will be obligated to maintain the airworthiness certification of such Aircraft in good standing at all times under the Federal Aviation Act. Generally, the Company will be obligated to replace or cause to be replaced all parts that may from time to time be incorporated or installed in or attached to any item of Equipment and that may become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use. The Company will be obligated to make all modifications to the Equipment which are required by law and will have the right to make other alterations, modifications and additions to the Equipment so long as such alterations, modifications or additions do not materially decrease the value, utility or remaining economic useful life of such Equipment. See the applicable Prospectus Supplement for a description of certain limitations, if any, applicable to provisions described in this paragraph. 16 49 Insurance. Unless otherwise indicated in the applicable Prospectus Supplement the Company will, at its own expense, cause to be carried and maintained with insurance companies (which may be captive insurance companies affiliated with the Company) (i) physical damage insurance in respect of all Equipment and (ii) public liability insurance with respect to third-party personal injury and property damage, in such amounts and against such risks at least equal to those customarily insured against by the Company in respect of equipment owned or leased by it similar in type to the Equipment. There is no assurance that any insurance will be carried in the future, or, if it is carried, as to the amount of such insurance or as to the amount of the deductible limits in respect of such insurance. See the applicable Prospectus Supplement for a description of any insurance obligations of the Company not described in this paragraph or any limitations applicable to provisions described in this paragraph. Lease Events of Default; Remedies. The applicable Prospectus Supplement will describe the Lease Events of Default under the related Leases, the remedies that the Owner Trustee may exercise with respect to the related Equipment, and other provisions relating to the occurrence of a Lease Event of Default and the exercise of remedies. THE PARTICIPATION AGREEMENTS In each Participation Agreement the Company makes certain representations relating to itself and the related Equipment. Each Participation Agreement provides that the Company will indemnify each Indenture Trustee, each Owner Participant, the Owner Trustee and the Pass Through Trustee, and certain parties affiliated with the foregoing (but not including holders of the Equipment Notes or the Certificateholders), for certain liabilities, losses, fees and expenses and for certain other matters arising out of the transactions described herein or relating to the applicable Equipment or the use thereof. In addition, under certain circumstances the Company will be required to indemnify such persons against certain taxes, levies and duties and for certain other matters relating to such transactions or the applicable Equipment. Subject to certain restrictions, each Participation Agreement permits the related Owner Participant to convey all of its right, title and interest in the related Owner Trust. Moreover, if so provided in the applicable Prospectus Supplement, a Participation Agreement may provide that, in certain circumstances the Company may assume the related Owner Trust's obligation under the related Equipment Notes on a full recourse basis upon a purchase of the related Equipment by the Company. Each Participation Agreement also provides that the Company will be prohibited from consolidating with or merging into any other corporation under circumstances in which the Company is not the surviving corporation, or from conveying, transferring or leasing all or substantially all of its assets as an entirety to any person, unless among other things, (i) the successor or transferee corporation expressly assumes all the obligations of the Company contained in such Participation Agreement, the related Lease and certain other related agreements and (ii) immediately before and after giving effect to such transaction, no Lease Event of Default under the related Lease shall be in existence. FEDERAL INCOME TAX CONSEQUENCES In the opinion of Simpson Thacher & Bartlett, tax counsel to the Company, the following discussion accurately describes the principal United States federal income tax consequences of ownership and disposition of the Pass Through Certificates, and should be read in conjunction with any additional discussion of federal income tax consequences included in the applicable Prospectus Supplement. This opinion is based on laws, regulations, rulings and decisions in effect as of the date hereof. Changes to existing law, which could have retroactive effect, may alter the consequences described below. This opinion does not purport to address federal income tax consequences applicable to particular categories of investors, some of which (for example, insurance companies and foreign investors) may be subject to special rules. This summary discusses only Pass Through Certificates held as capital assets for federal income tax purposes. Persons considering purchasing interests in Pass Through Certificates should consult their own tax advisors with regard to the application of the United States federal income tax laws to their particular situations as well as any tax consequences arising under the laws of any state, local or foreign jurisdiction. The Pass Through Trusts are not indemnified for any 17 50 federal income taxes that may be imposed upon them, and the imposition of any such taxes on a Pass Through Trust would result in a reduction in the amounts available for distribution to the Certificateholders of such Pass Through Trust. GENERAL The Pass Through Trusts will not be classified as associations taxable as corporations, but rather, will be classified as grantor trusts under Section 671 of the Internal Revenue Code of 1986, as amended (the "Code"), and each Certificateholder will be treated as the owner of a pro rata undivided interest in each of the Equipment Notes and any other property held in the related Pass Through Trust. Each Certificateholder will be required to report on its federal income tax return its pro rata share of the entire income from each of the Equipment Notes and any other property held in the related Pass Through Trust in accordance with such Certificateholder's method of accounting. A Certificateholder using the cash method of accounting must take into account its pro rata share of income as and when such income is considered to have been received by the Pass Through Trustee. A Certificateholder using an accrual method of accounting must take into account its pro rata share of income as it accrues or is received by the Pass Through Trustee, whichever is earlier. Each Certificateholder will generally be entitled to deduct its share of the Pass Through Trustee's fees and expenses incurred in connection with its administration of the related Pass Through Trust. However, a noncorporate Certificateholder's allocable share of the Pass Through Trustee's fees and expenses may be a "miscellaneous itemized deduction" as defined in Section 67 of the Code. Under that Section, "miscellaneous itemized deductions" will be deductible by a noncorporate Certificateholder only to the extent that the aggregate of such deductions (including those arising from transactions unrelated to holding the Pass Through Certificates) exceed 2% of such Certificateholder's adjusted gross income. A purchaser of an interest in a Pass Through Certificate will be treated as purchasing an interest in each Equipment Note and any other property in the related Pass Through Trust at a price determined by allocating the purchase price paid for the Pass Through Certificate among such Equipment Notes and other property in proportion to their relative fair market values at the time of purchase of the Pass Through Certificate. Unless otherwise indicated in a Prospectus Supplement, the Company anticipates that when all the Equipment Notes have been acquired by the related Pass Through Trust, the purchase price paid for a Pass Through Certificate of such Pass Through Trust by an original purchaser of such Pass Through Certificate should be allocated among the Equipment Notes held in such Pass Through Trust in proportion to their respective principal amounts. If an Equipment Note held by a Pass Through Trust is prepaid, a Certificateholder will be considered to have sold his pro rata share of that Equipment Note, and will recognize gain or loss equal to the difference between its aggregate adjusted basis in the Equipment Note and the amount realized on the sale (except to the extent attributable to accrued interest, which would be taxable as interest income if not previously included in income). Subject to the market discount provisions of the Code (described below), any such gain or loss will be long-term capital gain or loss if the Equipment Note is considered to have been held for more than one year. Net capital gains of individuals are, under certain circumstances, taxed at lower rates than items of ordinary income. With respect to the Equipment Notes, although the matter is not entirely free from doubt, an Owner Participant's conveyance of its interest in an Owner Trust will not constitute a taxable event to the holders of interests in the related Equipment Notes. If the Company were to assume an Owner Trust's obligations under the related Equipment Notes upon a purchase of the related Equipment by the Company, such assumption would be treated as a taxable exchange of the respective Equipment Notes resulting in the recognition of taxable gain or loss under the rules discussed above. For this purpose the amount realized will be equal to the fair market value of the Certificateholder's pro rata share of the respective Equipment Notes at such time. However, under proposed Treasury regulations not currently in effect, the Company's assumption of the Owner Trust's obligations under the circumstances described above would not be treated as a taxable exchange of the Equipment Notes. It is impossible to predict whether, or in what form, final or temporary regulations might be promulgated and what the substance or effective date of such regulations might be. 18 51 SALES OR EXCHANGES OF PASS THROUGH CERTIFICATES A Certificateholder that sells or exchanges a Pass Through Certificate will be considered to have sold his pro rata portion of the property held by the Pass Through Trust, and will recognize gain or loss on the basis discussed in the preceding paragraph. MARKET DISCOUNT A purchaser of a Pass Through Certificate generally will be considered to have acquired an interest in an Equipment Note at a "market discount" to the extent the remaining principal amount of such Equipment Note allocable to the Pass Through Certificate exceeds the Certificateholder's tax basis allocable to such Equipment Note, unless the excess does not exceed a prescribed de minimis amount. In the event such excess exceeds the de minimis amount, the Certificateholder will be subject to the market discount rules of Sections 1276 through 1278 of the Code with regard to its interest in such Equipment Note. In the case of a sale or certain other disposition of indebtedness subject to the market discount rules, Section 1276 of the Code requires that gain, if any, from such sale or disposition be treated as ordinary income to the extent such gain represents a market discount that has accrued during the period such indebtedness was held. If such indebtedness is disposed of in a nontaxable transaction (other than a nonrecognition transaction described in Code Section 1276(d)), accrued market discount will be includable as ordinary income as if the Certificateholder had sold the Equipment Note at its then market value. In the case of a partial principal payment on indebtedness subject to the market discount rules, Section 1276 of the Code requires that such payment be included in gross income as ordinary income to the extent such payment does not exceed the market discount that has accrued during the period such indebtedness was held. The amount of any accrued market discount later required to be included in income upon a disposition or subsequent partial principal payment will be reduced by the amount of accrued market discount previously included in income. Generally, market discount accrues under a straight line method or, at the election of the taxpayer, a constant interest method. However, in the case of installment obligations (such as the Equipment Notes), the manner in which the market discount is to be accrued has been left to Treasury regulations not yet promulgated. Until such Treasury regulations are issued, the explanatory Conference Report to the Tax Reform Act of 1986 (the "Conference Report") indicates that holders of installment obligations with a market discount (which do not have original issue discount) may elect to accrue the market discount either on the basis of a constant interest rate or as follows: the amount of the market discount that is deemed to accrue is the amount of the market discount that bears the same ratio to the total amount of the remaining market discount that the amount of stated interest paid in the accrual period bears to the total amount of stated interest remaining to be paid on the installment obligation as of the beginning of such period. Under Section 1277 of the Code, if in any taxable year interest paid or accrued on indebtedness incurred or continued to purchase or carry indebtedness subject to the market discount rules exceeds the interest currently includable in income with respect to such indebtedness, deduction of the excess interest must be deferred to the extent of the market discount allocable to the taxable year. The deferred portion of any interest expense will generally be deductible when such market discount is included in income upon the sale or other disposition (including repayment) of the indebtedness. Section 1278 of the Code allows a taxpayer to make an election to include market discount in his gross income currently. If such election is made, the rules of Sections 1276 and 1277 (described above) will not apply to the taxpayer. PREMIUM A Certificateholder will be considered to have acquired an interest in an Equipment Note at a premium to the extent such Certificateholder's tax basis allocable to such Equipment Note exceeds the remaining principal amount of such Equipment Note allocable to such Certificateholder's Pass Through Certificate. In that event, a Certificateholder that holds such Pass Through Certificate as a capital asset may elect (in 19 52 accordance with applicable Code provisions) to amortize such premium as an offset to interest income under Section 171 of the Code with corresponding reductions in the Certificateholder's tax basis in such Equipment Note. Generally, such amortization is on a constant yield basis. In the case of installment obligations (such as the Equipment Notes), however, the Conference Report indicates a Congressional intent that amortization will be in accordance with the same rules that will apply to the accrual of market discount on installment obligations. See "Market Discount." Since the Equipment Notes may be called at a premium prior to maturity, amortizable premium may be determined by reference to an early call date. Due to the complexities of the amortizable premium rules, particularly where there is more than one possible call date and the amount of any premium is uncertain, Certificateholders are urged to consult their tax advisors as to the amount of any such amortizable premium. If a Certificateholder acquires an interest in an Equipment Note at a premium and elects to amortize such premium, and the Internal Revenue Service successfully challenges the amount of amortization claimed for a particular period, then such Certificate Owner would be precluded from offsetting interest income on the Equipment Note for such period with the amount of the disallowed amortization, and the basis of such Equipment Note would be increased accordingly. ORIGINAL ISSUE DISCOUNT Under a reasonable interpretation of applicable Treasury regulations on original issue discount, it is not anticipated that the Equipment Notes (and, consequently, the Pass Through Certificates) will be issued with original issue discount. BACKUP WITHHOLDING Payments made on the Pass Through Certificates, and proceeds from the sale or exchange of the Pass Through Certificates to or through certain brokers, may be subject to a "backup" withholding tax of 31% unless the Certificateholder complies with certain reporting procedures or is an exempt recipient under the Code. Any such withholding amounts will be allowed as a credit against the Certificateholder's federal income tax and may entitle such Certificateholder to a refund, provided that the required information is furnished to the Internal Revenue Service. CERTAIN STATE TAXES The Pass Through Trustee is a national banking association with its corporate trust office in Hartford, Connecticut. Shipman & Goodwin, special counsel for the Pass Through Trustee, has advised the Company that, in its opinion, under currently applicable law, assuming that each Pass Through Trust will not be classified as an association taxable as a corporation for federal income tax purposes, but rather will be classified as a grantor trust under Section 671 of the Code, and assuming that each Pass Through Trust does not otherwise engage in business in Connecticut, (i) the Pass Through Trusts will not be subject to any tax (including, without limitation, net or gross income, tangible or intangible property, net worth, capital, franchise or doing business tax), fee or other governmental charge under the laws of the State of Connecticut or any political subdivision thereof and (ii) Certificateholders that are not residents of or otherwise subject to tax in Connecticut will not be subject to any tax (including, without limitation, net or gross income, tangible or intangible property, net worth, capital, franchise or doing business tax), fee or other governmental charge under the laws of the State of Connecticut or any political subdivision thereof as a result of purchasing, owning (including receiving payments with respect to) or selling a Pass Through Certificate. Neither the Pass Through Trusts nor the Certificateholders will be indemnified for any state or local taxes imposed on them, and the imposition of any such taxes on a Pass Through Trust would result in a reduction in the amounts available for distribution to the Certificateholders of such Pass Through Trust. In general, should a Certificateholder or a Pass Through Trust be subject to any State or local tax which would not be imposed if the Trustee were located in a different jurisdiction in the United States, the Trustee will resign and a new Trustee in such other jurisdiction will be appointed. 20 53 ERISA CONSIDERATIONS Unless otherwise indicated in the applicable Prospectus Supplement, Pass Through Certificates may not be purchased by, or with the assets of, any employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or individual retirement account or plan subject to Section 4975 of the Code unless such assets are subject to a prohibited transaction exemption issued by the Department of Labor which exemption applies to the purchase and holding of the Pass Through Certificates by the applicable plan or account. In addition, certain governmental plans and non-electing church plans are not subject to Title I of ERISA or Section 4975 of the Code and, therefore, may purchase the Pass Through Certificates. PLAN OF DISTRIBUTION The Pass Through Certificates may be sold to or through underwriters, directly to other purchasers or through agents. The distribution of the Pass Through Certificates may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, or at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. In connection with the sale of Pass Through Certificates, underwriters or agents may receive compensation from the Company or from purchasers of Pass Through Certificates for whom they may act as agents in the form of discounts, concessions or commissions. Underwriters may sell Pass Through Certificates to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of Pass Through Certificates may be deemed to be underwriters, and any discounts or commissions received by them from the Company and any profit on the resale of Pass Through Certificates by them may be deemed to be underwriting discounts and commissions, under the Securities Act. Any such underwriter or agent will be identified, and any such compensation received from the Company will be described, in the applicable Prospectus Supplement. Under agreements which may be entered into by the Company, underwriters and agents who participate in the distribution of Pass Through Certificates may be entitled to indemnification by the Company against certain liabilities, including liabilities under the Securities Act. Unless otherwise indicated in the applicable Prospectus Supplement, the Company does not intend to apply for the listing of any Series of Pass Through Certificates on a national securities exchange. If the Pass Through Certificates of any Series are sold to or through underwriters, the underwriters may make a market in such Pass Through Certificates, as permitted by applicable laws and regulations. No underwriter would be obligated, however, to make a market in such Pass Through Certificates, and any such market-making could be discontinued at any time at the sole discretion of the underwriters. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the Pass Through Certificates of any Series. Certain of the underwriters or agents and their associates may be customers of, engage in transactions with, and perform services for, the Company in the ordinary course of business. LEGAL MATTERS Unless otherwise indicated in the applicable Prospectus Supplement, the validity of the Pass Through Certificates offered hereby will be passed upon for the Company by special counsel to the Company, Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017, and for the underwriters and certain other purchasers by Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019. Unless otherwise indicated in the applicable Prospectus Supplement, both Simpson Thacher & Bartlett and Cravath, Swaine & Moore may rely on the opinion of Shipman & Goodwin, counsel for Shawmut Bank Connecticut, National Association, individually and as Pass Through Trustee, as to matters relating to the 21 54 authorization, execution and delivery of the Pass Through Agreement and of each Series of Pass Through Certificates by the Pass Through Trustee. EXPERTS The consolidated financial statements and schedules of the Company appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements and schedules are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 22 55 NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------------------------------------------------ TABLE OF CONTENTS PROSPECTUS SUPPLEMENT Prospectus Summary S-3 Phillips Petroleum Company S-9 Use of Proceeds S-9 Diagram of Payments S-10 Description of the Pass Through Certificates S-11 Description of the Equipment Notes S-14 Underwriting S-28 Legal Matters S-28 Glossary of Certain Terms A-1 PROSPECTUS Available Information 2 Incorporation of Certain Documents by Reference 2 Phillips Petroleum Company 3 Ratio of Earnings to Fixed Charges 3 Outline of Pass Through Trust Structure 3 Use of Proceeds 4 Description of the Pass Through Certificates 4 Description of the Equipment Notes 14 Federal Income Tax Consequences 17 Certain State Taxes 20 ERISA Considerations 21 Plan of Distribution 21 Legal Matters 21 Experts 22
Prospectus Supplement PHILLIPS PETROLEUM COMPANY $ % PASS THROUGH CERTIFICATES, SERIES 1994-A1 % PASS THROUGH CERTIFICATES, SERIES 1994-A2 CHEMICAL SECURITIES INC. Dated October , 1994 -----END PRIVACY-ENHANCED MESSAGE-----